In 1981, John Mackey had just opened his first Whole Foods grocery store in Austin, Texas. Everything was going well until a torrential downpour caused floodwaters to crash through the doors on Memorial Day weekend. The store was completely destroyed. There was no flood insurance, and in a few hours, Mackey and his team thought that their dream of starting a healthy and ethical grocery store was over.

Until the community around them got involved. Customers, neighbours, and even employees showed up to help clean up and rebuild. Suppliers and investors, many of whom had no guarantee they would get their money back, stepped in with support. No one was getting paid to help, so, why did they care so much? Why did they show up for a store that might never reopen?

What is Stakeholder Theory?

Stakeholder Theory emerged in 1984 through the work of R. Edward Freeman, who challenged the traditional view of corporate responsibility. In the 1970s, Milton Friedman argued that a company’s sole responsibility was to create value for its shareholders, measuring success purely by financial returns. However, Freeman proposed a broader perspective: a company’s success should also be judged by how it treats all of its stakeholders. These include employees, customers, suppliers, the local community, and the environment. Essentially, Stakeholder Theory posits that a company should create value for everyone it impacts, not just its investors.

What is the Influence of Stakeholder Theory?

Stakeholder Theory has shaped the way businesses operate, encouraging a broader understanding of corporate success. It has influenced major corporations like Costco, Whole Foods, and certified B Corporations, which are legally bound to balance profit with purpose. By adopting this mindset, companies can build long-term trust with their employees, customers, and partners, foster innovation, and enhance their brand reputation. Stakeholder Theory suggests that a company’s success is inextricably linked to how it engages with and supports all the people and environments it touches. This shift encourages businesses to prioritise sustainable, inclusive growth and long-term relationships over short-term profits.

John Mackey, co-founder of Whole Foods, calls this approach “conscious capitalism.” He argues that it creates more value for all stakeholders, including investors. When companies understand their ethical responsibility to balance the needs of all stakeholders, the synergies that arise can propel the business to new heights. It’s a management philosophy that recognises the interconnectedness of everyone involved in the company’s ecosystem.

What are the Core Beliefs of Stakeholder Theory?

At its heart, Stakeholder Theory revolves around the belief that businesses should serve the interests of all parties involved, rather than focusing solely on maximising shareholder profit. It stresses that businesses can – and should – create value for their employees, customers, suppliers, and the wider community, while also being environmentally conscious.

The theory’s core principles are:

• Value creation for all stakeholders: The well-being of employees, customers, and suppliers should be just as important as profit generation for shareholders.
• Long-term sustainability: Companies should focus on creating lasting, mutually beneficial relationships with their stakeholders, rather than seeking immediate financial gain.
• Ethical responsibility: Stakeholder Theory acknowledges that businesses have an ethical responsibility to contribute positively to society and the environment.

For Freeman, it’s not just about profits; it’s about creating a business ecosystem where everyone benefits. As he puts it, “Saying that profits are the only important thing to a company is like saying, ‘Red blood cells are life.’ You need red blood cells to have life, but you need so much more.”

The Case Against Stakeholder Theory 

Critics argue that balancing the interests of multiple stakeholders can be unmanageable and counterproductive. Several key concerns arise when trying to put this theory into practice:

• The limits of corporate responsibility: Some economists, like Milton Friedman, argue that expecting businesses to address societal challenges without government intervention is unrealistic. For example, problems like climate change often stem from externalities, costs that businesses do not directly bear, and without regulation, these issues may remain unaddressed.
• Decision-making paralysis: Balancing the interests of so many groups can slow down decision-making. Economist John Argenti contends that attempting to please too many stakeholders may lead to inaction, as businesses become bogged down by competing demands.
• Ambiguous accountability: With so many interests to consider, it becomes difficult to hold businesses accountable. As Colin Mayer warns, “If a company is accountable to everyone, it’s accountable to no one.” Without clear and measurable goals, such as shareholder returns, it’s challenging to assess a company’s success in concrete terms.

Further Reading

• Think like your stakeholders to build long term value – EY
• Stakeholder capitalism gets a report card – New York Times