The emergence of the stakeholder theory
The last two decades saw the emergence of a new notion in management studies: the notion of the stakeholder. Scholars in the field of management have been investigating the role and responsibility of businesses and the players in the organisational environment since the 1960s, and this has given rise to the stakeholder theory that emerged in the 1980s. Some recent scholars have argued that elements of stakeholder theory can be traced back to much earlier approaches to management. For example, Schilling (2000) argues that Mary Parker Follett (1918) in her work The New State predates the stakeholder theory by roughly 60 years, while Barnard (1938 in Key, 1999) suggested that the interests of the employees had to be assessed carefully as they played an important role in the companies’ successes. Clark (1984) traces it even further back to the 19th Century when the concepts of the co-operative movement and mutuality were popular.
Key found traces of the future stakeholder theory in the 1950s, 1960s as well: she quotes Eells who argued that the corporation “was accountable to many different sectors of society” (Eells, 1960:55 in Key, 1999:319). Key also refers to Abrams (1951) who
“identified four corporate claimants – employees, stockholders, customers and the public, including government” (Key, 1999:319). Merton (1957) and Evan (1966) (in Key, 1999) have also contributed to what became the stakeholder theory later; Merton (1957) by presenting his concept of role sets, Evan (1966) by suggesting a concept of organisational sets, both underpinning Freeman’s (1984) theory of stakeholders. Rhenman (1968) in his organisation theory identified key players who depend on the company or on whom the company is dependent (in Steadman and Green, 1997). Preston and Post (1975)
“implicitly and explicitly identified societal actors to whom the firm is responsible” (Key, 1999:319) “Eberstadt (1977) suggests that as early as the middle ages, “God” was considered a stakeholder, that is a corporate partner whose profits could be distributed to the poor at the end of each year.” (Key, 1999:319) Clark (1998) argues that this was a
time when the changing economic circumstances required close collaboration from all the players involved with a business.
The term ‘stakeholder’ was invented by the Stanford Research Institute in 1963, where the notion meant to refer to “those groups without whose support the organisation would cease to exist” (Freeman, 1984:31). In accordance with this definition, shareowners, employees, customers, suppliers, lenders and society were regarded as stakeholders.
Most academics engaged in researching the stakeholder theory (Carroll, 1996, Key 1999, Sautter and Leisen 1999) regard Freeman (1984) as the father of the stakeholder theory.
In his 1984 work Strategic Management: A Stakeholder Approach Freeman attempts to explain “the relationship of the firm to its external environment, and its behaviour within this environment” (Key 1999:319). Freeman (1984:46) defines a stakeholder as “any group or individual who can affect or is affected by the achievement of an organisation’s objectives”. His list of an organisation’s stakeholders included owners, customers, competitors, employees, suppliers, governments, local community organisations, special interest groups, environmentalists, consumer advocates, media, unions, trade associations, financial community and political groups.
Gray (1989) defines stakeholders in a similar way to Freeman. In her view, (quoted in Carroll, 1996:74) “Stakeholders are the actors with an interest in a common problem or issue and include all individuals, groups, or organisations directly influenced by the actions others take to solve the problem.” She elaborates the definition in more detail and one of her ways of identifying a business’s stakeholders resembles Freeman’s simplified definition.
Carroll (1989) develops Freeman’s ideas further, in his work Business and Society:
Ethics and Stakeholder Management with an attempt to depict the relations of businesses to various groups such as employees, customers, competitors, etc. His commitment to investigating the stakeholder theory led to two amended editions of the book. The latest one in 1996 contains references to three conferences that were convened in 1993 and 1994 in the United States and in Finland, serving as proof of the growing interest in the
stakeholder concept for business. Carroll provides several definitions of stakeholders.
One of them suggests that a stakeholder is “an individual or group that has one or more of the various kinds of stakes in a business” (1996:74). Another one of Carroll’s definitions resembles Freeman’s simplified definition: “a stakeholder may be thought of as any individual or group who can affect or is affected by the actions, decisions, policies, practices, or goals of the organisation.” (Carroll, 1996:74) In his point of view, the most obvious stakeholders of a business are stockholders, employees, customers and competitors, though he would also argue for the necessity of involving other groups such as “the community, special-interest groups, and society or public at large” in the stakeholder concept (Carroll, 1996:74)
Hill and Jones (1992) regard stakeholders as those with a legitimate claim on the firm.
