Stakeholder Theory and Analysis

Stakeholder Theory and Analysis is a framework that emphasizes the importance of considering all parties affected by an organization's actions, often referred to as stakeholders. This includes not only shareholders but also customers, employees, suppliers, community members, and other groups that may have an interest in the company’s operations and outcomes. The theory advocates for a balanced approach to decision-making, where the interests of diverse stakeholders are taken into account, aiming for ethical practices and long-term sustainability.

This approach contrasts with traditional business models that primarily focus on maximizing shareholder value. Stakeholder Theory posits that by acknowledging and addressing the needs of a broader range of stakeholders, organizations can achieve better overall performance and foster trust and loyalty among their various constituencies. Stakeholder analysis is a critical component, as it involves identifying stakeholders, understanding their needs and influence, and evaluating the potential impact of business decisions on these groups.

Overall, Stakeholder Theory encourages organizations to operate responsibly and transparently, fostering positive relationships that can ultimately lead to more resilient and successful business practices.

Published in: 2021

By: Zimmer, Scott

Subject Terms

Stakeholder Theory and Analysis

Abstract

Stakeholder theory emerged in the second half of the twentieth century and has its primary relevance to the fields of business, ethics, and law. While traditional thinking defined the duty of corporations and similar organizations as solely beholden to shareholders, stakeholder theory seeks to identify others who have an interest in the direction taken by an organization. Organizations must routinely identify stakeholders, analyze the effects on stakeholders of a particular action, and determine which stakeholder's interest is the most salient in a conflict.

Overview

The standard view holds that a corporation is responsible only to its shareholders, who are the people who have invested in the corporation by providing funds in exchange for a share in the ownership of the firm. The officers in charge of the corporation owe a fiduciary duty to the shareholders, meaning that they are required to act in the best interests of the shareholders. This is normally interpreted to mean taking any action that will increase profits, as this is the most measurable means by which the actions taken by a corporation can benefit its shareholders (Lindgreen, 2012).

The shareholder view of corporate social responsibility has sometimes proven detrimental, however. Corporations are different from human beings in that their actions are not bound by conscience. For example, a pharmaceutical corporation may choose to spend money to research medications for a minor ailment that occurs from time to time in wealthy nations and stands to be profitable, but decline to invest resources to cure a deadly epidemic that affects only developing nations and is not expected to be profitable (Purnell & Freeman, 2012). Under shareholder theory, the fiduciary duty is to ignore the needs of people in the developing world and concentrate instead on the more profitable treatment for wealthy customers.

Stakeholder theory sees an organization as having duties beyond the monetary interests of its shareholders. This is because a corporation, like any other entity, does not exist in a vacuum (Wicks, 2014). The actions it takes have effects on many parties, not only on those who have invested money in the corporation. In the example above, the corporation's decision not to develop drugs for an unprofitable disease has a detrimental effect on the people who need medication to survive the epidemic. Indirect effects on others may also result. For example, because the epidemic continues, international health workers will go to the region to treat patients in potentially dangerous conditions. The epidemic may also politically destabilize the region, which may result in military intervention. From this perspective, many stakeholders stand to gain or lose from decisions made by corporations (Buchholtz & Carroll, 2012).

Further Insights

Internal stakeholders are members of the organization considering what action to take. In the example above, internal stakeholders of the pharmaceutical corporation would include employees of the company, managers of the company, and those with an ownership interest in the company. These groups are called internal because they help make up the organization. Internal stakeholders have unique interests in the organization because they stand to reap a financial benefit from any successes the organization achieves; when a corporation is doing well, its employees continue to receive their salaries and may receive additional benefits such as bonuses or promotions. Internal stakeholders are usually easy to identify, because one need only look inside the corporate structure to locate them.

External stakeholders, on the other hand, can be much more difficult to ascertain because in some cases it is not obvious how a group may be affected by a course of action that is under consideration by a corporation. In the case of a corporation, some of the more obvious stakeholders include the corporation's customers and its creditors. The customers are affected by the corporation's decisions because they hope to be able to purchase the company's products (Harrison & Wicks, 2013). Decisions by the company to alter the product line or to go out of business entirely will have a major effect on customers.

Creditors are those institutions or individuals who have extended credit, for example, in the form of loans, to the corporation. Lenders expect to receive a return on their investment in the form of interest. If a company's decisions lead it into bankruptcy, then many of its creditors may not be repaid, so creditors also have a direct interest in what activities the company engages in. Companies have many other external stakeholders, but it can be difficult to trace their connection to the firm when they are only indirectly affected by the company's behavior. In some cases, the effects experienced by an external stakeholder are overwhelmed by many related effects from other actors. For example, the populace or government of a region in which the company is operating may be considered an external stakeholder, but at a more detached level (Orr, 2013).

