What is Stakeholder Theory? - Definition & Ethics

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  • 0:00 Definition &…
  • 1:21 Ethical Implications
  • 2:24 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

You may not know it, but you are a stakeholder in many organizations. In this lesson, you'll learn about stakeholder theory including some of its fundamental concepts. You'll also have a chance to take a short quiz.

Definition and Conceptual Framework

Stakeholder theory looks at the relationships between an organization and others in its internal and external environments. It also looks at how these connections influence how the business conducts its activities. Think of a stakeholder as a person or group that can affect or be affected by an organization. Stakeholders can come from inside or outside of the business. Examples include customers, employees, stockholders, suppliers, non-profit groups, government, and the local community, among many others.

One of the most important contributors to stakeholder theory is R. Edward Freeman and his book Strategic Management: A Stakeholder Approach (1984). The core idea of stakeholder theory is that organizations that manage their stakeholder relationships effectively will survive longer and perform better than organizations that don't. Freeman suggests that organizations should develop certain stakeholder competencies. These include:

  • Making a commitment to monitor stakeholder interests
  • Developing strategies to effectively deal with stakeholders and their concerns
  • Dividing and categorizing interests into manageable segments
  • Ensuring that organizational functions address the needs of stakeholders

Ethical Implications

Stakeholder theory also addresses one of the most important questions facing our economy: what is the role of a corporation in a modern capitalistic society? There are two primary theories of thinking on this issue. One theory, championed by Milton Friedman, is the stockholder model. It argues that the sole obligation of a corporation is to maximize shareholder wealth.

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