The stakeholder theory states that a company should take care of all those who are affected by its operation. They are employees, customers, suppliers, investors, government, and neighborhood communities. This is not only concerned with profit-making for shareholders. Rather, it talks about generating value for all. This theory helps build trust for years to come, solid connections, and ethical ways of doing business.

Stakeholder theory matters because it shows a wider view of how businesses should act. It supports being honest, fair, and responsible. These days, companies need to think about how they affect others, not just how much money they make.

Nowadays, businesses are more concerned about their customers, the environment, and workers’ rights. All these come under the stakeholder theory and are used in business studies and assists in business decision-making. 

Meaning of Stakeholder Theory

The stakeholder theory posits that organisations have the responsibility to take care of all persons, groups, and even organizations that affect or are affected by the organization. These persons, groups, and organizations are known as stakeholders. Stakeholders include a wide range of groups like customers, employees, suppliers, local community, environment, and government agencies.

History and Background

This idea was suggested by Edward Freeman, who is a full-time professor, in 1984. He talks about how companies need to get out of the profit thinking and create value for all stakeholders. This theory has brought ethics into business and really shook things up in thinking about responsibility in respect to companies.

Types of Stakeholders:

Internal stakeholders: Employees, Manager, and Owner

External stakeholders: customers, suppliers, government, and community

Each stakeholder wants something different from the company. Employees want fair pay. Customers want good quality. The government wants rules to be followed. This theory goes on to say that all these needs must be respected.

Examples of Stakeholder Theory

In India, most companies apply the stakeholder theory to develop in a just manner. Companies such as Wipro and Infosys incorporate this theory into their work culture. They treat everyone justly and establish trust. This makes them thrive for a long period.

Stakeholder theory instructs that business is all about relationships. When a company treats its employees well, people stand by the company. In this manner, everyone develops together.

For instance, Infosys trains its staff and educates poor children. Tata Steel offers free medical care in small towns. These things show that companies are cautious, and that is why individuals treat them with more respect.

Core Principles of Stakeholder Theory

Good principles form the foundation of stakeholder theory. These principles direct a corporation in its behavior. They determine what is ethical and how to deal with every constituent group. These values assist the company in upholding fairness and establishing trust.

Let us examine each underlying concept in depth.

• Respect for All: An entity has to consider all with whom it works. That ranges from its employees and suppliers to nature. No one has to be left out or harmed along the way. All stakeholders are valuable and are part of the success of the company. A good organization speaks to them, hears them, and responds to their needs.
• Ethical obligation: Ethics are a significant component of stakeholder theory. It is doing the right thing even when nobody is watching. The firm should not steal or cheat. It should be honest, transparent, and obey the law. It should keep its promises if it makes one.
• Long-term thinking: Fast money might look good in the starting, but it does not last. A business should always consider the long-term goal. Its relationships with individuals is the support that allows the business to remain standing during harsh times.
• Balance conflicting interest: Higher wages are desired by the workers, but the company lacks the finances to implement them. On the other hand, customers are looking for cheaper prices and sellers want better demand. Thus, the company is caught up in tough contention in meeting these different needs and trying to keep everybody happy.
• Open Communication: A business has to keep in touch with its stakeholders to maintain open lines of communication. When things change, it should inform them. And if there’s an issue, it really needs attention and listening.

Benefits of Stakeholder Theory

Stakeholder theory contributes to improved teamwork and long-term earnings. The following are its advantages to business organizations.

• It Builds Trust: When a business looks after the collective interest, people start trusting it. Employees feel proud. Customers come back again and again. Suppliers remain loyal. The local population supports it. Trust develops gradually, but it yields great rewards. Trust also assists in tough times.
• It Improves Company Name: A company that is good to people earns a good name. It is known to be a good and fair place. This attracts better employees. It also attracts more investors and consumers. The name value is very significant in today’s world.
• It Increases Loyalty: If a company listens and assists, people remain with it. Employees remain for years; customers prefer it to others, loyalty translates into more business, less expenditure, and greater growth.
•  It Helps in Risk management: Miserable people can ruin a whole lot for the organization. Workers can go on a strike. The customers can complain. But during Stakeholder Theory this scenario does not happen at any time. If people feel heard, they won’t become harmful, which saves loss for the business.
•  It Supports Society: Stakeholder theory challenges businesses to assist outsiders as well. That may mean employing young people locally, picking trash out of the rivers, or preserving trees. A business goes from being merely a facility where profits are created. It is part of society now.

