How do corporations that run their operations according to the stakeholder theory of the firm create value?

Understanding Stakeholder Theory

Who should a business seek to serve first? That’s the question at the heart of stakeholder theory, an organizational management approach that addresses corporate morals and values. Stakeholder theory is also relevant to project management. This article will discuss exactly what stakeholder theory is and how it applies to projects within your organization. We’ll also explore the challenges and benefits of stakeholder theory from a project management perspective.

Stakeholder theory suggests that shareholders, aka financial investors, are one of many groups a corporation or organization must serve. Under stakeholder theory, anyone that is affected by the organization or its workings in any way is considered a stakeholder, including employees, customers, suppliers, local communities, environmental groups, governmental groups, and more. Stakeholder theory holds that organizations and corporations should strive to do right by all these stakeholders and that in doing so, the organization will achieve true lasting success.

Stakeholder theory is diametrically opposed to shareholder theory. According to shareholder theory, a company’s sole motivation should be to advance its shareholders’ interests. Since shareholders are primarily concerned with monetary growth, shareholder theory essentially translates to a “make more profit at all costs” approach to business. 

From a project management perspective, stakeholder theory means considering the needs of all parties with a vested interest in a particular project. According to the Project Management Institute, stakeholders are “individuals and organizations who are actively involved in the project, or whose interests may be positively or negatively affected as a result of project execution or successful project completion.”

Stakeholder theory example

As an example of how stakeholder theory works, imagine an automobile company that has recently gone public. Naturally, the shareholders want to see their stock values rise, and the company is eager to please those shareholders because they have invested money into the firm. However, stakeholder theory says that those investors are only one class of stakeholders that the company should strive to serve. 

Other stakeholders would include:

• Employees
  Employees are major stakeholders in any company. They expect to be compensated fairly and work in safe conditions. If the company doesn’t meet these basic expectations and treats its employees like cogs in a wheel rather than valued team members, it can harm the business in the long run. There will be constant employee turnover, and the firm will earn a negative reputation among the workforce, ultimately weakening the company and its potential to earn higher revenues.
• Manufacturers/suppliers
  Under stakeholder theory, manufacturers, suppliers, and other vendors that the auto company works with are considered stakeholders. The auto company should treat these vendors fairly in business dealings and consider their employees and other stakeholders. For instance, if a supplier has a reputation for mistreating its employees and underpaying, then stakeholder theory would hold that you should find a different supplier that is more aligned with your business ethics.
• Customers
  If anyone impacted by a business or its workings is a stakeholder, then the car company’s customers are some of its biggest stakeholders. According to stakeholder theory, a top priority for the company should be producing a vehicle that safely transports its customers from point A to point B as reliably, comfortably, and efficiently as possible. 
• Customers’ neighbors and community members 
  Since automobiles produce emissions that can impact the environment, stakeholder theory says that anyone who lives in proximity to one of these vehicles may be affected and should be viewed as a stakeholder. With these stakeholders in mind, the company may adopt more fuel-efficient technology and cut down harmful carbon emissions. 
• Governmental bodies
  Carmakers must also consider any city, county, or state-mandated requirements, such as emission standards or safety features. The governmental agencies that enforce these standards are another set of stakeholders for the auto company.

Stakeholder theory template

Using the above example, let's look at how this could translate into a simple stakeholder analysis. Using a table like the one below, if we mark our X-axis as 'Interest', and our Y-axis as 'Influence', we can see the four quadrants that our stakeholders can fall into, and, therefore, how much time and effort we should put into ensuring they are up to speed on our project.

History of stakeholder theory

Stakeholder theory was formally laid out in 1984 by R. Edward Freeman in his book “Strategic Management: A Stakeholder Approach.” The idea of viewing all affected parties as equal stakeholders came as a response to shareholder theory, which holds that a company’s sole responsibility is to make money for its shareholders. In his book “Capitalism and Freedom,” economist Milton Friedman details the tenets of shareholder theory and states that corporations have no real “social responsibility.” According to Friedman, it is up to the shareholders to be socially responsible, not the company itself. 

Freeman argued against this stance, stating, “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 are the benefits of stakeholder theory?

In practice, stakeholder theory can promote a positive feedback loop that ultimately leads to greater returns for stakeholders and shareholders. For example, when employees are viewed and treated as valued stakeholders, they are motivated to do better, higher-quality work. This can lead to a boost in production volume and quality (or both), leading to happier, more satisfied customers. Satisfied customers tend to help boost sales and business growth, which makes shareholders happy. 

In a project management context, treating all project stakeholders — from team members to project sponsors to executives — as valued participants can positively affect the final project outcome. 

What are the challenges of stakeholder theory?

Critics of stakeholder theory have said that the needs and interests of the various stakeholder groups simply cannot be reconciled equitably. Under stakeholder theory, stakeholders represent multiple large and diverse groups, and one or more of those groups will inevitably take a back seat at some point in the process. Similarly, certain groups of stakeholders will hold more power or influence than others, which can create tension and discord. 

For project managers, these challenges can largely be solved with a stakeholder management plan. This plan should detail each group of stakeholders’ expectations and the rules for communicating with stakeholders. Additionally, the stakeholder management plan should prioritize stakeholders based on their level of influence on the project and how much they care about the outcome.

How Wrike helps with stakeholder management

Perhaps the single biggest key to successful stakeholder management is communication. Even if you can’t meet every stakeholder’s expectation or desire, you can maintain a positive relationship if you can effectively communicate the reasoning behind your decisions. Luckily, this is where Wrike shines. 

With Wrike, you’ll be armed with real-time reporting and customizable dashboards that help eliminate communication delays and ensure that stakeholders are in the loop at all times. With centralized project management on a single, unified platform, your team members and stakeholders are always on the same page and can work together more efficiently to achieve business goals. 

Get started with a free two-week trial today and discover how Wrike makes stakeholder management a snap.

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