Table 1 below shows the main groups of stakeholders and their potential interests.
Meeting the interests of stakeholders is necessary for the organisation to have any chance of succeeding. Evan and Freeman (1990) state that the success of a firm depends on satisfying all groups. However, the difficulty facing management is that stakeholder viewpoints and needs often conflict. A conflict of interest can occur when the needs of one stakeholder group are put ahead of another group whose interests should be served.
As can be seen in table 1, there are a number of dual interests, for example employees and managers are concerned about job security. Similarly, managers are concerned in the profitability and growth of the organisation, an interest shared by shareholders who care about the value of their investments. Common conflicts between stakeholder groups are shown in figure 1 below:
It is difficult to satisfy all stakeholders, and is why conflict resolution and stakeholder management is a difficult task. I will cover this in more detail later in the paper.
Stakeholder Mapping
Identifying your stakeholders is a crucial exercise. Recognising the relationships between the organisation and the stakeholders is equally important. There are now numerous methodologies or models that assist organisations in understanding the influence its stakeholders have, as well as the influence the organisation has on the stakeholders.
One such model is stakeholder mapping. Mendelow (1991) states that this tool assists an organisation in identifying the expectations and power of stakeholders. A stakeholder map allows an organisation to categorise its stakeholders, detailing their inter-relationships, and shows paths the company can pursue to achieve its business objectives. It is a useful strategic planning tool, which helps organisations allocate their limited human and financial resources to meet stakeholders' needs.
Figure 2 shows the graphical power/interest matrix, which can be used to ‘map’ the interests of stakeholder groups to the relative power of the group.
This tool assists organisations by classifying stakeholders in relation to the power they hold and the extent of likelihood of supporting or opposing particular strategies. Stakeholder mapping is used by many organisations to assist them with strategy decisions. From this tool you can develop an overall stakeholder network, identifying all key stakeholders and their inter-links.
Many organisations develop a stakeholder network diagram following the creation of a stakeholder map. Figure 3 shows the diagram created by EQ, a national equality and diversity agency that works in creative industries, for the arts and entertainment sector it covers.
Mapping its main stakeholders assisted in clarifying an intricate web of organisations. The diagram endeavours to show the range of stakeholders that could have an influence on arts organisations. As can be seen from the diagram, the number of stakeholders can be complex and diverse.
Importance of Stakeholders
The importance of stakeholders has increased over recent years. Previously, shareholders were deemed as the main consideration for organisations. After all, these are the people that invest in the company. This is known as ‘stockholder theory’ and is closely associated with Milton Friedman (1970). Friedman believed that an organisations primary responsibility is to increase its profits for the benefit of shareholders.
This was demonstrated in the Dodge v Ford Motor Company case in 1919. Henry Ford deemed that the company had made too much profit, and wanted to share these profits with the public (stakeholders – potential customers) by reducing the cost of vehicles. However, shareholders challenged this development and won the case in the Supreme Court, when the court ruled that a business was for the purpose of making profit for its investors.
This view has changed in the past 80+ years since this case. Whilst shareholders are an important element to an organisation, they are only one group of stakeholders that organisations have a duty to. It is now recognised that organisations have obligations to other groups that have a vested interest its operations. This change in thinking has led to the development of the stakeholder theory, advocated by Freeman (1984).
This theory argues that there are a number of groups to whom businesses are accountable to when determining strategy and pursuing objective(s). The traditional belief is that only direct links to a business, such as shareholders, customers and employees have an input into organisational decisions. But as previously mentioned, stakeholders are not just internal to the organisation itself.
When commenting on the importance of stakeholders, Halal (1996:64) referred to a stakeholder model of the organisation. This model views the organisation as a ‘socio-economic system’ composing of various equally important groups, a view which links in with Freeman’s theory.
Halal believes in the theory of the ‘nature of the firm’. In this theory, it’s stated that managers are dependent on stakeholders and have a need to combine the unique resource each stakeholder contributes, such as investor capital, talents of employees etc. This is a valid viewpoint and builds on the stakeholder theory by identifying the importance of such groups.
An organisation that embraces the stakeholder theory is the ING group. In a speech at the Georgetown Business Ethics Institute in 2002, Ewald Krist, the CEO of ING stated:
Greater influence is now put on organisations by external stakeholders, such as society itself. Shell fell foul of this in the early 1990's with its Brent Spar plant. The plant, decommissioned in 1991, was due to be dismantled by Shell and disposed of via Deepwater disposal. This created outrage from environmental groups with a belief that the seas should be kept clean.
This led both Shell and the UK Government to look at alternate options, with Shell abandoning the deepwater plans in 1995. The plant was finally disposed of in 1999 after long discussions with various stakeholders, and the majority of the construction was used to form a new quay in Norway, a solution acceptable to environmental groups, along with other stakeholders. This showed that even large global companies had important stakeholders to answer to.
Shareholders are still an extremely powerful stakeholder. Investors primarily concentrate on profit maximisation but this is not the most important consideration for other stakeholders such as customers, contractors or the local community.
There have been numerous occurrences of shareholders ousting directors and chairmen. The most recent one occurred this month, when the chief executive of Deutsche Telecom, Kai-Uwe Ricke resigned after losing the support of key shareholders in the organisation (the German government and private equity firm, Blackstone). FT.com reported that support was lost due to poor results and plans to move 45,000 jobs to lower paid areas.
