Economist Milton Friedman—one of the most famous economists of all time—put forward a theory that companies are ultimately beholden to just one stakeholder: their shareholders.
He called this 'Shareholder Theory'.
Stakeholder Theory is in many ways a direct contradiction to the ‘mono approach’ introduced by Friedman in that it suggests that organizations are responsible to many different stakeholders, of which shareholders are only one.
When you think about it, your own position on this is one of the first things you should do when defining your strategy. It goes to the very foundations of what you want to achieve and why you're doing it.
Are your shareholder interests your #1 priority? Or are you also trying to improve the lives of internal and external stakeholders?
In this article, we’ll explore not only what the stakeholder theory is, but also the benefits of applying it to your business and a step-by-step guide for successful implementation.
🎁 We’ll also provide you with a free Stakeholder Management Plan Template that you can tailor to your organization’s needs to help you maximize stakeholder engagement.
What Is Stakeholder Theory?
Stakeholder theory is based on the assumption that businesses can only be considered successful when they deliver value to the majority of their stakeholders.
One of the first and most influential books that explore this approach is Strategic Management: A Stakeholder Approach by R. Edward Freeman—American philosopher and professor of business administration at the Darden School of the University of Virginia. A very interesting read for all business leaders who see various stakeholder interests as crucial factors for success.
Stakeholder theory is widely applicable and can be used in many key fields, such as project management, strategic management, and business ethics.
It goes hand-in-hand with CSR (Corporate Social Responsibility) and, therefore, sustainability as well. That means that profit alone cannot be considered the only metric of business success, and value creation is not just about money.
Common Groups Of Stakeholders
Let's take a look at some of the common stakeholders for a typical business.
- Shareholders and/or stockholders: Despite stakeholder theory being positioned as the antithesis of shareholder theory, the reality is that shareholders will always be one of the biggest stakeholders of any business.
- Employees: Any business leader will agree that keeping your employees happy is important. Put simply, engaged employees perform better and drive better results.
- Customers: Customers are another obvious stakeholder group since their satisfaction and loyalty directly impact the company's success.
- Suppliers: They provide the raw materials or resources for a company's operations. The reliability and quality of their supplies are crucial to the organization.
- Communities: You can define community in a variety of different ways, from the local community to a virtual global one. Either way, they are a key player in stakeholder theory.
- Government and regulatory bodies: They can exert significant control and influence over a company's operations through laws, regulations, and taxation.
- Friends & family: This may seem a little odd, but your own friends and family (as well as those of your employees) are also critical stakeholders to satisfy under stakeholder theory.
- Competitors: The stakeholder theory suggests that a healthy competitive environment benefits everyone, including other stakeholders such as customers.
👉🏻 There are plenty of other stakeholders you could identify, such as NGOs, industry associations, trade unions, political groups, etc.
💡 Pro Tip: Every business has its unique cast of stakeholders, and there's no one-size-fits-all approach. The key to success lies in understanding, prioritizing, and effectively engaging with each one of them.
The stakeholder theory is not all about keeping stakeholders happy to make more money. Instead, it argues that companies play a vital role in the very fabric of our society (creating jobs, innovating, etc.) and that their success must be valued as a whole, not just in the returns they make for their shareholders. It’s about value maximization, not wealth maximization.
Benefits Of Stakeholder Theory
Stakeholder theory isn't just a philosophical concept; it's a practical guide to success in contemporary business since it offers various tangible benefits:
Prioritizing the concerns of a wide range of stakeholders can boost a company's public image, which is invaluable in a world where perception strongly influences success.
By addressing stakeholder concerns proactively, organizations can predict and mitigate potential conflicts and risks, reducing the likelihood of legal issues or reputation damage.
Sustainability & longevity
Stakeholder theory encourages long-term thinking, leading to sustainable practices that help companies thrive in a changing business landscape.
Focusing on stakeholders prompts organizations to consider a broader spectrum of factors in their decision-making, resulting in better strategic choices.
These benefits are just the tip of the iceberg when it comes to successfully building strong stakeholder relationships. While they may not appear to have an immediate impact on profits, they have the potential to yield significant financial advantages over the long term.
A well-rounded approach to the stakeholder theory can be a powerful source of competitive advantage for a business.
It’s interesting to draw a parallelism between the stakeholder theory and Maslow's Hierarchy of Needs—in which Maslow states that to achieve true happiness, one must go beyond material wealth toward a state of self-actualization.
Businesses adopting this approach can empathize with their stakeholders' basic needs and support their journey up the Maslow pyramid.
Challenges Of Stakeholder Theory
Stakeholder theory has its complexities.
It involves balancing diverse stakeholder interests, often pulling in different directions, all while working within resource constraints. It encourages organizations to embrace long-term sustainability, often calling for cultural shifts and ethical considerations when interests differ.
Crafting specific strategies for stakeholder engagement, understanding complex regulations, and showing quick financial gains can also be tricky when putting this approach into practice.
Stakeholder Theory Example
Let’s think of a practical example: a manufacturing company building a new production facility.
In a conventional approach, the focus would be shareholder returns. However, by applying stakeholder theory, the company considers a broader set of stakeholders, including employees, customers, the local community, environmental groups, and regulators.
Each of these stakeholders has different expectations and concerns. Employees may seek job security and safe working conditions, customers may want eco-friendly products, the local community may value reduced pollution and job opportunities, and environmental organizations may advocate for sustainable practices.
Applying stakeholder theory, the company conducts a comprehensive stakeholder analysis to ensure that the construction project aligns with the interests of all these stakeholders.
