Stakeholder theory (R. Edward Freeman, 1984) says a business should create value for everyone who affects or is affected by it: customers, employees, suppliers, communities and shareholders. It contrasts with shareholder theory, which puts owners' profits first.
Key ideas
- Who counts as a stakeholder: Freeman's classic definition is any group or individual who can affect, or is affected by, the achievement of the organisation's objectives.
- Value for all: long-term success depends on creating value for customers, employees, suppliers, communities and financiers together, not trading one off against the others.
- Managers as balancers: management's job is to understand and balance stakeholder interests.
Stakeholder theory vs shareholder theory
| Shareholder theory | Stakeholder theory | |
|---|---|---|
| Key name | Milton Friedman (1970 essay) | R. Edward Freeman (1984 book) |
| Purpose of business | Increase profits for owners, within the law | Create value for all stakeholders |
| Role of managers | Agents of shareholders | Balance competing interests |
| Strength | Clear goal and accountability | Builds trust, licence to operate and long-term value |
| Weakness | Can ignore wider harm | Hard to measure; 'accountable to everyone' can mean to no one |
UK company law sits between the two. Section 172 of the Companies Act 2006 asks directors to promote the success of the company for its members while having regard to employees, suppliers, customers, communities and the environment.
Three ways to read stakeholder theory
Donaldson and Preston (1995) separated three versions, which helps in evaluation answers:
| Version | Claim |
|---|---|
| Descriptive | Organisations do in fact manage many stakeholder interests |
| Instrumental | Managing stakeholders well leads to better performance |
| Normative | Organisations ought to treat stakeholder interests as valuable in their own right (the ethical case) |
Stakeholder theory in ACCA SBL
Stakeholders run through the SBL syllabus: governance, ethics, sustainability and strategy. Use stakeholder theory to explain why an organisation should consider a group, and Mendelow's matrix to show how to prioritise and manage them for a specific decision.
Worked example
For Historic Places (March 2025 pre-seen), cutting volunteer roles to save money might satisfy short-term financial targets, but stakeholder theory points to the cost: volunteers, members and donors are central to the charity's purpose and income. A balanced recommendation would consult volunteer leaders, explain the reasons openly and look for savings that protect the mission.
Advantages and criticisms
Advantages
- Reflects how sustainable businesses actually operate
- Supports ethical decision-making and reputation
- Fits modern reporting on sustainability and governance
Criticisms
- No clear rule for ranking conflicting interests
- Harder to hold managers to account
- Can be used to justify poor financial performance
- Defining who is a stakeholder can be open-ended
FAQs
What is stakeholder theory?
The idea that a business should create value for all the groups who affect or are affected by it (customers, employees, suppliers, communities, shareholders and others), not only for shareholders.
Who is the father of stakeholder theory?
R. Edward Freeman, whose 1984 book Strategic Management: A Stakeholder Approach is widely seen as its foundation.
What is the difference between stakeholder theory and shareholder theory?
Shareholder theory, associated with Milton Friedman, says the main responsibility of business is to increase profits for its owners within the law. Stakeholder theory says managers must balance the interests of all stakeholders.
How does UK law reflect stakeholder theory?
Section 172 of the Companies Act 2006 requires directors to promote the success of the company for its members while having regard to employees, suppliers, customers, the community and the environment. This is often called enlightened shareholder value.