Business Concepts
Stakeholder Theory: Edward Freeman's Model (+ Examples)
Stakeholder theory explained: Edward Freeman's stakeholder approach, the salience model, the Clarkson principles, and how it differs from shareholder theory.
Stakeholder theory is the idea that a company should create value for everyone its decisions affect, including employees, customers, suppliers, and local communities, not only shareholders. R. Edward Freeman set it out in 1984, and it is now a standard framework in strategic management and business ethics.
Quick answer
Stakeholder theory holds that managers must balance the needs and interests of every group affected by the organization, with shareholders’ returns treated as one claim among several. Freeman formalized this stakeholder approach in his 1984 book “Strategic Management: A Stakeholder Approach” as a direct alternative to shareholder-first thinking.
Key takeaways
- Stakeholder theory says a business creates value by serving every group affected by its decisions, not just shareholders.
- R. Edward Freeman formalized the approach in 1984, reframing corporate strategy around stakeholder relationships.
- It directly challenges Milton Friedman's shareholder theory, which treats profit for owners as the corporate objective.
- The 1997 salience model ranks stakeholders by power, legitimacy, and urgency, and the 1999 Clarkson Principles turn the theory into seven practical rules.
- Salience ranking has a blind spot: groups with a legitimate, urgent claim but no power tend to be heard last, so add a harm check.
What Is Stakeholder Theory?
At its core, stakeholder theory seeks to widen the list of people a company answers to. A business depends on more than its owners: employees show up, suppliers deliver, customers buy, and local communities provide the workforce, roads, and permits it needs to operate.
In his 1984 book Strategic Management: A Stakeholder Approach, R. Edward Freeman defined a stakeholder as any group or individual who can affect or is affected by the achievement of the organization's objectives. The definition is broad on purpose, which is why stakeholder groups range from investors to the town council.
The Wikipedia entry on stakeholder theory notes that the book "is widely cited in the field as being the foundation of stakeholder theory" and that Freeman is generally identified as the "father of stakeholder theory."
Understanding stakeholder theory starts with one shift: profit is an outcome, not the only goal. Under the stakeholder approach, managers ask how a decision lands on all the parties affected, not just how it moves the share price.
That does not mean ignoring shareholders. It means treating them as one group among several and balancing the interests of the various stakeholders, so that shareholders’ returns are earned alongside fair treatment of workers, customers, and suppliers, not at their expense.
Stakeholder theory belongs to the wider set of core business concepts that explain how companies are run day to day, alongside corporate strategy, organizational structure, and corporate governance.
Stakeholder Theory Explained: Edward Freeman's 1984 Argument
Edward Freeman published the book in 1984 with Pitman, and Cambridge University Press reissued that 1984 book in 2010. Freeman’s book “Strategic Management: A Stakeholder Approach” addresses morals and values in managing an organization, arguing that strategy works better when managers deal openly with every group that can help or block the firm.
The book identifies and models the groups which are stakeholders of a corporation: employees, customers, suppliers, communities, governmental bodies, and shareholders. It became a foundational theory of organizational management and business ethics. Since the 1980s, it has spread from strategy courses into law, public policy, and the wider social sciences.
Freeman's theory has become one of the leading stakeholder frameworks in business strategy. A separate 2010 book, “Stakeholder Theory: The State of the Art” (Cambridge University Press), was written by R. Edward Freeman, Jeffrey S. Harrison, Andrew C. Wicks, Bidhan L. Parmar, and Simone de Colle. It reviewed decades of study and development across disciplines.
Some strategy scholars link the stakeholder perspective to the resource-based view of the firm. The logic is simple: trusted relationships with workers and suppliers are hard for competitors to copy, so they can work like a strategic asset and a source of long-term value creation.
What Did Donaldson and Preston Add to Stakeholder Theory?
In 1995, Thomas Donaldson and Lee E. Preston argued that stakeholder theory is used in three distinct ways: descriptive, instrumental, and normative. Their Academy of Management Review paper, “The Stakeholder Theory of the Corporation,” showed that mixing up these uses explains much of the confusion about the theory’s claims.
- Descriptive: the theory describes how many firms already behave, since managers juggle demands from several groups every day.
- Instrumental: it predicts that firms that manage stakeholder relationships well tend to do better on conventional goals like profit and growth.
- Normative: it claims stakeholder interests are legitimate and deserve consideration for their own sake, not only because serving them pays.
Donaldson and Preston treated the normative base as the core. That matters in practice: a company that treats employees well only because it pays has no reason to keep doing it in the first quarter it stops paying.
Stakeholder Salience: Which Stakeholder Gets Priority?
Not every stakeholder carries equal weight within stakeholder theory, which is where stakeholder salience comes in. Mitchell, Agle and Wood's 1997 Academy of Management Review paper sorted stakeholders into seven classes based on three attributes: power, legitimacy, and urgency.