Discourse

Organizations that engage in stakeholder analysis tend to do so with one of three different purposes in mind. The literature, therefore, tends to describe stakeholder theory as following one of these paradigms of implementation: descriptive, normative, or instrumental.

Descriptive Stakeholder Analysis. Descriptive stakeholder analysis has as its goal the detailed mapping of an organization's stakeholder relationships. This is often done with the goal of giving managers or the board of directors a realistic picture of how a project may be perceived by various constituencies, as well as how thoroughly each of these groups can be relied upon to support or oppose the project, and for what reasons (Buchholtz & Carroll, 2012). This information is a vital component in the effective management of a company, because without it, the decisions made by the company are often made blindly and produce unintended (and usually undesirable) consequences. Having more information tends to lead to making better decisions, and descriptive stakeholder analysis can help to give an organization a clear vision of what its purpose is and who is impacted by activities that the organization conducts.

Normative Stakeholder Analysis. Normative stakeholder analysis has a very different purpose than descriptive analysis. Norms are societal conventions that most people agree on, and they function as a set of unwritten rules for how a group of people expect one another to behave As might be expected from its name, normative stakeholder analysis involves an organization taking the time to decide what rules it should follow. This does not refer to rules in the sense of laws, though an organization is expected to abide by the laws of the jurisdiction within which it operates (Wicks, 2014). Instead, normative stakeholder analysis is concerned with ethical rules which define what conduct is appropriate for the organization and what conduct is inappropriate and unacceptable.

Normative analysis often takes on a philosophical dimension, because it requires the organization (through its representatives) to ask what the organization's true purpose is. When this purpose is understood by the organization's decision makers, it becomes much more straightforward to decide what actions or projects further that interest and which are extraneous to it. When normative stakeholder analysis is undertaken at a deep and meaningful level, it can have an enormous impact on the character of an organization.

To return to the example of the pharmaceutical company, it might happen that the decision to pursue the more lucrative but less helpful drug could result in a backlash of negative publicity so severe that the company is forced to reconsider its position. Normative stakeholder analysis might lead the company to the conclusion that its ultimate purpose, over and above maximizing shareholder profit, is to accomplish more humanitarian ends by reducing suffering through the application of research to address medical issues. When companies engage in this type of self-reflection, the results can be transformative. Because the outcome of normative stakeholder analysis can cause the organization to make drastic changes in itself, it is usually not undertaken unless some type of crisis has forced the issue (Boutilier, 2012).

Instrumental Stakeholder Analysis. Some authors have observed that descriptive stakeholder analysis seems to lie on the surface of organizational inquiry, and normative stakeholder analysis rests at its heart. If this is the case, then it can also be said that the third type of stakeholder analysis, instrumental, lies somewhere in between these two extremes. Instrumental stakeholder analysis builds on the information revealed through descriptive stakeholder analysis and has as its goal the identification of connections between the organization's stakeholders and the performance of the organization and its progress toward the objectives it has identified. In a sense, instrumental stakeholder analysis asks questions about how various stakeholder groups participate in the achievement of organizational objectives.

Instrumental analysis may be compared with a medical checkup, because both activities are important to engage in periodically to make sure that one's behavior is consistent with one's goals (Smits & Erasmus Universiteit, 2014). Of the different types of stakeholder analysis, instrumental analysis is the least likely to provoke objections from critics, because it appears to have a purpose that is both clear and practical, as it identifies links between stakeholder groups and organizational activities. This is in contrast to descriptive analysis, which is sometimes seen as too mundane (like drawing organizational reporting charts) and normative analysis, which is criticized as bordering on spirituality.

Determining Stakeholder Interests. While each of these three approaches to stakeholder analysis has its own purpose, they share some common goals as well. The most obvious purpose of any type of stakeholder analysis is to determine the nature of the stakeholder's interest. For example, investors may be primarily interested in increasing profits, but employees will likely be more interested in the stability of the company, because they want to keep their jobs.

Stakeholder analysis is also focused on identifying risks, whether these are risks posed by a group of stakeholders or risks that are of concern to a particular group of stakeholders (Phillips, 2012). By identifying risks, the hope is that they can be avoided or their impact mitigated. There can also be a possibility that different groups of stakeholders may have the ability to influence one another, so stakeholder analysis seeks information about these types of intergroup relationships. While this type of information can certainly serve to complicate the analysis, since it involves assumptions and guesswork about the agendas of multiple segments of the organization and its environment, it can also be helpful in navigating the minefield of explicit and implicit alliances that may develop.