This shows the difficulty in keeping all stakeholders happy. By moving the jobs, it should have increased the profitability of the organisation, and therefore would please shareholders. However, this conflicts with the union’s viewpoint, which looks after the workforce and did not want to see profits increase at the expense of employees.
Many organisations hit problems when trying to change their strategy. Even basic changes can be met with disdain from certain stakeholders, e.g.
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Wendy’s fast food chain tried to replace foam plates and cups with paper ones to save money and protect the environment but test customers baulked at this move.
- Kodak tried to eliminate its yellow film boxes but were put off by customer resistance.
- McDonalds tried to implement mini-incinerators that converted trash to energy but met opposition from local communities concerned about air pollution.
This shows the importance of involving stakeholders in decision making. Communicating with the stakeholder groups allows the organisation to gauge opinion on future developments.
Other Important Considerations
As well as stakeholders, organisations have to consider other key areas when tackling strategic management decisions. These key areas are important and an organisation needs to give full consideration when contemplating strategic decisions (see figure 4).
Of these specific areas, I believe the most important to businesses are stakeholders and ethics. Throughout my research I have noticed just how closely the two are linked. In my opinion, this is due to the increase of stakeholder knowledge of ethical trading and commitments to the environment.
Whilst organisations need to keep stakeholders happy, they also need to ensure their decisions are ethical. At all times, the organisation must remember its own purpose – corporate values and objectives, and primarily its own mission statement.
Business ethics has risen in prominence in recent times and there are a number of ‘ethics driven’ companies. The primary example of this in the UK is that of the Co-Operative Bank. Their strategy is to invest only in companies that do not breach ethics polices, for example in Human Rights, or the Arms trade. The bank prides themselves on being ‘Customer led, ethically guided’.
Management of Stakeholders
Organisations must try to satisfy the demands of all stakeholders. A higher level of satisfaction or importance to one group of stakeholders could be to the dissatisfaction of or lesser importance to others. This makes the task of managing stakeholders a difficult one as stakeholders could have interests that may bring them in conflict with each other as well as with the company’s strategies.
Freeman (1984) believes that managers have a fiduciary relationship to stakeholders, and that the stakeholder manager needs to operate on a ‘normative core of fair contracts’. This view was originally advocated by Jensen & Meckling (1976), who stated that an organisation is nothing more than a ‘nexus’ of contracts – effectively the organisation has a collection of contracts with its stakeholders.
Both Freeman and Jensen agree that the manager is effectively an agent, and has role-related obligations, although Jensen (2001) does have concerns about stakeholder theory, as he believes it confuses management objectives. Supporting evidence to this viewpoint is the demise of US utilities giant Enron, which filed for bankruptcy in December 2002. The organisation’s collapse was attributed to insider dealing and conflicts of interest due to the pursuit of projects for ‘certain powerful government’ stakeholders whilst hiding losses to shareholders (Bowie and Werhane, 2005, pg 9)
BP manage their stakeholders very successfully and hold regular stakeholder forums (Bowie and Werhane, 2005, pg 106). BP are members of the CSR Europe network, which is a non-profit organisation promoting corporate social responsibility, and provides a roadmap to members for goal and strategy setting. BP have a stakeholder policy in place which also covers conflict:
As BP run pipelines throughout the world, their network of stakeholders is a vast one. However, through continuous stakeholder engagement in each country, BP are able to implement their policies successfully.
Halal’s nature of the firm theory, mentioned earlier, provides the view that managers act as stewards engaged in a ‘social contract’ to draw together the mix of resources and transform it into financial and social gains, which can then be distributed among stakeholders to reward for their contributions. The goal of an organisation therefore, should be to serve the public welfare of all of its stakeholders.
So is it the responsibility if management to manage stakeholders? Well in certain contexts, yes, after all, managers are responsible for the performance of their staff and have a duty to them, their work, and their development. A happy employee is an efficient employee. Likewise, managers handle client and supplier relationships. Stakeholders can be managed by contracts, policies and guidelines, which will define business operations. Key to the management of stakeholders is communication.
Conclusions
It is evident in my findings that the consideration of stakeholders in strategic management is of paramount importance to organisations. To ignore these pertinent groups could be at great cost, and can be the difference between success and failure.
In the world of business, it is crucial that organisations manage stakeholders and understand just how important they are to the progression of the organisation. Managers do have a key role in the management of stakeholders and to do this efficiently, it’s important to know more about your stakeholders.
How can organisations resolve conflict? Having company-wide policies reduces the complexity of managerial decision-making, and makes it clear that the company will have a strategy consistent with its policies and corresponding with duties to its stakeholders. This takes away the need for management to have overall responsibility for stakeholders, placing this firmly with the organisation itself.
An important point to remember is that although stakeholders may be both organisations and people, ultimately you must communicate with people. It is crucial to identify the correct individual stakeholders within a stakeholder organisation and to work with them as much as possible. Efficient and worthwhile communication will assist the business throughout the decision making process and will allow the business to make the correct decisions at all times.
Bibliography & Research List
