There are more and more people who are raising their voices, demanding a more

sustainable way of operating businesses. In fact, in times of climate change and

global pollution, companies must become more sustainable. Next to green
innovations, the stakeholder theory is probably the most crucial element
in making businesses more sustainable. In fact, it can serve as a blueprint for
creating a sustainable business model.

Stakeholder Theory?
The stakeholder theory assumes that a company can only continue to survive in the
long-term if it focuses on providing value to all stakeholders equally. It is based
on the assumption that businesses can only be considered successful when they
deliver value to the majority of their stakeholders. It goes hand-in-hand with CSR
(Corporate Social Responsibility) and, therefore, sustainability as well. This means
that profit alone cannot be considered the only measure of business success, and
value creation is not just about money.

A stakeholder is any party that has an interest in a company and can either
affect or be affected by the business. Typically, investors, employees, customers,
and suppliers are among the key stakeholders of a business.

However, today a large number of companies is mostly concerned about providing

value to investors, disregarding the impact of their business on their other
stakeholders. This is exactly what the stakeholder theory is critizising!

Instead, it argues that companies play a vital role in our society (creating jobs,
driving innovations, improving quality if life, etc.) and that therefore their
success must be valued as a whole, not just in the returns they make for their
shareholders.

It’s about PURPOSE and value maximization, not wealth maximization!

Types of Stakeholders
Generally, stakeholders can be divided into two groups: internal & external
stakeholders. In the following section we’ve summarized the most common types
of stakeholders and look at the unique needs (“stakes”) that each of them typically
has. The goal is to put yourself in the shoes of each type of stakeholder and see
things from their point of view.

Internal Stakeholders
Internal stakeholders are, as the name suggests, stakeholders that exist inside a
business. These are stakeholders who are directly affected by a project, such as
employees.

1. Employees
Stake: Employment income and safety

Employees have a direct stake in the company in that they earn an income to
support themselves, along with other benefits (both monetary and non-monetary).
Depending on the nature of the business, employees may also have a health and
safety interest (for example, in the industries of transportation, mining, oil and gas,
construction, etc.).

2. Team leads & Executives

Stake: Resources, trust and freedom

Whereas team leads & executives are employees too, they have additional interests.
In order to keep their teams and departments happy and motivated they need the
support of their company. This can include the provision of resources such as time &
budgets for team building events, team dinners, or personal development initiatives.
Furthermore, they need to be trusted by investors and be given the freedom to lead
their teams in a way to achieve their business goals.

3. Shareholders / Investors (Business Owners)

Stake: Financial returns

Investors include both shareholders and debtholders. Shareholders invest capital in

the business and expect to earn a certain rate of return on that invested capital.
Investors are commonly concerned with the concept of shareholder value. Lumped
in with this group are all other providers of capital, such as lenders and potential
acquirers. All shareholders are inherently stakeholders, but stakeholders are not
inherently shareholders.

External Stakeholders
External stakeholders are those who have an interest in the success of a business
but do not have a direct affiliation with the projects at an organization. A supplier is
an example of an external stakeholder.

1. Customers
Stake: Product/service quality and value

Many would argue that businesses exist to serve their customers. Customers are
actually stakeholders of a business, in that they are impacted by the quality of
service/products and their value. For example, passengers traveling on an airplane
literally have their lives in the company’s hands when flying with the airline.

2. Suppliers
Stake: Revenues and safety

Suppliers and vendors sell goods and/or services to a business and rely on it for
revenue generation and on-going income. In many industries, suppliers also have
their health and safety on the line, as they may be directly involved in the company’s
operations.

3. Local communities
Stake: Health, safety, economic development

Communities are major stakeholders in large businesses located in them. They are
impacted by a wide range of things, including job creation, economic development,
health, and safety. When a big company enters or exits a small community, there is
an immediate and significant impact on employment, incomes, and spending in the
area. With some industries, there is a potential health impact, too, as companies
may alter the environment.

