This week, the chief executives of a number of well-known companies, including Apple, Amazon, and Bank of America, declared that businesses should make a commitment to generating value for all stakeholders, not just shareholders. The Business Roundtable released a statement that summarizes the groundbreaking work on stakeholder management done by Ed Freeman, a professor at Darden, and his team.
Freeman has been teaching Stakeholder Theory for decades. This theory emphasizes the interdependence of society and business and the need for an organization to create value for all who hold a stake in it — not just the shareholders. Freeman is the author of the award-winning book Strategic Management: A Stakeholder Approach as well as six other books on the stakeholder approach. As he notes in “Is Profit the Purpose of Business?”:
“Stakeholder theory is perhaps Dardens greatest idea. It is now cited outside of its conventional domains of business ethics, strategy, and governance, demonstrating that it has fully entrenched itself in the academic literature. According to Joseph Burton, executive director of the Darden Institute for Business in Society, “researchers in finance, accounting, sociology, economics, organizational behavior, and other business disciplines have taken notice of it in recent years. The William H. Darden Foundation sponsors an annual summer stakeholder seminar for rising-star academics from around the world. Donner Family Foundation.
According to Burton, the stakeholder approach is essential to Darden’s identity, our institution’s character, and the student experience. “In some ways, Darden is ahead of many of its competitors. The notion that the only acceptable business motivation is financial gain is not forced upon our students ”.
A devotion to the notion that all functional areas work to deliver what the customer values most is how a fast-food chain in Kingsport, Tennessee, develops cult status with its patrons and consistently outperforms McDonald’s. Pal’s Sudden Service provides customers with three benefits: quality (ensured by a simplified menu to get things just right), speed (four times faster than the second-fastest competitor in the nation), and accuracy (one mistake per 3,600 orders — ten times better than the typical fast-food restaurant). Darden Professor Elliott Weiss explores these benefits in his article. “How to Raise Your Leadership Game, Part 1: The 9 Cs Enterprise-Perspective Model” has more information. ”.
The humanizing organization: Business is entering a new era where the outdated bureaucratic-machine paradigm is no longer sufficient for success. Transparency, information sharing, equitable pay and reward systems, and respect are given top priority by businesses whose leaders understand that the whole is greater than the sum of its parts. In “Bringing the Workplace to Life,” Darden Professor Joe Harder elaborates on how an organization and its people can thrive based on the class he has been teaching for almost 20 years. This chapter includes seven keys to a strong workplace culture that inspires employees.
A strong business plan is just as crucial to this company’s supply chain story as a quality product. Professor Doug Thomas of Darden University examines the practices of an artisanal chocolatier who is concerned with both social and economic success in his article “It’s All Goodio: Is Business Transparency Delicious.” The business is working to raise money for blockchain technology so that every transaction in the chain can be retrieved from a QR code on the label, including the location of the cacao bean’s cultivation, the price paid for it, who is responsible for drying and fermenting it, who makes the chocolate, and how much labor was paid for it. “Radical transparency,” they call it.
Economic growth and environmental preservation are not mutually exclusive and can both be sustainable. The Andean bear represents the potential for multiple gains in Colombia, where Conservamos la Vida is an example of a public-private partnership enhancing the world, in terms of protecting land and raising incomes. In “How to Grow Incomes, Preserve Land, and Save the Andean Bear,” Darden Professor Alan Beckenstein, a specialist in international economics and environmental management, examines how the partnership is helping local livelihoods and natural habitats, which are crucial goals of a developing country like Colombia. ”.
Value and transparency are crucial to shareholders, to varying degrees and under different circumstances. Consider CEO compensation: Under the Dodd-Frank Act, publicly traded companies must allow shareholders to vote on CEO compensation. It may depend on how proactive boards are in adjusting C-suite salaries and communicating about them — and how they communicate about them — as well as on company performance, how much investors care about C-suite salaries, and under what circumstances. In her article “Do Shareholders Actually Care About CEO Pay?,” Kim Whitler of Darden University highlights the results of her research.
Beckenstein is an expert on how public policy and world events affect businesses and industries. He has experience with issues related to environmental policy, global economic and financial shocks, antitrust, regulation, and deregulation as they relate to company decision-making, as well as these topics in competition policy. Beckenstein has worked as a professor and researcher at both the U S. economy and other regions globally. He has extensive experience in the economies of the Asia-Pacific region and has worked as a consultant for both national and international organizations.
