Stakeholder concept
Encyclopedia
A corporate stakeholder is a party that can affect or be affected by the actions of the
business as a whole. The stakeholder concept was first used in a 1963 internal memorandum at the Stanford Research Institute. It defined stakeholders as "those groups without whose support the organization would cease to exist." The theory was later developed and championed by R. Edward Freeman
in the 1980s. Since then it has gained wide acceptance in business practice and in theorizing relating to strategic management
, corporate governance
, business purpose and corporate social responsibility
(CSR).
The term has been broadened to include anyone who has an interest in a matter.
Market (or Primary) Stakeholders - usually internal stakeholders, are those that engage in economic transactions with the business. (For example stockholders, customers, suppliers, creditors, and employees)
Non-Market (or Secondary) Stakeholders - usually external stakeholders, are those who - although they do not engage in direct economic exchange with the business - are affected by or can affect its actions. (For example the general public, communities, activist groups, business support groups, and the media)
A broader mapping of a company's stakeholders may also include:
s, government agencies
, and non-profit organization
s -- the concept has been broadened to include everyone with an interest (or "stake") in what the entity does. This includes not only its vendors, employees
, and customer
s, but even members of a community where its offices or factory may affect the local economy or environment. In this context, "stakeholder" includes not only the directors or trustees on its governing board (who are stakeholders in the traditional sense of the word) but also all persons who "paid in" the figurative stake and the persons to whom it may be "paid out" (in the sense of a "payoff" in game theory
, meaning the outcome of the transaction).
Example
The holders of each separate kind of interest in the entity's affairs are called a constituency, so there may be a constituency of stockholders
, a constituency of adjoining property owners, a constituency of bank
s the entity owes money to, and so on. In that usage, "constituent" is a synonym for "stakeholder."
and corporate responsibility, a major debate is ongoing about whether the firm or company should be managed for stakeholders, stockholders (shareholders), or customers. Proponents in favour of stakeholders may base their arguments on the following four key assertions:
1) Value
can best be created by trying to maximize joint outcomes.
For example, according to this thinking, programs that satisfy both employees' need
s and stockholders' want
s are doubly valuable because they address two legitimate sets of stakeholders at the same time. There is even evidence that the combined effects of such a policy are not only additive but even multiplicative. For instance, by simultaneously addressing customer wishes in addition to employee and stockholder interests, both of the latter two groups also benefit from increased sales.
2) Supporters also take issue with the preeminent role given to stockholders by many business thinkers, especially in the past. The argument is that debt holders, employees, and suppliers also make contributions and take risks in creating a successful firm.
3) These normative
arguments would matter little if stockholders (shareholders) had complete control in guiding the firm. However, many believe that due to certain kinds of board of directors
structures, top managers like CEOs
are mostly in control of the firm.
4) The greatest value of a company is its image and brand. By attempting to fulfill the needs and wants of many different people ranging from the local population and customers to their own employees and owners, companies can prevent damage to their image and brand, prevent losing large amounts of sales and disgruntled customers, and prevent costly legal expenses. While the stakeholder view has an increased cost, many firms have decided that the concept improves their image, increases sales, reduces the risks of liability for corporate negligence, and makes them less likely to be targeted by pressure groups, campaigning groups and NGOs.
"The stakeholders in a corporation are the individuals and constituencies that contribute, either voluntarily or involuntarily, to its wealth-creating capacity and activities, and that are therefore its potential beneficiaries and/or risk bearers." This definition differs from the older definition of the term stakeholder in Stakeholder theory
(Freeman, 1984) that also includes competitors as stakeholders of a corporation. Robert Phillips provides a moral foundation for stakeholder theory in Stakeholder Theory and Organizational Ethics. There he defends a "principle of stakeholder fairness" based on the work of John Rawls
, as well as a distinction between normatively and derivatively legitimate stakeholders.
terms used by English councils
, and as such alarms or confuses ordinary people and is best avoided. It is recognised as jargon by the UK government, and defined as such by the Learning and Skills Council
. Councillor Tony Greaves actively objects to the word "stakeholder" considering it to be an example of management speak adopted by the Labour Party
under its New Labour guise to avoid sounding like socialists.