4. Trade associations
Stake: Membership fees

Trade and industry associations are stakeholders that represent multiple members of
one business sector or industry. They are usually set up to represent their members’
interest in national policy processes and to disseminate information to and from their
members. Trade and industry associations are essential in consultation process as it
is usually impossible for individual companies/entities to follow and participate in all
consultative processes for reasons of lack of time and information.

5. Competitors
Stake: Market share

Competitors can also be an important stakeholder element in that they are materially
affected by the actions taken by a company. Likewise, should a competitor introduce
changes, for example to its marketing strategy, a company could be forced to alter
their strategy too. In assessing competitors as a stakeholder group, comapnies
should try to uncover what information is available concerning the status of potential
rival projects being developed within competing firms. Further, where possible, the
lessons learned by competitors can be an important and useful source of information
for a company which is initiating a similar project.

6. Governments
Stake: Taxes, GDP & public opinions

Governments can also be considered a major stakeholder in a business, as they

collect taxes from the company (corporate income taxes), as well as from all the
people it employs (payroll taxes) and from other spending the company incurs (sales
taxes). Governments benefit from the overall Gross Domestic Product (GDP) that
companies contribute to.

7. Media
Stake: Information

It’s no secret that media are powerful! They can make or break your business in a
matter of days. The media industry includes firms that specialize in broadcast
content and delivery, including print, internet, television, radio, and direct mail. In
addition, the media helps shape consumer attitudes toward business. Media
companies are always happy to report on any topic that they think might be
interesting to their audiences. As a company, it is key to use the media to your
advantage and prevent any major negative coverage.

8. Society
Stake: Social purpose

The society in wich a company operates is another key stakeholder as it is (usually

indirectly) impacted by the actions that the company takes. Social values should be
an essential part of a company’s identity. If a company doesn’t have any social
purpose, what’s the reason for its existence in the first place? In fact, if the society
thinks that your business doesn’t have a social purpose or is even working against
public interest, there is a likelyhood you will notice this in your numbers. Many
companies have gone bankrupt already because of not properly communicating
their social purpose.

9. Environment
Stake: Environmental health

Finally, the environment is another key stakeholder of any business. Although it

cannot express itself like humans can, it still has a huge impact on businesses. In
fact, the environment’s impact on business performance is hugely underestimated by
most companies. Just think about environmental issues such as climate change or
pollution, which (already today) make it impossible to opertate for certain types of
businesses. Ultimately, environmental activist groups are gaining more and more
power, making it crucial to consider the environment as a legitimate stakeholder.

Stakeholder Theory vs
Shareholder Theory
There is a longstanding debate among economists and business leaders as to the
social responsibilities of companies. While some believe companies should focus
their efforts solely on profits, and that way serve only the needs of shareholders,
others believe that companies have an ethical responsibility to also serve the needs
of their other stakeholders.

Whereas opponents of the shareholder theory have the opinion that a company’s
sole responsibility is to make money for its shareholders. They view profits as a
company’s only purpose and argue that a company has no real social responsibility
to the public, since its only concern is to increase profits for its shareholders. The
shareholders, in turn, would then privately shoulder any social responsibility later on.

However, in contrast to this purely profit-driven approach to business,

the stakeholder theory suggest to go beyond the focus on shareholders and view
them as one of many stakeholders a company needs to serve. According to the
stakeholder theory, creating value for all its stakeholders is the only way a company
can survive and thrive in the long-term.
6 Principles of Stakeholder
Theory
The stakeholder theory is based on 6 fundamental principles. Only by applying
these principles, a company can be considered to act according to the stakeholder
theory.

 1. Principle of Entry & Exit

According to this principle, there must be clear rules that delineate, For example, the
rules when it comes to hiring employees and terminating their employment should be
clear-cut and transparent.

