What Is Stakeholder Theory? (With Benefits and an Example)
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In business, determining priorities and motivations can help guide your decisions, strategies and approach to revenue, project management and public perception. Many corporations and organizations have stakeholders who have an interest in seeing a business succeed as well as stockholders who own financial shares in a company. Stakeholder theory is a business management approach that places focus and commitment on stakeholders, and knowing more about how it works can help you develop professional capabilities and improve business practices.
In this article, we explore what stakeholder theory is in business, how it's beneficial and in what ways it varies from shareholder theory to help you better understand this business term.
What is stakeholder theory?
Stakeholder theory is an organizational management method that addresses a company's values, morals, ethics and goals and puts a focus on social responsibility rather than profits. Stakeholders are those who have an interest in the success of a company or organization, though traditionally not because of financial investments, like employees and customers, for example. Stakeholder theory operates by prioritizing these individuals, assuming that longevity and financial success results from making decisions with stakeholders in mind rather than strictly profits. A business might perform better and survive longer by managing strong stakeholder connections.
Stakeholder theory often works because it considers the needs of all parties involved in a project, business or organization. Typically, the more motivated and involved parties feel about the work they do, the better outcomes a company can achieve. Sometimes the theory can also apply to ethical concepts, like the responsibility to society, nature and the future, more so than creating profits and money for shareholders.
Related: Who Are Stakeholders in a Business
How is stakeholder theory beneficial?
Stakeholder theory is beneficial because it promotes a positive environment and good decision-making that frequently leads to favorable outcomes and returns for both the stakeholders and shareholders. Here are five specific advantages to using the stakeholder theory in business:
Employees viewed as stakeholders are often more motivated to do good work, engage with colleagues and their company and feel invested in the success of an organization. Establishing a stakeholder relationship with employees might lead to the sharing of valuable feedback, concerns or ideas that can help a company grow. You can often create a stakeholder relationship by offering competitive pay and compensation packages, offering benefits and creating a strong corporate culture. Happier employees also often have lower absentee rates, higher retention rates, increased job satisfaction and a positive view of leadership and the company.
A workforce with high job satisfaction rates might produce higher quality goods and services, more of them or both. Increased productivity in volume and quality can help you achieve goals sooner, attract new customers, grow loyalty with existing clients and increase revenue and shareholder returns. Consider using the stakeholder theory when making decisions that affect employees' job functions, work-life balance, pay, advancement and professional development.
For example, a company's leaders might send a survey to learn what pay elements employees care about most when conducting a compensation review. Additionally, they might prioritize hiring internal candidates over external applications for job promotions and new positions. Efforts like this that prioritize stakeholders can often lead to returns on the investment you might not even expect.
Higher quality work
Along with increased productivity through volume and quantity, stakeholder employees, business partners and other associates often produce better work of higher quality. Whether it's increased attention to detail, noticing a defect in production lots or developing more efficient and effective project planning methods, higher quality work may lead to cost savings and increased revenue. Excellent quality for your products and services also can promote brand awareness and loyalty amongst consumers, which increases brand equity and value and, in turn, positively impacts shareholders' interests.
When motivated employees produce more products of higher quality, you often experience higher customer satisfaction rates. For example, a customer getting a product delivered on time that works beyond expectations versus handling a return and refund can increase their satisfaction. Applying the stakeholder theory to your customers also might mean offering a fair price for a product or service, giving free shipping or returns and valuing the same moral obligations and expectations as your target audience. Good publicity, reviews and customer loyalty serve to reward a company and its shareholders financially.
The stakeholder theory can also help a company find its purpose or mission. For example, a low-cost airline might look to bring air travel to underserved communities or remote locations, prioritizing people and communities over high-priced ticket sales and popular destinations. Alternatively, a clothing company might operate with the business practice of donating a clothing item to a community in need for every like item it sells. Putting customers, communities and employees first can help companies recognize their approach to community engagement and corporate social responsibility.
Related: How To Engage Project Stakeholders
What's the difference between stakeholder theory vs. shareholder theory?
The primary difference between stakeholder theory and shareholder theory is the focus of which party is more important to be mindful of in business dealings. The shareholder theory focuses on the interests of its shareholders, those who financially invested in owned shares and stock. Because shareholders often focus on monetary returns and finances, companies might approach business decisions solely based on profit rather than on other concerns. With the stakeholder theory, a company's leadership cares about the shareholders' interests but typically believes the best way to achieve financial results is by viewing all parties connected to the company as stakeholders.
Here's an example of applying the stakeholder theory versus the shareholder theory in business:
GreenThumb is a small lawn care company with three financial investors, 10 employees and a 50 household client base. Its president wants to deliver sustainable lawn care services at reasonable prices. By operating with a stakeholder theory, he purchases a fleet of quiet, battery-powered lawnmowers and equipment despite the significantly higher initial price. It provides clean energy for the community, reduced noise for employees and fewer odors for both. The president explains how the investment can lead to costs savings from gas and revenue by offering a value appeal to environmentally conscious customers, helping investors gain even higher financial returns.
If GreenThumb operates using the shareholder theory instead, it might make profit-based decisions, like purchasing traditional gas mowers, which are cheaper and often easier to maintain. Alternatively, the three financial investors might pressure the president to invest in sustainable energy equipment sometime in the future, only after they earned back their initial investment.
What's an example of stakeholder theory?
Here's an example of stakeholder theory applied in business, using a car manufacturing company:
SelfDrive Automobile Company manufactures next-generation vehicles that feature self-driving mechanisms and recently went public. Executives want to please shareholders who invested in the company and aim to increase stock prices, though they choose to use stakeholder theory instead of a shareholder approach to conduct business, prioritizing several groups of people who make their business successful. Stakeholder groups at SelfDrive include:
*Employees: Providing safe work conditions and fair compensation makes these stakeholders feel valued, encouraging high morale and productivity to meet company goals, which can ultimately influence stock prices. Conversely, poor employee relations might lead to high turnover and absentee rates, negative perceptions of leadership and a decrease in productivity.*
*Customers: Prioritizing a safe, comfortable and affordable vehicle to its customers is a top priority for SelfDrive Automobile Company using the stakeholder theory. It can encourage brand value, public perception, sales and revenue, which continue to increase company performance and a shareholder's investment.*
*Communities: Stakeholder theory applied to communities might mean a focus on various environment protections, like reducing emissions and adapting hybrid or fuel-efficient technology, or prioritizing safety features, recalls and accident analysis to keep children, families and neighborhoods safe.*
*Manufacturing suppliers: The auto company also views its vendors as stakeholders, giving fair contracts and purchasing prices and paying bills on time. Keeping professional and good business dealings with business partners can often help a company grow its reputation and brand, which can both increase revenue, profits and shareholder investments.*
*Governments: Because the automobile industry complies with local, state and federal requirements, viewing governmental and industry groups as stakeholders can help ensure SelfDrive Automobile Company maintains a strong working relationship with these agencies. It can also mean the company enforces and maintains high standards to avoid penalties, fees or litigation.*
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