Stakeholders and Stakeholder Management - Principles of Management

A stakeholder is an individual, institution, or community that has a stake in the operationsof an organization and in how it does business. Stakeholders include those who regularlytransact directly with the organization, most notably employees, customers, suppliers, distributors,shareholders, and creditors. Stakeholders also include institutions that are more remotebut still have a stake in how the organization operates and does business, includinggovernment, local communities, and the general public.

Stakeholders and Stakeholder Management

STAKEHOLDERS AND THE ORGANIZATION

All stakeholders are in an exchange relationship with an organization. Each stakeholder groupsupplies the organization with important resources (or contributions), and in exchange eachexpects its interests to be satisfied (by inducements). 3 Employees provide labor and skills andexpect commensurate income, job satisfaction, job security, and good working conditions.Customers provide revenues and want reliable products that represent value for money.

Suppliersprovide inputs to the organization and seek prompt payment and dependable buyers.Distributors help sell an organization’s output, and in return they seek favorable paymentterms and products that will sell well. Shareholders provide a corporation with risk capital.They are also its legal owners. In exchange they expect management to maximize the returnon their investment in the corporation. Creditors such as bondholders provide the organizationwith capital in the form of debt, and they expect to be repaid on time with interest.

Governments provide an organization with rules and regulations that govern business practiceand maintain fair competition. In exchange they want businesses to adhere to rules andregulations and pay their taxes on time. Local communities provide organizations with localinfrastructure and want businesses that are responsible citizens. The general public providesorganizations with national infrastructure and seeks some assurance that the quality of lifewill be improved as a result of the organization’s existence.

TAKING STAKEHOLDERS INTO ACCOUNT

Managers need to take the various claims of stakeholders into account when making decisions.If they do not, stakeholders may withdraw their support. Shareholders may sell their shares,bondholders demand higher interest payments on new bonds, employees leave their jobs, andcustomers buy elsewhere. Suppliers may seek more dependable buyers, and distributors mayfavor the products of other enterprises. Unions, as the representatives of employees, mayengage in disruptive labor disputes. Government may take civil or criminal action against afirm and its top officers, imposing fines and in some cases jail terms.

Communities mayoppose a firm’s attempts to locate its facilities in their area, and the general public may formpressure groups, demanding action against businesses that impair the quality of life. Any ofthese reactions can have a damaging impact on an enterprise. In other words, catering to theclaims of different stakeholder groups is good business strategy and will help the organizationto survive and prosper in the long run.

Unfortunately managers cannot always satisfy the claims of all stakeholders. The goals ofdifferent groups may conflict. In practice few organizations have the resources to simultaneously satisfy all stakeholder claims. For example, employee claims for higher wages canconflict with consumer demands for reasonable prices and shareholder demands for higherreturns. Often managers must choose between the competing claims of different stakeholders.To do so, they must identify the most important stakeholders and give highest priority topursuing actions that satisfy their needs. Stakeholder impact analysis can provide such identification.Typically stakeholder impact analysis follows the steps illustrated in Figure.

stakeholder impact analysis

Such an analysis enables managers to identify the stakeholders most critical to the survivalof their organization, making sure that the satisfaction of their needs is paramount. Most businessesthat have gone through this process quickly come to the conclusion that three stakeholdergroups must be satisfied above all others if a firm is to survive and prosper: customers,employees, and shareholders.

If customers defect, financial performance will decline. Ifskilled employees leave the organization for work elsewhere, the human capital that the firmcan draw upon will decline, productivity will fall, costs will increase, and financial performancewill again fall. And if shareholders sell their shares, the stock price of the firm willdecline, its cost of capital will rise, and the firm will find it difficult to raise fresh capital frominvestors.

In general, if managers can satisfy the claims of the customers and employees of thefirm, financial performance will be strong, the share price will rise, and this will satisfy the claims of shareholders. In other words, in the long run satisfying the claims of shareholders requires managers to first pay close attention to their customers and employees. If customers satisfied, they will continue to purchase from the firm and sales will be strong.

If employees are satisfied, they will work hard, productivity will increase, costs will fall, and financial performance will improve. Enterprises like Southwest Airlines and Starbucks have a virtue out of satisfying the demands of their customers and creating a good environment their employees. It is not surprising that both enterprises have been rewarded with financial performance and a strong stock price, thereby satisfying the claims of shareholders.

Although it is important to focus on the claims of customers, employees, and shareholders, managers must be careful not to ignore the claims of other stakeholder groups. Monsanto, for example, spent billions of dollars to develop genetically modified crops that were resistant to common pests. Monsanto’s belief was that these products would benefit farmers, Monsanto’s customers, who could spend less money on chemical insecticides.

