What Stakeholder Theory Is and What It Means for You?

What is stakeholder theory? What does it mean for you and your business? In this blog post, we will discuss these questions and more. Stakeholder theory is a business ethics concept that suggests that companies should be managed in a way that benefits all of their stakeholders, not just shareholders. This includes employees, customers, suppliers, the community, and other individuals or groups with a vested interest in the company.

What is stakeholder theory?

Stakeholders are individuals or groups that can affect an organization and affect it. The people who work for companies, customers who buy products from them, investors in these businesses, and even the communities where firms operate are all examples of stakeholders. For instance, a stakeholder could include anyone with a vested interest, such as employees at a company, customers of the company, and suppliers to the company.

The theory behind stakeholder management suggests that companies should benefit all of their stakeholders, not just shareholders. This means that businesses need to consider how their decisions will impact those interested.

Failing to do so can have negative consequences for a company, such as decreased profits, loss of customers, and even bankruptcy. Ethics and corporate responsibility should not be considered two distinct issues. This is feasible as long as stakeholders are included in the business’s strategy. It’s not a flawless solution, but it’s a good place to start.

Difference between Stakeholder theory and Shareholder theory

There are different schools of thought on how best to manage stakeholders. The two most popular methods are the stakeholder theory and the shareholder theory.

The stakeholder theory suggests that companies should consider all interests when making decisions. This includes shareholders and employees, customers, suppliers, government agencies, and any other stakeholders affected by the business’s actions.

It has been described as an ethical approach to managing companies. It considers how each stakeholder will fare under different scenarios before deciding to hurt some groups while helping others.

The shareholder theory suggests that the only people who matter have a financial stake in the company. This theory is based on the idea that companies should be run to make the most money for shareholders. Therefore, those who don’t have a financial interest in the company, such as employees and customers, are not considered when making decisions.

There are pros and cons to each of these theories. The stakeholder approach may lead to better outcomes for all groups involved. It considers how everyone will fare under different scenarios before deciding to hurt some groups while helping others.

However, this theory can also be challenging to implement in practice due to conflicting interests among stakeholders or a lack of information about what each group wants from the business. On the other hand, the shareholder approach is easier to implement but may lead to decisions, not in the best interests of employees or customers. For example, a company could close a factory to increase profits even if it negatively impacts employees.

So which theory is better? There is no easy answer, and there is no one-size-fits-all solution. Each business needs to decide which approach works best for them, taking into account the unique circumstances of their company and stakeholders. However, companies need to be aware of both theories and understand the pros and cons of each so they can make informed decisions that are in the best interests of all stakeholders.

Stakeholder Theory Examples

Below are a few examples of Stakeholder theory:

Manufacturers/supplier

A manufacturer’s suppliers are one of the most important stakeholders because the company would not make its products without them. A good example is Apple and Foxconn; they have a long-standing relationship that goes back years, but it has faced some challenges recently due to working conditions at Foxconn factories in China.

Apple was forced to make changes or risk losing access to this key stakeholder group, which could have led other suppliers to follow suit and stop working with them too (like Samsung did when they ended their partnership).

The relationship between stakeholders is dynamic; it can change over time as a business’s needs evolve, and new issues arise. Therefore, companies need to know who their stakeholders are and how they can impact them.

Customers

The customers are the ones who buy a company’s product or service, so they are an important stakeholder group. An excellent example of this is Amazon and its relationship with sellers on its e-commerce platform; if there were no buyers for these goods, Amazon wouldn’t make money from selling them.

Employees

The employees are the ones who do all of the work, so they are a key stakeholder group. A good example is General Electric; it has struggled as its business model changes. Many people have lost their jobs because of this transition from selling appliances to becoming more focused on software development services like cloud computing (which require fewer workers).

Local communities

The community is the group of people who are not directly connected to the company but may be affected by its actions. For example, a company that operates in a small town will have a different relationship with the community than one based in a big city. The community can be supportive or hostile towards a business depending on how it operates and its impact (for example, pollution caused by factories).

Government

The government is not just one stakeholder group but many different stakeholders interested in a company’s business operations, such as regulators or tax authorities. For example, Uber was recently forced to pay over 20 million dollars in fines because it didn’t comply with the world for the business owner to manage.

How can you use stakeholder theory?

Stakeholder management is a process that helps businesses to identify and prioritize different stakeholders, understand their needs or concerns, and develop strategies for managing relationships with them. It also helps companies respond appropriately when conflicts or issues arise.

Businesses can use stakeholder theory to make better decisions by understanding their stakeholders’ different interests and priorities. For example, a company might focus on increasing profits to please its investors, but this could come at the expense of employees laid off. By using stakeholder theory, businesses can weigh the different interests of all their stakeholders and make decisions that are more in line with their values.

History of stakeholder theory

Stakeholder theory was formally laid out in 1984 by R. Edward Freeman in his book “Strategic Management: A Stakeholder Approach.” He argued that businesses should consider how their actions will affect all stakeholders involved, not just shareholders or owners.

Stakeholder theory has continued to evolve and is now one of the most widely used concepts in business ethics. It can be applied to almost any situation involving multiple parties because stakeholder management is about managing relationships.

Agency Theory vs. Stakeholder Theory

Stakeholder theory is a way to manage relationships between businesses and their stakeholders, but it’s also used in other contexts such as politics or psychology. It can be contrasted with agency theory because they are both concerned about how people interact. However, stakeholder theory focuses on the interests of all parties involved, while agency theory only considers one party’s interests at a time.

On the other hand, Agency theory is a way to understand how people will act in certain situations when they have different goals or incentives than other parties involved with them. The most common example of this situation occurs between an agent (the person who acts on behalf) and their principal (the person who is being acted upon).

For example, a real estate agent’s job is to sell houses for their clients. However, the real estate agent isn’t just working in his client’s best interest. He also wants to make money by selling as many properties at once and for higher prices than possible (less commission for each house). This creates a conflict of interest between the agent and the client.

Agency theory can be used to understand this type of situation and help to resolve any conflicts that may arise. It can also help predict how people will behave in specific situations.

Additionally, stakeholder theory focuses on all stakeholders involved, while agency theory only considers the agent’s interests.

Both theories help understand how people interact, but they offer different perspectives useful in different situations. For example, stakeholder theory is useful when multiple parties are involved, and agency theory works well for understanding one individual’s behavior.

How can stakeholder management benefit your business?

Stakeholder management can be beneficial in many ways, including:

• First, it helps businesses identify their most important stakeholders and be affected by different decisions or actions.
• It allows businesses to align their goals with those of their stakeholders, working toward something mutually beneficial.
• It improves communication between organizations and the people who depend on them for success (such as employees). This helps create stronger relationships, leading to increased loyalty and trust among all parties involved in a business transaction or relationship.
• It encourages businesses to act ethically and responsibly since they know that their actions will be scrutinized by their stakeholders.

Related: Fiedler’s Contingency Theory

Final Thoughts

Stakeholder management is vital for any business that wants to be successful. Companies should always consider how their decisions will affect the people who depend on them for success, such as employees or customers. In addition, they need to consider all stakeholders when making decisions to ensure everyone involved benefits from what happens next.

Stakeholder theory is a way to manage relationships between businesses and their stakeholders, but it’s also used in other contexts such as politics or psychology. It can be contrasted with agency theory because they are both concerned about how people interact. However, stakeholder theory focuses on the interests of all parties involved, while agency theory only considers one party’s interests at a time.

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