The paper's subtitle, “Defining the Principle of Who and What Really Counts,” sums up its goal. The theory of stakeholder identification and salience gives managers a way to rank stakeholders based on those attributes instead of treating every voice as equally urgent.
| Salience class | Attributes held | Hypothetical example |
|---|---|---|
| Dormant | Power only | A large lender with no current claim on the firm |
| Discretionary | Legitimacy only | A local charity the company sponsors |
| Demanding | Urgency only | A lone protester with no formal standing |
| Dominant | Power and legitimacy | A major institutional shareholder |
| Dangerous | Power and urgency | Workers threatening a wildcat strike |
| Dependent | Legitimacy and urgency | Residents near a chemical spill who rely on regulators to act |
| Definitive | All three | A dominant shareholder group demanding action this week |
Salience is not fixed. A dominant stakeholder that gains urgency becomes definitive, and dealing with various stakeholder groups means re-scoring them as conditions change. That is the core of strategic stakeholder decisions: limited management attention goes where all three attributes meet.
Why does the salience model miss powerless stakeholders?
The salience model has a blind spot. Dependent stakeholders, such as residents near a spill, have a legitimate and urgent claim but no power of their own. A firm that ranks purely on salience will tend to hear them last, after regulators or the press have already given them power.
A practical fix is to add a fourth check to any salience map: who would be harmed most if this decision goes wrong, regardless of power? That question keeps dependent groups on the list before a crisis promotes them.
Shareholder Theory vs Stakeholder Theory: How Do They Differ?
Stakeholder theory is usually read as a reply to economist Milton Friedman. Milton Friedman argued in The New York Times Magazine on September 13, 1970, that the social responsibility of business is to increase its profits.
Friedman's full article allowed for obeying the law and ethical custom, but it treated profit for owners as the corporate objective function. Shareholder theory puts the shareholders’ interests first, while Freeman's stakeholder theory treats the objective as value creation for the whole set of stakeholders.
The usual case for putting shareholders’ claims first is that they are residual claimants: they get paid only after workers, suppliers, and lenders have been paid. Stakeholder theorists answer that employees and suppliers also take risks the contracts do not fully cover, such as skills and investments tied to a single firm.
| Question | Shareholder theory | Stakeholder theory |
|---|---|---|
| Who the firm serves | Owners | Everyone affected by the organization, owners included |
| Corporate objective | Maximize shareholder value | Create value for the full set of stakeholders |
| Role of CSR | Justified only if it raises profit | Part of how the firm creates value |
| Key thinker | Milton Friedman (1970) | R. Edward Freeman (1984) |
| Main criticism | Ignores costs pushed onto others | Too vague to settle hard trade-offs |
Shareholder primacy shaped much of corporate America during the neoliberalism era of the 1980s and 1990s. Stakeholder theory grew up as the main counterargument, and the gap between the two views still runs through business strategy debates.
The honest version of the debate is narrower than it looks. Both sides agree that shareholders’ capital matters. They disagree on whether it is the only claim that counts when a decision pushes costs onto workers, suppliers, or neighbors.
Stakeholder Theory Examples in Everyday Business Decisions
Stakeholder theory examples show up in decisions companies make every week. For example, a factory considering layoffs has to weigh shareholders who want lower costs against employees who lose income and a community that loses tax revenue and local spending.
Modern stakeholder groups typically include:
- Employees: want fair pay, safe conditions, and job security.
- Customers: want reliable products and honest pricing.
- Suppliers: want timely payment and long-term contracts.
- Shareholders: want a return on investment and growth.
- Governmental bodies: want tax compliance and regulatory adherence (e.g., permits and zoning).
- Local communities: want jobs, environmental care, and civic investment.
- Even competitors: can act as stakeholders through trade associations that set shared industry standards.
In a typical manufacturing company, stakeholders include factory workers, parts suppliers, and the town that hosts the plant. Each reads the same decision through a different lens.
Supplier relationships keep changing too. Many industries are watching the return of middlemen through reintermediation, which changes who counts as a direct stakeholder in a supply chain.
From a stakeholder perspective, a product recall is never only a cost line. Shareholders want the cheapest fix, customers want safety, regulators want compliance, and employees want clear instructions instead of chaos. For nine cases where these claims pull in opposite directions, see these business ethical dilemma examples.
How to Use Stakeholder Theory: Analysis, Stakeholder Engagement, and Management
Applying stakeholder theory starts with a formal stakeholder analysis. List all parties involved in or affected by a decision, then score each one on power, legitimacy, and urgency using the seven salience classes. Then ask who would be harmed most if the decision fails, so powerless groups are not dropped.
Next comes stakeholder engagement: talking to those groups instead of guessing what they want. Surveys, advisory panels, works councils, and supplier check-ins all count, and they surface conflicts before they turn into public disputes.
Stakeholder management is the ongoing discipline of balancing diverse interests as conditions change. A supplier that was low priority last quarter can become critical the moment a shortage hits.