Applying The Stakeholder Approach To Your Business
Stakeholder theory isn't a traditional strategic framework in the same way as, for example, SWOT analysis or Porter's Five Forces model. Instead, it's more of a guiding philosophy for how you run your business.
💡 Pro Tip: While it doesn't fit the mold of a traditional strategic framework, it can complement and inform your strategic choices and actions when blended with other models.
We’ve prepared a step-by-step guide to help you adopt this theory:
Step 1: Conduct a stakeholder analysis
Begin by identifying your organization’s stakeholders. You can start with the list we shared previously, but you need to think about your unique context.
The normative approach is to examine the function of your organization and then decide who are the most important stakeholders.
The following questions might help:
- Who is directly influenced by our business operations?
- Which constituencies is our board of directors willing to consider?
- Which individuals or groups can shape our decision-making?
- Who aligns with our core values and mission?
List your stakeholder groups out in simple bullet point form—you should have at least 5 or 6 and possibly many more.
After that, build your stakeholder analysis matrix to understand how your company plans to engage with each of these groups.
This basic matrix is perfect to start:
Keep in mind that you’ll also have to create stakeholder engagement plans, at least for some groups. This matrix will help inform your engagement plans.
Step 2: Evaluate your strategy & initiatives
This step is about making sure your strategy is aligned and catering to the needs of your stakeholders.
So, look at your strategy—the objectives, goals, projects, and KPIs you’ve set to reach your core business metrics—and categorize your initiatives into the list of stakeholders you’ve identified.
Think about which stakeholders will benefit from your success against any given goal:
- Shift your focus towards the 'outcomes' and 'objectives' in your strategic plan, not just individual projects and KPIs.
- Don't think of this as a 1:1 relationship—a single outcome can contribute to multiple stakeholders.
- Don't be afraid to think broadly—it's likely you won't have specific goals for every single stakeholder group, but you'll probably find that some of the things you're working on will help them indirectly.
Step 3: Understand your gaps & opportunities
Now you should have a clearer picture of your current strategy and how it caters to your different stakeholders’ needs.
It’s very likely that the majority of your goals are contributing to either your shareholders, customers, or employees. But, as you’ve already realized, there are other important stakeholders you might need to consider.
Think about your strategy and your key stakeholders to identify gaps and opportunities:
- Does the breakdown look about right?
- Are there any key stakeholders that we’re not considering?
- Are there any areas where our strategy could better serve the identified stakeholders?
- How do the needs and expectations of these stakeholders evolve over time, and how can we adapt our strategy to keep pace?
This exercise might give you insights such as:
- We predominantly focus on shareholders, employees, and customers.
- We allocate more objectives to customers than shareholders, reflecting a product-centric approach.
- We are heavily invested in R&D to lead in technological advancements within a competitive landscape.
- Our engagement with local communities and environmental organizations falls short. We need to strengthen our involvement to make a positive impact.
Now that you uncovered these findings, you can adapt your strategy and ensure an accurate stakeholder alignment.
Step 4: Adapt to ensure stakeholder alignment
With a clear understanding of how your strategy relates to stakeholders and recognizing gaps and opportunities, it's time to put your insights into action.
Start by revisiting your game plan. Take a fresh look at your goals, projects, and KPIs.
Look through the eyes of your stakeholders—are you hitting the mark, or are there mismatches?
If you spot areas where your strategy can better align with stakeholder needs, don't hesitate to tweak things. This might mean shaking up your objectives, reallocating resources, or brainstorming new initiatives.
Step 5: Get ready for execution
You’ve made the necessary changes to your strategy, it’s time to ensure it’s execution-ready.
Here are some tips for successful implementation:
- Rally your teams and stakeholders, and get them on board with the changes.
- Share the 'why' behind these shifts and ensure everyone knows their part in the new plan.
- Keep a close eye on how things are progressing, track your results, and be open to further refinements.
- Ensure everyone understands that this isn't just about meeting stakeholder needs; it's about forging more meaningful connections with your key stakeholders.
💡 Pro Tip: For a smoother implementation and adoption of stakeholder theory, consider integrating it with other strategic frameworks. Check out our article on the "11 Best Strategic Frameworks For Your Organization" for valuable insights.
👉🏻 Get your free customizable Stakeholder Communication Plan Template to craft an effective stakeholder communication plan.
Achieve Effective Stakeholder Management With Cascade 🚀
We’ve already walked you through the importance of successful stakeholder engagement and how these groups can influence your business outcomes.
Cascade’s key features allow you to:
- Centralize your strategy, ensuring alignment across all stakeholders while keeping everyone informed and engaged.
- Create and share real-time reports with both internal and external stakeholders. Define customized report templates to provide shareholders with essential data.
- Engage your employees by enabling them to provide team updates, showing how their work directly contributes to the overarching strategy.
- Foster cross-functional collaboration and gain visibility into how initiatives from different departments work together to advance your overarching business objectives.
- Assess goal progress with real-time dashboards and ensure you're on the path to achieving the objectives you defined for your stakeholder engagement plan.
👉🏻 Bonus—a few classic texts by experts and theorists to dive deeper into the topic:
- The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications by Thomas Donaldson and Lee E. Preston
- Stakeholder Theory: The State of the Art by R. Edward Freeman, Jeffrey S. Harrison, Andrew C. Wicks, Bidhan L Parmar, Simone de Colle
- Stakeholder Theory and Organizational Ethics by Robert Phillips
- Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who and What Really Counts by Ronald K. Mitchell, Bradley R. Agle and Donna J. Wood