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Stakeholder Theory

Stakeholder theory has its roots in business and organization studies and is an umbrella term describing attempts to identify, explain, and prescribe an organization's relationship and responsibility to other actors. In the conventional model of the corporation, managers are seen as primarily beholden to the interests of their stockholders, or those with an economic share in the corporation. Stakeholder theories depart from the conventional, primarily profit-oriented business approach by adopting a broader conception of who should be seen as having a legitimate stake in an organization's functioning. In contrast to stockholders, which refers only to those with a financial interest in an organization, the term stakeholders can include any human or nonhuman actor who influences and is influenced by an organization. The stakeholder perspective has developed in response to growing concerns about the social and environmental impacts of corporations.

History

A classic business perspective holds that the corporation is the private property of its shareholders and thus conceives of the corporation in fiduciary duty to its investors. Within this perspective, a corporation's accountability is limited to its stockholders and to a lesser extent, to its employees, suppliers, and customers. Throughout the 1960s and 1970s, influential Chicago School economist Milton Friedman exemplified this position, arguing that a corporation's only social responsibility included obtaining the greatest possible profit for its shareholders. In 1984, Edward Freeman published his book, Strategic Management: A Stakeholder Approach, which laid the groundwork for a contrasting, stakeholder perspective of the social responsibility of corporations. Stating that a corporation and its managers had an interest in attending to actors beyond their stockholders, Freeman proposed a model of stakeholder management that included tactics for identifying and responding to multiple stakeholders. Over the next decade, Freeman's book sparked much debate and extension. In their 1995 article, Thomas Donaldson and Lee Preston catalogued nearly 100 articles and a dozen books appearing on the subject. They identified three uses of stakeholder theory: (1) descriptive—when theorists use stakeholder theory to explain the characteristics and behaviors of actually existing corporations; (2) instrumental—when theorists use stakeholder theory to understand how to accomplish desired (often managerial) outcomes, such as increasing profitability and growth or warding against lawsuits; and (3) normative uses—when theorists use the theory in a prescriptive manner according to a set of ethical or philosophical principles, such as to argue for greater corporate social responsibility. Donaldson and Preston concluded that the justification for stakeholder theory lies in its normative value, or in its ability to provide a more ethically just vision of the corporation.

Since the 1990s, the use of stakeholder theory has become increasingly tied to debates about corporate social responsibility, natural resources management, public health, and sustainable development. Stakeholder theory has also expanded beyond its business origins to inform the work of policymaking, nongovernmental organizations, and community-based organizations and activists. In addition, the use of the term stakeholder to describe groups with an interest in a particular outcome has become increasingly commonplace.

Identifying and Prioritizing Stakeholders

One of the most controversial issues related to stakeholder theory includes stakeholder identification, or defining who counts as a legitimate stakeholder (including who is able to make that determination). Although definitions vary across academic disciplines and particular contexts, stakeholders can range from individuals, such as an employee, to groups, such as customers or community members. Stakeholders can also include systems, such as a public health system, or nonhuman agents and systems, such as a regional watershed or forest.

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