The company also thought that the resulting profits would benefit shareholders through appreciation in the company’s stock price, as well as employees, who would have more secure employment. However, Monsanto failed to anticipate the adverse reaction from another important stakeholder group: the general public. Monsanto’s introduction of genetically modified crops has met stiff resistance from the general public in both Europe and Latin America. The public has several concerns.

One is that genetically modified food might constitute a health risk and cause cancer. A second is that in the long run, Monsanto’s insect-resistant crops might make matters worse because over time insects will evolve resistance to the “natural pesticides”engineered into Monsanto’s plants, rendering the plants vulnerable to a new generation of “superbugs.” A third concern, termed “genetic pollution,” is the possibility that the DNA inserted into Monsanto’s plants might jump across species into plants it was never intended for, there producing a pesticide harmful to insects that do not damage crops.

Public concern led to action by pressure groups such as Friends of the Earth and Greenpeace. These pressure groups successfully lobbied governments in Europe and Latin America to prohibit the sale of certain genetically modified foods, which hurt Monsanto’s shareholdersand employees.

Critics argue that Monsanto hurt itself by initially dismissing public concerns. Managers, claiming that protestors ignored scientific evidence, stated that genetically modified seeds had beneficial effects on agricultural productivity and would lead to lower food prices. The general public in Europe and parts of Latin America perceived Monsanto’s approach, which seemed reasonable to the firm’s managers, as arrogant and insensitive.

Monsanto may have helped its case if it had first invested in acarefully crafted public education campaigndesigned to inform both the public and governmentofficials that genetically modifiedfood poses no health risks, and that concernsregarding superbugs and genetic pollutionare vastly exaggerated. The reality is that thescientific evidence is on Monsanto’s side; butby ignoring public perceptions and failing toanticipate the hostile reaction from an importantstakeholder group, Monsanto hurt ratherthan helped its case.

Another problem arises when managersmake the mistake of putting the claims ofshareholders in front of all other claims. It istrue that a business corporation should try tomaximize the return associated with holdingits stock; but it is also true that if managersfocus obsessively on that goal, they may takeactions that not only run counter to the interestsof other important stakeholder groups, butalso are not in the best long-term interests ofshareholders themselves.

Most notably, in anattempt to boost the stock price, managers maycut investments in employees, productive assets,and technology that are essential for thehealth of the corporation. The increased cashflow may boost the short-term performance ofthe firm; however, in the long run the lack ofinvestment in employees, production facilities,and new technology can lead to a decline inperformance that leaves all worse off.

For example, when Al Dunlap joined the troubled small appliance maker Sunbeam,shareholders expected great things. In his previous job as CEO of Scott Paper, Dunlap hadengineered a tough turnaround. Within three months of joining Sunbeam, Dunlap had firedmany senior managers and announced plans to cut the workforce in half and close 18 ofthe company’s 26 factories.

At the same time he claimed that his cost-cutting strategywould soon boost profits and revenues, richly rewarding stockholders. The stock price didsurge from $18 when Dunlap was first hired to $53 a share over the next 18 months as thecost-cutting strategy initially boosted the bottom line. Then Sunbeam’s performance beganto falter. It soon became clear that Dunlap had so gutted Sunbeam’s workforce, facilities,and product development pipeline that the company lacked the capability to meet his ambitiousgrowth goals.

Worse still, Dunlap had apparently been urging his managers to engagein ethically dubious practices to hit financial performance goals and keep the stockprice up. One of these practices, known as “bill and hold,” involved Sunbeam selling itsproducts to retailers at a large discount to normal prices, and then holding them in warehousesfor delivery later. In effect the company had been inflating its financial performanceby shifting sales from the future to the current period. When this practice wasdiscovered, the board of directors fired Dunlap. It was too late for Sunbeam, however,which never did recover from Dunlap’s tenure and ultimately went bankrupt.

In sum, by trying to boost the short-term share price, Dunlap damaged Sunbeam and didconsiderable harm to all stakeholder groups, including shareholders. The lesson in theMonsanto and Sunbeam examples is that managers must pay attention to all stakeholdergroups, balancing their claims and taking actions that are in the best long-term interests of key stake holders—employees, customers, and shareholders—while being careful not to alienate other key stakeholders, such as the general public. As we will see in the next section, ifmanagers have a strong ethical foundation, they are far less likely to take actions that damagestakeholder interests.


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