flowchart TD
F["<b>The firm</b>"] --- A["<b>Shareholders</b>"]
F --- B["<b>Employees</b>"]
F --- C["<b>Customers</b>"]
F --- D["<b>Suppliers</b>"]
F --- E["<b>Lenders</b>"]
F -.- G["<b>Regulators</b>"]
F -.- H["<b>Local community</b>"]
F -.- I["<b>Media and civil society</b>"]
F -.- J["<b>Environment and<br>future generations</b>"]
style F fill:#ede7f6,stroke:#7E57C2
style A fill:#e3f2fd,stroke:#1976D2
style B fill:#e3f2fd,stroke:#1976D2
style C fill:#e3f2fd,stroke:#1976D2
style D fill:#e3f2fd,stroke:#1976D2
style E fill:#e3f2fd,stroke:#1976D2
style G fill:#e8f5e9,stroke:#388E3C
style H fill:#e8f5e9,stroke:#388E3C
style I fill:#e8f5e9,stroke:#388E3C
style J fill:#e8f5e9,stroke:#388E3C
19 Stakeholder Theory
ImportantLearning Objectives
You will be able to:
- Define a stakeholder and distinguish primary from secondary stakeholders.
- Construct a stakeholder map for an organisation and identify interests, expectations and power.
- Assess stakeholder salience using power, legitimacy and urgency, and explain what salience does and does not settle.
- Distinguish the descriptive, instrumental and normative uses of stakeholder thinking.
- Analyse a managerial decision through a stakeholder lens and evaluate its implications for each affected group.
19.1 Introduction
Chapters 16 to 18 supplied three tests for judging a decision. Each of them requires knowing who is affected, and none of them tells a manager how to find out. That is what this chapter provides.
A stakeholder is any group or individual who can affect, or is affected by, the achievement of an organisation’s purpose (R. Edward Freeman, 1984). The definition is deliberately wide in both directions. It includes those with power over the firm and those with none, those in a contractual relationship and those who never chose to be involved at all (Anne T. Lawrence & James Weber, 2020).
Stakeholder thinking is not itself an ethical framework in the way the previous three chapters were. It does not tell a manager what is right. It tells a manager where to look, which is the step most often skipped, and it is the analytical bridge between the abstract frameworks and a real decision (Manuel G. Velasquez, 2018).
The deeper question of whether a firm ought to be run for shareholders or for stakeholders belongs to corporate governance, and Chapter 28 takes it up in those terms. This chapter is about identification, mapping and engagement.
19.2 Identifying Stakeholders
The conventional division separates two groups by the nature of their relationship with the firm (Anne T. Lawrence & James Weber, 2020).
Primary stakeholders stand in a direct, usually contractual, relationship and are essential to the firm’s continued operation: shareholders, employees, customers, suppliers, lenders. The firm and they exchange something, and each side can withdraw.
Secondary stakeholders affect or are affected by the firm without a transactional relationship: regulators, local communities, industry associations, media, civil society organisations, and in most modern accounts the natural environment and future generations, whose interests must be represented by others.
WarningCommon Misconception: Secondary Means Less Important
The labels describe the type of relationship, not its weight. A secondary stakeholder can end a business faster than any primary one. A community that withdraws its acceptance can stop a plant, as Chapter 3 showed. A regulator can withdraw a licence. A civil society organisation with evidence can change a market’s willingness to buy.
The error is compounded by a second one, which is to treat secondary stakeholders as a communications problem rather than a source of information. The people living beside a facility usually know things about its operation that no internal report contains. A firm that engages them only when it needs consent has forfeited the more valuable use of the relationship.
Two practical cautions apply when building a list. First, stakeholder groups are not homogeneous, and treating them as though they were is where most stakeholder analysis fails. “Employees” contains permanent staff, contract workers and the workforce of a supplier, whose interests in a cost reduction diverge sharply. Second, a person is often a stakeholder in several capacities at once, and an employee who is also a shareholder and lives in the affected community has three sets of interests that may not point the same way.
19.3 Mapping and Salience
A list becomes useful when interests, expectations and influence are set against each other. The standard managerial map has four columns.
