Stakeholder theory is an approach that proposes that firms must abandon the traditional focus on shareholders and adopt a wider perspective. This theory was developed and championed by Edward Freeman in the 1980s. According to Freeman, business can be understood as a set of relationships among groups that have a stake in the activities that make up the business. These groups are called stakeholders. Stakeholders are groups or individuals who are substantially affected by or is in the position to affect the firm’s activities. There are two major types of stakeholders. The primary stakeholders, that is, those who are vital to growth and the survival of any business, customers, employees, suppliers, communities and the financiers, that is, shareholders and debt holders. The secondary stakeholders are those who affect primary stakeholders such as media, government, the competitors. All these stakeholders have a legitimate interest in the company. Stakeholder theory assigns the managers the responsibility of building positive and reciprocally satisfying relationships with them. This responsibility involves integrating social and governmental issues in the firm’s strategies and improving the joint firm outcomes for all the interested parties, which is the link between a stakeholder theory and the social responsibility of the firm. Stakeholder theory can be understood ethically as implying that stakeholder interest should be respected for their own sake. The reason is that stakeholders contribute essential resources to companies, which are as important as the capital provided by shareholders. Moreover, stakeholders make company specific investments that are difficult to be moved out of the company. As strategy scholar Sumantra Ghoshal said, most shareholders can sell their stocks far more easily than most employees can find another job. This implies that stakeholders deserve at least the same degree of protection as shareholders. But stakeholder theory can also be understood instrumentally, that is, as implying that satisfying stakeholder interest is instrumental to making profit. Why? One, if primary stakeholders are unsatisfied, they will withdraw their contributions, which are essential to a firm’s value creation activities. Think of talented employees that accept job offers from a firm’s competitors or customers, whose reach to other brands. Second, unsatisfied secondary stakeholders have the means to influence negatively primary stakeholders or to make life hard for companies. Think of governments that step in with a new regulation in response to socially harmful corporate behavior or NGOs that mount a protest against the company. For these reasons, it is unlikely that a company that manages for shareholders at the dispense of other stakeholders can sustain its performance. Conversely, a firm that manages for stakeholders can build positive relationships that contribute to trust, legitimacy, cooperation and the firm's specific investments by primary stakeholders. Managing for stakeholders means balancing and keeping an alignment among the better stakeholder interest, including those of shareholders. This could be difficult because these interests are not necessarily consistent with each other. For example, raising salaries makes employees happy, but it could mean higher prices for customers. So managing for stakeholders requires the adoption of certain broad principles. First, the different interests of the various stakeholder groups go together only over time. This means that managing for stakeholders means adopting a long-term perspective. This is in contrast with the short-term perspective that often characterizes the shareholder value approach. Second, it is difficult to align these different interests if firms do not have a unifying purpose, a sense of what they stand for. This purpose must include creating value for at least the customers and employees, if not for society as a whole. This purpose is sometimes stated in a mission statement or in a more or less explicit enterprise strategy. For example, Steve Jobs’ mission statement for Apple in 1980 was to make a contribution to the world by making tools for the mind that advance humankind. Notice how this mission does not mention shareholders. Third, even if one understands stakeholder theory instrumentally, firms cannot put aside ethics or value questions because stakeholders expect treatment that is fair. Therefore, corporate leaders must be engaged in the conversation about what is the proper role of business in society. Fourth, managing for stakeholders is not confined to the arena of abstract principles but should be included in everyday business processes. These processes include stakeholder dialogue, consultation, engagement and some degree of involvement of the stakeholders in day by day decision making by a company.
