Stakeholder Theory Guide: 3 Stakeholder Management Styles

In business ethics, stakeholder theory states that a company’s management strategy must take into account all stakeholders involved for the company to be successful. While a company may survive in the short-term by focusing solely on profits, this ethical theory believes it's essential to acknowledge all parties who have an interest or concern in the company, i.e. its stakeholders, to succeed long term. Stakeholder theory, also called stockholder theory, was first detailed by University of Virginia business professor and philosopher R. Edward Freeman in his 1984 book Strategic Management: A Stakeholder Approach.

Stakeholder theory argues that a business has a corporate social responsibility to improve society as a whole and therefore must value all stakeholder relationships to be successful. By contrast, shareholder theory, developed by economist Milton Friedman, states that a company has a fiduciary duty to put its shareholders' needs first.

A stakeholder is any person or group who impacts or is impacted by a company's actions. There are two primary types of stakeholders:

1. 1. Internal stakeholders: Internal stakeholders operate within a company and can include employees, managers, business owners, and shareholders.
2. 2. External stakeholders: External stakeholders are not part of the company, but are affected by the company's actions. Examples of external stakeholders include customers, suppliers, financiers, local communities, trade associations, competitors, the government, and society.

To identify, understand, and engage with stakeholders, a company can conduct stakeholder engagement research and stakeholder analysis. The benefits of engaging stakeholders include:

• Shared value creation: Business leaders who factor stakeholder theory and ethical responsibilities into the decision-making process create a shared value between the business and society.
• Financial gain: When all stakeholders in a company feel valued, a company's public reputation improves, which can lead to financial profit. Employees will likely be more productive, customers more loyal, and financiers more trusting of the company.
• Societal gain: The tenets of stakeholder theory can encourage scientific innovation, improve a company's local community, create a healthy competitive market for other companies, and benefit the mental health of all stakeholders.

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.

1. 1. Descriptive: This approach examines stakeholder salience, or the importance of each stakeholder group to a company. This approach 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. 2. Instrumental: This approach uses data to determine the appropriate stakeholder management method to achieve the company's financial goals.
3. 3. Normative: 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 R. Edward Freeman's initial description of stakeholder theory.

Get the MasterClass Annual Membership for exclusive access to video lessons taught by business luminaries, including Bob Iger, Chris Voss, Robin Roberts, Sara Blakely, Daniel Pink, Howard Schultz, Anna Wintour, and more.