Stakeholder Theory

What is Stakeholder Theory?

In the landbook book, Strategic Management: A Stakeholder Approach, published in 1984 and reprinted in 2010, R. Edward Freeman set the agenda for what is now known as stakeholder theory. In this video R. Edward Freeman explains Stakeholder Theory.

Stakeholder Theory - video transcript

"Stakeholder Theory is an idea about how business really works. It says that for any business to be successful it has to create value for customers, suppliers, employees, communities and financiers, shareholders, banks and others people with the money. It says that you can't look at any one of their stakes or stakeholders if you like, in isolation. Their interest has to go together, and the job of a manager or entrepreneur is to work out how the interest of customers, suppliers, communities, employees and financiers go in the same direction.

Now, think about how important each of these groups is for business to be successful, think about a business that's lost its edge with its customers that has products and services that its customers don't want as much or that they don't want at all that's a business in decline.

Think about a business who manages suppliers in a way that the suppliers don't make them better. The suppliers just take orders and sell stuff, but the suppliers aren't trying to make a business more innovative, more creative that's a business that's in a holding pattern and probably in decline.

Think about a business whose employees don't want to be there every day who aren't using a hundred percent of their efforts and they're energy and their creativity to make the business better that's a business in decline.

Think about a business that's not a good citizen in the community that routinely ignores or violates local custom in law. That doesn't pay attention to the quality of life in the community, doesn't pay attention to issues of corporate responsibility of sustainability, of its effects uncivil society that's a business that soon to be regulated into decline.

Think about a business that doesn't create value doesn't create profits for its financiers, its shareholders, banks and others, that's a business in decline

So stakeholder theory is the idea that each one of these groups is important to the success of a business, and figuring out where their interests go in the same direction is what the managerial task and the entrepreneurial task is all about.

Stakeholder theory says if you're just focused on financiers you miss what makes capitalism tick. What makes capitalism tick is that shareholders and financiers, customers, suppliers, employees, communities can together create something that no one of them can create alone."

Stakeholder Theory references

Freeman, R. E. 1984. Strategic Management: A Stakeholder Approach. Boston: Pitman. Latest edition Strategic Management: A Stakeholder Approach

R. Edward Freeman, Stakeholder Management [online] Available at: http://redwardfreeman.com/stakeholder-management/ [Accessed 24 July 2013]

Further reading

The Blackwell Handbook of Strategic Management (Blackwell Handbooks in Management) by R. Edward Freeman (Author), Jeffrey S. Harrison (Author), Hitt (Author). 3 Oct 2001.

Stakeholder Theory resources

Some critics of Stakeholder Theory say that it creates a paradox. This article explains the stakeholder paradox

The CEO of Cummins explains why she embraces the stakeholder model

Watch Ed. Freeman answer the key question What are stakeholders?

Watch Thomas M. Jones explain What's next for Stakeholder Theory
 
 
Stakeholder Management Templates