Bryson and Crosby (1992:65) suggest that a stakeholder is “any person, group, or organization that is affected by the causes or consequences of an issue”. Donaldson and Preston (1995:67) argue that stakeholders are “persons or groups with legitimate interests in procedural and /or substantive aspects of corporate activity”. In Clarkson's (1995) view we can regard a person or a group stakeholders if they "have, or claim, ownership, rights or interests in a corporation and its activities, past, present or future" (Getz and Timur, 2005:235) Steadman and Green (1997) do not suggests any definitions but they compile a list of the typical stakeholders of a firm: customers, employees, environmentalists, suppliers, unions, government, stockholders and bondholders are quoted. Argenti (1997:442) identifies five major stakeholder groups: “investors, employees, customers, suppliers and the relevant community”. Schilling (2000:225) summarises the various stakeholder definitions as a group including customers, employees, management, stockholders, creditors, suppliers, community, “and sometimes even competitors”.
The analysis of the historical emergence of the concept of ‘stakeholder’ in the management literature has indicated that the concept involves those directly involved in and directly affected by a development. There is a suggestion that it is possible to construct the nature of the ‘stake’ in different ways and for individuals and organisations
to hold more than one type of stake in the process. There are also early concerns about who can be considered as ‘legitimate’ stakeholders.
As the above definitions demonstrated, the term ‘stakeholder’ is used in different ways, which were discussed at the 1993 Toronto Conference on stakeholders. One of the participants, Mark Starik summarised the range of stakeholders the following way:
“The range appears to be bounded in this case, on the one end, by those entities which can and are making their actual stakes known (sometimes called “voice”), and on the other, by those which are or might be influenced by, or are potentially influencers of, some organisation or another, whether or not this influence is perceived or not.” (The Toronto Conference: Reflections on Stakeholder Theory, 1994:90)
However, Starik (1993) challenges the authors of the numerous stakeholder definitions by saying that they all limit the concept to human beings and therefore exclude possible other, non-human stakeholders. He argues for the natural environment being accepted as a stakeholder, as this would allow the human-natural environment interactions to be identified and also planned for. Starik reminds us of environmental audits and impact statements as mechanisms, whereby human beings try to manage their relationship to the natural environment using stakeholder management processes. Therefore, if non-human beings are involved in the stakeholder theory, the concept has to be redefined to include
“any naturally occurring single entity which affects or is affected by organizational performance” (Starik, 1993:22).
He gives examples of two special cases when natural environment-based, non-living entities might be considered stakeholders. The first example refers to those humans who have already died or are not born yet. (Dead ancestors or future generations may be given the stakeholder status.) The second case relates to non-living entities such as “human transformed objects, such as one’s house, car, computers, equipment, and the multitude of ‘personal products’ each of us uses, works with or creates inside and outside of our organizations everyday” (The Toronto Conference: Reflections on Stakeholder Theory, 1994:93)
Starik also quotes Mitroff (1983) who argues that a ‘stakeholder’ does not need to have a physical form, therefore concepts such as love, honesty, goodness (and also their opposites) might be considered stakeholders. Humans in many civilisations in the past deified similar ideas, sometimes even gave them human forms or names.
The broadening of the concept to include non-human entities may pose the question of where the limits are. It is not entirely certain that involving living and non-living entities of the natural environment in the stakeholder definitions will lead to a better understanding of the concept. This raises important issues for the difference between the development for theoretical purposes and for the translation of those concepts into analysis and practice. The ways in which non-human entities can become involved in the development process is through the actions of intermediaries of a human kind. What we are seeing here is that these non-human entities are perhaps not agencies in their own right but serve as sources of legitimacy for the claims of other stakeholders.
Stakeholder groups
The various stakeholder definitions have different scopes: some academics emphasise the
‘stake’ notion (Carroll, 1996), while others focus on the “affect or is affected by” concept (Freeman, 1984). This may already suggest that authors make a distinction between stakeholders, i.e. prioritising some stakeholders over others. When it comes to prioritising stakeholders, measuring the ‘criticalness’ of a stakeholder group and comparing it with that of others is an often used technique.
