Stakeholder theory
Encyclopedia
The stakeholder theory is a theory of organizational management and business ethics
that addresses morals and values in managing an organization. It was originally detailed by R. Edward Freeman
in the book Strategic Management: A Stakeholder Approach, and identifies and models the groups which are stakeholders of a corporation
, and both describes and recommends methods by which management can give due regard to the interests of those groups. In short, it attempts to address the "Principle of Who or What Really Counts."
HM view (the only one recognized in business law in most countries), the shareholders or stockholders are the owners of the company, and the firm has a binding fiduciary duty to put their needs first, to increase value for them. In older input-output model
s of the corporation, the firm converts the inputs of investor
s, employees, and suppliers into usable (salable) outputs which customer
s buy, thereby returning some capital
benefit to the firm. By this model, firms only address the needs and wishes of those four parties: investors, employees, suppliers, and customers. However, stakeholder theory argues that there are other parties involved, including governmental bodies, political groups, trade association
s, trade unions, communities
, associated corporations, prospective employees, prospective customers, and the public at large. Sometimes even competitors are counted as stakeholders.
The stakeholder view of strategy is an instrumental theory of the corporation, integrating both the resource-based view as well as the market-based view, and adding a socio-political level. This view of the firm is used to define the specific stakeholders of a corporation (the normative theory (Donaldson) of stakeholder identification) as well as examine the conditions under which these parties should be treated as stakeholders (the descriptive theory of stakeholder salience). These two questions make up the modern treatment of Stakeholder Theory.
There have been numerous articles and books written on stakeholder theory. Recent scholarly works on the topic of stakeholder theory that exemplify research and theorizing in this area include Donaldson and Preston and Mitchell, Agle, and Wood (1997), Friedman and Miles (2002) and Phillips (2003).
Donaldson and Preston argue that the normative base of the theory, including the "identification of moral or philosophical guidelines for the operation and management of the corporation", is the core of the theory. Mitchell, et al. derive a typology of stakeholders based on the attributes of power
(the extent a party has means to impose its will in a relationship), legitimacy (socially accepted and expected structures or behaviors), and urgency (time sensitivity or criticality of the stakeholder's claims). By examining the combination of these attributes in a binary manner, 8 types of stakeholders are derived along with their implications for the organization. Friedman and Miles explore the implications of contentious relationships between stakeholders and organizations by introducing compatible/incompatible interests and necessary/contingent connections as additional attributes with which to examine the configuration of these relationships.
The political philosopher Charles Blattberg
has criticized stakeholder theory for assuming that the interests of the various stakeholders can be, at best, compromised or balanced against each other. Blattberg argues that this is a product of its emphasis on negotiation as the chief mode of dialogue for dealing with conflicts between stakeholder interests. He recommends conversation instead and this leads him to defend what he calls a 'patriotic' conception of the corporation as an alternative to that associated with stakeholder theory.
Stakeholder theory is defined by Rossouw et al. in Ethics for Accountants and Auditors and by Mintz et al. in Ethical Obligations and Decision Making in Accounting.
Business ethics
Business ethics is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations.Business...
that addresses morals and values in managing an organization. It was originally detailed by R. Edward Freeman
R. Edward Freeman
R. Edward Freeman is an American philosopher and professor of business administration at the Darden School of the University of Virginia. He has also taught at the University of Minnesota and the Wharton School. Freeman is particularly known for his work on stakeholder theory and on business works...
in the book Strategic Management: A Stakeholder Approach, and identifies and models the groups which are stakeholders of a corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
, and both describes and recommends methods by which management can give due regard to the interests of those groups. In short, it attempts to address the "Principle of Who or What Really Counts."
