Toward a Conceptualization of Stakeholder Business Communication

In the field of management, Freeman was the first to introduce Stakeholder Management Theory. According to Freeman (1984), “Stakeholders are individuals or groups who are affected by or can affect the activities of a corporation.” Furthermore, stakeholder management is defined as “a series of activities that involve identifying who the stakeholders are, determining their demands, and continuously communicating with them to apply such demands to managerial decisions.”

Afterward, various scholars have researched Stakeholder Management Theory in diverse ways over the course of around 60 years (Ahlstedt & Jahnukainen, 1971; Argandoña, 1998; Bowie, 1988; Brenner, 1993; Carroll & Näsi, 1997; Clarkson, 1995; Cornell & Shapiro, 1987; Cragg, 2002; Donaldson & Preston, 1995; Freeman & Reed, 1983; Hendry, 2001; Hill & Jones, 1992; Kochan & Rubinstein, 2000; Langtry, 1994; Näsi, 1995; Phillips, 2003; Reed, 1999; Rhenman, 1964).

Stakeholder Management Theory has evolved as a distinct theory, distinct from the shareholder-centric management theory based on Chicago School of Economics’ Friedman, which emphasizes ‘Shareholder Primacy’, and the neoclassical economic-based theories. Friedman from the Chicago School of Economics argued that shareholders are the owners of the company and that the company exists to maximize shareholder interests. However, in Stakeholder Management Theory, responsibility extends beyond just the economic interests of shareholders to emphasize the balance of interests among all stakeholders (Freeman, Harrison, Wicks, Parmar, & de Colle, 2010). In other words, by expanding the scope of responsibility to include not only shareholders but also employees, suppliers, customers, and the local community, Stakeholder Management Theory evolves into a strategic management theory that seeks to balance the interests of various stakeholders comprising the company. It argues that by pursuing this balance, both social and economic value can be achieved simultaneously.

Representative studies analyzing the differences between stakeholder and shareholder-centric management include Blair and Stout (1999), Kochan and Rubinstein (2000), Carney, Gedajlovic, and Sur (2011). According to their research, it can be seen that perspectives on the purpose and role of companies, the relationship between companies and society, perspectives on humanity, and the relationship between management strategy and ethics are significantly different (Table 1). Freeman, a prominent stakeholder management theorist, distinguishes between shareholder-centric management and stakeholder management as shown in the table below (Freeman, Parmar, & Martin, 2020).

Shareholder-centric management argues that the sole purpose of a company is to maximize profit for shareholders. In contrast, stakeholder management emphasizes a balance of interests among shareholders and various stakeholders, including not only profit but also ethical consciousness for the company’s purpose, values, and collaboration for mutual benefit with multiple stakeholders.

Prominent stakeholder management theorist Freeman (1984) argues that companies are subsystems of the social system, and because companies can create value through collaboration with various stakeholders such as shareholders, customers, employees, suppliers, and the local community, it is impossible to narrowly focus management activities solely on shareholders.

Shareholder-centric management holds that the sole owners of a company are the shareholders, and stakeholders such as employees, suppliers, the local community, and customers are not more important than shareholders. The theoretical basis for such an argument is the principal-agent theory, which posits that employees and management are agents serving the owners, who are the shareholders. According to this theory, employees and management are mere agents serving the interests of the shareholders. In contrast, stakeholder management argues that not only shareholders but also employees and management are important stakeholders, and thus their rights are as significant as those of the shareholders.

Shareholder-centric management argues that companies should strive to maximize profits without regulation in a free market. In contrast, stakeholder management asserts that companies, as subsystems of the social system, should engage in management activities that align with the values, beliefs, and ethics endorsed by the society they operate in. Friedman (1962), a proponent of shareholder-centric management from the Chicago School of Economics, assumes that in a free market without government interference, companies, as the sole owners, will engage in selfish behavior to maximize the economic interests of shareholders. He argues that even though companies act selfishly, guided by the principle of profit maximization for shareholders, an “invisible hand” will ensure that the overall wealth of society increases as resources are efficiently utilized and related activities are designed without deception or fraud.

