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Should You Apply Stakeholder Theory to How You Run Your Business?

"All stakeholders must participate in the gains and losses of any particular situation."
Christine Lagarde

As a business owner, you want to build a profitable enterprise, satisfy your customers, and create a supportive, nurturing work environment for your team. Whose needs are the highest priority of your business? This question is at the heart of Stakeholder Theory, and to better understand what this means, our strategic planning agency in Minneapolis is sharing what this theory is and how you can apply it to running your business.

What Is Stakeholder Theory?

Traditionally, the highest priority of a business or corporation was to satisfy the needs of the shareholders and maximize profits. In fact, noted economist Milton Friedman built much of his economic theory in the mid-twentieth century on the premise that a healthy economy is dependent on free-market capitalism and the fiscal success of shareholders, thus shareholders should be treated with the highest respect and prioritization (Ferrero, et al., 2014). This whole premise is referred to as the Friedman doctrine or shareholder theory.

However, in 1983, an alternative business theory began to take hold based on R. Edward Freeman’s article in California Management Review outlining what he called stakeholder theory. This was later expanded upon in his book, Strategic Management: A Stakeholder Approach. Stakeholder theory is a theory of business ethics and organizational management in which a business or corporation addresses the needs of, and maximizes value to, those with a stake in the success of the business.

Who Are Your Stakeholders?

A stakeholder is “any group or individual who can affect or is affected by the achievement of the organization’s objectives (Freeman, 1984. p 46). This is intentionally left very vague, with some interpretations narrowing the field of who is a potential stakeholder and other interpretations including a broader, societal level.

However, all interpretations of stakeholder theory include the following groups with a vested interest in the success of the company and how, by making these groups a priority, those groups can help the business succeed.

Shareholders/Owners

The shareholders or owners want to see their profits or the value of stock rise. This money can be placed back into the business to support growth as well as attract more investors. While shareholder theory states that investors should be the only priority, stakeholder theory says that investors are only one group the business should serve.

Employees

Employees should be compensated fairly and provided a safe, supportive work environment. Satisfied employees are more likely to stay with the business long-term, work harder, and get better results, whereas high turnover and poor employee performance harm the business in the long term.

Suppliers/Vendors

Treating vendors and suppliers fairly in your business dealings will improve your reputation and strengthen your flow of supplies or inventory. It’s also important to work with vendors and suppliers whose ethics align with yours.

Customers

Your customers also have a considerable stake in your business — they want a product or service they can rely on and trust, and they also want to work with a company whose values align with theirs. By making your customers a high priority, you’re more likely to provide better service, which will, in turn, build their loyalty to you and keep them coming back.

Community & Neighborhood

Stakeholder theory means that those living in the community of your business will be affected by you or your product, and it’s important to reduce harm. For example, if you have a restaurant, you want to reduce odors or minimize noise that may affect the neighborhood around your business. Similarly, by prioritizing your community, the community will be more welcoming and supportive, improving your reputation and increasing your business.

Governmental Bodies

As a business owner, you most likely have to comply with some type of government regulation, such as food safety, building codes, or professional licensing. The government body that enforces these regulations are a stakeholder in that they levy fines against you or even close you down, causing irreparable harm.

Benefits and Challenges of Applying Stakeholder Theory to Your Business

With a better understanding of what stakeholder theory is and who your stakeholders are, let’s consider the benefits and challenges to applying this ethical practice to your business.

Benefits of Stakeholder Theory

This operating theory proposes that a business will only succeed when it works on behalf of its stakeholders, and the benefits include:

  • Greater productivity from employees and improved employee retention.
  • Better customer satisfaction and increased loyalty which in turn leads to repeat business and referrals.
  • Improved social reputation as company who operates with values and ethics.

Challenges of Stakeholder Theory

The greatest challenge to operating your business in accordance with stakeholder theory is that it’s virtually impossible to please every stakeholder and can’t give each group equal prioritization. Determining what group will hold the most influence and take the highest priority can be incredibly difficult. Do you put the needs of your customers first and work to please them, or do you strive to keep your employees happy and satisfied?

Schedule a Consultation to Discuss Strategic Planning for Your Business

If you’re interested in how to apply aspects of stakeholder theory to your business or would like assistance in developing your business plan and model, we can help you succeed. We can sit down with you to identify your stakeholders, determine their influence and interest, and create an effective strategic plan to manage your stakeholders. To schedule a consultation or learn more, contact us today.

Ferrero, Ignacio; Hoffman, W. Michael; McNulty, Robert E. “Must Milton Friedman Embrace Stakeholder Theory?” Business and Society Review Volume 19, Issue 1. March 3, 2014 Accessed online 07/10/2022 https://onlinelibrary.wiley.com/doi/abs/10.1111/basr.12024 Freeman, R.E. Strategic Management: A Stakeholder Approach 1984. Pitman Publishing

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