Definition of the Stakeholder Concept and its Relation to Corporate Social Responsibility

The stakeholder concept is a theory of organizational management and business ethics that addresses morals and values in managing an organization. It was originally detailed by R. Edward Freeman in the book “Strategic Management: A Stakeholder Approach”. [40] The concept identifies and models the groups, which are stakeholders of a company and describes and recommends methods by which management can give due regard to the interests of those groups. According to Freeman’s definition “a stakeholder in an organization is any group or individual who can affect or is affected by the achievement of the organization’s objectives”. [41]

In the traditional view of the company, the shareholder view (usually the only one recognized in business law in most countries), the shareholders or stockholders are the owners of the company. The company has a binding fiduciary duty to put their needs first - to increase value for them. In older models of the company, the enterprise converts the inputs of investors, employees, and suppliers into usable outputs which customers buy, thereby returning some capital benefit to the enterprise. By this model, companies only address the needs and wishes of those four parties: investors, employees, suppliers, and customers. However, stakeholder theory argues that there are other parties involved, including governmental bodies, political groups, trade associations, trade unions, communities, various interest groups (e.g. non-profit organizations), associated companies, prospective employees, prospective customers, and the public at large. Sometimes even competitors are counted as stakeholders.

Company’s stakeholders can be grouped, for example, in the following four categories, as portrayed in Figure 1.3: Stakeholder Model” on the following page:

· Authorizers – this group includes government, regulatory authorities, shareholders, and the Board of Directors. These are the stakeholders who have authority over the company and authorize its decisions;

· Business partners – employees, suppliers, trade associations, and service providers are all business partners. These stakeholders help company in reaching its objectives;

· Customer groups – all kind of customers fall within this stakeholder group;

· External influences – community members, media, and issue advocates also influence company’s decision-making process.

The stakeholder concept is highly relevant for CSR, as without it would be difficult to identify various groups (stakeholders) that can be, and actually in practice are, highly influential for company’s success. Further, also many modern definitions of CSR incorporate stakeholder theory (e.g. Chandler, the European Commission), for detail see subchapter Defining Corporate Social Responsibility.

Also, using stakeholder concept can help in measuring CSR. Clarkson proposed that corporate social performance can be analyzed and evaluated more effectively by using a framework based on the management of a corporation’s relationships with its stakeholders than by using models and methodologies based on concepts concerning CSR. [42]

Figure 1.3: Stakeholder Model

Source: Based on Dell (2007), Dell's Sustainability Report for fiscal year 2006, available at: http://www.dell.com/downloads /global/corporate/environ/2006_sustainability_report.pdf

Relationships with stakeholders are not static but evolve over time. These relationships often go through the following stages:

· Awareness – at this stage stakeholders know that the company exists;

· Knowledge – stakeholders have begun to understand what the company does, its values, strategy, and mission. During this stage companies provide stakeholders with relevant information to make knowledgeable decisions;

· Admiration – in this stage trust between companies and stakeholders is being developed;

· Action – companies collaborate further with stakeholders. Customers refer business, investors recommend the stock, and employees are willing to take greater responsibility. [43]

Similarly as CSR, stakeholder concept has also its critics. One of their arguments is that “stakeholders aims to take rights away from the owners, who can be assumed to constitute a single body with a common purpose, and to give those rights to a plurality of groups, which would include shareholders but in a much diminished role.” [44] Surely, this claim has a lot true in it, but stakeholder concept does not want to take rights away from shareholders, only to increase a number of groups, which has to be taken into account when making decisions in the company.