Stakeholder theory + Stakeholder analysis: A simple explanation
7th February, 2023
What is stakeholder theory and stakeholder analysis? There are theories applicable in all areas of life, and business is no different. In this article I will look at stakeholder theory, as well as stakeholder analysis and how they relate to one another.
What is stakeholder theory?
Stakeholder theory is an organisational management and business ethics theory. It was first proposed by Dr. F Edward Freeman. This theory is in opposition to that of the economist Milton Friedman, who proposed ‘shareholder theory’ – this says that a company’s sole responsibility is making money for their shareholders.
Stakeholder theory, which Freeman proposed in a book in 1984, is different. It accounts for everyone impacted by a business: its employees, the suppliers, customers, local communities, creditors and more. Stakeholder theory is concerned with the morals and values that come alongside managing an organisation: market economy, corporate social responsibility, and social contract theory are some examples of this.
Viewing and implementing strategy or strategies from the stakeholder’s perspective adds a socio-political element to a business. It takes a resource-based and market-based view, focusing on what is best for ALL people who have some sort of ‘stake’ in the business – rather than only doing best by the shareholders…
Freeman says: “If you can get all your stakeholders to swim or row in the same direction, you’ve got a company with momentum and real power. Saying that profits are the only important thing to a company is like saying, ‘Red blood cells are life.’ You need red blood cells to have life, but you need so much more.”
What is stakeholder analysis?
So what is stakeholder analysis, and how does it relate to the theory? Stakeholder analysis is the actual process of assessing (or analysing) the system in place – in business, usually, but in conflict resolution and project management too, sometimes – and any potential changes in terms of how they relate to stakeholders. The information born from this analysis is used to assess how the interests of these people should be taken into consideration as things progress.
The point in stakeholder analysis is to look at all of the stakeholders of a business or situation, and examine how a particular issue is or will be affecting them. Stakeholders have different demands and feelings depending on who they are, and it is important that people in a managerial position take all of them into consideration. There is rarely a way of making *everybody* happy, but good stakeholder analysis ensures that everybody is considered and the best overall option is taken forward.
What (or who) is a stakeholder?
We shouldn’t go any further in terms of examining stakeholder theory and analysis without first completely understanding what a stakeholder actually is – who counts, who doesn’t, and why.
The ISO 26000 is a really helpful tool for businesses and organisations, especially when it comes to having any form of social responsibility. It was published in 2010 by the International Organization for Standardization. Despite being over a decade old, the ISO 26000 is still relevant and used by businesses across the globe. It was written by a unique group representing governments, non-governmental organisations (NGOs), industry professionals, consumer groups, labour, and academic/consultancy organisations around the world.
But why does that matter? Well, the ISO 26000 is useful for us when we come to look at who or what is a stakeholder. They define a stakeholder as an: “individual or group that has an interest in any decision or activity of an organization.” This may include (but is not limited to):
- Internal staff
- Local communities
- Regional communities
- Trade associations
As you can see, there are many examples of a stakeholder. Pretty much anybody can or will have some sort of stake in a business. This is why stakeholder analysis is so important – it gives businesses the best chance to consider and do right by as many people as possible who have some sort of vested interest in their company.
A real-life example of stakeholder analysis
It is all well and good examining stakeholder theory and analysis in theory, but how does it work in reality? Below you’ll see how stakeholder analysis works, and how it is done.
Creating a stakeholder analysis matrix is a great way to get started. This can be done as a table, where you list the stakeholders themselves (individual people or wider groups) alongside sections for how much impact the business or project has on the stakeholder, as well as how much influence they have over it.
Also in this grid, there are additional sections for how the stakeholder could or does contribute, as well as how they can or do ‘block’ the project or make things difficult for the business. It also gives space to examine what is important to each stakeholder, as well as what strategy can be used to engage each stakeholder.
Once this matrix has been laid out and the organisation has established who its stakeholders are, it is time to ‘map’ the stakeholders. This is a way of ‘prioritising’ the different people or groups, to ensure the most effective outcome is reached.
There are different ways and techniques of mapping stakeholders during analysis. You can see some brief information about each below.
- Cameron et al – a process of ranking stakeholders based on their needs, and by the relative importance of stakeholders to others stakeholders.
- Fletcher et al – mapping stakeholder expectations based on value hierarchies and key performance indicators (KPIs).
- Mitchell et al – a classification of stakeholders based on their power to influence business as well as the legitimacy of each stakeholder’s relationship with the organisation, and the urgency of the stakeholder’s claim on the organisation.
- Savage et al – a way to classify stakeholders according to any potential threat and also any potential for cooperation.
- Turner et al – a process of identification alongside assessment of awareness, support, and influence which leads to strategies for communicating and assessing stakeholder satisfaction. It also determines who is aware or ignorant, and whether their attitude is supportive or opposing.
How stakeholder analysis works
Let’s look at a tangible example of stakeholder analysis using a hypothetical construction company. There will be various people who are considered stakeholders, given their ‘stake’ or vested interest in the company. These include shareholders, employees, suppliers, environmentalists, the local community and more.
The people at the top of the construction company would create a matrix including all of these groups of people, and work out how much their next project (for example, building a new airport) would impact the stakeholders as well as how much influence these people might have on the project. For example, building an airport would have a big impact on the local community as it would cause more traffic to and from the nearby area as well as increased noise pollution. Environmentalists would have a big influence on the project, being able to examine plans (which, according to stakeholder theory, they should have access to) and advise on any environmental issues which may arise during the building of the new airport.
The construction company can use their analysis to form a plan of action. This plan might include meeting with certain groups of people, or offering compensation to particular stakeholders for whatever reason.
Why is stakeholder theory important?
If it works properly, stakeholder theory – and analysis – ensures a fair business model which continually strives to improve itself. It allows businesses to be considerate, and focus on things other than making money. When done right, it should allow for the implementation of corporate social responsibility factors, sustainability, compensation for those affected negatively and so on.
There are tangible benefits of stakeholder theory, too. These might include:
- Employee satisfaction leading to more productivity and lower staff turnover rates
- Better ideas coming from people you (as a business) might not speak to otherwise
- Increased funding if investors are happy with how things are working out
- A more sustainable and/or eco-friendly way of running a business which provides benefits for the local and wider community
- Better mental health of all stakeholders involved
- More attractiveness as an ethical company leading to further business, happier customers and so on
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