Challenges in Implementing Stakeholder Theory

Stakeholder theory is a great concept, but it is not always a walk in the park. Businesses will have a lot of problems when attempting to adhere to it. Following are the limitations faced with this theory:

•  It is Difficult to Tackle All Needs: Everybody desires something different. Some of these desires conflict with one another. For instance, employees can desire greater wages, yet the business might need to trim expenses. A business has to make unpopular decisions. Making all parties happy is difficult.
• It Takes Time and Money: For the good of society, employee training and protecting the environment takes money and time. Small businesses cannot always afford it and others might not be interested in considering this which can be a major problem in a competitive business climate.
• It Takes Firm Leadership: Only strong leaders can enforce stakeholder theory. They must be transparent, honest, and fair and not every manager has these qualities because of which this theory can fail.

• People Might Abuse It: At times, some groups will demand too much. They might exploit the good nature of the company. They might attempt to grab more than they need. This can be detrimental to the company if not managed appropriately.
• Not All Results Show Fast: Stakeholder Theory has slow returns. Some individuals may desire fast profits. They might feel that the company is not developing at a high speed. This may result in pressure from investors or senior bosses. Firms need to learn how to deal with these problems and remain firm in their convictions.

Stakeholder Theory vs Shareholder Theory

Stakeholder Theory and Shareholder Theory are usually contrasted in business research.The world needs responsible companies. People want safe products, clean nature, and fair treatment and the firms who follow it earn more trust. Shareholder theory holds that the primary responsibility of a business is to generate profits for its shareholders or owners. Shareholder Theory preceded Stakeholder Theory and was extremely popular for decades. However, people now realise its limitations.

Point	Stakeholder Theory	Shareholder Theory
Main Focus	All stakeholders (workers, public, customers, competitors etc.)	Only shareholders (owners)
Goal	Increasing Value for all	Earning Maximum profit
Long-term or short-term	Long-term value creation	Often short-term profit
Risk Handling	Balanced and low due to strong ties	Higher risk of backlash
Business Ethics	Very important	Less focus on ethics

Relevance to ACCA Syllabus

The stakeholder theory is closely tied to ACCA exams, such as the Strategic Business Leaders (SBL) and Corporate and Business Law exams. ACCA highlights the significance of ethical business practices, governance, and managing the interests of various stakeholders. Understanding Stakeholder Theory helps ACCA candidates hone their leadership abilities and apply stakeholder perspectives in their decision-making and performance management processes.

Stakeholder Theory ACCA Questions

Q1: What is the principal internal stakeholder of a business?

A) Customer

B) Employee

C) Government

D) supplier

Ans : B) Employee

Q2: Why, in stakeholder theory, should a company take care of external stakeholders?

A) to pay more taxes

B) only to conform to the law

C)To establish long-term relationships and avoid risks

D)for brand promotion

Ans: C) to establish long-term relationships and avoid risks

Q3: Which ACCA paper is most related to stakeholder interests and morality?

A) Financial management

B) Audit and assurance

C) Strategic business leader

D) Performance Management

Ans: C) Strategic business leader

Q4: Which of the following is not an example of stakeholder interest?

A) Timely payment to suppliers

B) Customer wants low-quality products

C) Appropriate salary for employees

D) The community wants a clean environment

Ans: B) Customer wants low-quality products

Q5: What is the central purpose of Stakeholder Theory in business decision-making?

