Stakeholder

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The term stakeholder has two distinct uses in the English language:

The traditional usage, in law and notably gambling, a third party who temporarily holds money or property while its owner is still being determined.

More recently a very different meaning of the term has become widely used in management. This sees a stakeholder as a person or organization that has a legitimate interest in a project or entity.

The new use of the term arose together with and due to the spread of corporate social responsibility ideas, but there are also utilitarian and traditional business goals that are served by the new meaning of the term (see stakeholder concept and below).

In law

The role of stakeholder is a very old concept in law. A stakeholder was originally a person who temporarily holds money or other property while its owner is being determined. This is, for example, the situation when two persons bet on the outcome of a future event and ask a third, disinterested, neutral person to hold the money (or "stake[s]") that they have wagered (or "staked"). After the event occurs, the stakeholder distributes the stakes to one or both of the original (or other) parties according to the outcome of the event and according to the previously decided conditions. Courts sometimes act as stakeholders, holding property while litigation between the possible owners resolves the issue of which one is entitled to the property. Trustees also often act as stakeholders, holding property until beneficiaries come of age, for example. An "escrow agent" is one kind of trustee who is a stakeholder, usually in a situation where part of the purchase price of property is being held until some condition is satisfied. In legal documents, the escrow agent is often referred to as a "mere stakeholder."

In management

In the last decades of the 20th century, the word "stakeholder" has become more commonly used to mean a person or organization that has a legitimate interest in a project or entity. In discussing the decision-making process for institutions -- including large business corporations, government agencies, and non-profit organizations -- the concept has been broadened to include everyone with an interest (or "stake") in what the entity does. This includes not only its vendors, employees, and customers, but even members of a community where its offices or factory may affect the local economy or environment. In this context, "stakeholder" includes not only the directors or trustees on its governing board (who are stakeholders in the traditional sense of the word) but also all persons who "paid in" the figurative stake and the persons to whom it may be "paid out" (in the sense of a "payoff" in game theory, meaning the outcome of the transaction).

Example

For example, in the case of a professional landlord undertaking the refurbishment of some rented housing that is occupied while the work is being carried out, key stakeholders would be the residents, neighbours (for whom the work is a nuisance), and the tenancy management team and housing maintenance team employed by the landlord. Other stakeholders would be funders and the design and construction team.

The holders of each separate kind of interest in the entity's affairs are called a constituency, so there may be a constituency of stockholders, a constituency of adjoining property owners, a constituency of banks the entity owes money to, and so on. In that usage, "constituent" is a synonym for "stakeholder."

In the field of corporate governance and corporate responsibility, a major debate is ongoing about whether the firm should be managed for stakeholders, stockholders, or customers. Those who support the stakeholder view usually base their arguments on the following four key assertions:

1) Value can best be created by trying to maximize joint outcomes. For example, according to this thinking, programs that satisfy both employees' needs and stockholders' wants are doubly valuable because they address two legitimate sets of stakeholders at the same time. There is even evidence that the combined effects of such a policy are not only additive but even multiplicative. For instance, by simultaneously addressing customer wishes in addition to employee and stockholder interests, both of the latter two groups also benefit from increased sales.

2) Supporters also take issue with the preeminent role given to stockholders by many business thinkers, especially in the past. The argument is that debt holders, employees, and suppliers also make contributions and take risks in creating a successful firm.

3) These normative arguments would matter little if stockholders had complete control in guiding the firm. However, many believe that due to certain kinds of board of directors structures, top managers like CEOs are mostly in control of the firm.

4) The greatest value of a company is its image and brand. By attempting to fulfill the needs and wants of many different people ranging from the local population and customers to their own employees and owners, companies can prevent damage to their image and brand, prevent losing large amounts of sales and disgruntled customers, and prevent costly legal expenses. While the stakeholder view has an increased cost, many firms have decided that the concept improves their image, increases sales, reduces the risks of liability for corporate negligence, and makes them less likely to be targeted by pressure groups.

Types of stakeholders

People who will be affected by an endeavor and can influence it but who are not directly involved with doing the work. In the private sector, examples include managers who are affected by a project, process owners, people who work with the process under study, internal departments that support the process, the financial department, suppliers, and even customers.

People who are (or might be) affected by any action taken by an organization or group. Examples are parents, children, customers, owners, employees, associates, partners, contractors, suppliers, people that are related or located near by. Any group or individual who can affect or who is affected by achievement of a group's objectives.

An individual or group with an interest in a group's or an organization's success in delivering intended results and in maintaining the viability of the group or the organization's product and/or service. Stakeholders influence programs, products, and services.

Any organization, governmental entity, or individual that has a stake in or may be impacted by a given approach to environmental regulation, pollution prevention, energy conservation, etc.

A participant in a community mobilization effort, representing a particular segment of society. School board members, environmental organizations, elected officials, chamber of commerce representatives, neighborhood advisory council members, and religious leaders are all examples of local stakeholders.

Examples of common stakeholders

Stakeholder view theory

Post, Preston, Sachs (2002), in their theory called Stakeholder view, use the following definition of the term "stakeholder": "The stakeholders in a corporation are the individuals and constituencies that contribute, either voluntarily or involuntarily, to its wealth-creating capacity and activities, and that are therefore its potential beneficiaries and/or risk bearers."

This definition differs from the older definition of the term stakeholder in Stakeholder theory (Freeman, 1984) that also includes competitors as stakeholders of a corporation.