business as a whole. The stakeholder concept was first used in a 1963 internal memorandum at the Stanford Research Institute. It defined stakeholders as "those groups without whose support the organization would cease to exist." The theory was later developed and championed by R. Edward Freeman
R. Edward Freeman
R. Edward Freeman is an American philosopher and professor of business administration at the Darden School of the University of Virginia. He has also taught at the University of Minnesota and the Wharton School. Freeman is particularly known for his work on stakeholder theory and on business works...
in the 1980s. Since then it has gained wide acceptance in business practice and in theorizing relating to strategic management
Strategic management
Strategic management is a field that deals with the major intended and emergent initiatives taken by general managers on behalf of owners, involving utilization of resources, to enhance the performance of firms in their external environments...
, corporate governance
Corporate governance
Corporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled...
, business purpose and corporate social responsibility
Corporate social responsibility
Corporate social responsibility is a form of corporate self-regulation integrated into a business model...
(CSR).
The term has been broadened to include anyone who has an interest in a matter.
Examples of a company's stakeholders
| Stakeholders | Examples of interests |
|---|---|
| Government | taxation, VAT Vat Vat or VAT may refer to:* A type of container such as a barrel, storage tank, or tub, often constructed of welded sheet stainless steel, and used for holding, storing, and processing liquids such as milk, wine, and beer... , legislation Legislation Legislation is law which has been promulgated by a legislature or other governing body, or the process of making it... , low unemployment, truthful reporting. |
| Employees | rates of pay, job security Job security Job security is the probability that an individual will keep his or her job; a job with a high level of job security is such that a person with the job would have a small chance of becoming unemployed.-Factors affecting job security:... , compensation, respect, truthful communication. |
| Customers | value, quality, customer care, ethical products. |
| Suppliers | providers of products and services used in the end product for the customer, equitable business opportunities. |
| Creditors | credit score, new contracts, liquidity. |
| Community | jobs, involvement, environmental protection, shares, truthful communication. |
| Trade Unions | quality, Staff protection, jobs. |
| Owner | have interest of the success of his/her business. |
Types of stakeholders
- People who will be affected by an endeavor and can influence it but who are not directly involved with doing the work.
- In the private sectorPrivate sectorIn economics, the private sector is that part of the economy, sometimes referred to as the citizen sector, which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the state...
, people who are (or might be) affected by any action taken by an organization or group. Examples are parents, children, customers, owners, employees, associates, partners, contractors, and suppliers, people that are related or located nearby. Any group or individual who can affect or who is affected by achievement of a group's objectives.
- An individual or group with an interest in a group's or an organization's success in delivering intended results and in maintaining the viability of the group or the organization's product and/or service. Stakeholders influence programs, products, and services.
- Any organization, governmental entity, or individual that has a stake in or may be impacted by a given approach to environmental regulation, pollution prevention, energy conservation, etc.
- A participant in a community mobilization effort, representing a particular segment of society. School board members, environmental organizations, elected officials, chamber of commerce representatives, neighborhood advisory council members, and religious leaders are all examples of local stakeholders.
Market (or Primary) Stakeholders - usually internal stakeholders, are those that engage in economic transactions with the business. (For example stockholders, customers, suppliers, creditors, and employees)
Non-Market (or Secondary) Stakeholders - usually external stakeholders, are those who - although they do not engage in direct economic exchange with the business - are affected by or can affect its actions. (For example the general public, communities, activist groups, business support groups, and the media)
Company stakeholder mapping
A narrow mapping of a company's stakeholders might identify the following stakeholders:- Employees
- CommunitiesCommunityThe term community has two distinct meanings:*a group of interacting people, possibly living in close proximity, and often refers to a group that shares some common values, and is attributed with social cohesion within a shared geographical location, generally in social units larger than a household...
