Stakeholder Theory

Background and Freeman's definition

Berle and Means (1932) asked, for the modern corporation in which ownership and control are separated, whose interests managers should serve. Mainstream finance then developed the view of managers as shareholders' agents, as in Jensen and Meckling's (1976) agency theory, and Milton Friedman (1970) argued in The New York Times Magazine that "the social responsibility of business is to increase its profits." In Strategic Management: A Stakeholder Approach (1984), R. Edward Freeman defined a stakeholder as any group or individual who can affect or is affected by the achievement of the organization's objectives, and argued that in turbulent environments firms must manage these relationships strategically to succeed. Offered first as a practical strategy tool, the idea soon became the center of a normative debate about corporate purpose.

Three perspectives and the salience model

Donaldson and Preston (1995) separated three aspects of the theory: a descriptive view of how firms actually behave, an instrumental view that managing stakeholders well improves performance, and a normative view that stakeholders' interests deserve consideration for their own sake, which they saw as the theory's core. Jones (1995) offered an instrumental theory in which relationships built on trust and cooperation reduce contracting and monitoring costs and so create advantage, linking the theory to transaction cost economics. Mitchell, Agle and Wood (1997) proposed the salience model, explaining which stakeholders managers attend to through three attributes, power, legitimacy and urgency, with groups possessing all three receiving highest priority. Clarkson (1995) distinguished primary and secondary stakeholders to provide a framework for assessing corporate social performance.

The shareholder value debate and recent work

Critics argue that multiple objectives blur managerial accountability. Michael Jensen (2001) insisted on a single objective function and proposed enlightened value maximization, attending to stakeholders while maximizing long-run firm value. Porter and Kramer (2011) advanced creating shared value, generating economic value by addressing social problems, and Hart and Zingales (2017) argued that firms should maximize shareholder welfare rather than market value, leaving room for shareholders' social preferences. When the US Business Roundtable issued its 2019 statement on a corporate purpose serving all stakeholders, the debate spread into ESG and governance. Bebchuk and Tallarita (2020), however, contended that stakeholder governance may weaken managerial accountability. Reviewing the field, Freeman et al. (2010) concluded that shareholder and stakeholder interests are often jointly created over the long run rather than opposed.

FAQ

What is stakeholder theory in simple terms?

It says a company creates value not only for shareholders but through its relationships with everyone it affects and is affected by, such as employees, customers, suppliers and communities.

How does it differ from shareholder primacy?

Shareholder primacy treats maximizing shareholder value as management's ultimate goal, while stakeholder theory holds that considering multiple groups' interests is either the firm's purpose or necessary for long-run performance.

Sources reviewed: 2026-10-26

References

1. Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Boston: Pitman.
2. Friedman, M. (1970, September 13). The social responsibility of business is to increase its profits. The New York Times Magazine, 32–33, 122–126.
3. Berle, A. A., & Means, G. C. (1932). The Modern Corporation and Private Property. New York: Macmillan.
4. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
5. Donaldson, T., & Preston, L. E. (1995). The stakeholder theory of the corporation: Concepts, evidence, and implications. Academy of Management Review, 20(1), 65–91.
6. Mitchell, R. K., Agle, B. R., & Wood, D. J. (1997). Toward a theory of stakeholder identification and salience. Academy of Management Review, 22(4), 853–886.
7. Jones, T. M. (1995). Instrumental stakeholder theory: A synthesis of ethics and economics. Academy of Management Review, 20(2), 404–437.
8. Clarkson, M. B. E. (1995). A stakeholder framework for analyzing and evaluating corporate social performance. Academy of Management Review, 20(1), 92–117.
9. Jensen, M. C. (2001). Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance, 14(3), 8–21.
10. Freeman, R. E., Harrison, J. S., Wicks, A. C., Parmar, B. L., & de Colle, S. (2010). Stakeholder Theory: The State of the Art. Cambridge: Cambridge University Press.
11. Porter, M. E., & Kramer, M. R. (2011). Creating shared value. Harvard Business Review, 89(1–2), 62–77.
12. Hart, O., & Zingales, L. (2017). Companies should maximize shareholder welfare not market value. Journal of Law, Finance, and Accounting, 2(2), 247–274.
13. Bebchuk, L. A., & Tallarita, R. (2020). The illusory promise of stakeholder governance. Cornell Law Review, 106(1), 91–178.