STAKEHOLDER
THEORY
WHAT IS STAKEHOLDER?
Any person, or organization who can be
positively or negatively impacted by, or
cause an impact on the actions of a
company.
(R. Edward Freeman, 1984)
STAKEHOLDER THEORY
• A conceptual framework of business ethics and organizational management
which addresses moral and ethical values in the management of a business or
other organization.
• Stakeholder theory looks at the relationships between an organization and
others in its internal and external environment. It also looks at how these
relationships affect how the organization conducts its activities. You can think of
a stakeholder as a person or organization that can affect or be affected by your
organization. Stakeholders can come from inside or outside of the organization.
• Corporations are not simply managed in the interests of their shareholders
alone, but that there are a whole range of stakeholders. It identifies and models
the groups, which are stakeholders of a corporation and both describes and
recommends various methods to satisfy them. Ethical organization recognizes
its responsibilities towards all stakeholders.
STAKEHOLDER THEORY (cont’d)
• Two broad stakeholder theories
Friedman – focus on the shareholders as they only stakeholders who matter. The
business of business is making a profit and building shareholder value the prime
purpose. (Milton Friedman)
Freeman - The quickest way to destroy shareholder value is to ignore
stakeholders. Stakeholder theory is about identifying the groups who are
stakeholders in a corporation and need to be managed - R. Edward Freeman
(1984)
“Every business creates, and sometimes destroys, value for
customers, suppliers, employees, communities and financiers.
The idea that business is about maximizing profits for
shareholders is outdated and doesn’t work very well, as the
recent global financial crisis has taught us. The 21st Century is
one of “Managing for Stakeholders.” The task of executives is to
create as much value as possible for stakeholders without
resorting to tradeoffs. Great companies endure because they
manage to get stakeholder interests aligned in the same
direction.”
R. Edward Freeman
STAKEHOLDER THEORY (cont’d)
NORMATIVE BRANCH POSITIVE BRANCH
Ethical (moral) / Prescriptive Managerial
Ethical perspective of SHT argues Attempt to explain when corporate
that all stakeholders have the right management will be likely to attend
to be treated fairly by an to the expectations of particular
organization, and that issues of (typically powerful) stakeholders.
stakeholder power are not directly According to Gray et al. (1996),
relevant. this alternative perspective tends
The impact of the organization on to be more ‘organization-centred’.
the life experiences of a
stakeholder should be what
determines the organization’s
responsibilities to that stakeholder,
rather than the extent of that
stakeholder’s (economic) power
over the organization.
EXAMPLES
• Not all stakeholders are equal. Some
stakeholders are less important to a
business than others.
• Clarkson (1995) divide stakeholder into:-
PRIMARY STAKEHOLDER
SECONDARY STAKEHOLDER
PRIMARY STAKEHOLDER
• People or groups seen by the business to be vital to
the organization's success or failure.
• For a restaurant a supplier may be considered a
primary stakeholder, as the entire reputation depends
upon the quality of the food from the supplier.
• For all organizations the key primary stakeholders
are:-
• The owners / shareholders
• The staff / managers
• The customers
• Some also regards suppliers as key stakeholders
SECONDARY STAKEHOLDER
• People or group who feel involved in the organization's
success or failure, whether or not the management
agree.
• Example of secondary stakeholders: Local residents
who may be affected by traffic noise from deliveries or
by pollution from smelly or smoky factory or firms.
Stakeholders and corporate reporting
Guthrie et al. (2006, p.256) stated that:
• “According to stakeholder theory, an organisation’s management
is expected to undertake activities deemed important by their
stakeholders and to report on those activities back to the
stakeholders… stakeholder theory highlights organisational
accountability beyond simple economic and financial
performance”.
• The organisation has an obligation to provide information about how its
activities affect the stakeholders (Deegan, 2000). In this regard, social
and environmental disclosure for example has been found to be part of
mechanism for organisations to dialogue with stakeholders (Gray et al.,
1995b).
