If you buy or sell, work or employ, engage in the community, pay taxes, own a business or invest in someone else’s business, then you are a stakeholder or shareholder. Any of these activities qualify as having a ‘stake’ or an interest in the entity. What happens in that transaction is relevant to you.
It may not always be of grave importance – some transactions are quite minor – but each has potential to be significant in their impact. Transacting with a company is not the only way to be a stakeholder or stockholder. Governments and community organizations are also legitimate stakeholders because they too are subject to the impact of what companies do in the world.
The idea of stakeholders was developed as a theory by Edward Freeman in the mid-1980s. His basic premise was that, in addition to shareholders, there are many groups that have a legitimate interest in a company and he referred to these groups as ‘stakeholders’. Although shareholders have a direct financial interest in a company which might benefit or harm them, stakeholders also have something ‘at risk’ by virtue of their direct and indirect interaction with the company. For example, there is the possibility of benefit or harm accruing to employees via their jobs or to customers through the products purchased or to the suppliers who contract with the company.
Each stakeholder has something they have invested in the company. That investment is not necessarily financial. It might be time or trust or loyalty. The ‘affects’ of transacting with a company might involve an issue of equity or access or pollution or toxicity. Stakeholders have issues that are as unique as the individuals themselves.
Stakeholders are not only individuals who have transacted with the company. They also include community organizations. The voluntary civic and social organizations and institutions that comprise the communities in which companies operate are also legitimate stakeholders.
These groups represent the interests that society sees as significant. They might be charities for children, environmental groups, cultural groups, professional associations, trade unions, academia and many more. They include not-for-profit organizations and non-governmental organizations like Rotary International, World Vision and Red Cross as well as small neighborhood-based associations such as a local cooperative or youth group.
Each company has a responsibility to consider how its decisions and activities will impact upon each stakeholder group. This is generally not an easy task. Stakeholders come with issues and these issues vary considerably. Not all customers will be concerned about the same issues. For example, mortgage customers of a bank may worry about rising interest rates while others who have cash investments may welcome an increase in interest rates. Some employees might revel in participative management while others might find it daunting.
Bringing the different views and values of stakeholders into corporate decision-making adds complexity. It requires great focus and new skills. However, in recognizing that stakeholders are many in number, influential by nature and that anyone can be a stakeholder, the importance of stakeholder engagement is clear.