- Shareholders
- Creditors
- Investors
- GovernmentGovernmentGovernment refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
- Customers
A broader mapping of a company's stakeholders may also include:
- Suppliers
- Labor unions
- Government regulatory agencies
- Government legislative bodies
- Government tax-collecting agencies
- Industry trade groupIndustry trade groupA trade association, also known as an industry trade group, business association or sector association, is an organization founded and funded by businesses that operate in a specific industry...
s - Professional associations
- NGOs and other advocacy groupAdvocacy groupAdvocacy groups use various forms of advocacy to influence public opinion and/or policy; they have played and continue to play an important part in the development of political and social systems...
s - Prospective employees
- Prospective customers
- Local communities
- National communities
- Public at Large (Global Community)
- Competitors
- SchoolSchoolA school is an institution designed for the teaching of students under the direction of teachers. Most countries have systems of formal education, which is commonly compulsory. In these systems, students progress through a series of schools...
s - Future generations
- Analysts and Media
- Alumni (Ex-employees)
- Research centers
- Each Person
In management
In the last decades of the 20th century, the word "stakeholder" has become more commonly used to mean a person or organization that has a legitimate interest in a project or entity. In discussing the decision-making process for institutions—including large business corporationCorporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
s, government agencies
Government agency
A government or state agency is a permanent or semi-permanent organization in the machinery of government that is responsible for the oversight and administration of specific functions, such as an intelligence agency. There is a notable variety of agency types...
, and non-profit organization
Non-profit organization
Nonprofit organization is neither a legal nor technical definition but generally refers to an organization that uses surplus revenues to achieve its goals, rather than distributing them as profit or dividends...
s -- the concept has been broadened to include everyone with an interest (or "stake") in what the entity does. This includes not only its vendors, employees
Employment
Employment is a contract between two parties, one being the employer and the other being the employee. An employee may be defined as:- Employee :...
, and customer
Customer
A customer is usually used to refer to a current or potential buyer or user of the products of an individual or organization, called the supplier, seller, or vendor. This is typically through purchasing or renting goods or services...
s, but even members of a community where its offices or factory may affect the local economy or environment. In this context, "stakeholder" includes not only the directors or trustees on its governing board (who are stakeholders in the traditional sense of the word) but also all persons who "paid in" the figurative stake and the persons to whom it may be "paid out" (in the sense of a "payoff" in game theory
Game theory
Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...
, meaning the outcome of the transaction).
Example
- For example, in the case of a professional landlord undertaking the refurbishment of some rented housing that is occupied while the work is being carried out, key stakeholders would be the residents, neighbors (for whom the work is a nuisance), and the tenancy management team and housing maintenance team employed by the landlord. Other stakeholders would be funders and the design and construction team.
The holders of each separate kind of interest in the entity's affairs are called a constituency, so there may be a constituency of stockholders
Shareholder
A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
, a constituency of adjoining property owners, a constituency of bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s the entity owes money to, and so on. In that usage, "constituent" is a synonym for "stakeholder."
In corporate responsibility
In the field of corporate governanceCorporate governance
Corporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled...
and corporate responsibility, a major debate is ongoing about whether the firm or company should be managed for stakeholders, stockholders (shareholders), or customers. Proponents in favour of stakeholders may base their arguments on the following four key assertions:
1) Value
Value (economics)
An economic value is the worth of a good or service as determined by the market.The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods...
can best be created by trying to maximize joint outcomes.
For example, according to this thinking, programs that satisfy both employees' need
Need
A need is something that is necessary for organisms to live a healthy life. Needs are distinguished from wants because a deficiency would cause a clear negative outcome, such as dysfunction or death. Needs can be objective and physical, such as food, or they can be subjective and psychological,...
s and stockholders' want
Want
The idea of want can be examined from many perspectives. In secular societies want might be considered similar to the emotion desire, which can be studied scientifically through the disciplines of psychology or sociology...
s are doubly valuable because they address two legitimate sets of stakeholders at the same time. There is even evidence that the combined effects of such a policy are not only additive but even multiplicative. For instance, by simultaneously addressing customer wishes in addition to employee and stockholder interests, both of the latter two groups also benefit from increased sales.
