A stakeholder is anyone who has an interest in a project, business or organization. More importantly, stakeholder management is critical for the success of any project or organization because it can influence everything and everyone, including senior management, project leaders, team members, customers, users and many others.

That’s why managers must prioritize and focus on the most important stakeholders, those with power, proximity and urgency. That’s when stakeholder theory comes into play.

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What Is Stakeholder Theory?

Stakeholder theory addresses business ethics, morals and values when managing stakeholders involved with a project or organization. It seeks to optimize relations with stakeholders, thereby improving efficiencies throughout the project or organization. Stakeholder theory is used in many important fields such as project management, corporate social responsibility, strategic management and business ethics.

Taking your stakeholder theory into practice requires project management software. ProjectManager is online work and project management software that helps you manage your stakeholder expectations and keep them updated. Our real-time reports can be filtered to show only the data stakeholders want to see and then easily shared as a PDF or even printed out.

History of Stakeholder Theory

The first person to define stakeholder theory was organizational theorist Ian Mitroff in his book Stakeholders of the Organizational Mind, which came out in 1983. Shortly thereafter, an article about stakeholder theory was released in 1983 in the California Management Review by philosopher and professor of business administration R. Edward Freeman. Freeman doesn’t cite Mitroff as a source, rather he attributes stakeholder theory to discussions at the Stanford Research Institute. He went on to publish his book, Strategic Management: A Stakeholder Approach, shortly after the article.

That’s why sometimes stakeholder theory is also referred to as Freeman’s stakeholder theory. In Freeman’s book, he identifies and models stakeholder groups within a corporation, describing and recommending ways to manage their interests and determine who counts from the perspective of the company. Increasing value for stakeholders will improve the business in all aspects.

Freeman’s stakeholder theory is also often confused with the shareholder theory, created by the economist Milton Friedman in the 1970s. Let’s learn about the differences between these similar yet different theories.

Stakeholder Theory vs. Shareholder Theory

Edward Freeman’s stakeholder theory greatly differs from Milton Friedman’s shareholder theory because they propose two very different approaches when it comes to stakeholder management.

Friedman’s theory affirms that shareholders should be the only focus of a corporation because they’re the ones who financially support the organization. On the other hand, Freeman’s theory states that all stakeholders are important for a corporation widening the focus to a more socially-conscious stakeholder management theory.

Friedman’s shareholder theory was the guiding principle for most organizations until Freeman’s stakeholder theory gained acceptance in the business and project management fields and has become the new standard.

Related: Best Project Management Software Comparison for 2024

Stakeholder Theory Example

Stakeholder theory notes that there are several interested parties or stakeholder groups that must be included under the umbrella of stakeholders, such as the company’s employees, customers, suppliers, financiers, communities, governmental bodies, political groups, trade associations, trade unions and even competitors, as they too can impact the company.

Stakeholders aren’t universally agreed upon, and even the definition of a stakeholder remains contested by some.

For our example, we’ll identify the interests and expectations of stakeholders for the construction of a manufacturing facility.

• Employees: In this case, the employees would be all those involved in the planning and execution of the construction project, such as the site manager and crew members. They are responsible for the success of the project. In terms of expectations, they need a workplace that complies with safety regulations and proper working conditions.
• Suppliers: You’ll need several suppliers who will provide raw materials, equipment and other resources. Building a relationship with them is important to maintain an efficient flow of construction supplies. There are different supply relationship management approaches to help you understand how to better negotiate with them.
• Customers: The local customers will benefit from this new facility because the new facility will increase in product offers, which lowers prices while improving quality due to increased competition in the market. Customers expect high-quality products that not only solve their needs but are also safe for their health and the environment.
• Community: In this case, the term community refers to the people that are indirectly impacted by the project. They will be both positively and negatively impacted by the construction of this new manufacturing facility. On one hand, there are economic benefits for the community, as new employees will spend money on housing, transportation, basic goods, etc. On the other hand, there’s a high risk of pollution. If the facility doesn’t comply with environmental regulations, it could damage critical natural resources for the community, such as water sources.
• Government: The government defends the interests of the people through laws and regulations. Any construction project must comply with every single government regulation that exists to guarantee the safety of its employees, the community and the environment.

Evolution of Stakeholder Theory

Freeman says he stood on the shoulders of giants, such as building from research in strategic management, corporate planning, systems theory, organization theory and corporate social responsibility, the latter of which was first discussed by the Italian economist Giancarlo Pallavicini in an article published in 1968.

More recently, in 1995, ethicist Thomas Donaldson argued that stakeholder theory has descriptive, instrumental and normative aspects or approaches that are mutually supportive.

• Descriptive Approach: The stakeholder theory is descriptive because it describes the interests of an organization and its stakeholders, providing a framework to better understand the relationship between the organization and stakeholders.
• Instrumental Approach: The stakeholder theory is instrumental because its main goal is to increase value for stakeholders as a means to achieve the organization’s goals. The implementation of stakeholder theory should result in benefits for both the organization and stakeholders.
• Normative Approach: The implementation of stakeholder theory is normative because stakeholders have intrinsic value to projects and businesses, making it an absolute necessity.

