LECTURE 3: Stakeholder Management

From Shareholder Value To Stakeholder Thinking

• Stakeholder thinking has emerged over the last 25 years as a popular way of framing corporate behavior.

• A socially responsible firm is one whose managerial staff balances a multiplicity of interests. Instead of striving only for larger profits for its stockholders, a responsible enterprise also takes into account employees, suppliers, dealers, local communities, and the nation.

• More recently, many developments have contributed to increasing demands that companies broaden the distribution of business benefits to a wider set of stakeholders, not only shareholders.

From Shareholder Value To Stakeholder Thinking Cont..

• Henry Mintzberg criticized the focus on shareholder value, noting that even though shareholders need a fair return on their investment in order for the capital markets to work, an unbalanced focus on shareholder value creates a wedge between shareholders and other stakeholders and is therefore ‘bad for business and bad for capitalism’.

• Companies also seek to contribute to the societies in which they operate.

• Overall, then, a significant degree of pressure has come to bear on organizations to take account of a much wider range of actors than simply their owners or shareholders.

What Are Stakeholders?

• Stakeholders comprise individuals, or sometimes groups, with similar interest in a particular organization.

• For example, shareholders are mainly interested in gaining adequate return on their investment. A variety of groups, including shareholders, employees, customers and suppliers, are typically identified as stakeholders.

• It should also be noted that the same individual or group may have multiple interests in an organization and therefore belong to various stakeholder clusters.

• Stakeholder groups can be categorized in many ways. A distinction is often made between internal and external stakeholders, distinguishing those who form the organization from those who just interact with it. However this distinction simply locates the groups involved and tells us little about the nature that the stakeholders have in the company.

Conflicting Interest And Stakeholder Importance

• There are inevitable situations where the interests of stakeholders conflict.

• A conflict may exist when employees ask for a salary increase and other benefits while shareholders put pressure on the management to cut cost of production and labour.

• Companies thus need prioritize stakeholders often because of resource limitations.

Stakeholder Importance

• A more sophisticated way to determine the importance of stakeholders involves:– Power of a stakeholder to influence an organization. Stakeholders derive their

power from a mix of sources depending on their resources and relationships. Investors and governments, for example, derive their power from legal or contractual arrangements that allow them to have some degree of influence. Other stakeholders including customers and suppliers, have economic power over corporate performance, stakeholders may also have political power to express and put forward their interest.

– Legitimacy of the stakeholder relationship with the company. Legitimacy pertains to the perception that the stakeholder's goals and activities are in line with generally accepted values and norms in society.

– Urgency of the stakeholder's claim on the company. Urgency calls for immediate attention on the basis of two conditions: (1) time sensitivity- the degree to which a delay in dealing with the claim is intolerable to the stakeholder; and (2) criticality- the importance of the claim or relationship with the company to the stakeholder.

Stakeholder Theory

• Stakeholder theory posits the company as a hub of relationships between diverse actors.

• These relationships were initially portrayed as a two-way influence between the company and a range of stakeholder groups, although it was recognized that stakeholders are interconnected and that coalitions of stakeholder groups may emerge to help or oppose a company on a particular issue.

• Researchers have viewed stakeholder relationships as more complex and interrelated, rather than just a collection of one-to-one relationships between the company and its various stakeholders.

• Managers should take into account the interests of all stakeholders because of the intrinsic value that each stakeholder possesses.

• Stakeholders have legitimate interests in companies for their own sake, rather than because they can further the achievement of some organizational goals.

Stakeholder Theory As An Alternative Theory Of The Firm

• Conventionally, companies have been viewed as organization that managers control for the benefit of the owners

• As a black boxers that transform inputs provided by investors, employees and suppliers into outputs for the benefit of customers.

• However, stakeholder theory has been seen as an alternative to this theory of the firm.

• In stakeholder theory, companies are presented as organizations through which diversity of actors accomplish multiple and sometimes conflicting purposes.

Approach to strategic management

• Stakeholder theory has also been advanced as an approach to strategic management.

• Stakeholder theory takes into account the social and political environment in which companies operate.

• Strategic threats and opportunities arise from the claims and expectations placed on the company by various social and political actors.

• Stakeholder theory can be seen as a substitute for PEST (political, economic, social and technological) analysis and other frameworks that provide structure for the examination of the strategic threats and opportunities arising from the external environment.

Framework of Corporate Social Responsibility

• Stakeholder theory has been advanced as an increasingly popular way of conceptualizing corporate social responsibility.

• There is a natural fit between the concepts of corporate social responsibility and stakeholders, because the stakeholder concept provides a way to frame and assess society's values and expectations of business.

• Corporate social responsibility can therefore be more easily analyzed through relationships that companies have to their constituent groups than in direct terms of issues or values.

Theoretical Models Of Stakeholder Management

• Stakeholder management involves the process by which managers reconcile objectives of a company with the claims and expectations of various stakeholder groups.

