Stakeholder Governance Through Prioritization - Corporate Governance and Business Ethics

As for the prioritization of stakeholder interests, we first have to distinguish whether these interests refer to the durable constitution of the team as a collective actor or to the team’s distinct transactions. As for the constitutive aspect, the forms of contract and the desired duration of contract, as illustrated, seem to be an appropriate criterion for prioritization. I would like to call this the first of the four following criteria “contract relevance”.

  1. “Contract relevance”: Regarding “contract relevance”, the interests of long-term investors and employees are preferable to those of short-term investors and NGO's. However, this constitutional perspective has to be supplemented by the requirements of the specific transaction, whose realization requires the resources of stakeholders. Here, the following criteria are likely to be of interest:
  2. “Resource relevance”: Stakeholders are owners of resources whose specificity can be of varying significance and importance for realizing a certain transaction. Suppliers or employees as stakeholders can, for example, be distinguished by their technical knowledge related to the production of goods or services, while NGO's can contribute societal knowledge and moral legitimacy regarding a company’s corporate social responsibility.
  3. “Cooperation relevance”: Teams are collaborative projects of stakeholders. From this, it follows that the degree of the willingness and ability to cooperate is of major significance for generating a cooperation rent and reciprocal advantages. Predictability, reliability, the ability to handle conflict situations and assume responsibility are indicators that define the collaborative quality of a stakeholder. Potential stakeholders that have few or none of these qualities cannot become actual stakeholders. The same applies to employees, suppliers and NGO's, but not to actors with classical contracts, since they are controlled by the market.
  4. “Investment relevance”: The willingness to build up team-specific and transaction-related resources and to invest them in the team is an indicator of the quality and durability of a stakeholder relationship and of the willingness to assume responsibility for the team and the consequences that might arise from its transactions.

Stakeholders with non-team-specific resources are able to contribute to the success of a team by means of transaction-related resources, but the costs of changing to another team are low. That does not mean that it disqualifies them for a certain transaction, but it will probably reduce their loyalty to the team. In this case, it is the job of the stakeholder management to create incentives for team-specific and transaction-specific investments (i.e., not just transaction-related investments). Their relevance can be high, medium or low, which also determines their initial prioritization. Stakeholders that are rated “high” in all four areas of relevance should be prioritized over stakeholders that are rated “low” for all four relevance criteria. This decision-making algorithm applies to everybody involved in the constitution of a Stakeholder prioritization matrix.

Stakeholder-prioritization-matrix

Stakeholder-prioritization-matrix

NGO's can be characterized by high resource relevance, medium cooperation relevance and low investment and contract relevance; this means that a team should offer incentives to this stakeholder to invest in team- or transaction-specific resources so that the potential team member can become an actual team member. One such incentive can be a value management system (Wieland 2004), which binds an NGO to a firm by an implicit contract or motivates the NGO’s “carriers of expertise” to change from an implicit to an explicit and formal contract status. The same is true for employees who have high contract relevance, medium resource and cooperation relevance and low investment relevance. Here, a potential solution can be to increase the investment specificity of the contributed resource. Generally speaking, the process of prioritizing stakeholder relations should not primarily focus on the acceptance, rejection, or ranking of stakeholders, but always also and first and foremost on their qualifications for a long-term team membership. Stakeholders with low contract, resource, cooperation, and investment relevance will leave the team or will not be admitted to the team. In this sense, the identification and prioritization of stakeholders is a two-step process of the governance of stakeholder relations, i.e., the creation of the formal and informal rules that a team should have to ensure its continuity in realizing transactions and generating cooperation rent.


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