Freeman is best known for his work on business ethics and stakeholder theory, in which he recommends that companies base their strategy on their interactions with important stakeholders. His knowledge also encompasses management, corporate social responsibility, and business strategy. Since publishing the acclaimed book Strategic Management: A Stakeholder Approach in 1984, Freeman has received countless citations from academics, businessmen, and students all over the world.
Thomas, a specialist in supply chain management, investigates production and inventory planning throughout the extended enterprise and links decision models to logistics performance measurement. He is a co-founder and the company’s chief scientist. Plan2Execute offers supply chain software and consulting services for advanced production and inventory planning, transportation management, and warehouse management.
The Stakeholder Model
Importance of the stakeholder model
Theoretically, implementing a stakeholder model could enhance the company’s reputation among all stakeholders, leading to a positive feedback loop that, in turn, could increase returns for the company’s shareholders and stakeholders. For instance, there is a higher chance that prospective clients will choose to work with a company that is environmentally conscious and willing to promote diversity and inclusion principles over other similar businesses that have fewer concerns for stakeholders.
Other potential benefits of adopting the stakeholder model are:
The stakeholder model can benefit the entire community in addition to the business, with some of these benefits being:
What is a stakeholder model?
The stakeholder model, also known as stakeholder theory, is a theory that suggests a direct relationship between a business and various other outside parties who have a direct or indirect stake in it, such as employees, suppliers, customers, investors, and the general public. This theory states that a company must create value for all of these parties, not just its shareholders. Edward Freeman, an American professor of business administration and philosopher, created it for the first time in 1984.
The stakeholder model is typically used by different businesses to create their strategic vision, with the most pertinent metrics being environmental, social, and governance. These can be applied to measure a company’s value to shareholders in ways that are roughly comparable to those of traditional financial metrics. Corporate responsibility and environmental objectives are typically prioritized by businesses that want to align with these metrics. Environmental, Social, and Governance (ESG) metrics and goals can be adopted in a variety of ways depending on how they are implemented precisely, including:
5 parts of a stakeholder model
The specific components of a stakeholder model are heavily influenced by variables like the nature of the business, its workforce, environment, industry it operates in, and other similar ones. However, most such models have some similar parts. Some of them are:
An organizations employees are usually very important stakeholders. Fair treatment and compensation for them will probably lead to greater employee satisfaction, which can increase productivity. Alternately, treating them unfairly can damage their commitment and confidence, which will have a negative impact on productivity and retention rates. The fact that having a reputation as a company that treats its employees well is likely to help the organization attract top talent can be a significant indirect benefit of putting employee well-being first, in addition to the direct benefits.
2. Manufacturers and suppliers
Many businesses source various product components or entire products from external manufacturers and suppliers. Making sure that these businesses’ employees work in a fair and well-paid environment, despite the fact that some of them may be situated in various nations and continents, can be part of the stakeholder model.
Most for-profit businesses prioritize bringing in and keeping as many customers as they can, making them crucial stakeholders. Customers’ satisfaction can be raised and they may be persuaded to do business with your company once more by considering their feedback and encouraging fair business practices between the company and its clients.
4. Local communities
Even if the residents of a community aren’t clients of a local business, it is still the responsibility of that business to ensure that its operations don’t adversely affect the community’s environment, including its water and power supplies or anything else that might interfere with its way of life. According to the stakeholder model, the people who live close to organizations are stakeholders and must be informed of their plans and objectives.
The shareholders of a company are typically the most significant stakeholders, despite the fact that the stakeholder model is typically seen as the opposite of the shareholder model. As a result, they are in line with the stakeholder theory, and any for-profit organization would place a high priority on their satisfaction.
What is the meaning of stakeholder model?
Stakeholder theory emphasizes how a company’s relationships with its clients, partners, workers, investors, communities, and other parties with an interest in the organization are intertwined. According to the theory, a company should generate value for all parties involved, not just shareholders.
What are the 3 stakeholder approaches?
The process of organizing, monitoring, and strengthening your relationships with your stakeholders is known as stakeholder management. It entails methodically identifying stakeholders, assessing their requirements and expectations, and organizing and carrying out various tasks to interact with them.
Who created the stakeholder model?
Stakeholder claims vary in their significance for a firm. There are three theoretical approaches to taking into account stakeholder claims, according to Donaldson and Preston5: a descriptive approach, an instrumental approach, and a normative approach.