On the other hand, stakeholder management criticizes the limitations of the market’s self-regulating function, arguing that the pursuit of profit maximization for shareholders often forces unilateral sacrifices upon important stakeholders who constitute the company, such as employees, suppliers, the local community, and customers. Stakeholder management criticizes that if companies enforce unilateral sacrifices of other stakeholders to maximize shareholder interests, it will lead to severe conflicts and resistance, ultimately diminishing the company’s competitiveness.

Shareholder-centric management assumes a solitary individual who exists in society solely to pursue economic pleasure, detached from others. This view of human nature is presupposed in neoclassical economics. On the contrary, stakeholder management assumes that humans are not solely beings who pursue economic pleasure, but multifaceted individuals who seek meaning, fulfillment, values, and beliefs in life (Freeman et al., 2020). In other words, humans are beings who are both selfish and considerate of others, capable of making rational decisions as assumed in neoclassical economics, while also making decisions based on emotions, values, identity, and beliefs.

Shareholder-centric management argues that management and ethics should be separated, whereas stakeholder management claims that management and ethics are mutually complementary, and thus should be addressed from an integrated perspective (Freeman et al., 2010, 2020). Stakeholder management asserts that management strategy and ethics cannot be separated and, in fact, should be actively integrated. Stakeholder management advocates for integrating the strategic level of the organization with the level of its purpose. This strategy incorporates the demands of various stakeholders within the society to which the company belongs, along with principles such as the UN Global Compact’s Human Rights, Labour, Environment, and Anti-Corruption, among others (Carroll, Brown, & Buchholtz, 2018).

In summary, shareholder-centric management and stakeholder management differ significantly in perspectives on the purpose of the company, the scope of stakeholders, the relationship between the company and society, assumptions about human nature, and the relationship between strategy and ethics. Due to these various aspects of differentiation, the two approaches inevitably have different business communication strategies.

The shift from shareholder-centric management to stakeholder management represents a systemic innovation, also known as archetypical innovation. This systemic innovation involves uncertainties and ambiguities, leading to resistance to change from stakeholders. Therefore, companies must use effective communication to instill stakeholders with confidence and trust in the vision of transitioning to stakeholder management. Therefore, businesses must provide assurance to all stakeholders within the company that through mutual prosperity and collaboration, everyone can thrive. To achieve this, businesses should engage in communication with stakeholders to share the company’s purpose, vision, and values.

The purpose of a business refers to its reason for existence, answering the question, “What do we exist for in society?” (Freeman, 1984), The purpose of a business is defined by identifying what products and services align with the universal ethical consciousness pursued by a society and how these products and services will contribute to the development of the social community. Here, the demands of various stakeholders in society and the ten principles of the UN Global Compact, which include human rights, labor, environment, and anti-corruption, are reflected (Carroll et al., 2018).

Vision is a concrete depiction of the future state of the company. Companies practicing stakeholder management depart from a singular vision based solely on financial performance. Instead, they define a future vision that realizes the collective interests of diverse stakeholders constituting the company, thus embodying a vision for societal consensus and share it.

Values are the beliefs and principles that a company aspires to, serving as guidelines for both actions to be taken and actions to be avoided, thereby functioning as decision-making guidelines.

In summary, the purpose is to answer the ‘why’ question of ‘Why does a company exist?’. The vision is to answer the ‘what’ question of ‘What do we want to create in the future?’ Values answer the “how” question of ‘How will we reach the desired future?’ (Mirvis, Googins, & Kinnicutt, 2010). The purpose, vision, and values of this kind operate as frameworks for making sense of organizational identity and circumstances. This is important because they serve as mechanisms that promote interpreting meaning, attributing significance, and facilitating action within ambiguous and uncertain organizational environments. In other words, it is important because it operates as a framework for interpreting events and phenomena occurring both within and outside the organization, enabling the attribution of meaning and interpretation (Weick, 1993). The term “framework of reference” here refers to the mental models applied when interpreting the internal and external environments surrounding the organization. When all stakeholders share such mental models of understanding, the boundaries of identity extend beyond the physical and legal limits of the organization, transcending them (Santos & Eisenhardt, 2005). Because companies are subjectively and socially constructed. This means that through the sharing of meaning among internal and external stakeholders and the sharing of identity, trust is established. Not only that, but it also implies that the effectiveness and efficiency of communication are increased, minimizing unnecessary conflicts and costs. Therefore, in this study, we can formulate the following proposition:

Companies practicing stakeholder management not only clearly articulate their purpose, vision, and values and share them with internal and external stakeholders but also define a strategic framework aligned with these elements to create shared value. They then share this framework with stakeholders. A CSV strategy is a model that emphasizes symbiotic relationships between companies and their internal and external stakeholders, moving away from traditional zero-sum strategies such as industrial structure theory and resource-based theory (Porter & Kramer, 2011). In other words, CSV strategy is based on the premise of a symbiotic relationship between society and the company, aiming to create value that is shared by all stakeholders. It proposes practical approaches such as (1) reinterpreting products and markets, (2) redefining the value chain, and (3) establishing regional industry clusters to achieve this goal. A CSV strategy to avoid becoming an empty CSR theory and to be implemented in the business field, it is essential for both internal and external stakeholders of the company to share the relevant strategic framework. Therefore, we can derive the following proposition:

Stakeholder management strategy is fundamentally a process of deriving strategies formed through learning and evolution within an interconnected corporate ecosystem. It involves translating these strategies into action. To implement such strategies, the involvement and dedication of stakeholders in the company’s production activities are required. To put such strategies into practice, the participation and dedication of stakeholders in the company’s production activities are necessary. Furthermore, to promote their participation and dedication, a new form of communication within the company is needed. This entails a transition from functional communication to relational communication.

Functional communication refers to PR communication and marketing communication aimed at forming a positive image of the company (Cyron, 2021). Functional communication may take the form of a conversation outwardly, but it tends to prioritize unilateral transmission of information rather than mutual understanding. According to Habermas’ theory of communicative action, strategic communication refers to exerting influence on others to achieve one’s own intentions (Habermas, 2006). Strategic communication fundamentally involves framing the counterpart as the target of strategy within the dynamic of subject and object, utilizing incentives and influence to gain consensus (Ha, 2009, 2016).

While language is still employed in such strategic communication, the emphasis lies more on exerting influence over the counterpart rather than the validity of the argument (Habermas, 2006). Externally, it may seem like communication is being valued, but internally, it faces criticism as a strategically veiled linguistic act with specific intentions concealed (Ha, 2016). On the other hand, relational communication revolves around mutual subjectivity between subjects, emphasizing mutual understanding and egalitarian dialogue within this framework. It entails practicing reciprocal questioning and active listening for mutual understanding. As a result, it becomes possible to share identities, beliefs, and values between parties, and the conversation itself acquires ethical value.

According to Habermas’ theory of communicative action, this form of communication attains legitimacy based on mutual agreement. In other words, communication involves not merely conforming to one-sided assertions, but ensuring that all participants in the conversation have equal rights to speak and opportunities to argue or refute (Kim, 2016). Through this form of communication, both parties establish mutual trust and legitimacy in their communicative acts. Therefore, we can derive the following proposition:

When relational communication between the company and stakeholders promotes the participation and dedication of stakeholders, it serves as the foundation for organizational learning and evolution. Through such learning, companies develop and implement distinctive management strategies. Senge (2014) contends that through learning, individuals come to reconceive the world and their relationship with it, asserting that such learning can cultivate the ability to create. And in this context, he defines a learning organization as an organization that continually expands its capacity for creating the future. In other words, a learning organization refers to an organization where members continuously learn together and share methods of learning (Park, 2021).

For this type of organizational learning to take place, individual learning at the level of questioning and inquiry must precede it, because individuals are the agents of organizational learning (Argyris & Schön, 1978; Kim & Yoon, 2012). Individual learning can be broadly categorized into single-loop learning, where apparent mistakes are corrected without challenging the governing values that dominate the individual and the organization, and double-loop learning, where individuals challenge and question the values that govern both themselves and the organization, developing new alternative values and perspectives (Argyris, 2002; Argyris & Schön, 1978).