NoteThe Stakeholder Map
| Column | The question it answers |
|---|---|
| Interest | What does this group actually want from the firm, stated in their terms rather than ours? |
| Stake | What do they stand to gain or lose from the decision under consideration? |
| Power | What can they do about it, and through what channel? |
| Legitimacy of claim | On what basis is their claim proper, whether by contract, by law, by having borne a cost, or by moral standing? |
Managers must then decide which claims to attend to first, and stakeholder analysis offers three attributes that together determine salience.
- Power is the capacity to bring about an outcome the firm would not otherwise choose, whether through coercion, resources, or influence over others.
- Legitimacy is the perception that a claim is proper and appropriate within a system of norms and values.
- Urgency is the degree to which a claim calls for immediate attention, combining time sensitivity with how critical it is to the claimant.
A stakeholder holding all three attributes is definitive, and firms respond to them. A stakeholder holding only one is latent, and firms usually ignore them.
TipPractitioner Insight: Salience Describes Attention, It Does Not Justify It
The three attributes are an accurate description of how organisations actually allocate attention, and that is exactly why they must not be mistaken for a moral ranking. A claim can be entirely legitimate, extremely urgent for the claimant, and carry no power at all. Contract workers, small suppliers, and communities without organised representation sit in precisely that position, and the salience model predicts that a firm will ignore them.
The managerial use of the model is therefore diagnostic rather than prescriptive. Build the map, apply the three attributes honestly, then look specifically at the cells with high legitimacy and low power. Those are the stakeholders the firm’s ordinary processes will fail, and they are also, in almost every corporate failure examined in Module VI, where the harm accumulated before anyone noticed.
19.4 Three Uses of Stakeholder Thinking
Stakeholder theory is used in three distinct ways, and arguments about it usually come apart because the parties are using it differently.
| Use | The claim being made | How it would be tested |
|---|---|---|
| Descriptive | Firms do in fact have stakeholders, and managers do in fact attend to them | By observing what organisations actually do |
| Instrumental | Attending to stakeholders improves firm performance, because trust, reputation and reliability are assets | By evidence linking stakeholder practices to outcomes |
| Normative | Stakeholders have interests of intrinsic worth, so the firm owes them consideration regardless of whether it profits | By moral argument of the kind Chapters 16 to 18 supplied |
The instrumental claim is the one most often made in business settings, because it requires no ethical commitment. It is also the weakest ground on which to build, since it collapses the moment attending to a stakeholder stops paying. A firm that treats suppliers well because it improves reliability will treat them badly the moment a supplier becomes replaceable.
The normative use is where stakeholder thinking meets the three frameworks. Deontology supplies the reason a stakeholder’s interest matters independently of its usefulness: they are persons who may not be used merely as means. Utilitarianism supplies the reason their welfare enters the calculation at all. Virtue ethics supplies the reason a manager notices them before being forced to.
19.5 Engagement
Identification and mapping produce a plan; engagement is what makes it real. Engagement runs along a spectrum, and firms routinely claim a level higher than they practise.
| Level | What happens | Honest description |
|---|---|---|
| Inform | The firm tells the stakeholder what it has decided | One-way communication, not engagement |
| Consult | The firm asks for views before deciding | Engagement only if the answer can change the decision |
| Involve | Stakeholder concerns are worked into the design of the decision | Requires engaging early enough that design is still open |
| Collaborate | The stakeholder shares in developing options and in the recommendation | Requires accepting constraints on the outcome |
| Empower | The decision, or part of it, rests with the stakeholder | Rare, and usually confined to a defined scope |
The test that separates consultation from its imitation is simple and uncomfortable: could the process have produced a different decision. A consultation conducted after the capital has been committed is an information exercise wearing a consultative label, and the stakeholders involved almost always recognise it, which damages trust more than not consulting at all.
19.6 Case Studies
19.6.1 Case Study 1: The Group That Was Not Consulted
The following situation is constructed rather than reported.
A hospital chain automates its patient records and appointment system. It consults doctors extensively, since their cooperation is essential, and consults administrative staff briefly. It does not consult the ward assistants and support staff whose work is reorganised most, the patients who now book through an application, or the small pathology laboratories whose referral flow depends on the old system. The rollout is technically successful. Appointment abandonment rises among older patients, support staff turnover doubles, and two laboratories close.
