This theory advocates that organization invariably seeks to strike a balance between the interests of its diverse stakeholders in order to ensure that each stakeholder gets some degree of satisfaction. Stakeholder theory better explains the role of corporate governance than the agency theory by highlighting different constituents of a firm. This model addresses the needs of employers, suppliers, investors and customers.
Stakeholder also argues that the stakeholders should include governmental bodies, political groups, trade unions, trade associations, communities, prospective employees associated corporations and the general public. In some cases competitors and prospective clients can also be regarded as stakeholders in order to aid improvement in business efficiency in the market.
Stakeholder theory has gained prominence as the activities of an organization impacts its external environment thus, requiring accountability of the organization to a wider set of audience than to just its shareholders.
In order to differentiate among various stakeholder categories, Rodriguez et al., (2002): the following classification has been adopted:
- Consubstantial stakeholders – The stakeholders essential for the business’s existence (strategic partners, shareholders and investors, employees)
- Contractual stakeholders – Stakeholders having some type of a formal contract with the business (suppliers and sub-contractors, financial institutions, customers)
- Contextual stakeholders – These are representatives of social and natural systems within which the business operates. They play a fundamental role in obtaining business credibility and, ultimately, the acceptance of organization’s activities (local communities, countries and societies, public administration, knowledge and opinion makers)
The company, ideally, should safeguard the interests of all who contribute to the value creation process or make specific investments in it. These company-specific investments are diverse and include human, physical and social capital.