Stakeholder Theory

Stakeholder theory concerns the central idea that stakeholders in general should be the focus of organizations for value maximization, rather than only shareholders (investors), who are concerned with profit maximization. Stakeholder theory is useful for understanding organizational life because it helps illustrate and explain organizations’ features and behaviors. It is known as a managerial tool that helps evaluate the achievement of business goals by assessing managers’ behaviors. It also provides meaning and value because it offers a set of ethical guidelines that managers can follow for managing stakeholders, their expectations, and their needs. This entry first illustrates the main features, principles, and development of stakeholder theory. It then describes the main criticisms of the theory, and finally, it explores managerial implications for communication professionals who are engaged in corporate reputation initiatives.

Main Features of Stakeholder Theory

Stakeholder Identification Process

To support organizations’ survival during turbulent and changing times, stakeholder theory–based contributions have first focused on the stakeholder’s identification process. In 1984, R. Edward Freeman proposed a broad definition of stakeholders, by intending them as “any group or individual who can affect or is affected by the achievement of the organization’s objectives” (p. 46). Freeman’s definition could potentially include everyone who has a stake in the organization and influence on its behaviors by means of a strong relationship. A narrower definition by Max Clarkson (1994) is that stakeholders are those individuals who “bear some form of risk as a result of having invested some form of capital, human or financial, something of value, in a firm” (p. 5).

Between such broad or narrow definitions of the stakeholder, several contributions have focused on different features of the concept and proposed different categorizations. By taking into account the interdependency level between stakeholders and organizations (low or high), Clarkson identified two groups of stakeholders: primary and secondary. The primary stakeholder group is formed by those individuals who are considered necessary for the organization’s survival. The group is usually composed of shareholders, employees, clients, suppliers, governments, and communities. Managers should be able to satisfy and create value for each of these stakeholders. The secondary stakeholder group is constituted by those individuals who can affect or be affected by an organization but who are not fundamental for the organization’s endurance. Media and interest groups could be identified as a secondary stakeholder group. They don’t constitute a threat to the organization’s survival, but they could damage its reputation, and they need to be conveniently taken into account.

Stakeholder Salience

According to Ronald Mitchell, Bradley Agle, and Donna Wood, stakeholders can be identified based on three attributes: (1) power, defined as the capability of a party to impose its will in a relationship; (2) legitimacy, intended as the coherence and acceptability of an entity’s action compared with a constructed system of norms and beliefs; and (3) urgency, or the degree to which stakeholders require instant attention from organizations. By combining the presence of these attributes, Mitchell and colleagues identified eight classes of stakeholders: (1) dormant, who own the power to enact their will but are without a legitimate bond or a pressing claim; (2) discretionary, who hold the legitimacy attribute but are without the power to affect firms’ decisions and without urgent needs to claim; (3) demanding, who own the attribute of urgency; (4) dominant, who form a part of the dominant coalition as they are able to affect firm behaviors by their power and legitimation attributes; (5) dangerous, who lack legitimacy but have the attributes of power and urgency, which make them intimidating toward the organization; (6) dependent, who are characterized by the lack of power but having urgency and legitimate relationships with other stakeholders; (7) definitive, who own all the three attributes of power, legitimacy, and urgency; and (8) nonstakeholder, who own none of the three attributes.

Stakeholder Features and Roles

Robert Phillips explored the attribute of legitimacy with the aim of examining stakeholders’ features and roles. According to Phillips, all the different stakeholder definitions share the belief that any individual or group of individuals is a legitimate object of managerial or organizational attention. By adopting this starting point, Phillips has proposed a classification of stakeholders formed by two categories: (1) normative stakeholders and (2) derivative stakeholders. Normative stakeholders are those individuals to whom companies show moral obligation. Managers should guarantee the respect and safeguard the rights of these stakeholders. Derivative stakeholders are those individuals whose behaviors could affect organizations and their normative stakeholders. Andrew Friedman and Samantha Miles moved the attention from stakeholders’ features and attributes to the analysis of the configuration of their relationships. They focus on the analysis of the types of relationships occurring between organizations and stakeholders and on the examination of their possible change over time.

Stakeholder Management

Freeman’s original work on stakeholder theory offered a framework of stakeholder management with the aim of providing professionals with a managerial tool for managing stakeholders. It is based on three levels at which organizations could use different processes and tools for effectively managing and relating to stakeholders: (1) rational, (2) process, and (3) transactional levels. At the first level, the rational, companies need to identify and understand who their stakeholders are and to what extent they can affect or be affected by organizations. Organizations need to examine and analyze their environment. The starting point could be the creation of a stakeholder map around strategic issues for the organization. Once stakeholders are identified, companies should be able to identify the stakes of different groups in order to categorize them by two variables: interest and power. At the process level, organizations need to define and understand how to manage stakeholders and to what extent their strategies, initiatives, and activities fit with the stakeholder map. The last level, the transactional, refers to the way in which organizations can relate to stakeholders. Companies are required to define the kinds of transactions to finalize and relationships to manage.

Criticisms of Stakeholder Theory

Stakeholder theory has stimulated a deep debate characterized by the development and sharing of different opinions, standpoints, and analytical perspectives about its validity and implementation. Freeman’s seminal work has been discussed and reviewed by different authors, who underlined some critiques or, in other cases, proposed new stakeholder theories.

Freeman’s stakeholder theory has been mainly criticized for the absence of a theoretical basis in describing and explaining corporate or stakeholder behaviors. Freeman seems to be oriented more toward providing a managerial tool, as explained in his official statements, rather than providing a theoretical and systemic analysis. Some scholars have criticized stakeholder theory for not providing adequate analysis and explanation of the process, for the absence of links between the internal and external variables of a company, for the lack of attention to the features of the system where organizations operate, and for not providing enough description of the changing nature of the environment. Since stakeholder theory’s original conceptualization, criticism has led to the development of a stakeholder audit process and tools, which have been defined as useful for developing and managing organizational strategies. Freeman’s work has also led to the deepening of the application of normative ethics to organizations where stakeholders are not considered a tool for accomplishing organizational aims but a main purpose for organizations in themselves. Debate over stakeholder theory has also led to the development of new frameworks and theories that have allowed stakeholder theory to evolve from a corporate-based perspective to a more overall and complete research field, where new stakeholder theories such as instrumental stakeholder theory, convergent stakeholder theory, and divergent stakeholder theory have developed.

Implications for Corporate Reputation

The development of stakeholder theory has affected theoretical and empirical work emerging in different disciplinary areas, such as strategic management, corporate organizational planning, and corporate social responsibility. Although scholars have analyzed the topic by adopting different perspectives of analysis, it is possible to identify a common element of such contributions: the acknowledgment of the need to pay attention to stakeholders in order to obtain the legitimacy to operate, which organizations require for their success.

Concerning corporate reputation, stakeholder theories have provided useful insights for developing a specific knowledge and understanding of how to prioritize corporate stakeholders and how to better face new trends in the corporate reputation field. Such information could integrate the current method implemented by professionals who are used to identifying stakeholders based on their relationship to the situations or the communication strategies of organizations. In addition, if different stakeholder groups receive and are exposed to diverse messages from the company and from other stakeholders, they can react in different ways by developing various personal opinions and perceptions. If reputation professionals use stakeholder theory to improve the management of corporate reputation, they can integrate it with innovative communication practices and expertise to identify and prioritize stakeholders, define relational processes for effectively managing interactions with them, and finalize the interactions with stakeholders in order to gain legitimacy.