Discussion questions
- Build the stakeholder map. For each group, state interest, stake, power and legitimacy of claim.
- Apply the three salience attributes. Explain, using the model, precisely why the consulted groups were consulted.
- Identify the high legitimacy and low power cells, and state what the hospital would have learned from each.
19.6.2 Case Study 2: One Group, Three Interests
The following situation is constructed rather than reported.
A logistics company plans to move from an owned fleet with employed drivers to a mixed model using contracted owner-drivers. The change reduces cost, increases flexibility, and offers some current drivers the chance to buy a vehicle and earn more. Others, particularly older drivers with long service, would lose employment protection they cannot replace. The union represents permanent drivers only. Contract loaders at the depots are affected but represented by nobody.
Discussion questions
- Disaggregate the employee stakeholder into its real components and map each separately. Where do their interests diverge?
- The union speaks for one component. What does that mean for the firm’s understanding of the others, and what should it do about it?
- Apply the three frameworks from Chapters 16 to 18 to the decision. Which stakeholder does each framework bring into focus?
19.6.3 Case Study 3: The Instrumental Case That Ran Out
The following situation is constructed rather than reported.
A packaged foods company has for years paid its small farmer suppliers within seven days, well ahead of industry practice, and has said publicly that this reflects its values. The practice was originally adopted because it secured supply in a tight market and reduced quality problems. A new sourcing option appears that is cheaper and more reliable, making the farmer relationship commercially unnecessary. The sourcing head proposes moving to standard sixty-day terms for the farmers.
Discussion questions
- Which of the three uses of stakeholder theory was the seven-day practice actually built on? What does that predict about its survival?
- What obligations, if any, survive the disappearance of the commercial rationale, and on what basis?
- If the company adopts the change, what does it owe the farmers, and what does the public statement about values now require of it?
19.7 Applying the Chapter
ImportantExercise: A Stakeholder Analysis of a Live Decision
An Indian quick-commerce company operating dark stores in six cities plans to shift its last-mile delivery workforce entirely to a gig model, remove the guaranteed minimum earning currently offered to full-time riders, and introduce an algorithmic allocation system that assigns orders based on past acceptance rates and delivery speed.
Working in a group, produce a stakeholder analysis and evaluation. CO-3 requires you to compare frameworks and evaluate implications for stakeholders, so the deliverable must do both.
- Identify every stakeholder, primary and secondary, and disaggregate any group whose members’ interests diverge. You should find at least ten distinct groups.
- Build the map. For each, state interest, stake in this specific decision, power, and legitimacy of claim, in the group’s own terms rather than the company’s.
- Apply salience honestly. Score each group on power, legitimacy and urgency, and predict which the company will actually attend to. Mark the high legitimacy and low power cells explicitly.
- Evaluate through the three frameworks. For the three most affected groups, state what a utilitarian, a deontological and a virtue analysis each says about the decision as it affects them. Note where the frameworks disagree.
- Test the engagement. Design a consultation for the two groups you judge most affected, and state what would have to be true for it to be genuine rather than an information exercise. Identify what part of the decision would have to remain open.
- Recommend. Propose either the decision as framed, a modified version, or an alternative. Name what your recommendation costs the company, which stakeholder still loses under it, and what is owed to them.
Present the analysis as a stakeholder map table plus a two-page evaluation ending in a recommendation.
19.8 Summary
NoteChapter Summary
A stakeholder is any group or individual who can affect or is affected by the achievement of an organisation’s purpose (R. Edward Freeman, 1984). Stakeholder thinking is not itself an ethical framework: it does not say what is right, it says where to look, which is the step the three frameworks each require and none supplies (Manuel G. Velasquez, 2018).
Primary stakeholders stand in a direct and usually contractual relationship and can withdraw from it; secondary stakeholders affect or are affected by the firm without transacting with it, and include regulators, communities, media, civil society, and the environment and future generations whose interests must be represented by others (Anne T. Lawrence & James Weber, 2020). Secondary does not mean less important, since a community or a regulator can end a business faster than a customer can. Two cautions govern list-building: stakeholder groups are not homogeneous, and the same person is often a stakeholder in several capacities at once.