 2. Principle of Agency
This principle states that the manager of a firm is an agent of the firm and therefore has
responsibilities to the stakeholders as well as the shareholders.

 3. Principle of Externalities
This is concerned with how a group that does not benefit from the actions of the
corporation has to suffer certain difficulties because of the actions of the corporation. The
principle of externalities suggests that anyone who has to bear the costs of other
stakeholders has the right to become a stakeholder as well based on stakeholder theory.
Anyone who is affected by a business becomes a stakeholder.

 4. Principle of Governance
This principle is concerned with how the rules governing the relationship between the
stakeholders and the firm can be amended. With unanimous consent, any changes can
be transparently communicated and executed.
  5. Principle of Contract Costs
Each party to a contract should either bear equal amounts when it comes to cost, or the
cost they bear should be proportional to the advantage they have in the firm. Not all of
these costs are financial in nature, so they may be difficult to quantify.

 6. Principle of Limited Immortality

This principle deals with the longevity of a firm. To ensure the success of the organization
and its owners alike, it is necessary for the organization to exist for a prolonged period of
time. If the firm only exists for a very limited period of time, it would be advantageous for
some of the stakeholders and disadvantageous for others. This violates the concept of a
stakeholder theory. Thus the firm must remain in existence for a length of time, and it
should be managed in a way that ensures its survival. “Limited” immortality refers to the
fact that the firm can be long-lasting but it is impossible for it to actually be immortal.

3 Approaches to Stakeholder
Theory
In 1995, business professors Thomas Donaldson and Lee E. Preston wrote an
influential paper—“The Stakeholder Theory of the Corporation: Concepts, Evidence,
and Implications”—arguing that there are three ways a company can approach
stakeholder theory.

We’ve quickly summarized them for you below:

1. Descriptive approach to stakeholder

theory
This approach examines stakeholder salience, or the importance of each
stakeholder group to a company. It acknowledges that every stakeholder group has
its own interests that affect the company in various ways, and the company must
determine a fair system to balance the interests of each group.

2. Instrumental approach to
stakeholder theory
This approach uses data to determine the appropriate stakeholder management
method to achieve the company’s financial goals.

3. Normative approach to stakeholder

theory
This approach follows the principle that the interests of all stakeholder groups have
value outside of benefiting the company and shareholder’s interests. The normative
approach establishes corporate ethical guidelines and is the approach that most
closely aligns with the initial description of the stakeholder theory.

10 Benefits of Stakeholder
Theory
1. Clarifying ethical dilemmas
Stakeholder theory is a practical model that can guide your business’s organization
and operational processes. It’s also a way to prevent greenwashing and an ethical
guideline that can help resolve moral conflicts regarding your business practices.
When it comes to tough decision-making, like selecting vendors (e.g. choosing the
lowest-cost provider versus a more sustainable provider), the stakeholder theory can
guide morally smart choices.

2. Creating sustainable growth

If a company alienates a key stakeholder group by ignoring their interests, they may
face hurdles to business operations. For example, ignoring the needs of workers can
result in decreased morale, while providing bad customer service can diminish
consumer loyalty. Prioritizing stakeholder interests supports sustainability and
growth. Growth could also entail connecting with new stakeholders—for example,
hiring independent professionals to support digital transformation or the circular
economy.

3. Fostering long-term partnerships

Long-term business partnerships allow for more reliable operations. For example,
switching to a new vendor can require complex adjustment of order placement,
processing, and delivery processes—resulting in potential delays and interrupting
operations. When a company has suppliers it can count on, it saves money, time,
and stress on vetting new connections. By respecting the vendor stakeholder’s
needs and wants, a company improves the odds of fostering successful
relationships.

4. Earning public support

Companies have to work harder than in the past to earn and maintain support. A
stakeholder-first approach to business can earn public support. For example, North
American consumers are now eager to support brands that are environmentally
conscious and exhibit good hiring practices.

