Stakeholder Theory: Power, Interest, and Business Impact

Core Concepts: Who Are Stakeholders?

Stakeholders are individuals or groups who can affect—or are affected by—a business’s actions. They hold power, legitimacy, and urgency (Mitchell et al.’s 1997 model) to demand attention. Unlike shareholders (who own equity), stakeholders include:

• Internal: Employees, managers, owners.
• External: Customers, suppliers, governments, NGOs, communities.

Why does this matter? Businesses ignore stakeholders at their peril. For example:

• Nepal’s NTC must balance shareholder profits (dividends) with customer demands (affordable internet) and employee unions (fair wages).
• Daraz prioritizes suppliers (to keep inventory) but risks customer trust if prices spike.

Key Models: How to Map Stakeholders

1. Mitchell et al.’s Typology (1997)

Stakeholders are ranked by three attributes:

• Power: Ability to influence (e.g., unions can strike).
• Legitimacy: Perceived right to demand action (e.g., customers expect safe products).
• Urgency: Time-sensitive claims (e.g., a supplier’s last-minute payment demand).

• Dominant: High power + legitimacy + urgency (e.g., Ncell’s regulators).
• Dangerous: High power + urgency but low legitimacy (e.g., illegal street vendors pressuring a mall).
• Discretionary: Low power but high legitimacy (e.g., NGOs like Greenpeace).

2. Freeman’s Stakeholder Circle

A concentric model showing how stakeholders interact:

• Center: The business.
• First ring: Direct stakeholders (employees, customers).
• Outer rings: Indirect stakeholders (government, media).

Real-world tie-in:

• Himalayan Java (Nepal’s coffee brand) uses this to map:
  • Direct: Farmers (suppliers), baristas (employees).
  • Indirect: Climate activists (community), tourism boards (government).

Stakeholder Theory vs. Shareholder Theory

Worked Example: Kathmandu Traffic Chaos

• Stakeholders:
  • Drivers (urgent: stuck in traffic).
  • Pedestrians (legitimate: right of way).
  • Businesses (legitimate: lost sales).
  • Government (power: can enforce rules).
• Conflict: Expanding roads (benefits businesses) vs. preserving heritage (community demand).
• Solution: Stakeholder mapping reveals pedestrians (high legitimacy) and businesses (high urgency) must be prioritized over car owners (high power but low legitimacy in this case).

Stakeholder Management Strategies

Companies use engagement levels to respond:

1. Inform: One-way communication (e.g., NTC sends bills to customers).
2. Consult: Two-way dialogue (e.g., Pathao surveys drivers on pay rates).
3. Involve: Collaborative projects (e.g., Himalayan Java trains farmers in sustainable farming).
4. Collaborate: Joint decision-making (e.g., Nabil Bank co-designs loan terms with borrowers).

flowchart TD
  A["Stakeholder Engagement"] --> B["Inform"]
  A --> C["Consult"]
  A --> D["Involve"]
  A --> E["Collaborate"]
  B -->|"Example:"| F["NTC's Bill Notices"]
  C -->|"Example:"| G["Pathao Driver Surveys"]
  D -->|"Example:"| H["Himalayan Java Farmer Training"]
  E -->|"Example:"| I["Nabil Bank Loan Design Workshops"]

Case Study: Toyota’s Recall Crisis (2010)

• Stakeholders:
  • Customers (urgent: safety risks).
  • Regulators (power: fines/recalls).
  • Dealers (legitimate: lost sales).
• Response:
  • Collaborated with regulators to fix defects.
  • Informed customers transparently (avoided lawsuits).
  • Involved dealers in distribution plans.

Nepali Parallel: Ncell’s Data Privacy Scandal (2021)

• Stakeholders:
  • Customers (legitimate: privacy rights).
  • Government (power: fines under PDPA).
  • Competitors (urgent: gain market share).
• Failure: Ncell ignored customers (low power in their view) and consulted only regulators.
• Outcome: $500K fine + reputational damage.

In the Real World

1. eSewa and Stakeholder Power

   • Stakeholders:
     • Customers (urgent: seamless transactions).
     • Banks (legitimate: payment processing rights).
     • Government (power: regulates digital payments).
   • Conflict: eSewa must collaborate with banks (to avoid fraud) but inform customers quickly (to retain trust).
   • Real Example: When eSewa’s app crashed during Dashain, customers (high urgency) and merchants (high legitimacy) demanded fixes. eSewa involved tech teams and consulted banks to restore service in 48 hours.

2. Daraz’s Supplier vs. Customer Trade-offs

   • Stakeholders:
     • Suppliers (power: can switch to competitors like Amazon India).
     • Customers (urgent: low prices).
   • Dilemma: Daraz’s "Lightning Deal" discounts squeeze supplier margins.
   • Solution: Daraz involves suppliers in pricing (e.g., bulk discounts) while informing customers via ads.

3. NEPSE and Retail Investors

   • Stakeholders:
     • Institutional investors (power: control voting).
     • Retail traders (legitimate: access to market).
   • Conflict: NEPSE’s trading halts (to prevent crashes) anger retail traders (urgent: want liquidity) but protect institutional investors (legitimate: stability).
   • Real Example: During the 2020 COVID-19 crash, NEPSE consulted retail groups before reopening markets, balancing urgency (traders) with legitimacy (investor protection).

Advantages and Disadvantages of Stakeholder Theory

Worked Example: Kathmandu’s Air Pollution

• Stakeholders:
  • Residents (urgent: health risks).
  • Industries (power: economic contribution).
  • Government (legitimate: environmental laws).
• Stakeholder Theory Approach:
  • Collaborate with industries to adopt clean fuel (long-term).
  • Involve residents in awareness campaigns (short-term).
• Shareholder Theory Approach:
  • Ignore pollution (short-term profit) → fines and protests.

Exam Tip: How to Score Full Marks

1. Define Clearly

   • Start with: "Stakeholder theory posits that businesses must account for all groups affected by their actions, not just shareholders. Mitchell et al. (1997) classify stakeholders based on power, legitimacy, and urgency..."

2. Use Real Examples

   • Nepal: Ncell’s data scandal, Daraz’s supplier issues, NTC’s customer complaints.
   • Global: Toyota’s recalls, Patagonia’s environmental activism.
   • Link to PU Syllabus: Always tie answers to ethics, CSR, or governance (other units).

3. Draw Diagrams

   • Mitchell’s matrix (pie chart) or Freeman’s circle (graph) earns 3–5 marks in descriptive questions.

4. Compare Theories

   • Stakeholder vs. Shareholder: Use Nabil Bank (stakeholder: microfinance) vs. Chaudhary Group (shareholder: dividends).

5. Case Study Questions

   • Structure:
     1. Identify 3 stakeholders (power/legitimacy/urgency).
     2. Map them using Mitchell’s model.
     3. Suggest engagement strategies (inform/consult/involve/collaborate).
   • Example Question: "How would you apply stakeholder theory to resolve conflicts between Pathao drivers and passengers over surge pricing?"
     • Answer:
       • Stakeholders: Drivers (power: can strike), Passengers (urgency: need rides), Company (legitimacy: profit).
       • Strategy: Collaborate with drivers to set dynamic pay bands; inform passengers via app transparency.

6. Common Pitfalls

   • ❌ Listing only shareholders (partial credit).
   • ❌ Ignoring urgency in Mitchell’s model (lose marks).
   • ❌ Generic answers (e.g., "businesses should be ethical") without examples.

Visual Summary for Quick Revision