2) Supporters also take issue with the preeminent role given to stockholders by many business thinkers, especially in the past. The argument is that debt holders, employees, and suppliers also make contributions and take risks in creating a successful firm.
3) These normative
Normative economics
Normative economics is that part of economics that expresses value judgments about economic fairness or what the economy ought to be like or what goals of public policy ought to be....
arguments would matter little if stockholders (shareholders) had complete control in guiding the firm. However, many believe that due to certain kinds of board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
structures, top managers like CEOs
Chief executive officer
A chief executive officer , managing director , Executive Director for non-profit organizations, or chief executive is the highest-ranking corporate officer or administrator in charge of total management of an organization...
are mostly in control of the firm.
4) The greatest value of a company is its image and brand. By attempting to fulfill the needs and wants of many different people ranging from the local population and customers to their own employees and owners, companies can prevent damage to their image and brand, prevent losing large amounts of sales and disgruntled customers, and prevent costly legal expenses. While the stakeholder view has an increased cost, many firms have decided that the concept improves their image, increases sales, reduces the risks of liability for corporate negligence, and makes them less likely to be targeted by pressure groups, campaigning groups and NGOs.
Stakeholder view theory
Post, Preston, Sachs (2002), in their theory called Stakeholder view, use the following definition of the term "stakeholder":"The stakeholders in a corporation are the individuals and constituencies that contribute, either voluntarily or involuntarily, to its wealth-creating capacity and activities, and that are therefore its potential beneficiaries and/or risk bearers." This definition differs from the older definition of the term stakeholder in Stakeholder theory
Stakeholder theory
The stakeholder theory is a theory of organizational management and business ethics that addresses morals and values in managing an organization. It was originally detailed by R...
(Freeman, 1984) that also includes competitors as stakeholders of a corporation. Robert Phillips provides a moral foundation for stakeholder theory in Stakeholder Theory and Organizational Ethics. There he defends a "principle of stakeholder fairness" based on the work of John Rawls
John Rawls
John Bordley Rawls was an American philosopher and a leading figure in moral and political philosophy. He held the James Bryant Conant University Professorship at Harvard University....
, as well as a distinction between normatively and derivatively legitimate stakeholders.
As jargon in local government
The word "stakeholder" has been listed as one of the top ten classic jargonJargon
Jargon is terminology which is especially defined in relationship to a specific activity, profession, group, or event. The philosophe Condillac observed in 1782 that "Every science requires a special language because every science has its own ideas." As a rationalist member of the Enlightenment he...
terms used by English councils
Municipality
A municipality is essentially an urban administrative division having corporate status and usually powers of self-government. It can also be used to mean the governing body of a municipality. A municipality is a general-purpose administrative subdivision, as opposed to a special-purpose district...
, and as such alarms or confuses ordinary people and is best avoided. It is recognised as jargon by the UK government, and defined as such by the Learning and Skills Council
Learning and Skills Council
The Learning and Skills Council was a non-departmental public body jointly sponsored by the Department for Business, Innovation and Skills and the Department for Children, Schools and Families in England...
. Councillor Tony Greaves actively objects to the word "stakeholder" considering it to be an example of management speak adopted by the Labour Party
Labour Party (UK)
The Labour Party is a centre-left democratic socialist party in the United Kingdom. It surpassed the Liberal Party in general elections during the early 1920s, forming minority governments under Ramsay MacDonald in 1924 and 1929-1931. The party was in a wartime coalition from 1940 to 1945, after...
under its New Labour guise to avoid sounding like socialists.
See also
- Stakeholder engagementStakeholder engagementStakeholder engagement is the process by which an organisation involves people who may be affected by the decisions it makes or can influence the implementation of its decisions...
- Stakeholder (law)
- Stakeholder theoryStakeholder theoryThe stakeholder theory is a theory of organizational management and business ethics that addresses morals and values in managing an organization. It was originally detailed by R...
- UK company law
External links
- Stakeholders in knoow.net