De Jargon a theory: The Stakeholder Theory of Firm

Employee motivation

The stakeholder theory of the firm is concept that looks at the various groups to which a corporation has a responsibility or duty of care.  On the surface stakeholder theory of firm is fairly straight forward to grasp, a corporation simply identifies all the parties they are responsible for in the course of running the corporation. However, the complexity of this theory lies in the various definitions of what constitutes a stakeholder and when do they become a stakeholder (or stop being one for that matter). As a result there have been many academic studies, further theories and definitions developed around ‘who is the stakeholder’, ranging from everyone who supports an organisation, to employees and suppliers, and communities. Even competitors can be considered a stakeholder.

Stakeholder Theory Defined

One of the more straightforward definitions of the stakeholder comes from Edward Freeman (1984) who first introduced the term to differentiate against the then popular belief that the stockholder was king (a result of when capitalists started investing & trading in companies and the stockmarket was born). This concept of stockholder as the only individual a corporation should feel accountable to was introduced by Milton Friedman (1970) who firmly believed the only person a corporation should feel accountable to are its owners to whom the corporation had a fiduciary responsibility. Freeman didn’t agree with this and felt that corporations should be responsible to a broader range of people, or society as a whole and in 1984 his original definition was ‘any group or individual who can affect of is affected by the achievements of the organisations objectives’. This was a little broad, so in 1993 with fellow theorist William Evan, the definition of a stakeholder of corporation become an individual or group which either: is harmed by, or benefits from, the corporation; or whose rights can be violated, or have to be respected by the corporation (Crane & Matten p62). Nevertheless, the revised definition is still not a definitive way to identify stakeholders as it can very much depend on the corporation itself, the situation it is in or the individual project, it does however shift thinking away from it being all about the stockholder, which in itself is a good thing.

How do I use it?

So what relevance can this theory hold for you? In day to day business activity we are all, as employees, responsible to and for individuals both internal and external to the company. This includes your team members, subordinates, colleagues, supervisors or your customers, third party partners and suppliers. Understanding and taking responsibility for your day to day actions and the impact they have on other stakeholders is a great way to become more cognisant of the role you play in a corporation and the impact your decisions can have on the bigger picture. Take time to think before you start a new project or make the tough decisions about who it is impacting or benefiting and how – not only will it help you make better decisions, it will help you justify them should there be backlash.

 

References: Crane, A. & Matten, D. (2010) Business Ethics. Managing corporate citizenship & sustainability in the age of globilization. 3rd ed. Oxford, New York

 

About Zena Churchill

Zena Churchill is a Director at Max & Buddy Consulting. She has worked in senior level business roles across national and multinational corporations, as well as being a small business owner. Zena is a strategic thinker and brings a practical, straight-forward approach to marketing and social media. She has a passion for training & development running practical business workshops for small business. Zena is a Certified Practising Marketer (AMI), sometimes tutors in Marketing at the University of Wollongong and is a Senior Consultant with Trinity P3.

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