Before rolling out major changes, weigh the trade-offs new technology brings to every stakeholder group, not only the shareholders funding it. An automation project that lifts margins can also remove the jobs of long-serving employees.
| Step | Question to answer | Typical output |
|---|---|---|
| 1. Identify | Who can affect, or is affected by, this decision? | A full stakeholder list |
| 2. Score | Which of power, legitimacy, and urgency does each group hold? | A salience map |
| 3. Harm check | Who loses most if this goes wrong, regardless of power? | A list of dependent groups to protect |
| 4. Engage | What does each group actually want? | Survey results, meeting notes, supplier feedback |
| 5. Decide and explain | Why is the trade-off fair to each group? | A written rationale the board can defend |
The Clarkson Principles: 7 Principles of Stakeholder Management
The most practical checklist for stakeholder management comes from the Clarkson Centre for Business Ethics at the University of Toronto, which published seven Principles of Stakeholder Management in 1999. They are named after Max Clarkson, a pioneer of stakeholder research, and translate the theory into rules managers can follow.
- Acknowledge and monitor the concerns of all legitimate stakeholders and take their interests into account in decisions.
- Listen and communicate openly about the concerns, contributions, and risks each group takes on.
- Adopt processes that fit the concerns and capabilities of each stakeholder constituency.
- Distribute benefits and burdens fairly, recognizing that efforts and rewards are interdependent.
- Work with other entities, public and private, to reduce risks and compensate for harms the firm causes.
- Avoid activities that could jeopardize basic human rights or create unacceptable risks for stakeholders.
- Acknowledge conflicts between managers' own role as stakeholders and their duties to everyone else, and handle them openly.
The seventh principle is the one most firms skip. Managers are stakeholders too, with pay and careers at stake, so a credible process puts their own interests on the table instead of pretending they are neutral referees.
Firms that foster trust with employees and suppliers in good years have more goodwill to draw on in bad ones. Under stakeholder theory, a company must serve the whole network, not just whoever has the loudest voice in the boardroom.
Stakeholder Capitalism and CSR: Where Stakeholder Theory Went Next
Stakeholder capitalism is the economy-wide version of the same idea. Klaus Schwab, who founded the forum that became the World Economic Forum in 1971, promoted it in the 1973 Davos Manifesto and again in his 2021 book “Stakeholder Capitalism.”
In August 2019, 181 CEOs signed the Business Roundtable's Statement on the Purpose of a Corporation, committing their companies to deliver value to customers, employees, suppliers, communities, and shareholders. For this major U.S. business group, that was a public break from its earlier shareholder-first position.
Reporting followed the same direction. ESG and sustainability disclosures ask companies to show how they affect people and the environment, not only how they perform for investors, which turns stakeholder thinking into a reporting habit.
The old debate never left, though. In 2023, the International Sustainability Standards Board issued its first two standards, IFRS S1 and IFRS S2, aimed at investors, lenders, and other creditors. Even sustainability reporting can be framed around the shareholders’ information needs rather than the wider set of stakeholders.
CSR programs, ESG reports, and stakeholder capitalism all draw on corporate social responsibility thinking and the stakeholder theory of the corporation, even when business leaders never cite Freeman. The evolution of stakeholder thinking swings like a pendulum, from older ideas of corporate stakeholding to shareholder primacy and back.
A business that only serves shareholders is running on borrowed trust from everyone else who shows up to make it work.
What Are the Main Criticisms of Stakeholder Theory?
Critics in the Friedman tradition argue that stakeholder theory is too vague to guide real decisions, since managers cannot maximize value for every group at once and may use “stakeholders” as cover for weak results. Supporters answer that the theory was never meant to produce a single number, only better judgment under competing demands.
A second criticism is accountability. When a manager answers to everyone, nobody can easily tell whether the manager failed. Shareholder theory at least offers one scoreboard, which is why many boards still treat the shareholders’ return as the final check even after signing stakeholder pledges.
The scope of stakeholder theory has widened well past Freeman's original list and the original concept of stakeholders, but the test is still practical. Before a big decision, managers should be able to name who is affected and explain why the trade-off is fair, including to the directors who protect the shareholders’ capital.
Stakeholder Theory FAQ: Freeman, Principles, and Key Terms
What is R. Edward Freeman's stakeholder theory?
Freeman's stakeholder theory holds that a company should create value for every group affected by its decisions, including employees, customers, suppliers, communities, and shareholders. He introduced it in his 1984 book Strategic Management: A Stakeholder Approach.
Why can't you say stakeholder anymore?
You still can: stakeholder is still the standard term in business, management research, and stakeholder theory itself. Some public-sector and health style guides suggest alternatives such as “partners” or “interested parties” because some readers link the word “stake” to colonial land claims, but that is a style preference, not a rule.
What are the 7 principles of stakeholder management?
The 7 principles of stakeholder management are the Clarkson Principles, published in 1999 by the Clarkson Centre for Business Ethics at the University of Toronto. They cover monitoring concerns, open communication, fitting processes, fair distribution, working with others, avoiding serious harm, and disclosing managers' own conflicts.
How is stakeholder theory different from shareholder theory?
Shareholder theory says a company's main duty is to maximize returns for its owners, while stakeholder theory says it should create value for everyone its decisions affect. Friedman's 1970 essay is the classic case for the first view, and Freeman's 1984 book is the classic case for the second.
How is stakeholder theory different from CSR?
Stakeholder theory is a model of how a company should be run, while corporate social responsibility is a set of programs a company runs. A firm can fund CSR projects and still put the shareholders’ interests first in every core decision.