Stakeholder Theory and its Importance

Abstract

Every organization created has a purpose. The purpose of a for-profit organization is to maximize wealth, while a non-profit's goal is to help its target group of people. Initially, before the development of stakeholders theory, organizations usually thought about their shareholders, but this idea was changed after the introduction of stakeholder theory by R. Edward Freeman. He is the first to identify the importance of maintaining a solid relationship with its customers, employees, vendors that supply resources to the company, the communities that depend on the organization, and its investors.

If a company wants to prosper, it must start accepting the importance of engaging with stakeholders rather than focusing only on shareholders. Engaging with stakeholders has many advantages. The most significant advantage of engaging with stakeholders is establishing excellent communication channels. With incredible communication channels, we can acquire all the right information for developing or updating a product, correcting the direction in which the company is moving, or strategic planning. If an organization engages with the stakeholders, there is an increased buy-in from its employees, so productivity increases, and the company's value also increases. In this paper, the authors will define the words Stakeholder and stakeholder theory and discuss stakeholder theory's relation to corporate social responsibility, Value Creation, Finance, and ethics.