A map sets out interest, stake, power and legitimacy of claim for each group. Salience is then determined by power, legitimacy and urgency together, and that model accurately describes how firms allocate attention, which is exactly why it must not be read as a moral ranking. Its managerial value is diagnostic: build the map, apply the attributes honestly, and look at the high legitimacy and low power cells, because those are the stakeholders ordinary processes fail and where harm accumulates unnoticed.
Stakeholder theory is used descriptively, instrumentally and normatively. The instrumental claim is the most commonly made in business because it demands no ethical commitment, and the weakest to build on, since it collapses the moment a stakeholder becomes replaceable. The normative use is where stakeholder thinking meets the frameworks: deontology explains why an interest matters independently of usefulness, utilitarianism why welfare enters the calculation, virtue ethics why a manager notices before being forced to.
Engagement runs from informing through consulting, involving and collaborating to empowering, and firms routinely claim a level above what they practise. The test separating consultation from its imitation is whether the process could have produced a different decision.
TipKey Terms
Stakeholder · Primary stakeholder · Secondary stakeholder · Disaggregation · Multiple capacities · Stakeholder map · Interest · Stake · Power · Legitimacy of claim · Urgency · Salience · Definitive stakeholder · Latent stakeholder · High legitimacy and low power · Descriptive use · Instrumental use · Normative use · Inform, consult, involve, collaborate, empower · Genuine consultation test
Summary
| Concept | Description |
|---|---|
| Identifying Stakeholders | |
| Stakeholder | Any group or individual who can affect, or is affected by, the achievement of the firm's purpose |
| Where to look, not what is right | The role of stakeholder analysis as a bridge between abstract frameworks and a real decision |
| Primary stakeholder | A group in a direct and usually contractual relationship, essential to operations and able to withdraw |
| Secondary stakeholder | A group affected by or affecting the firm without transacting with it |
| Secondary is not lesser | The reminder that a community or regulator can end a business faster than a customer can |
| Source of information | The under-used value of secondary stakeholders, who know things internal reports do not contain |
| Disaggregation | Breaking a nominal group into components whose interests actually diverge |
| Multiple capacities | The fact that one person may hold several stakeholder positions that do not align |
| The Map | |
| Stakeholder map | The four-column tool setting interest, stake, power and legitimacy against each group |
| Interest | What the group actually wants, stated in its own terms rather than the firm's |
| Stake | What the group stands to gain or lose from the specific decision under consideration |
| Power | The capacity to bring about an outcome the firm would not otherwise choose |
| Legitimacy of claim | The basis on which a claim is proper, whether by contract, law, borne cost or moral standing |
| Salience | |
| Urgency | How far a claim demands immediate attention, combining time sensitivity and criticality |
| Salience | The combination of power, legitimacy and urgency that determines the attention a firm actually gives |
| Definitive stakeholder | A stakeholder holding all three attributes, to whom firms reliably respond |
| Latent stakeholder | A stakeholder holding only one attribute, whom firms reliably ignore |
| High legitimacy, low power | The diagnostic cell where ordinary processes fail and harm accumulates before anyone notices |
| Three Uses | |
| Descriptive use | The claim that firms do have stakeholders and managers do attend to them, tested by observation |
| Instrumental use | The claim that attending to stakeholders improves performance, tested by evidence |
| Normative use | The claim that stakeholder interests have intrinsic worth, tested by moral argument |
| Fragility of the instrumental case | The weakness that instrumental commitments end the moment a stakeholder becomes replaceable |
| Deontology and stakeholders | The reason an interest matters independently of usefulness: persons may not be used merely as means |
| Utilitarianism and stakeholders | The reason a stakeholder's welfare enters the calculation at all |
| Virtue and stakeholders | The reason a manager perceives a stakeholder before being compelled to |
| Engagement | |
| Inform | One-way communication of a decision already taken, which is not engagement |
| Consult | Seeking views before deciding, which counts only if the answer can change the outcome |
| Involve | Working stakeholder concerns into the design, which requires engaging while design is open |
| Collaborate | Sharing development of options and the recommendation, which constrains the outcome |
| Empower | Placing the decision, or a defined part of it, with the stakeholder |
| The genuine consultation test | Asking whether the process could have produced a different decision |
| Consultation after commitment | The imitation that damages trust more than not consulting at all |