Overview
In the traditional view of the firm, the shareholderShareholder
A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
HM view (the only one recognized in business law in most countries), the shareholders or stockholders are the owners of the company, and the firm has a binding fiduciary duty to put their needs first, to increase value for them. In older input-output model
Input-output model
In economics, an input-output model is a quantitative economic technique that represents the interdependencies between different branches of national economy or between branches of different, even competing economies. Wassily Leontief developed this type of analysis and took the Nobel Memorial...
s of the corporation, the firm converts the inputs of investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
s, employees, and suppliers into usable (salable) outputs which customer
Customer
A customer is usually used to refer to a current or potential buyer or user of the products of an individual or organization, called the supplier, seller, or vendor. This is typically through purchasing or renting goods or services...
s buy, thereby returning some capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
benefit to the firm. By this model, firms only address the needs and wishes of those four parties: investors, employees, suppliers, and customers. However, stakeholder theory argues that there are other parties involved, including governmental bodies, political groups, trade association
Trade association
A trade association, also known as an industry trade group, business association or sector association, is an organization founded and funded by businesses that operate in a specific industry...
s, trade unions, communities
Community
The term community has two distinct meanings:*a group of interacting people, possibly living in close proximity, and often refers to a group that shares some common values, and is attributed with social cohesion within a shared geographical location, generally in social units larger than a household...
, associated corporations, prospective employees, prospective customers, and the public at large. Sometimes even competitors are counted as stakeholders.
The stakeholder view of strategy is an instrumental theory of the corporation, integrating both the resource-based view as well as the market-based view, and adding a socio-political level. This view of the firm is used to define the specific stakeholders of a corporation (the normative theory (Donaldson) of stakeholder identification) as well as examine the conditions under which these parties should be treated as stakeholders (the descriptive theory of stakeholder salience). These two questions make up the modern treatment of Stakeholder Theory.
There have been numerous articles and books written on stakeholder theory. Recent scholarly works on the topic of stakeholder theory that exemplify research and theorizing in this area include Donaldson and Preston and Mitchell, Agle, and Wood (1997), Friedman and Miles (2002) and Phillips (2003).
Donaldson and Preston argue that the normative base of the theory, including the "identification of moral or philosophical guidelines for the operation and management of the corporation", is the core of the theory. Mitchell, et al. derive a typology of stakeholders based on the attributes of power
Power (sociology)
Power is a measurement of an entity's ability to control its environment, including the behavior of other entities. The term authority is often used for power perceived as legitimate by the social structure. Power can be seen as evil or unjust, but the exercise of power is accepted as endemic to...
(the extent a party has means to impose its will in a relationship), legitimacy (socially accepted and expected structures or behaviors), and urgency (time sensitivity or criticality of the stakeholder's claims). By examining the combination of these attributes in a binary manner, 8 types of stakeholders are derived along with their implications for the organization. Friedman and Miles explore the implications of contentious relationships between stakeholders and organizations by introducing compatible/incompatible interests and necessary/contingent connections as additional attributes with which to examine the configuration of these relationships.
The political philosopher Charles Blattberg
Charles Blattberg
Charles Blattberg is a professor of political philosophy at the Université de Montréal. Blattberg grew up in Toronto and completed his undergraduate degree at the University of Toronto, where he also served as president of its Students’ Administrative Council during the 1989–90 academic...
has criticized stakeholder theory for assuming that the interests of the various stakeholders can be, at best, compromised or balanced against each other. Blattberg argues that this is a product of its emphasis on negotiation as the chief mode of dialogue for dealing with conflicts between stakeholder interests. He recommends conversation instead and this leads him to defend what he calls a 'patriotic' conception of the corporation as an alternative to that associated with stakeholder theory.
Stakeholder theory is defined by Rossouw et al. in Ethics for Accountants and Auditors and by Mintz et al. in Ethical Obligations and Decision Making in Accounting.
See also
- Stakeholder (corporate)
- Stakeholder analysisStakeholder analysisStakeholder analysis in conflict resolution, project management, and business administration, is the process of identifying the individuals or groups that are likely to affect or be affected by a proposed action, and sorting them according to their impact on the action and the impact the action...
- Stakeholder (law)
- Agency costAgency costAn agency cost is an economic concept that relates to the cost incurred by an entity associated with problems such as divergent management-shareholder objectives and information asymmetry...
- Principal–agent problem
External links
- Discussion on the role of stakeholders in project management- Redefining the Corporation
- "Redefining the Corporation: Stakeholder Management and Organizational Wealth", by Post, Preston, and Sachs, Stanford University Press, 2002
- Stakeholderforum.org
- Multistakeholder Processes for Governance and Sustainability - Stakeholder Forum, Earthscan 2002
- Politics at stake: a critical note on stakeholder analysis