5. Developing a purposeful culture

As mentioned, consumers are increasingly flocking to brands with “purpose,” as
evidenced by demonstrable corporate social responsibility (CSR). The stakeholder
theory can help a company develop a purposeful culture by encouraging it to reflect
on the needs of diverse stakeholders, from trade associations to local communities.
It’s no longer enough to simply peddle a product or service.

6. Establishing industry influence

Finally, companies that exhibit stakeholder-driven business practices can establish
themselves as influencers and leaders in their field. Again, the public is now quicker
to recognize companies that take care of their stakeholders and disparage those that
don’t. This trend is likely to continue, and companies that have demonstrated a
strong stakeholder-first approach can become leaders.

7. Improving talent acquisistion

More and more people are concerned about their personal impact on the
environment. And their job is no exception to that! In the modern ecocnomy, workers
want to not only work for their paycheck, but also for a bigger purpose. This can
include things like equality, justice, climate action, and peace. By applying the
principles of the stakeholder theory you can create a workspace with a bigger
purpose to society and the environment. As a result, you’ll likely attract more talent
and keep staff motivated. Finally, it is a great way to retain talent as workers feel that
they are contributing to create a better world.

8. Increasing productivity of workers

Taking all stakeholders into account when making business decisions does not only
help in acquiring and retaining talent, but it also helps to increase the productivity of
your workforce. If your staff is closely connected to your company’s vision and
shares the same values, it is more likely that they are ready to go that additional mile
that brings your business forward. Furthermore, implementing the stakeholder theory
in your company is also going to enhance creative & critical thinking of your
employees, which in turn leads to higher productivity levels as a result of more
effective processes.

9. Improving retention
Additionally, focusing on each stakeholder equally has the benefit of increased
retention in all aspects of your business. By satisfying all stakeholders, you can
heavily improve your company’s retention. Your customers are more likely to refer to
you and your products. Suppliers are ready to treat you as a superior customer. The
government is more likely to enact laws that are beneficial to your business. And the
media are happy to share your company and your products with the public, which in
turn will potentially perceive your company and your products as superior compared
to the products of your competitors.

10. Increasing investments by

financiers
Financiers are loooking at the potential long-term health of your business. If they
think that your business won’t be able to survive and grow in the long-run, they
probably won’t be ready to provide you with the capital that you need in order to
bring your company to the next level. By applying the key ideas of the stakeholder
theory (which has the shared goal of long-term success), you can prove to your
financiers that they will be missing out on a huge deal when not investing in your
company.

Stakeholder Theory Example

As an example of how stakeholder theory works, imagine an automobile company
that has recently gone public. Naturally, the shareholders want to see their stock
values rise and/or receive dividends, and the company is eager to please those
shareholders because they have invested money into the firm. However, stakeholder
theory says that those investors are only one type of stakeholders that the company
should strive to serve.

In this example, other stakeholders would include:

 Employees
They expect to be paid fairly and work in safe conditions. If the
company doesn’t meet these basic expectations and treats its
employees poorly rather than as valued team members, it can harm
the business in the long run. There will be constant employee
turnover, and the firm will earn a negative reputation among the
workforce, ultimately weakening the company and its potential to
earn higher revenues.
 Manufacturers/suppliers
Under stakeholder theory, manufacturers, suppliers, and other
 vendors that the auto company works with are
considered stakeholders. The auto company should treat these
vendors fairly in business dealings and consider their employees and
other stakeholders. For instance, if a supplier has a reputation for
mistreating its employees and underpaying, then stakeholder theory
would hold that you should find a different supplier that is more
aligned with your business ethics.

 Customers
The car company’s customers are some of its biggest stakeholders.
According to stakeholder theory, a top priority for the company
should be producing a vehicle that safely transports its customers
from point A to point B as reliably, comfortably, and efficiently as
possible. Of course, on top of that the car company has to take into
account their customers needs and serve them accordingly.

