What Is Stakeholder Theory?

ProjectManager.com

A stakeholder is anyone who has an interest in a project, business or organization. In project management terms, a stakeholder is an individual or group that will be impacted by the outcome of the project. Stakeholders can be within the organization or outside of it; either way, they are very interested in the project and its proceedings.

In short, stakeholders are important. They sponsor a project or organization and are invested in its successful completion. But that doesn’t mean they just sit idly by and watch. They are often active, and they can have a positive or negative influence depending on their actions.

Stakeholders can influence everything and everyone in a project or organization, including senior management, project leaders, team members, customers, users and many others. With so many ways to sway a project, as a manager it’s critical to prioritize and focus on only the most important stakeholders, those with power, proximity and urgency.

This is the beginning of stakeholder theory. Stakeholder theory addresses business ethics, morals and values when managing stakeholders involved with a project or organization. It seeks to optimize relations with stakeholders, thereby improving efficiencies throughout the project or organization.

the importance of stakeholder theory

Origins of Stakeholder Theory

The first person to define stakeholder theory was organizational theorist Ian Mitroff in his book Stakeholders of the Organizational Mind, which came out in 1983. Shortly thereafter, an article about stakeholder theory was released in 1983 in the California Management Review by philosopher and professor of business administration R. Edward Freeman. Freeman doesn’t cite Mitroff as a source, rather he attributes stakeholder theory to discussions at the Stanford Research Institute. He went on to publish his own book, Strategic Management: A Stakeholder Approach, shortly after the article.

In Freeman’s book, he identifies and models stakeholder groups within a corporation, describing and recommending ways to manage their interests and determine who really counts from the perspective of the company. Increasing value for stakeholders will improve the business in all aspects.

Evaluating All the Stakeholders

But stakeholder theory notes that there are several interested parties that must be included under the umbrella of stakeholder, such as the company’s employees, customers, suppliers, financiers, communities, governmental bodies, political groups, trade associations, trade unions and even competitors, as they too can impact the company.

The list of who the stakeholders are is not universally agreed upon, and even the definition of a stakeholder remains contested by some. Even the academic literature is in conflict. There are many books and articles on the subject and most cite Freeman as its father.

Evolution of Stakeholder Theory

Freeman says he stood on the shoulders of giants, such as building from research in strategic management, corporate planning, systems theory, organization theory and corporate social responsibility, the latter of which was first discussed by the Italian economist Giancarlo Pallavicini in an article published in 1968.

More recently, in 1995, ethicist Thomas Donaldson has argued that stakeholder theory has descriptive, instrumental and normative aspects that are mutually supportive. Descriptive is used in research to identify and define characteristics and behaviors of companies and how they’re managed. Instrumental uses empirical data to find connections between management of stakeholders and reaching corporate goals. Normative is a core theory on the function of the corporation and how it can morally carry out its processes, ensuring that management sticks to positive philosophical guidelines.

Benefits of Stakeholder Theory

Stakeholder theory posits that a company is only successful when it delivers value to its stakeholders, and those values can come in many forms beyond financial benefits.

Impact on Employees and Customers

One of the values produced by stakeholder theory includes greater productivity across the organization. If employees, who are considered stakeholders, feel as if they’re being valued, then they’re going to work harder and be more productive.

This also means that companies will have greater retention of their employees, but also of customers. If the productivity is up, then the product or service delivered to the customer is improved. With that improvement comes more customer loyalty, especially as they are one of the many stakeholders the company is considering when making decisions. Customers are also more likely to then refer other customers to the company.

Increased Investment

All this is leading to more investment from financiers. They too, of course, are stakeholders. While sometimes they are thought of as the only stakeholders or the most important to a company as they hold their hands on the level of capital, they’re really connected to other stakeholders. As other stakeholders are valued, the value of the company grows, and investors are more likely to add money to production to take advantage of this increased market share.

Related: Stakeholder vs. Shareholder: How They’re Different & Why It Matters

From there, it’s not only capital that is infused into the company, but talent. Everyone loves a winner, and as the company grows and dominates because of its care for stakeholders, it will inevitably attract new talent to its doors.

Ethical Benefits

Stakeholder theory drives more than profits and productivity. There are ethical benefits of practicing it as well. Companies find that the mental health of the workforce is greatly improved as their job satisfaction increases. It also will elevate the status of the company’s social-economic status in the local community. When one company practices stakeholder theory, it creates healthy competition among other companies, where all can thrive and help benefit their stakeholders.

Drawbacks of Stakeholder Theory

Some critics, such as political philosopher Charles Blattberg, say stakeholder theory is problematic. They claim that the interests of various stakeholders cannot be balanced against each other.

This is because stakeholders represent such a large and diverse group. You can’t please every stakeholder. One or more stakeholders will have to take a backseat to other, more dominant ones, which is likely to create discord. This will disrupt the benefits associated with stakeholder theory.

Also, who will wield the most influence? Some stakeholders might find that they’re not impacting decisions as much as another group. The different power levels and spheres of influence can be a problem. Even those with seemingly more influence might not feel that they’re getting what they want.

Stakeholder Management Strategy

Stakeholder theory is a component of the larger stakeholder management, which creates positive relationships with stakeholders by managing their expectations and objectives. In order to control this process, a strategic plan is required.

To begin, stakeholders are identified, their influence and interest determined, and a communication plan is devised to keep them informed. But not all stakeholders are created equally. This doesn’t mean some are more important than others, just that prioritizing offers a structure in managing them effectively.

Again, to manage stakeholders and develop an effective strategic plan, it is crucial to understand them. Know their financial or emotional interests in the outcome of the work, what motivates them, what data do you require from you, how do they want to get information, what do they think of the job you’re doing, who influences their opinions, etc.

The key principle of stakeholder engagement is communication. Here are some key tips for making sure that stakeholder communication stays strong and efficient:

  • Make sure messages are targeted and delivered timely
  • Consult early and often
  • Know that stakeholders are people with feelings and need to be treated as such to build trust
  • Consider potential risks and opportunities with each stakeholder
  • Compromise
  • Know how success is defined
  • Take responsibility

Stakeholders want to be a part of the process. They need to stay informed, and the information you deliver must be targeted and current. ProjectManager.com is a cloud-based project management software, so the data is up-to-date. Its real-time dashboard makes reporting simple, with dropdown menus to create easy-to-read graphs and charts, supplying only that information needed by the recipient. See how it can support your stakeholder theory by taking this free 30-day trial.

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