Benefits of Using the Stakeholder Theory

Stakeholder theory posits that a company is only successful when it delivers value to its stakeholders, and those values can come in many forms beyond financial benefits.

Impact on Employees and Customers

One of the values produced by stakeholder theory includes greater productivity across the organization. If employees, who are considered stakeholders, feel as if they’re being valued, then they’re going to work harder and be more productive.

This also means that companies will have greater retention of their employees, but also of customers. If productivity is up, then the product or service delivered to the customer is improved. With that improvement comes more customer loyalty, especially as they are one of the many stakeholders the company is considering when making decisions. Customers are also more likely to then refer other customers to the company.

Increased Investment

All this is leading to more investment from financiers. They too, of course, are stakeholders. While sometimes they are thought of as the only stakeholders or the most important to a company as they hold their hands on the level of capital, they’re connected to other stakeholders. As other stakeholders are valued, the value of the company grows, and investors are more likely to add money to production to take advantage of this increased market share.

Related: Stakeholder vs. Shareholder: How They’re Different & Why It Matters

From there, it’s not only capital that is infused into the company but talent. Everyone loves a winner, and as the company grows and dominates because it cares for stakeholders, it will inevitably attract new talent to its doors.

Ethical Benefits

Stakeholder theory drives more than profits and productivity. There are ethical benefits of practicing it as well. Companies find that the mental health of the workforce is greatly improved as their job satisfaction increases. It also will elevate the status of the company’s social-economic status in the local community. When one company practices stakeholder theory, it creates healthy competition among other companies, where all can thrive and help benefit their stakeholders.

Drawbacks of Stakeholder Theory

Some critics, such as political philosopher Charles Blattberg, say stakeholder theory is problematic. They claim that the interests of various stakeholders cannot be balanced against each other.

This is because stakeholders represent such a large and diverse group. You can’t please every stakeholder. One or more stakeholders will have to take a backseat to other, more dominant ones, which is likely to create discord. This will disrupt the benefits associated with stakeholder theory.

Also, who will wield the most influence? Some stakeholders might find that they’re not impacting decisions as much as other groups. The different power levels and spheres of influence can be a problem. Even those with seemingly more influence might not feel that they’re getting what they want.

Stakeholder Management

Stakeholder theory is a component of larger stakeholder management, which creates positive relationships with stakeholders by managing their expectations and objectives. To control this process, a strategic plan is required.

To begin, stakeholders are identified, their influence and interest determined, and a communication plan is devised to keep them informed. But not all stakeholders are created equally. This doesn’t mean some are more important than others, just that prioritizing offers a structure for managing them effectively.

Again, to manage stakeholders and develop an effective strategic plan, it is crucial to understand them. Know their financial or emotional interests in the outcome of the work, what motivates them, what data you require from you, how they want to get information, what they think of the job you’re doing, who influences their opinions, etc.

The key principle of stakeholder engagement is communication. Here are some key tips for making sure that stakeholder communication stays strong and efficient:

• Make sure messages are targeted and delivered timely
• Consult early and often
• Know that stakeholders are people with feelings and need to be treated as such to build trust
• Consider potential risks and opportunities with each stakeholder
• Compromise
• Know how success is defined
• Take responsibility

ProjectManager & Stakeholder Management

Stakeholders have a vested interest in the project. They are not likely to sit on the sidelines and wait for that deliverable to show up. They want to know how the project is going and that means keeping them in the loop.

But stakeholders aren’t interested in going into the weeds. How can you give stakeholders just the information they want to keep the content? We can help.

Shareable Plans With the Latest Data

ProjectManager is award-winning software that helps you manage projects, tasks and people—including stakeholders. This begins at the planning stage.

ProjectManager has online Gantt charts that schedule tasks over a project timeline. Stakeholders love that those plans can be exported and shared or even printed out, if they prefer a paper copy. Plus, these timelines are clear and easy for stakeholders to digest.

Dashboards for Easy Live Tracking

When the project is executed, that project plan is put to the test. Does it in fact align with the actual progress of the project? Project managers track the high-level project using key metrics that are monitored automatically on ProjectManager’s real-time dashboard.

These easy-to-read charts and graphs can also be shared at stakeholder presentations to keep them updated on the progress of the project.

Eight Different Reports for In-Depth Analysis

Dashboards are great for a bird’s-eye view of the project, but what if a stakeholder wants more detailed information? The last thing a project manager wants is to be caught off-guard. ProjectManager has easy reporting features for more granular data. These reports can be quickly filtered to respond to whatever query a stakeholder might have.

Finally, some stakeholders want a more intimate relationship with the project. They’ll have questions and suggestions throughout the project lifecycle. ProjectManager makes it easy for them to stay connected to the project team. Stakeholders can comment on tasks, ask questions and get responses from the project team in real time. ProjectManager makes happy stakeholders.

Stakeholders want to be a part of the process. They need to stay informed, and the information you deliver must be targeted and current. ProjectManager is online project management software, so the data is up-to-date. Its real-time dashboard makes reporting simple, with dropdown menus to create easy-to-read graphs and charts, supplying only the information needed by the recipient. See how it can support your stakeholder theory by taking this free 30-day trial.