A) To avoid legal costs

B) To make a profit only for shareholders

C) To look out for the needs of all the affected groups

D) To raise stock value

Ans: C )To look out for the needs of all the affected groups

Relevance to US CMA Syllabus

US CMA entails strategic management, ethics, and performance management. Stakeholder theory is a great match for these topics. It teaches prospective management accountants how to balance the needs of different stakeholders and improve company strategy and sustainable performance.

Stakeholder Theory US CMA Questions

Q1: How does stakeholder theory help in improving performance management?

A) By neglecting the needs of society

B) By considering the only profit

C) By aligning goals with stakeholder expectations

D) Increasing labor hours

Ans: C) By aligning goals with stakeholder expectations

Q2: Who is a secondary stakeholder?

A) Customer

B) Board of directors

C) Local community

D) Employee

Ans: C) Local community

Q3: Why is learning Stakeholder Theory important for CMA professionals?

A) For reducing stakeholder issues

B) For taking ethical business decisions

C) To maximize only benefit

D) To exclude environmental impacts

Ans: B) For taking ethical business decisions

Q4: In which CMA part does Stakeholder Theory play a significant role?

A) Financial Reporting

B) Performance Management

C) Corporate Finance

D) External Auditing

Ans: B) Performance Management

Relevance to US CPA Syllabus

Stakeholder Theory relates to the US CPA Business Environment and Concepts (BEC) and Regulation (REG). Stakeholder Theory assists candidates in learning business strategy, ethics, corporate governance, and social responsibility. CPAs are supposed to know how business decisions impact different stakeholders.

Stakeholder Theory US CPA Questions

Q1: What is the major concept of Stakeholder Theory?

A) To pay dividends on time

B) To minimize marketing costs

C) To serve the interest of all concerned

D) To serve regulators only

Ans: C) To serve the interest of all concerned

Q2: Why is Stakeholder Theory useful in the REG section?

A) It covers merely legal tax planning

B) It promotes the understanding of social responsibility

C) It aids in the memorization of IRS codes

D) It avoids interference by shareholders

Ans: B) It promotes the understanding of social responsibility

Q3: Which of these promotes stakeholder engagement?

A) Avoiding the customers’ complaints,

B) Exclusively organizing meetings with their investors,

C) Open to every communication,

D) Indifferent to suppliers’ feedback.

Ans: C) Openly communicating with every group

Q4: What is the assistance provided by stakeholder Theory in a business?

A) It decreases income.

B) It creates legal conflict.

C) It Constructs ethical and sustainability models for business.

D) It emphasizes short-term gains.

Ans: C) It Constructs ethical and sustainable models in business.

Relevance to CFA Syllabus

The CFA program gives prominence to ethics, corporate governance, and stakeholder management, particularly in Levels I and II. Stakeholder theory is applied in the analysis of corporate goals and ethical leadership, as well as in reconciling company practices that emphasize finance and ESG (Environmental, Social, and Governance) aspirations.

Stakeholder Theory CFA Questions

Q1: What is the important stakeholder?

A) It only supports financial revelations

B) It is about single projects

C) This is about the long-term value for all involved

D) It discourages investor interests

Ans: C) This is about the long-term value for all involved

Q2: Which CFA theme discusses stakeholder principles?

A) Equity valuation

B) Corporate Menter – Governance and ESG

C) Quantitative methods

D) Derivative

Ans: B) Corporate Menter – Governance and ESG

Q3: What is the role of the board in stakeholder theory?

A) To focus only on shareholder returns

B) To take care of a business section

C) To guide moral and balanced decisions

D) Only to report creditors

Ans: C) to guide moral and balanced decisions

Q4: What is the concern of one of the following stakeholders in finance?

A) Controlling product prices only

B) Ethical use to deal with capital and risk

C) Ignoring the needs of employees

D) Short-term exchange

Ans: B) Ethical use to deal with capital and risk

Q5: What does Stakeholder Theory recommend for investment decision-makers?

A) Disregard community impacts

B) Keep attention to quarterly outcomes alone

C) Account for all stakeholders in the valuation

D) Avoid ESG goals

Ans: C)  Account for all stakeholders in the valuation