Stakeholder Theory has emerged as a crucial theory in management studies, concerned with issues related to the ethics and morals in managing a business. In management terms, the theory is principally interested in making sure that “satisfaction and moral responsibility is delivered to a range of groups and individuals, within the context of the organisation” (Todd et al. 2017:496). Essentially, it suggests that an organisation should try to maximise value to all its stakeholders, by emphasising the links among the organisation and all the actors that have a stake in it. A stakeholder can be the customers, sponsors, employees, community, shareholders, suppliers, volunteers, among others.

According to Freeman et al. (2004:364), “The focus of stakeholder theory is articulated in two core questions (Freeman 1994). First, it asks, what is the purpose of the firm? This encourages managers to articulate the shared sense of the value they create, and what brings its core stakeholders together. This propels the firm forward and allows it to generate outstanding performance, determined both in terms of its purpose and marketplace financial metrics. Second, stakeholder theory asks, what responsibility does management have to stakeholders? This pushes managers to articulate how they want to do business—specifically, what kinds of relationships they want and need to create with their stakeholders to deliver on their purpose”.

But, did you know that there are different approaches to the stakeholder theory? Some look at the stakeholder-organisation relationship, others at stakeholder salience, among others. Which means that to use such a theory, you first need to think about why and for what purpose are you going to use it.

Donaldson and Preston (1995) stakeholder theory, has the purpose of helping management handling uncertain environments, suggesting three aspects of the theory – descriptive, instrumental and normative. Descriptively, the theory assists in describing and explaining the actions and features of the organisation, including its nature, how management is approached and the process behind management. Instrumentally, the theory utilises empirical data to understand how to best manage stakeholders aiming to maximise the corporate goals. Lastly, as the authors argue, the normative aspect is the core one, because the theory determines how ethically an organisation should function.

Fundamentally, Donaldson and Preston (1995) approach deals “with uncertain environments normatively by suggesting moral reasons as to why firms should respond to various stakeholder demands, instrumentally by figuring out how firms could do so to their own benefit, and descriptively by holding up a mirror to firms that shows them what they actually do” (Bakker and Hond 2008:9).

Another approach was presented by Mitchell et al. (1997:854), the theory of stakeholder identification and salience – “the degree to which managers give priority to competing stakeholder claims” – which has the purpose of helping management deciding which claims should be prioritised at a given time. Essentially, the authors argue that the higher number of attributes – power, legitimacy and urgency – a stakeholder is perceived to possess by an organisation, the increasing level of salience they have. Thus, meaning that the interests of a stakeholder that possesses the combination of all three attributes will be prioritised over other interests. The authors developed a dynamic model that categorises stakeholders into three groups. Latent stakeholders, who only possess one attribute, meaning that these have a low level of salience. Expectant stakeholders, who possess two attributes having a moderate level of salience. And definitive stakeholders, who possess all three attributes and are perceived as highly salient.

In conclusion, if you are going to use this theory in your research, in your organisation, etc., first think about the reason why you need the theory. And only then decide on the approach that best fits your purpose. It is also important to mention that this was a very brief explanation and that there are many more approaches.

Further Suggestions to Read:

Donaldson, T., and Preston, L. E. (1995) “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications”. Academy of Management Review, 20(1), 65–91.

Freeman, R. E. (1984) Stakeholder management: framework and philosophy. Pitman, Mansfield, MA.

Freeman, R. E., Wicks, A. C., and Parmar, B. (2004) “Stakeholder Theory and ‘The Corporate Objective Revisited’”. Organizational Science, 15 (3) 364-369.

Friedman, A., and Miles, S. (2002) “Developing stakeholder theory”. Journal of Management Studies, 39(1), 1–21.

Mitchell, R. K., and Wood, D. J. (1997) “Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who and What Really Counts”. Academy of Management Review, 22(4), 853–886.

References

Bakker, F., and Hond, F. (2008) “Introducing the Politics of Stakeholder Influence”. Business and Society, 47(1), 8-20.

Donaldson, T., and Preston, L. E. (1995) “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications”. Academy of Management Review, 20(1), 65–91.

Freeman, R. E. (1984) Stakeholder management: framework and philosophy. Pitman, Mansfield, MA.

Freeman, R. E., Wicks, A. C., and Parmar, B. (2004) “Stakeholder Theory and ‘The Corporate Objective Revisited’”. Organizational Science, 15 (3) 364-369.

Mitchell, R. K., and Wood, D. J. (1997) “Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who and What Really Counts”. Academy of Management Review, 22(4), 853–886.

Todd, L., Leask, A., and Ensor, J. (2017) “Understanding primary stakeholders’ multiple roles in hallmark event tourism management”. Tourism Management, 59, 494-509.