Stakeholder theory has provoked controversy for more than 70 years, even though the term “stakeholder” is itself of more recent origin. The theory raises a highly contentious question: in whose interests should a business corporation or other type of organization be run? Opponents stress the primacy of shareholder rights. Supporters claim corporations have wider responsibilities toward a broad range of groups and individuals with a “stake,” whether financial or otherwise, in the operations of the business. In the contemporary world, strategic stakeholder communication has become a key driver of corporate reputation. Hence the stakeholder concept is a central concern for the field of public relations.
The origins of the stakeholder debate can be traced to scholarly disputes in the 1930s between Harvard law professor E. Merrick Dodd and management theorist Adolf Berle. Dodd contended corporate powers were held in trust for the entire community, while Berle argued the same powers should be held in trust for shareholders. In the 1950s, Berle conceded the argument to Dodd. The word “stakeholder” first appeared in the management literature in an internal memorandum at the Stanford Research Institute in 1963. It was originally defined as “those groups without whose support the organization would cease to exist” (Freeman 1984, 31). Thus the initial conceptualization of a stakeholder extended to such groups as shareholders, employees, customers, suppliers, lenders, and society. The term was intended to broaden the notion that shareholders are the only group to whom management need be responsive. The term “stakeholder” was coined as a rhetorical device, designed to advocate an alternative perspective on business theory and practice – one that eschewed the traditional notion of serving the shareholder, or business owner(s), alone. The Stanford definition has come to be known as the “narrow” definition of a stakeholder.
The intense contemporary interest in the theory and current ubiquity of the term “stakeholder” began with the publication of R. Edward Freeman’s seminal 1984 book Strategic management: A stakeholder approach. In addition to sparking a voluminous body of scholarly and practitioner literature, Freeman (1984) introduced a new definition of “stakeholder,” greatly broadening its applicability. According to Freeman (1984, 25), a stakeholder is “any group or individual who can affect or is affected by the achievement of the firm’s objectives.” In other words, virtually anyone – even a terrorist – can be considered a stakeholder.
Since then definitions have proliferated, Mitchell et al. (1997) presented no fewer than 27 that have appeared in the literature over the past 40 years. Some authors have even extended the concept to nonhuman entities such as the environment. It is widely acknowledged that the lack of an agreed definition is one of the theory’s most intractable problems. Very broad definitions present obvious difficulties for managers actually attempting to implement the concept.
Current scholarship suggests the stakeholder concept represents a genre of theories rather a single theory. Donaldson and Preston (1995) identified three distinct types of stakeholder theory, which they argued had always been implicit in the stakeholder debate but hitherto had been thrown together in an inappropriate manner. “Descriptive stakeholder theory” attempts to describe and sometimes explain aspects of corporate and stakeholder behavior. It is concerned with what managers and organizations actually do. “Instrumental stakeholder theory” relates to the potential connections between certain stakeholder management practices and the achievement of traditional corporate objectives such as profitability and growth. “Normative stakeholder theory” focuses on ethical guidelines for the operation and management of corporations. It endeavors to tell managers what they should do.
Descriptive stakeholder theory has made relatively little progress despite its potential significance. Some scholars have speculated that the vagaries of human behavior put the development of a descriptively useful stakeholder theory of the firm beyond reach. A number of published studies adopt an instrumental perspective; however, the extant evidence for the financial efficacy of stakeholder management remains sketchy and methodological difficulties abound. Several instrumental researchers have used corporate social responsibility ratings published by an independent agency as a proxy measure, rather than attempting to tap stakeholder management practices directly. Others rely on case studies, with limited generalizability as a result. Many scholars have called for more empirical research from an instrumental perspective.
The normative stakeholder literature is voluminous, dwarfing the number of contributions from other perspectives. Many normative stakeholder theorists hold that conventional shareholder capitalism is simply immoral. Replacing it with a stakeholder model is therefore an ethical imperative. Critics of this position argue normative stakeholder theory is inimical to the fundamental purpose of business (i.e., to generate wealth for the providers of capital) and that stakeholder management amounts to a breach of fiduciary duties to shareholders, thus is itself unethical. To be a fiduciary to multiple stakeholder groups, critics claim, is to be a fiduciary to no one. Goodpaster (1991) identified what he called the “stakeholder paradox”: it is both essential, yet in some ways illegitimate, to orient corporate decisions by ethical values that go beyond strategic stakeholder considerations to multi-fiduciary ones. The paradox remains fiercely debated.
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- Berman, S. L., Wicks, A. C., Kotha, S., & Jones, T. M. (1999). Does stakeholder orientation matter? The relationship between stakeholder management models and firm financial performance. Academy of Management Journal, 42(5), 488–506.
- Donaldson, T., & 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.
- Goodpaster, K. E. (1991). Business ethics and stakeholder analysis. Business Ethics Quarterly, 1(1), 53–73.
- Marcoux, A. M. (2003). A fiduciary argument against stakeholder theory. Business Ethics Quarterly, 13(1), 1–24.
- 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, 22(4), 853–886.
- Post, J. E., Preston, L. E., & Sachs, S. (2002). Redefining the corporation: Stakeholder management and organizational wealth. Stanford, CA: Stanford University Press.