Hill and Jones (1992) argue that “stakeholders may vary with respect to the degree of importance they place on their own stake, the degree of importance management places on their stake, and also with respect to the amount of power the stakeholders has with management” (Schilling, 2000:225) Donaldson and Preston (1995) attempt to identify various stakeholder groups based on their interests. Carroll (1996), on the one hand, identifies primary and secondary stakeholders, where primary stakeholders in this context
are those with a formal or contractual relationship to the organisation; all others are seen as secondary stakeholders. On the other hand he quotes terms that were invented to categorise stakeholders at the second Toronto Conference on Stakeholder Theory, i.e.
core, strategic and environmental stakeholders. Core stakeholders are the ones “that are essential for the survival of the organisation” (Carroll 1996:78). Strategic stakeholders are also vital to the organisation because of the “the particular set of threats and opportunities it faces at a particular point of time” (Carroll 1996:78). All the others in the organisation’s environment, that are not core or strategic classify as environmental stakeholders. This is reverting to using the term ‘environment’ in the sense of the business environment rather than the natural environment and therefore does not extend the analysis to make use of Starik (1993).
Campbell (1997:447) makes a distinction between ‘active’ and ‘passive’ stakeholders:
“The active stakeholders are stakeholders who can affect the performance of the company and whose demands are unquenchable. These stakeholders are infinitely greedy. They always want more dividends, higher wages, better terms of trade and lower prices. Their loyalty can, therefore, only be won by offering more than others. The ‘passive’
stakeholders are all the other stakeholders. They have less active influence on the company because they do not have daily transactions with the company and their needs are definable.”
Freeman (1984) identifies different types of effects that stakeholders have on the firm and/or the firm has on stakeholders. He suggests the organisation make a stakeholder analysis, along two dimensions: interest or stake and power. The first dimension looks at
“the range of perceived stakes of multiple stakeholders” (1984:60). Freeman delineates three categories of stake: 1) equity (having an equity interest in the firm such as owners), 2) economic (having a market stake as a customer or a supplier) and 3) influencer (being able to affect the firm even if not directly).
The second dimension of the categorisation is power. Freeman makes a distinction between 1) voting power (typical of owners), 2) economic power (typical of customers
and suppliers) and 3) political power (typical of government) He provides a simplified categorisation in the Classical Stakeholder Grid (Table 4.1)
POWER STAKE
Formal or voting Economic Political
Equity Stockholders Directors
Minority Interests
Customers Competitors Suppliers Unions
Foreign Governments Economic
Debt Holders
Influencer Consumer Advocates
Government Trade Association Table 4.1: Classical stakeholder grid (Adapted from Freeman, 1984:62)
However, Freeman admits that the Classical Stakeholder Grid may not resemble the real world therefore he suggests drawing a “Real World” Stakeholder Grid which depicts the complexity of the problem. Donaldson and Preston (1995) suggest that Freeman’s categories of influencers and stakeholders are regarded as separate entities, for some actors in the organisation may be both, but some stakeholders may have no influence (job applicants), and some influencers have no stakes (the media).
At the first Toronto Conference, it was suggested geographic or temporal proximity, strategic utility and management preferences are also criteria used to distinguish stakeholder status. For example, Starik quoted the management and crisis literature, where the issues of probability and impact are key criteria of prioritising stakeholders.
“As in these other two fields, those entities which have the highest probability of interacting with an organisation or those which would have greatest impacts on, or greatest impact from, the organization’s actions would be more likely to be considered stakeholders and managed accordingly.” (The Toronto Conference: Reflections on Stakeholder Theory, 1994:91) This develops the idea of Savage et al (1991) who see the stakeholder relationship as a two sided coin, with the significance judged by both the stakeholder’s ability to cooperate with and to threaten the organisation.
Mitchell, Agle and Wood (1997) suggest that stakeholders may be identified by relational attributes of power, legitimacy and urgency. Power of a stakeholder can be identified in situations when the stakeholder can impose its own will on others through various means such as coercion, pressure, etc. “Legitimacy relates to the perceptions that the interests or claims of a stakeholder are appropriate or desirable, with these perceptions being based on socially constructed values and beliefs.” (de Araujo and Bramwell, 2000:272).
Urgency arises from “the degree to which stakeholder claims call for immediate attention” (Mitchell, Agle and Wood 1997:867).
Friedman and Mason (2004) refine this categorisation further in their study of public subsidies for professional sport facilities. They suggest that the three criteria of power, legitimacy and urgency can be used to construct an eightfold typology based on the amounts of each characteristic manifest by the different stakeholders. Two interesting things emerge from their attempt:
1. They note that possession of only one characteristic may not be enough to become a significant stakeholder
2. They observe that stakeholders can present their claims in a variety of ways with different appeals to support their case.
