Stakeholder thinking can be more successful once we resolve the dilemma of "value"
Theresa May couldn’t have been clearer. In her inaugural speech, the UK’s new prime minister spelled out her vision for a country that works for everyone, “not for a privileged few”. To ram home the point, she pledged to have large corporations find a seat for worker representatives on their boards. Why? Because “the people who run big businesses are supposed to be accountable to outsiders.”
Edward Freeman could be forgiven for patting himself on the back. Few academics have done more to put stakeholder theory on the map over the past three decades than this prolific professor at the University of Virginia’s Darden School of Business. His 1984 book on strategic management, subtitled A Stakeholder Approach, is now widely recognised as a founding text on the subject. Today, stakeholder thinking underpins a host of newer management fads sweeping across the CSR landscape. Most notable perhaps is the notion of "shared value", a concept refined and promulgated by the Harvard duo Mark Kramer and Michael Porter, and now cited by everyone from global multinational Nestlé to UK charity Save the Children.
So what’s stakeholder theory in a nut shell? At its most basic, it’s a management framework that encourages business leaders to take into account the interests of two sets of people: those with the ability to affect the achievement of a corporation’s objectives, and those meaningfully affected by that corporation. By adopting such an approach, businesses will become more responsive to the multiple audiences that impinge on their success, and consequently they will be more resilient and more profitable over the long term. So the theory goes, at least.
In a 2001 working paper with Darden colleague John McVea, Freeman defines seven core characteristics of the stakeholder approach. The list includes the promotion of values-based management, of holistic thinking (i.e. considering political, ethical, social and environmental concerns alongside the purely economic) and of mutual success (not merely that of the corporation alone). In short: it’s stockholder theory – the rocket that launched modern capitalism’s profit maximisation spree – just with others invited to the party as well (and on an equal footing).
Defining who these "others" are presents theorists and managers alike with a problem. The generic categories aren’t especially controversial. Customers, employees, suppliers, communities and investors comprise the “Big Five” stakeholders. But how should managers balance these different interest groups? Indeed, can they be balanced? And how should managers judge certain "stakeholders" to be legitimate, and others not? For all its promise of adding value, most stakeholder mapping techniques are skewed heavily towards reducing risk rather than unleashing opportunity. A more fundamental criticism levelled at the theory is its implicit instrumentalism. An individual’s "stake" is not a stake on its own intrinsic merits, but only if it carries the necessary legitimacy, urgency or power (to cite Mitchell, Agle and Wood’s seminal 1997 typography) to make the company sit up. Ultimately, this places the company as chief arbiter of an individual or group’s right to stakeholder status. Fine if you make their list; troublesome if you don’t.
The theory’s influence in the ivory towers of business schools is not inconsiderable. Its footprint is clearest in the field of corporate ethics. Thomas Donaldson and Lee Preston were among the first to assess the various ways in which academics have taken it up: namely, as normative (how managers should act), descriptive (how managers do act towards stakeholders), instrumental (how managers can derive value) or managerial (how, in general, managers should manage) approach to business administration. Meanwhile, a literary review co-written by Freeman in 2010 charts the theory’s uptake in fields as diverse as accounting, information technology, law, healthcare and public policy.
For years, stakeholder theorists felt the need to battle it out with advocates of shareholder primacy. With all the empirical evidence now building up for stakeholder management, that debate is now beginning to feel old-hat. Looking forward there is certainly a need for more cross-country research. Does the theory play out among African and Asian firms, for example, as well as it does in North America and Europe (the subject of most research to date)? At a more applied level, categorising the different stakeholder engagement strategies that now exist and assessing how these relate to subsequent outcomes would mark a valuable addition. Then there’s the big prize: resolving the "value" dilemma.
In her same inaugural speech, Theresa May dismissed “political platitudes” about so-called "stakeholder societies". To win over such skeptics will require stakeholder scholars to broaden the idea of value from its narrow economic base and then resolve how it might be (re)distributed fairly through society.
Donaldson T. and Preston, L.E. (1995). ‘The stakeholder theory of the corporation: Concepts, evidence, and implications,’ Academy of management Review 20 (1), 65-91
Freeman R.E. (1984). ‘Strategic management: A stakeholder approach.’ Boston, Pitman Publishing.
Freeman, R.E., Harrison, J.S., Wicks, A.C., Parmar, B. and de Colle, S. (2010). ‘Stakeholder theory: The state of the art.’ Cambridge: Cambridge University Press.
Freeman, R. E., & McVea, J. (2001). ‘A Stakeholder Approach to Strategic Management.’ Darden Business School Working Paper No. 01-02.
Harrison, J.S. and Wicks, A.C. (2013). ‘Stakeholder theory, value and firm performance. Business Ethics Quarterly,’ 23, 97-125.stakeholder CSR Environment accountability