• Three overall types of focus have been outlined, as explained in the following sub-sections– Focus on the generic, approach towards a stakeholder

– Focus on the relationship

– Focus on the stakeholder network

Focus on the generic approach towards a stakeholder

• Savage et al. (1991) argued that strategies for managing for managing stakeholders should be based two assessments:– the stakeholder's potential to threaten the organization

– the stakeholder's potential to cooperate with the organization.

These assessments depend on at least four factors that have an impact on the level of threat or cooperation posed by stakeholders; possession of resources needed by the company; relative power of the stakeholder; willingness of the stakeholder to take action; and the likelihood of the stakeholder to form coalition with other stakeholders increases its likelihood of forming an alliance with the company has the opposite effect.

Focus on the generic approach towards a stakeholder Cont….

• Based on the assessment of the stakeholder's potential for threat and cooperation, four separate strategies for managing stakeholders can be identified.

– Involvement concerns the inclusion of stakeholders into decision making and other activities in organizations. Companies can, for example, involve their suppliers in the development of new production processes

– Monitoring refers to the consideration of particular stakeholder groups when important decisions are being made. Such stakeholders typically include issue-specific organizations that have a limited interest in the company. The objective of monitoring is to ensure that the interest of stakeholders do not at any stage conflict with those of the organization.

– Defense involves attempts to decrease the power that the stakeholder has over the company. For example, companies may seek to establish exclusive relationships with suppliers in order to fight off a competitor.

– Collaboration refers of partnerships and other collaborative ventures established between the organization and its stakeholders. Such partnership projects are discussed in more detail below.

The Generic Approach

Mixed blessing stakeholder

Collaborate

Supportive stakeholder

Involve

Non-supportive stakeholder

Defend

Marginal stakeholder Monitor

Stakeholder’s potential for cooperation

High

Low

Stakeholder’s potential for threat to organisation

Savage et al. (1991)

High Low

Focus on the relationship

• Friedman & Miles (2002) suggested that strategic taken by organizations and their stakeholders depend on two variables that characterize relationships between them:

– the compatibility of their interest

– the nature of the connections between them

The interest of companies and their shareholders can be said to be compatible because top management will have to manage the organisation in the interest o the shareholders.

Secondary, the connection between organisations and their stakeholders vary from necessary to contingent. If both parties recognise a formal relationship exists, then is necessary but if it is not recognized, or only exists momentarily in special circumstances the relationship is contingent.

Nature of Relationship

Defend:ShareholdersTop managementPartners

Form relation:The general publicCompanies connected through trade associations

Compromise:Trade unionsCustomersSuppliersSome NGO’s

Eliminate:Some NGO’sAggrieved/criminal members of the public

Connections between stakeholders

Necessary Contingent

Compatible

Incompatible

Shareholder interest

Focus on the stakeholder network

• A third approach is provided by Rowley (1997), who argued that individual stakeholder relationships cannot be used to explain corporate responses to stakeholder pressures because companies respond to the entire network of stakeholder relationships. He posited that the way in which companies respond to stakeholder pressures depends on the variation of two factors:

– The centrality of the company in the stakeholder network and

– The density of this network surrounding the organization

Centrality refers to the number of contacts the company has to actors in the stakeholder network. The company is able to resist stakeholder pressure when contact to actors is many. Network density is the ties that exist among stakeholders. Larger ties means stakeholders have the ability to constrain companies activities.

Role in stakeholder network

Compromiser subordinate

Commander solitarian

Centrality of the company in the stakeholder network

High Low

High

Low

Density of the stakeholder network

Stakeholder Management In Practice

• Stakeholder encompasses the identification and analysis of stakeholder groups as well as the development of organizational policies and practices that are aimed at addressing the expectations of these groups.

• Stakeholder management can be regarded as a set of techniques that organizations can use to better understand and manage stakeholder concerns. Three of such techniques are described in this section: (1) stakeholder mapping; (2) surveys and stakeholder dialogue; and (3) partnership projects between companies and non-governmental organizations. The first two of these involve the identification and assessment of stakeholder concerns and interest, while the third is an increasingly common way of responding to stakeholder pressures.

Implications On Corporate Social Responsibility

• Issues management and stakeholder management can be seen as alternative approaches to how society's values and expectations are framed.

• Stakeholder management, in contrast places more emphasis on relations to stakeholders and it is stakeholders who represent and express society's values and expectations of business.

• Over time, the focus has shifted from issues management to stakeholder management, which has become increasingly popular among business and society scholars following the publication in 1984 of Freeman's book on the stakeholder approach to strategic management.

Implications On Corporate Social Responsibility

• Indeed, the role of stakeholders has been considered so central in the development of issues that some researchers believe that the main challenge for issues management is ' to bring a more coordinated, proactive, and sustained approach to the management of an organization's relationship with its stakeholders.

• Issues management and stakeholder theory as complementary rather than alternative ways of identifying and addressing society's values and expectations.

• In many public sector organizations, careful attention is paid to key stakeholders, such as funding bodies or elected representatives, so that the main issues are directed in terms of the interest and needs of these groups.