 Customers’ neighbors and community members

Since automobiles produce emissions that can impact the
environment, stakeholder theory says that anyone who lives in
proximity to one of these vehicles may be affected and should be
viewed as a stakeholder. With these stakeholders in mind, the
company may adopt more fuel-efficient technology and cut down
harmful carbon emissions.

 Governmental bodies
The carmaker must also consider any city, county, or state-mandated
requirements, such as emission standards or safety features. The
governmental agencies that enforce these standards are another set
of stakeholders for the auto company.
Criticism of Stakeholder Theory
Critics of stakeholder theory have said that the needs and interests of the various
stakeholder groups simply cannot be reconciled equitably. Under stakeholder theory,
stakeholders represent multiple large and diverse groups, and one or more of those
groups will inevitably take a back seat at some point in the process. Similarly, certain
groups of stakeholders will hold more power or influence than others, which can
create tension and discord.

For example, you cannot suffer to meet the hunger of various non-
financial stakeholders. If there is a lower demand for your products, you cannot just
pile up your inventory to please your suppliers. With an increase in pay of your
employees, you cannot satisfy your financiers who are concerned with the cash
flows retained by the entity.

Essentially, a business (and any other type of organization) stands or falls with
money. If you cannot finance your operations in the long-term, your business is
simply not going to survive. That is why, there are many who argue that, even
though all stakeholders are important, the shareholders’ needs must always be
served first.

Finally, critics say that it’s impossible to apply the stakeholder theory to all
businesses equally. This is because every business is operating in a unique
(stakeholder) environment that needs unique approaches to stakeholder
management. For one company it might make sense to invest in resources for
meeting the needs of environmental activism groups, whereas for another company
it would make more sense to invest the same resources elsewhere, for example
in green innovations or in a more sustainable workspace for its employees.
Applying Stakeholder Theory in
Practice
1. Define your stakeholders
Begin with stakeholder identification and figure out who your stakeholders are. You
can start with the ones we discussed in this article so far, but you need to think
carefully about your own personal set of circumstances.

Examine the function of your organization and then decide who you care about. Who
will be impacted by your work and activities?

If you’re struggling to come up with a satisfying list of stakeholders, talk to your

colleagues, friends, and family – ask them whom they think your organization should
consider a stakeholder.

2. Analyze your activities

Look at your strategic plan – the objectives, goals, projects, and KPIs you use to run
your business. Start categorizing these activities into the list of stakeholders you
have identified.

Do this by thinking about which stakeholders will benefit from your success against
any given goal.

 Focus on the ‘outcomes’ or ‘objectives’ in your strategic plan rather

than the 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 that are aimed at friends and family for example, but by
thinking laterally you’ll probably find that some of the things you’re
working on will help your friends and family indirectly at least.

3. Understand your gaps

Let’s be realistic – the majority of your goals will likely be contributing to either your
shareholders, customers, or employees. At least that’s true for most commercial
businesses.

And that’s perfectly ok. Have a look at how your own strategy maps against the
stakeholders you’ve said you consider important. Does the breakdown look about
right?

4. Create a communication plan

It’s important to engage your stakeholders with strong and efficient communication.
Here are some tips:

 Firstly, create a contacts list and share it with all the stakeholders.
 Build trust. Ensure your communication — whether in person, over
the phone, or online — is courteous, helpful, and frequent.
 Next, consider potential risks and opportunities with each
stakeholder.
 Take ownership of projects and any issues, and prepare to
compromise.
 Finally, deliver messages early and often.

5. Adapt as your business grows

The bigger your business becomes, the more different groups will be affected.
Stakeholder management is the process of recognizing and adapting to the needs of
these different groups, winning their support, and fostering good relationships. This
is all crucial to the long-term health of your business. As Edward Freeman (the
founder of the stakeholder theory) once said: “If you can get all your stakeholders to
swim or row in the same direction, you’ve got a company with momentum and real
power.”