Stakeholder theory

As originally detailed by R. E. Freeman (1984), stakeholder theory attempts to ascertain which groups are stakeholders in a corporation and thus deserve management attention. In short, it attempts to address the "Principle of Who or What Really Counts."

In traditional input-output models of the corporation, the firm uses the inputs of investors, employees, and suppliers to convert inputs into usable (salable) outputs which customers buy and return to the firm some capital benefit. By this model, firms only address the needs and wishes of those four parties: investors, employees, suppliers, and customers.

Stakeholder theory recognizes that there are other parties involved, including governmental bodies, political groups, trade associations, trade unions, communities, associated corporations, etc. This view of the firm is used to define the specific stakeholders of a corporation (the normative theory (Donaldson) of stakeholder identification) as well as examine the conditions under which these parties should be treated as stakeholders (the descriptive theory of stakeholder salience). These two questions make up the modern treatment of Stakeholder Theory.

Scholarly Contributions

There have been well over 100 articles written on stakeholder theory including an entire issue of the Academy of Management Journal (v 42 n 5, 1999). Recent scholarship on the topic of stakeholder theory that exemplify research and theorizing in this area are Donaldson and Preston (1995) and Mitchell, Agle, and Wood (1997), Friedman and Miles (2002) and Phillips (2003).

Donaldson and Preston argue that the normative base of the theory, including the "identification of moral or philosophical guidelines for the operation and management of the corporation" (pg. 71), is the core of the theory. Mitchell, et al derive a typology of stakeholders based on the attributes of power:power (sociology) (the extent a party has means to impose its will in a relationship), legitimacy (socially accepted and expected structures or behaviors), and urgency (time sensitivity or criticality of the stakeholder's claims). By examining the combination of these attributes in a binary manner, 8 types of stakeholders are derived along with their implications for the organization. Friedman and Miles explore the implications of contentious relationships between stakeholders and organizations by introducing compatible/incompatible interests and necessary/contingent connections as additional attributes with which to examine the configuration of these relationships.

The political philosopher Charles Blattberg has criticized stakeholder theory for assuming that the interests of the various stakeholders can be, at best, compromised or balanced against each other. Blattberg argues that this is a product of its emphasis on negotiation as the chief mode of dialogue for dealing with conflicts between stakeholder interests. He recommends conversation instead and this leads him to defend what he calls a 'patriotic' conception of the corporation as an alternative to that associated with stakeholder theory.

References

• Blattberg, C. From Pluralist to Patriotic Politics: Putting Practice First, Oxford and New York: Oxford University Press, 2000, ch. 6. ISBN 0-19-829688-6.
• Donaldson, T. & Preston, L. 1995. The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications. Academy of Management Review, v 20, n 1, pp 65-91.
• Freeman, R.E. 1984, Strategic Management: A stakeholder approach. Boston: Pitman.
• Friedman, A.L. & Miles, S. 2002 Developing Stakeholder Theory. Journal of Management Studies, v 39, n 1, pp 1-21.
• Mitchell, R.K., Agle, B.R., & Wood, D.J. 1997. Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who and What Really Counts. Academy of Management Review, v 22, n 4, pp 853-886.