The Primacy of Shareholder Interest. Stakeholder theory and analysis has provoked criticism on a number of fronts. Much of this can be traced to resistance against the suggestion that the organization's highest duty not might be to its shareholders (Purnell & Freeman, 2012). Many, particularly in the fields of business, entrepreneurship, and finance, believe that the central tenet of the capitalist system is what might be termed the "healthy self-interest" of the corporation. According to this model, any challenge to the shareholder analysis model of corporate governance is dangerous to the modern market economy.

The essence of stakeholder analysis is self-reflection on the part of an organization. As some are leery of the soul searching that an individual might engage in through therapy or meditation, critics of stakeholder analysis express concern that trying to serve multiple conflicting interests—introducing "conscience"—to business analysis will create organizational weakness and self-doubt. Because the definition of a stakeholder is not rigidly define, some claim that anyone can consider themselves a stakeholder in an attempt to profit or otherwise benefit from the organization's actions. Over time such approaches could potentially have the effect of weakening the primary focus on shareholders and diluting the profit-driven motivation of corporations. An undistracted focus on profit is required to keep corporations competitive, critics argue.

Advocates of stakeholder analysis argue that not every approach taken in the marketplace needs to be cutthroat and that considering the ramifications of corporation activities for all stakeholders is healthier for an organization in the long run than short-term bottom line strategies that seek to maximize immediate dividends for current shareholders (Mansell, 2013).

Terms & Concepts

Fiduciary duty: A legal duty held by one party toward another party, requiring that the fiduciary do everything in its power to protect the interest of the party on whose behalf it is acting. Thus, a lawyer representing a client has a fiduciary duty to protect that client's interests as aggressively as if the lawyer had no other client to watch out for.

Salience: Salience is an indication of how important a particular stakeholder is to a company. Because most stakeholders consider their own interests of the utmost importance, the company's estimation of the salience of a stakeholder will often differ from that held by the stakeholder, and will often be kept secret, so that stakeholders are not offended to discover that other groups have priority over them.

Stakeholder mapping: A method of stakeholder analysis that allows an organization contemplating a decision to diagram the likely responses to different decisions that could be made. This is done so that the organization can choose the most beneficial course that is palatable to the greatest number of influential stakeholders.

Bibliography

Boutilier, R. (2012). A stakeholder approach to issues management. New York: Business Expert Press.

Buchholtz, A. K., & Carroll, A. B. (2012). Business & society: Ethics & stakeholder management. S.l: South-Western Cengage Learning.

Harrison, J. S., & Wicks, A. C. (2013). Stakeholder theory, value, and firm performance. Business Ethics Quarterly, 23, 97–124. Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=85893469&site=ehost-live

Lindgreen, A. (2012). A stakeholder approach to corporate social responsibility: Pressures, conflicts, and reconciliation. Burlington, VT: Gower.

Mansell, S. F. (2013). Capitalism, corporations and the social contract: A critique of stakeholder theory. Cambridge, UK: Cambridge University Press.

Mitchell, R. K., et al. (2016). Stakeholder agency and social welfare: Pluralism and decision making in the multi-objective corporation. Academy of Management Review, 41(2), 252–275, Retrieved December 7, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=114307458&site=eds-live

Orr, S. K. (2013). Environmental policymaking and stakeholder collaboration: Theory and practice. Boca Raton, FL: CRC Press.

Phillips, R. A. (2012). Stakeholder theory: Impacts and prospects. S.l.: Edward Elgar.

Purnell, L. S., & Freeman, R. E. (2012). Stakeholder theory, fact/value dichotomy, and the normative core: How Wall Street stops the ethics conversation. Journal of Business Ethics, 109, 109–116. Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=78085572&site=ehost-live

Smits, R. A., & Erasmus Universiteit. (2014). Virtue and stakeholder theory: A purpose-driven approach to business ethics. Rotterdam, Netherlands: Erasmus Universiteit.

Wicks, A. (2014). Stakeholder theory and spirituality. Journal of Management, Spirituality & Religion, 11, 294–306. Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=99572650&site=ehost-live

Stakeholder Theory and Analysis

On this Page

Subject Terms

Stakeholder Theory and Analysis

Abstract

Overview

Further Insights

Discourse

Terms & Concepts

Bibliography

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