Question

Use your own words to describe briefly about stake holder theory

Answer 1

Stake holder theory is a theory that is used in the field of capitalism and corporate governance. This theory emphasizes that interconnected relationships exists between a business entity and its different stakeholders. It should be noted that c corporate entity has various different stakeholders like its customers, its suppliers, its employees, its investors, and the community at large. A company has got interconnected relationship with all these stakeholders.

The core of stake holder theory is that a company or an organization should function with an objective to create value for all these stakeholders and cannot only focus on creating value for its customers or cannot only focus on maximizing its profits. Many companies only try and create maximum value for the shareholders by focusing on profit maximization and this is a faulty approach as per the stake holder theory. This is because the stake holder theory requires a company to focus equally on the interests of all its stakeholders. This has led to the development of a concept called the triple bottom-line approach. In this approach focus is on 3 Ps i.e. people, planet and profit. Here the focus is on social aspects of a business (people), environmental aspects (planet) and financial aspects (profit). This is a holistic way of looking at a business and looking at and managing the operations of a business.

To conclude we can say that stake holder theory enables a business to focus on its performance in a broader perspective and this helps the business to create more value and greater value for all its stakeholders in the long run in a systematic manner and in a tangible manner.