They develop an argument based on the construction of what they refer to as “typical cases” but they admit that the stakeholder analysis that they propose is more interesting in those cases that were outside the norm. Friedman and Mason (2004:249) argue that
“Through stakeholder analysis, a systematic evaluation may be undertaken of those cases
in which the expected groups did not necessarily achieve their objectives. By exploring situational factors and the interactions between stakeholders in terms of their underlying objectives and the attributes possessed, a better understanding can emerge regarding the resolution of economic development program decision conflicts.”
They suggest the following terms:
Definitive Expectant Latent Nonstakeholder
7: Definitive
Table 4.2: Stakeholder types (Adapted from Friedman and Mason, 2004:238–241)
The categorisation is an interesting attempt to differentiate between stakeholders but we would question the basis of the constructs that inform the categories. As we will demonstrate the questions of power and legitimacy call upon more complex arguments than those cited here.
Although there are various stakeholder groups who represent different interests, possess different degrees of power, a clearly defined hierarchy of stakeholders is not a necessary
conclusion. Donaldson and Preston argue that each stakeholder group should be treated as equally important, i.e. “as an end in itself, and not as means to some other end”
(1995:73). Carroll (1996), on the other hand implies that the stakeholders with more power and legitimacy require more attention. “This primary/secondary distinction is needed to help management prioritize the legitimacy of the claims that various stakeholder groups have or are making.” (Carroll 1996:76) Evan and Freeman (1988) state that one stakeholder group should not be given primacy over another, thought they admit that there may be times when one group will benefit at the expenses of the other (Schilling, 2000).
Argenti (1997) presents a double argument to support the critique of the notion of equality between stakeholders. On the one hand he questions the equity of the stakeholder categories, and illustrates his point with the following argument: “And if all stakeholders are equal, does this imply that when shareholders’ dividends rise by 20%, the employees (all of them, cleaners and directors equally) should expect, as of right, 20% extra pay; are the customers entitled to a 20% discount; will the company plant 20% more trees for the community? Of course not.” (1997:443) On the other hand, Argenti also claims that
“none of the members of the (other) categories are similar or equal” (1997:442), only shareholders are homogenous. No company treats the very senior, long-serving executives the same way as the low-paid casual employees.
No one would question the importance of mapping out the different stakeholder groups, to be able to manage them in the appropriate manner. However, it must be noted that some of the stakeholder sets may overlap therefore an individual may be a customer, a local community citizen or an environmentalist at the same time (Brenner and Cochran, 1991).
Typology of the stakeholder theory
The examples of the definitions by different authors demonstrate that the concept of stakeholders and stakeholder theory are “explained and used by various authors in very
different ways and supported (or critiqued) with diverse and often contradictory evidence and arguments” (The Toronto Conference: Reflections on Stakeholder Theory, 1994:85) This difference is reflected in the approaches the various authors use to the stakeholder theory. Donaldson and Preston (1995) suggest that currently there are three different types of stakeholder theory discussed in the academic field. One approach is used to depict how firms and/or their managers behave in certain situations, which they call descriptive stakeholder theory. This approach is purely empirical; it describes and sometimes explains specific corporate behaviour. Another type of stakeholder theory is used to look at how certain outcomes and results are more likely if the firm and/or their manager act in a certain way: this approach is labelled as instrumental. The instrumental approach is primarily hypothetical. The third way of utilising the stakeholder theory is via the normative approach, where the focus of the investigation is on how the firms and/or their managers should behave. The normative use of the stakeholder theory is essentially categorical.
An important issue raised at the 1993 Toronto Conference relates primarily to the descriptive approach. Donna J. Wood suggested that there are two different orientations of the descriptive approach, one describing observed realities, the other describing theoretical relationships. The first idea is referred to as empirical description, where the empirical reality leads to theoretical understanding. The latter approach is labelled as theoretical description, where a logical set of relationships among analytical categories of variables is built, with the aim of predicting “stakeholder behaviours in various situations, the effectiveness of managerial responses, likely outcomes, and so on, leading to an empirical understanding of theoretical reality.” (The Toronto Conference: Reflections on
An important issue raised at the 1993 Toronto Conference relates primarily to the descriptive approach. Donna J. Wood suggested that there are two different orientations of the descriptive approach, one describing observed realities, the other describing theoretical relationships. The first idea is referred to as empirical description, where the empirical reality leads to theoretical understanding. The latter approach is labelled as theoretical description, where a logical set of relationships among analytical categories of variables is built, with the aim of predicting “stakeholder behaviours in various situations, the effectiveness of managerial responses, likely outcomes, and so on, leading to an empirical understanding of theoretical reality.” (The Toronto Conference: Reflections on