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What Is the Stakeholder Theory?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 October 2014
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The stakeholder theory is a type of approach that has to do with the way in which stakeholders approach the reasons for the establishment and ongoing operation of a business. There are actually a number of different approaches to the theory, with the underlying foundation often including debate on whether or not a company exists for any reason other than to make money for the owners. The stakeholder theory holds that earning profits for owners is only one reason for the existence of a company, since both direct and indirect benefits associated with the operation impact the lives of a number of other people, effectively providing them with a stake or interest in the continued operation of that company.

One key element of understanding the stakeholder theory is to have a working definition of what constitutes a stakeholder. In one sense, anyone with a direct financial interest in a business can rightly be termed a stakeholder. This means that company owners as well as any investor holding shares of stock issued by the business are stakeholders. At the same time, the definition is usually broad enough to include others who benefit from the ongoing operation, including vendors and suppliers, employees and even the owners of other businesses who are able to sell goods and services to those employees. When considered in this light, it can be said that any community in which the business functions has at least a small stake in the company and its operation.

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A basic of the stakeholder theory is that the purpose for the establishment and operation of a company goes beyond simply generating profits for those with a financial stake in the business. The revenue generated by a company also helps to support local and sometimes national economies, ultimately producing benefits that are realized by citizens with no direct connection to that company. For this reason, municipalities will often offer incentives to keep a company located within its city limits, or a national government may provide financial help to corporations that provide goods and services considered important to the maintenance of a stable economy.

The actual application of the stakeholder theory is often shaped by the specific factors that surround a given company and how far its influence extends. Just about any type of business has some impact on people other than owners and investors. Even the loss of a local business will have some impact on the life of that community, in that the closing may have a negative effect on the quality of life within the immediate area by creating more unemployment, forcing consumers to look elsewhere for goods and services they need and want, and generally creating an economic imbalance that must be rectified in order for the community to recover.

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