Stakeholder theory: What it is and how to use it
Professor Bastiaan Van der Linden, director of EDHEC’s MSc in Global & Sustainable Business, gives us an overview of stakeholder theory and how it is taught in the master’s programme.
What is stakeholder theory?
That's a question without a straightforward answer. There’s not just one stakeholder theory, but many. You could say that it’s a genre of theories. If you were to ask me for the one defining characteristic that sets stakeholder theory apart from other approaches, I’d probably say that stakeholder theory puts ethics at the heart of business.
You may think it a bit strange to tie ethics and business together. When you think of ethics, you might think of universal principles, angels and demons, or some such. And, of course, that's part of it. However, stakeholder theory gives ethics a much more pragmatic slant. It says ethics is something we do together in our day-to-day lives to solve our problems and make things better for everyone.
This pragmatic view would appear to put ethics right at the heart of business. In business, we try to understand the types of product and service we should sell to consumers to make their lives better. We try to provide meaningful jobs ‒ and, of course, salary ‒ to employees. It's about having sound and stable relationships with suppliers to get the goods and resources a company needs. It's about understanding how companies can fit into and contribute to the communities in which they operate. And, of course, it's about understanding how companies can reward investors for the money they provided and the risk they took in doing so. Therefore, if we view ethics as something that makes our daily lives work, it does, indeed, lie at the heart of business. And I think that is what sets stakeholder theory apart.
What is the difference between stakeholder theory and shareholder theory?
Some people put stakeholder theory in one corner of the ring and shareholder theory in the other. They see it as a boxing match, waiting to see who gets knocked out first. In my opinion, this is not really the right perspective.
Stakeholder and shareholder theory are different ways of looking at the same thing. The shareholder view is more economically oriented, while the stakeholder view is more managerially minded. Stakeholder theory says that if you want to create value for investors, you need to create value for all stakeholders. Stakeholder theorists believe that focusing on maximizing shareholder value is not always the best way to do so. One of the pitfalls of shareholder theory is that it can lure us into thinking in terms of trade-offs, that resources spent on customers, employees, etc, can no longer go to investors. Stakeholder theory invites us to see the bigger picture and to try to ‘increase the pie’ rather than redistribute it.
Indeed, stakeholder theory is now also embraced by investors such as Larry Fink of Blackrock, the CEO of the world’s largest investment company. He has talked at events, such as at the Economic Club of Chicago, about how we have been focusing too much on profit. Thriving businesses create value for all stakeholders, including shareholders.
We have seen stakeholder theory being espoused by other CEOs in the United States, too. In 2019, 181 CEOs of the American Business Roundtable signed a statement committing to lead their companies as stakeholder corporations to the benefit of customers, employees, suppliers and communities, all while generating returns for shareholders.
How can stakeholder theory help us understand the concept of ‘business purpose’?
‘Business purpose’ is one of the watchwords of the moment, also here in France. This is in part attributed to the fact that the French government recently brought in new corporate legislation that allows companies to officially state their business purpose. It is one thing to state a purpose, but another thing to have a purpose. And that raises an interesting question. What is ‘business purpose’? Well, again, there’s no easy answer to that.
Here, however, I think stakeholder theory can help. It says we must think of a business as an entity that creates value for different stakeholders. We can use this as a starting point to think of business purpose as something that brings stakeholder interests together. Business purpose is why a company expects certain contributions from its stakeholders and how it induces them to deliver those contributions. Thus, business purpose becomes central to a company’s way of doing business. Profits follow when a company gets its business purpose right, then realises it. Taking a stakeholder perspective is, therefore, a way of thinking that can help us understand a company’s purpose.
There is a lot of work underway, both on the theoretical and practical side, to develop this new idea of what business purpose is. I think one of the big questions is how to define and apply it in a contemporary, pluralist society where people have different values, objectives and life goals, where creating a business purpose will not necessarily inspire all stakeholders and commit them to a company. But I think stakeholder theory is a good place to start.
How does stakeholder theory apply to corporate sustainability?
To answer this, I must first say something about sustainability. One aspect I would like to highlight is that many of our sustainability challenges are what you might call ‘dilemmas of collective action’. We all depend on our environment and on certain, specific elements of it. We all benefit from natural resources, for example, and it's difficult to cooperate to protect those resources if we all take what we want from them. To paraphrase the Nobel Prize-winning American economist, Eleanor Ostrom: there is a finite number of fish in the sea. If people keep taking as many fish as they can catch, the sea will eventually be empty, and nobody will have any fish.
That's what's called a ‘common pool’ of resources. We must find ways of managing that pool of resources, so that we can use them in the longer run. Eleanor Ostrom showed in a famous study on fisheries that, under the right conditions, industry participants can come together to find ways of managing these resources without governmental intervention. To make this kind of collective action possible and to tackle the issue of limited resources, we must look around us. We must understand the network to which a company belongs and how mutual interest can be realised in a more complicated setting. I think stakeholder theory is the ideal vehicle for understanding these dynamics from a business perspective.
How does stakeholder theory feature in the MSc in Global & Sustainable Business?
The MSc focuses on the global businesses of the future. Of course, global business – and globalisation more generally – have contributed enormously to prosperity around the world. Everyone, rich and poor, has benefited to some extend from globalisation, but we have also come to realise that globalisation has dramatically increased inequality. Moreover, globalisation is now running into the limits of what our natural environment can support. The global businesses of the future will need to find opportunities for growth while reducing inequalities – and all this within the limits set by the natural environment.
If global businesses are to work in this setting, they will have to have a stakeholder-style focus on their particular context and how they can create value for different participants. Thus, I think you could say stakeholder theory is also at the heart of the rationale behind this MSc.
More tangibly, it is the central tenet of one of our Strategy courses and features in others. For example, it is generally part of the thinking behind our courses on different industries. It is worth mentioning that this MSc has been co-created with students, with the businesses that will hire our students, with professors, and with EDHEC more broadly. We wanted to bring stakeholders together and create the kind of programme that works for the students, for businesses and for others involved. So, stakeholder theory is also a significant element in the way this MSc has been designed.