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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