Idea 40 - Stakeholders (50 Management ideas you really need to know)

Idea 40 -  Stakeholders

It is the fate of some words to evolve rapidly through enlightening to hot, overused and, finally, very irritating, and 'stakeholder' has become one of them. It is sprinkled over reports and jammed into mission statements, as if use alone were enough to prove concern. Worse, politicians have got hold of it. In their mouths, it seems to refer to the population at large, which makes them sound caring without meaning very much. All this is a pity because its original concept represents a radical shift in the way the corporation views, or should view itself.

The stakeholder idea began its march with R. Edward Freeman's 1984 book Strategic Management: A Stakeholders Approach. Freeman held that commercial firms would be much more effectively managed at a strategic level if the concerns of various stakeholders were taken into account. In other words, there would be long-term benefit for shareholders. He said later that the word 'stakeholder' was chosen deliberately to contrast with 'stockholder'. Freeman defined a stakeholder in an organization as any individual or group who 'can affect or is affected by' its activities. That's sufficiently broad to include a company's competitors, which seems unnecessarily generous. But it drew attention to the fact that companies live in a community, and that good neighbors tend to lead more fulfilled lives.

The idea caused a stir in academic circles, but it also rubbed off onto the real world of business. Further momentum came from the Caux Round Table, a group of business people from Europe, North America and Japan who first gathered in Switzerland to try to find an escape from international trade tensions. Along the way, the group recognized that big companies had a global responsibility to reduce social and economic threats to world peace and stability and, in 1994, it issued the first code of international business ethics - the Caux Principles - principles of 'stakeholder management'.

Flesh on the bones a year later, an extraordinary, networked five-year project began, involving several hundred scholars from all over the world. It was called Redefining the
Corporation, was supported by a grant from the Alfred P. Sloan Foundation, and looked at the stakeholder model of the corporation and its implications for management theory, research and business practice. In 2002 academics James E. Post, Lee E. Preston and Sybille Sachs published the project's final book under the same name. It calls for business to rethink its purpose and, drawing on the experiences of Cummings Engine Company, Motorola and Shell (including the notorious Brent Spar affair), fleshes out the concept of the stakeholder.
The authors don't see the firm as being one entity and stakeholders another - the corporation is a 'collaboration of multiple and diverse constituencies and interests referred to as stakeholders'. Their main thesis is that specific stakeholder relationships go beyond enlightened self-interest. They are central to the creation (or destruction) of 'organizational wealth' and, as such, to the core purposes and operations of the corporation. So stakeholder management, defined as managing relationships with stakeholders for mutual benefit, is critical to corporate success.
'Corporations are what they do', the authors claim. Firms clearly no longer conform to the medieval model, whose social purpose was central. Nor should they conform to the current 'ownership' model that puts the heaviest emphasis on the private interests of investors. The purpose of the corporation is to create wealth, but its legitimacy - its social charter or 'licence to operate' - depends on its ability to meet the expectations of a large group of constituents. The connection between wealth and responsibility has been acknowledged for more than a century and, if the corporation is to survive, they insist, it must adapt to social change. The authors claim there are two reasons why there is a need to redefine the large corporation. One is its sheer size and power, and the other that, while shareholders hold securities, they don't actually own the company in any meaningful sense - and they are certainly not the only constituents vital to its success. By their nature, major multinationals alter the social, political and physical environments in which they operate, and these impacts have to be thought of as part of their output. Output is the responsibility of a firm's managers and, sometimes, it can be unwanted or even harmful. Rather than attracting costly, unwanted and possibly ineffective government intervention, managers can reduce these effects if they are motivated to do so.
Ditching the conventional ownership model doesn't mean 'the death of property rights', however, or 'the end of shareholder value' (both criticisms of the stakeholder model). As early as 1946, Peter Drucker described as a 'crude old legal fiction' the idea that the company was nothing but the sum of the property rights of the shareholders. Post, Preston and Sachs say there is a similarity and mutuality of interests among the corporation's constituents, and that it cannot survive if it doesn't take responsibility for their welfare and the well-being of the society within which it operates.
A stake in the game the point of the stakeholder definition is that they have a stake in the outcome of the game, and want the corporation to be run in such a way that it makes them better off or at least, no worse off. In Toward a Stakeholder Theory of the Firm, Thomas Kochan and Saul Rubinstein isolate three stakeholder ID tags: they supply critical resources; their welfare is affected by the fate of the enterprise; or they have power to affect its performance, favorably or unfavorably.

By either measure, stakeholders include employees, investors, customers, unions, suppliers, regulators, local communities and citizens, various private organizations and governments. Benefits or harms between them and the firm flow both ways, according to Post, Preston and Sachs - even involuntary stakeholders, like those living near a factory, contribute by tolerating the presence of the firm and receive benefits or harms as a result. They can be linked to each other as well as to the firm, and may be at each other's throats over an issue. Communities are like that.

Reference: 50 Management Ideas You Really Need to Know

Book by Edward Russell-Walling

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