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Today’s consumers have higher expectations of the brands they support, demanding more ethical business practices—from environmentally friendly production to inclusive hiring. Research reveals that consumers are more likely to champion businesses with “purpose,” as evidenced in sustainable business practices, issues advocacy, and the fair treatment of workers.
Companies are likewise starting to acknowledge the importance of adopting new value frameworks. Businesses once focused primarily on delivering results to shareholders or stockholders—the individuals who invest in a company and profit from its success. In the 21st century, businesses are increasingly taking a more inclusive attitude that considers stakeholders.
The stakeholder theory is an excellent way to expand narrow notions of business success. A stakeholder is any individual, entity, or group impacted by a company’s operations. This could include workers, suppliers, customers, and more. The stakeholder theory argues that a company wouldn’t exist without stakeholders, presenting the corporate world as an ecosystem of interconnected groups. In this ecosystem, businesses should consider all stakeholders’ needs to ensure their long-term success.
Stakeholder theory explained: Basic concepts and principles
The stakeholder theory was defined by R. Edward Freeman and detailed in his work, “Strategic Management: A Stakeholder Approach” (Pitman Publishing, Boston, 1984). Freeman argued that a company should create value for all parties integral to its livelihood (stakeholders), not just those who stand to profit (shareholders). His stance was a counterpoint to economist Milton Friedman’s shareholder theory, which argued that companies should maximize shareholder value.
Successfully implementing the stakeholder theory requires recognizing the interdependence of business and society. Stakeholder theory scholar Jeffrey S. Harrison explains how this creates competitive advantages for businesses: “Stakeholder configurations created by entrepreneurs, because they are complex social systems, can lead to sustainable competitive advantages for the organizations these entrepreneurs create.”
Freeman, now a stakeholder theory scholar at the University of Virginia Darden School of Business and author of “Stakeholder Theory: The State of the Art,” cites various examples of business leaders who “get it” and have embraced “conscious capitalism.” One case study Freeman cites is that of the CEO of The Container Store, Kip Tindell. Tindell recognizes that taking care of workers means workers take care of customers—ultimately driving business and profits. Everybody wins.
Who’s a stakeholder?
The first step in adopting the stakeholder theory is listing all company stakeholders. You can then match this list against a list of business objectives (short- and long-term goals) and activities (projects, key performance indicators, etc.). A stakeholder analysis aims to determine which stakeholders benefit from which business successes. You can then identify gaps—which stakeholders are failing to benefit?—and determine how to close those gaps.
According to stakeholder theory expert Thomas Donaldson, a stakeholder is “an individual or organization likely affected by the performance of an organization.” Here’s a list of common stakeholders and a brief description of how the stakeholder theory might conceptualize success in the form of stakeholder benefit:
- Team members: Team members treated well, fairly compensated, and given opportunities for advancement are more likely to enjoy the workplace. Morale will be better. This can result in a more motivated workforce and improved individual productivity, boosting the company’s overall productivity and, ultimately, profits.
- Independent professionals: Today’s workforces are frequently hybrid, featuring full-time and independent professionals. Positive partnerships with independent workers focus on outcomes instead of activities, avoiding micromanaging. Companies that trust in independent workers’ accountability, flexibility, and personal agency empower them. This means more positive collaboration and decreased turnover, reducing HR efforts and costs.
- Suppliers: A company relies on suppliers to provide essential goods and services needed to maintain business operations. According to the stakeholder theory, companies should treat suppliers fairly and ensure the supplier is acting ethically and fairly. This fosters positive working relationships and paves the path toward lasting relationships.
- Customers: Customers are critical to a company’s success. Treating customers fairly and equitably—for example, with the implementation of comprehensive, accessible, and courteous customer support resources—makes life easier for customers. In turn, this fosters brand loyalty and decreases the likelihood of customers seeking the same products or services from other providers.
- Community groups: Community groups could be neighborhoods or municipalities where a business operates. A company that fosters a positive reputation in the community—for example, contributing to area charities, hiring locally, and treating workers equitably—will nurture support and loyalty among area buyers.
Why you should care about the stakeholder theory: Advantages of this approach
Applying the stakeholder theory can benefit organizations in an operational, ethical, and practical sense. Here are some ways that companies can benefit.
1. Clarifying ethical quandaries
Stakeholder theory is a practical model that can guide your business’s organization and operational processes. It’s also an ethical guideline that can help resolve moral conflicts regarding your business practices. When it comes to tough decision-making, like selecting vendors (e.g., choosing the lowest-cost provider versus a more sustainable provider), the stakeholder theory can guide morally smart choices.
2. Creating sustainable growth
If a company alienates a key stakeholder group by ignoring their interests, it may face hurdles to business operations. For example, ignoring the needs of workers can result in decreased morale, while providing bad customer service can diminish consumer loyalty. Prioritizing stakeholder interests supports sustainability and growth. Growth could also entail connecting with new stakeholders—for example, hiring independent professionals to support digital transformation.
3. Fostering long-term partnerships
Long-term business partnerships allow for more reliable operations. For example, switching to a new vendor can require complex adjustments to order placement, processing, and delivery processes—resulting in potential delays and interrupting operations. When a company has suppliers it can count on, it saves money, time, and stress on vetting new connections. By respecting the vendor stakeholder’s needs and wants, a company improves the odds of fostering successful relationships.
4. Earning public support
Companies have to work harder than in the past to earn and maintain support. A stakeholder-first approach to business can earn public support. For example, North American consumers are now eager to support brands that are environmentally conscious and exhibit good hiring practices.
5. Developing a purposeful culture
As mentioned, consumers are increasingly flocking to brands with “purpose,” as evidenced by demonstrable corporate social responsibility (CSR). The stakeholder theory can help a company develop a purposeful culture by encouraging it to reflect on the needs of diverse stakeholders, from trade associations to local communities. It’s no longer enough to simply peddle a product or service.
6. Establishing industry influence
Finally, companies that exhibit stakeholder-driven business practices can establish themselves as influencers in their field. Again, the public is now quicker to recognize companies that take care of their stakeholders and disparage those that don’t. This trend is likely to continue, and companies that have demonstrated a strong stakeholder-first approach can become leaders.
Assemble the right team for stakeholder success
As the modern business world continues to evolve toward more ethical business practices that look beyond the needs of the “1%,” the stakeholder theory can serve as an excellent guide for greater inclusivity. By recognizing the importance of stakeholders through their organizational structures and operational processes, companies can foster positive relationships with the stakeholders they rely on—and enjoy greater long-term success.
Stakeholders are at the heart of any company’s success. Collaborating with the right professionals is essential. Upwork provides a far-reaching platform where you can hire the right freelance experts to join your company’s ecosystem. You can also find experts on the platform to help in your mission to implement the stakeholder theory in your organization. Whatever you need, Upwork has you covered.
