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Stakeholder Theory: What Is it and Who Counts?

May 22, 2019

In a capitalist economy, it’s easy for companies to convince themselves that their bottom line is of the utmost importance.

The stakeholder theory, originated by Edward Freeman, says otherwise. Freeman’s theory postulates that anyone who is affected by a product or service is considered a stakeholder and their desires should be taken into account. In other words, the customer experience should be valued as highly as a board member's opinion. 

This theory is opposite to the shareholder theory, a belief formed by Milton Friedman (could they have had more similar last names?) stating that only a company’s shareholders (read: money-makers) are of value to the company. 

examples of stakeholders

Image courtesy of Marketing91

Freeman’s argument is that, while a company does need money to survive, it also needs customers, and people who are willing to work for them, and media groups that are willing to write articles and report on them.

In other words, businesses need community for survival; they cannot depend solely on themselves.

What’s the stakeholder theory, and who are the stakeholders?

As I’ve already explained, stakeholder theory is essentially the belief that businesses can only thrive with the support of other key players such as customers, the media, employees, etc. In this philosophy, all of those supporting players are stakeholders. 

types of stakeholders
 

Every business is different. Therefore, there is no universally agreed-upon list of what a stakeholder is. However, the following types are most commonly referenced as examples.

Manufacturers

Your business is dependent on those who are producing your goods or services. For this reason, and simply for humane reasons, you should consider the conditions your manufacturers are working under: both domestic, and abroad. 

Are they being paid living wages? Taking regular breaks? Do they have healthcare and can get antibiotics when they’re sick, allowing them to return to work more quickly? Failing to consider their needs could result in strikes, poor performance, and an overall negative reputation .

Suppliers

Suppliers are whoever you buy your materials from. Consider if you’re paying them fairly for the quality of product they’re supplying. Be sure you’re treating them with the utmost respect. Think of it kind of like a server in a restaurant: they may be working for you at this moment, but don’t forget, they’re the ones handling your food. 

Treat your suppliers well and maintain a positive relationship with them and your business is sure to go farther than it will if you treat them as though they’re expendable.

Activists

Every action has effects. Local or even international activists (depending on the scope of your project or company) are around to keep businesses accountable.

Are you considering the environmental impacts of your business? Are you considering the socio-economic impacts of your business? Are you considering how your business will impact the people who already live near your proposed location? 

While you may not have the same values as activists, lobbyist groups, and your community, their approval or disapproval can have a huge impact on your success. Organized communities are not afraid to fight large corporations — and they can win.

Employees

Employees are some of the biggest stakeholders you have. They are the ones who make your company’s wheels go round. If your employees are unhappy, you can bet your business will struggle.

Some ways employee dissatisfaction can affect company performance:

  • Employees will not advocate for your company or refer trusted friends to apply
  • Quality of work will suffer due to a lack of motivation
  • Morale will be palpably low which can decrease production
  • Employees might be motivated to unionize or even strike

When it comes to employees, get it right the first time. Pay fair wages, give the hours you promised, allow for breaks (as it is the law); do whatever is necessary to create a fair work environment. Without enthusiastic, or at least satisfied, employees, you can expect to close up shop before long.

Customers

This one is a no-brainer: you have to have happy customers. Companies have built dedicated customer-service teams around this sole concept. Customers are invaluable stakeholders, as they decide whether to transfer money from their pockets, into yours.

While the customer doesn’t always have to be right, they do need to be cared for. Make sure you have a well-thought-out customer service philosophy  that lets customers know what they mean to your business, and has them coming back time and again. 

And remember that in a digital society, positive reviews and recommendations can make or break a business. Try going above and beyond every now and then to ensure your efforts overshadow your errors.

Tip: See our Customer Service Ultimate Guide, a comprehensive document that can help you and your business build an effective philosophy around customer service and satisfaction.

Government Entities

The law can come down hard on companies that are not in compliance. Whether you’re just starting your business, or building a new factory, or beginning to ship products abroad, make sure you know all the rules and regulations involved.

Even if you have approval at the beginning, things could change over time. Make sure you continuously check in with certain agencies to ensure you have continued approval for your business and/or projects.

Stakes are high

If you’ve taken all the steps to start a business, there are a lot of people depending on you. Your family, your employees, your investors: all involved parties are hoping your business will succeed. 

If you take your stakeholders into account when making business decisions, you’re that much more likely to achieve success.

Wondering if a project is right for you at this time? Learn how to conduct a feasibility study.

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