Understanding stakeholder theory

In every organization, shareholders are a high priority, but there are other stakeholders and their interests should count, too. Stakeholder theory helps companies decide how to prioritize the various interests of their stakeholders. 

Using stakeholder theory, you can anticipate stakeholder needs and interests while planning your company’s strategy. 

What is stakeholder theory? 

Stakeholder theory helps organizations and project managers understand the relationships between different groups within and outside of the company. Through the stakeholder theory framework, managers can see who is impacted by decisions made in the organization and determine how to relate effectively with stakeholders. Who does the business work for? Stakeholder theory seeks to answer this question and explore its ramifications. 

For managers, stakeholder theory can have significant and lasting impacts on decision-making. Understanding how to use stakeholder theory and appreciating its value in managerial decisions can positively impact organizations. 

Examples of stakeholders can include: 

• Employees: The people who work for the organization, contractors, and others who are employed in some capacity by the company. 
• Suppliers: This could include manufacturers, contractors, the employees of contractors, and others working for companies connected to the company. 
• Community members: People who live in neighborhoods impacted by the company, businesses located in areas where the company operates, and others who are local to the community where the company operates. 
• Competitors: Other companies in the same industry or in adjacent industries, companies that offer similar products or services, and companies that have offerings that compete directly. 
• Governments: Public authorities, local or city governments, states, national governments, and other governing authorities. 
• Customers: Buyers, clients, and internal or external end users. 
• Shareholders/ Owners: Those who own stock in the company, are partners, or control the organization. 

If you extend your list of stakeholders outward, you may find that nearly everyone could become a stakeholder of your organization to some degree. Your list of stakeholders should be refined and sorted by relevance and impact. Even if you have dozens of stakeholders, your day-to-day stakeholder management strategy may only involve a handful of people. 

Stakeholder theory is helpful because it expands and broadens the list of people who have a “stake” in how management makes its decisions. Forgetting about stakeholders and focusing too intently on the needs of shareholders can blind organizations and even cause long-term strategic harm. 

History of stakeholder theory 

In order to understand stakeholder theory, it’s important to look closely at the framework’s older counterpart: shareholder theory. Shareholder theory holds that shareholders or owners of the company are the primary or only group the organization serves. All accountability, responsibility, and ultimate benefit from the company’s accomplishments rests with and accrues to the shareholders. Other groups, such as employees, have a secondary role in shareholder theory. 

Explanation of stakeholder theory  

Stakeholder theory claims that there’s a much larger group beyond the shareholders that every business must take into account when making decisions. Companies have a social responsibility to consider all stakeholders’ best interests. 

For example, a decision to open a new manufacturing plant shouldn’t just take shareholders’ needs for profitability into account. Companies should also consider the interests of local neighbors who live near the site, of employees who will be asked to relocate, and of customers who may experience changes in service quality as a result of the plant’s construction. 

Who counts as a stakeholder? 

Determining who is a stakeholder in your organization might require some additional consideration and analysis. Many global companies could have millions of potential individual stakeholders, while small businesses typically have a much smaller footprint. Traditionally, stakeholders are usually close to a company–either geographically or relationally. The internet significantly expanded the scope of influence for many organizations. Stakeholders can be anywhere and anyone. 

What is your company’s sphere of influence? That’s a good clue to who your stakeholders are: 

• Your communities: Beyond your local community, your organization may be part of other types of communities—your industry is one of them. Your organization may have an influence on others. A decision your team makes may have implications for others in your industry. 
• Internal stakeholders: Employees, internal customers, other divisions or subsidiaries, and other stakeholders inside your organization. 
• Other companies: Those companies you interact with. Suppliers, customers, or competitors. 
• Consumers: Individuals who could be customers or end users of your products or your customers’ products. 
• The public: Almost everyone else–these stakeholders might not interact with your company but could be impacted indirectly by what your company does. 

A company might have a broad sphere of influence, even if not everyone buys its product. For example, an innovative electric car manufacturer may directly influence the public’s conversations about transportation and gas-powered vehicles. 

Pros and cons of stakeholder theory 

Stakeholder theory has unique pros and cons. 

Pros of stakeholder theory 

Following stakeholder theory can lead organizations to pay close attention to their stakeholders. Stakeholders who are listened to and treated as valuable collaborators generally relate more favorably to the company. 

• Customer promotion: Keep your customers happy, for example, and those happy customers promote your organization. 
• Avoid PR disasters: If you’re keeping your stakeholders happy, you can better protect your company’s reputation. 
• Build goodwill: A strong positive reputation is a valuable asset that’s not easily replaceable. Stakeholder theory can help you establish goodwill. 
• Strengthen projects: Project managers benefit when their stakeholders feel engaged and appreciated. 

Cons of stakeholder theory 

Stakeholder theory presents some challenges for organizations also. 

• Prioritization: Almost inevitably, prioritizing the needs of one stakeholder can take away from other stakeholders. 
• Fairness: Treating all stakeholders fairly is a challenge, and it may even be impossible in some situations. 
• Shareholder theory: Sidelining one or more stakeholders gives you essentially the same results as a shareholder theory approach. Paying attention to shareholders is easy–they write the checks, so a cynical view of shareholder theory might argue that shareholders still benefit the most. 

Whenever you use stakeholder theory, be aware of the disadvantages. Be on the lookout for ways to make stakeholder management fit your company’s vision and mission in spite of the potential drawbacks. 

Successful stakeholder relationships are a valuable resource. Reach your company’s potential by engaging your stakeholders.