Improving long-term business health with stakeholder theory

This post was originally published on July 19, 2019, and updated most recently on April 11, 2021.

Shareholders are people who have a financial interest in a company, usually through owning stock or shares. It is the company’s responsibility to make a profit for them.

A stakeholder, on the other hand, includes shareholders as well as anyone who has a more general interest in the business.

Stakeholder theory is the brainchild of Dr. F. Edward Freeman, a professor at the University of Virginia. He first coined the phrase in his landmark 1984 book, Strategic Management: A Stakeholder Approach. According to him, stakeholders are a broad group of parties and individuals that includes anyone who is affected by the company and its activities. And, he says, the long-term health of a business depends on keeping them satisfied.

What are the benefits of stakeholder theory?

According to Freeman, a company is only successful when it delivers value to its stakeholders. Why? Because they have a direct impact on business, both positively and negatively. Here are some of the key benefits of keeping stakeholders satisfied:

Motivated employees (and happier customers)

When employees feel valued, they work harder. And harder working employees means a more efficient business. That efficiency also means you’ll have happier, more satisfied customers who are more likely to remain loyal and recommend you to others.

Increased investment

Better performance and a strong customer base mean you’re more likely to receive good publicity and higher levels of trust from financiers and investors who are more likely to add money to your funds. This, in turn, will help your business grow and secure you a greater share of the market.

Improved reputation

Stakeholders include communities, government bodies, and environmentalists. Considering the needs of these groups while operating in a manner that’s transparent and free from corruption not only ensures stakeholder satisfaction, but it also improves the reputation of your company and fosters good public relations — something that’s especially important in today’s increasingly connected, ethically-conscious world.

What are the drawbacks of stakeholder theory?

Some criticize stakeholder theory, claiming the interests of the group are just too broad to realistically manage. You can’t please everyone, as the saying goes, and the needs of some stakeholders will naturally place higher than the interests of others.

So how do you decide who to prioritize? It’s a balancing act to which there’s no clear answer, but something called stakeholder mapping can help. Read on to learn how.

How to manage your stakeholders in 5 easy steps

1. Work out your values

Examine your business activities and work out what your values are, as well as the consequences of your actions. Then decide how to manage these in a way that’s realistic, sustainable, and responsible.

2. Conduct stakeholder analysis

Before you can manage them, you need to work out who your stakeholders are. These will be people or groups who are affected by your work or who have influence over it.

This could include shareholders, government parties, your boss, senior executives, trade associations, suppliers, the press, your team, lenders, analysts, communities, environmental groups, customers, analysts, and advisors… The list will be large, so spend some time on it and confer with other people in the organization to get a fuller picture.

3. Prioritize your stakeholders with a diagram

Organize your stakeholders in a spreadsheet, so you can see who is responsible for what and when. Then map out your stakeholders using a power vs. interest grid, like the diagram below.

The resulting diagram will dictate your management strategies (monitor, keep informed, etc.) alongside each group’s level of authority and concern over the project’s outcome. The diagram should help you create a clear plan for interacting with all the stakeholders in a way that keeps them as happy as possible.

An online diagramming tool can help you assemble this information quickly and easily.

4. Create a communication plan

It’s important to engage your stakeholders with strong and efficient communication. Here are some tips:

• Firstly, create a contacts list and share it with all the project stakeholders. If you’re using project management software that offers a Wiki feature, then turn this list into a collaborative repository and add other useful information, such as email correspondence and project documents.
• Build trust. Ensure your communication — whether in person, over the phone, or online — is courteous, helpful, and frequent.
• Next, consider potential risks and opportunities with each stakeholder.
• Take ownership of projects and any issues, and prepare to compromise.
• Finally, deliver messages early and often. Use cloud-based project management software to keep data up-to-date and report in real-time.

5. Adapt as your business grows

The bigger your business becomes, the more different groups will be affected. Stakeholder management is the process of recognizing and adapting to the needs of these different groups, winning their support, and fostering good relationships. This is all crucial to the long-term health of your business. As Edward Freeman once said: “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.”