The difference between the two types of learning can be likened to an automatic temperature control device installed in an office. Single-loop learning involves reflexively adjusting the office temperature based on the preset temperature settings. On the other hand, double-loop learning entails reflecting on why the office temperature is set at its current level and potentially resetting the temperature settings accordingly. To foster double-loop learning beyond single-loop learning, it is essential to reflect on mistakes and be able to challenge past dominant values. In this process, dialogue among members is crucial (Argyris & Schön, 1978; Kim & Yoon, 2012). The meaning of dialogue is to engage in deliberative communication where members openly and honestly share new information from a mutually horizontal perspective, allowing questioning and feedback to challenge existing dominant values and normalized norms within the organization.

Through deliberative communication, companies and stakeholders can not only build mutual trust but also learn together. This enables the formulation of distinctive strategies, ultimately enhancing the effectiveness and efficiency of the company. Consequently, the interests of all internal and external stakeholders, including shareholders, employees, partner companies, local communities, and customers, can be improved. Especially in today’s rapidly changing external business environment with increased uncertainty, organizational learning that strengthens or revises past dominant values, beliefs, and behaviors is crucial for companies to survive and continuously evolve. Therefore, it is necessary to move away from passive, reactive, defensive communication in the dimension of stakeholder-related risk or crisis management, and instead embrace proactive, preemptive, and open communication with stakeholders from the perspective of learning, evolution, and the formulation of distinctive strategies. Hence, we can derive the following proposition:

Stakeholder management presupposes a positive-sum game, aiming for a balance of interests among all internal and external stakeholders, rather than assuming a zero-sum game among them. In essence, it emphasizes maximizing shared value through management activities and distributing it equitably. Therefore, the transition from shareholder-centric management, which emphasizes maximizing profits only for shareholders, to stakeholder-centric management signifies a shift towards management that overcomes the dilemma of conflicting interests among various stakeholders and achieves greater common ground through collaboration.

The theory of the Prisoner’s Dilemma has two main implications. Firstly, the cause of the Prisoner’s Dilemma lies in the asymmetry of information among relevant stakeholders, necessitating communication measures to overcome this. Firstly, the cause of the Prisoner’s Dilemma lies in the asymmetry of information among relevant stakeholders, necessitating communication measures to overcome this information asymmetry. Related stakeholders must share not only financial performance information, but also non-financial performance information related to E (environment), S (social), G (governance). Through this, they must overcome the Prisoner’s Dilemma. Therefore, the following proposition can be derived:

The second implication of the prisoner’s dilemma theory is that the outcomes after a cooperative game are less favorable than the utility gained from betraying the other party. Therefore, companies need to develop measures to manage the betrayal of stakeholders.

The basis for such an argument can be found in Olson’s theory of collective action and Ostrom’s theory of governing the commons (Olson, 1965; Ostrom, 1990).

Olson criticized the optimism of collective action theory. Optimism in this context refers to the belief that individuals will cooperate in pursuit of a common interest. Olson argued that without mechanisms to compel individuals to act for the common good, they would pursue selfish interests. In other words, his argument suggests that when conflicts arise between collective interests and individual interests, institutions are needed to compel individuals to sacrifice their selfish interests and pursue common interests. In other words, it suggests the need to establish mechanisms that encourage individuals to choose long-term common interests over short-term individual gains within the tension between short-term individual benefits and long-term collective interests (Bridoux & Stoelhorst, 2022, 2016; Ostrom, 1990).

Therefore, to prefer collective interests over individual gains and long-term benefits over short-term gains, it is necessary to define the long-term benefits that will be obtained through the practice of stakeholder management, and to constantly share them through formal and informal channels. In summary, it is necessary to minimize opportunistic behaviors and betrayal actions of certain stakeholders and promote the pursuit of cooperative long-term benefits. Therefore, the following proposition can be derived: