Stakeholder Management

David Wasieleski, James Weber, David M. Wasieleski, James Weber

• Publisher: Emerald Publishing Limited
• Year: 2017
• ISBN:
  9781787149250
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Stakeholder theory is used for many purposes in a wide array of disciplines. It was intended to serve as a strategic management tool for business and society relationships in a capitalist system. While it has broad scholarly appeal, it is still somewhat controversial and is considered to be empirically underdeveloped. This new book offers a series of ten chapters from well-known, established and emerging business and society scholars working with stakeholder theory in its many aspects. Each chapter is centered on a different sub-topic related to stakeholder management, written by the actual published experts on that sub-topic. The chapters stand alone as comprehensive pieces of scholarship in themselves, but they are intimately related and interwoven so as to give readers an overall sense of cohesion around the area of stakeholder management.

Chapter 1

Five Challenges to Stakeholder Theory: A Report on Research in Progress

R. Edward Freeman

Abstract

This chapter suggests that there are at least five main challenges to the development of stakeholder theory as it currently stands. We need more research on understanding what counts as the total performance of a business; accounting for stakeholders rather than accounting only for investors; explaining real stakeholder behavior; formulating smart public policy given stakeholder theory; and rethinking the basics of ethical theory. The chapter explains the issues involved in each challenge and suggests ways to meet the challenge. It is a preliminary report of research in progress as well as a blueprint for how others may join the conversation to develop a more useful stakeholder theory.

Keywords: Stakeholder management; stakeholder theory; value creation; public policy; stakeholder accounting; total performance

Introduction

The body of research that has come to be known as “stakeholder theory” has grown enormously over the past 40 years. There are literally hundreds of articles and books devoted to some part of these ideas. In a recent book (Freeman, Harrison, Wicks, Palmer, & de Colle, 2010) that summarized stakeholder theory, my colleagues and I put together a bibliography that was 45 published pages long. A quick perusal of “stakeholder” yields over 47 million results when typed into Google, and over 1 million when Google Scholar is consulted. “Stakeholder management” yields over 4 million and 900,000, respectively, on Google and Google Scholar. “Stakeholder theory” in Google Scholar yields over 500,000 hits. There are many lines of work, some overlapping, some perpendicular, and some that offer novel, even seemingly indefensible, accounts of the main ideas. It is perhaps a fool’s errand to attempt to suggest that there are some overarching challenges to stakeholder theory. Nonetheless, the main point of this essay is to do just that.

Before setting forth these five challenges I want to clarify how I see stakeholder theory, as I have found that I may have a quite different interpretations of the main ideas than many others who write about it (Freeman, 2011; Freeman, Harrison, & Wicks, 2007). Then I will, in turn, and very briefly, set forth the five challenges which are: (1) The Total Performance Challenge; (2) The Stakeholder Accounting Challenge; (3) The Behavioral Stakeholder Theory Challenge; (4) The Public Policy Challenge; and (5) The Ethical Theory Challenge. I am currently engaged with a number of colleagues on joint research projects for each of these challenges. This chapter is a very brief report on this work in progress, and is also a very stylized account of both stakeholder theory and these challenges. In what follows I will do my best to represent their ideas as accurately as possible. Please note their contributions in the Acknowledgements section below. I find that I often get far too much credit for my own rather modest contribution many years ago. Stakeholder theory is alive and well because so many scholars are engaged in research that I believe will foster a generational change in the narrative of business.

What is Stakeholder Theory?

The ideas behind the stakeholder concept are as old as business itself. Even though the word “stakeholder” has a fairly recent common usage, from the earliest beginnings, it is difficult to deny that business has been a matter of trade between buyers and sellers so that both were at least perceptually better off because of the exchange, even in times of barter societies. Exchange created value between the partners and led to specialization of labor, more knowledge and innovation, and hence more exchange. Eventually, employees were added, though during ancient times they had relatively little freedom. While the separation of ownership and control may well be rooted in feudal society, the emergence of wealthy merchants who often earned their profits on the backs of others has a long history. While value was often created, it was also sometimes destroyed, especially when trade-offs were made at the expense of one group, say employees, by favoring another, say owners. Business has always affected customers, suppliers, and employees and the owners of the business, even if value was sometimes destroyed for some. Even communities and governments have long been involved in value creation and trade. Fernand Braudel’s (1992) magisterial history of capitalism shows us the fiction that is free floating markets disconnected from the rest of society.

Companies incorporate offshore to minimize tax exposure. Managing the government or community relationship has been a part of value creation and trade from the very beginning.

The basic idea of “managing for stakeholders” or “value creation stakeholder theory”¹ is quite simple. Business can be understood as a set of value-creating relationships among groups that have a stake in the activities that make up the business. Business is about how customers, suppliers, employees, financiers (stockholders, bondholders, banks, etc.), communities, and managers interact and create value. To understand a business is to know how these relationships work. And, the executive’s or entrepreneur’s job is to manage and shape these relationships, hence the title “managing for stakeholders.”

To say that business is a set of interconnected relationships may well be controversial. Economists and others want to see business as a discrete set of economic transactions, where it is always possible to maximize expected value by taking a “future-forward” approach. “Business as relational” is a much more subtle idea. Relationships are not reducible to transactions. Much more research needs to be done in spelling out such a change in the fundamental vocabulary of business.²

The idea of “managing for stakeholders” is usually depicted in a variation of the classic “wheel and spoke” diagram with the corporation at the center (Freeman et al., 2007; Phillips, 2003). However, it is important to note that the stakeholder idea is perfectly general. Corporations are certainly not the center of the universe, and there are many possible pictures. One might put customers in the center to signal that a company puts customers as the key priority. Novo Nordisk, a diabetes drug company, puts “people with diabetes” in the center of its map. Another might put employees in the center and link them to customers and shareholders. Or, one might have no organization in the center to signify that this is an interconnected system of stakeholders. But, there is no larger metaphysical claim here. It depends on the purpose of the picture, or the problem that one is trying to solve.

Stakeholders and Stakes

Owners or financiers (a better term) clearly have a financial stake in the business in the form of stocks, bonds, and so on, and they expect some kind of financial return from them. Of course, the stakes of financiers will differ by type of owner, preferences for money, moral preferences, and so on, as well as by type of firm. The shareholders of Google may well want returns as well as be supportive of Google’s articulated purpose of “Do No Evil.” To the extent that it makes sense to talk about the financiers “owning the firm,” they have a concomitant responsibility for the uses of their property. Stout (2012) has argued that depicting “shareholders” as “owners” is at best misleading, and from a legal point of view, simply incorrect. And, it is equally a mistake to believe that financiers’ interests can be considered solely in their own right. As with every stakeholder, financiers are connected to customers’, employees’, suppliers’, and communities’ interests as well. Stakeholders are interconnected. They have joint interests.

Employees have their jobs and usually their livelihood at stake; they often have specialized skills for which there is usually no perfectly elastic market. In return for their labor, they expect security, wages, benefits, and meaningful work. Employees often want to find meaning at work, and to participate in the decision-making. In today’s world, employees who are engaged in the business are much more likely to produce good results for themselves and the other stakeholders. And, employees are sometimes financiers as well, since many companies have stock ownership plans, and loyal employees who believe in the future of their companies often voluntarily invest.

Customers and suppliers exchange resources for the products and services of the firm and in return receive the benefits of the products and services. As with financiers and employees, the customer and supplier relationships are enmeshed in ethics. Companies make promises to customers via their advertising, and when products or services do not deliver on these promises then management has a responsibility to rectify the situation. It is also important to have suppliers who are committed to making a company better. If suppliers find a better, faster, and cheaper way of making critical parts or services, then both supplier and company can win. Of course, some suppliers simply compete on price, but even so, there is a moral element of fairness and transparency to the supplier relationship. For businesses in the 21st century, the supply chain from customers to suppliers is often integrated into the operations of the business. Many of these supply chains have impacts on the natural environment, and there has been a great deal of innovation in business in mitigating the effects of global supply chains.

Finally, the local community grants the firm the right to build facilities, and in turn, it benefits from the tax base and economic and social contributions of the firm. Companies have a real impact on communities, and being located in a welcoming community helps a company create value for its other stakeholders. In return for the provision of local services, companies are expected to be good citizens, as is any individual person. It should not expose the community to unreasonable hazards in the form of pollution, toxic waste, etc. It should keep whatever commitments it makes to the community, and operate in a transparent manner as far as possible. Of course, companies do not have perfect knowledge, but when management discovers some danger or runs afoul of new competition, it is expected to inform and work with local communities to mitigate any negative effects, as far as possible. “Community” is an ambiguous term. Some companies define it narrowly to mean only those places where they have facilities. Others define it broadly to include the communities where their suppliers are located. And, some even define community more globally to include billions of people who may use their products or be affected by them.

Oftentimes, management theorists overemphasize the role of definition in theories or frameworks. As a pragmatist philosopher, I believe that definitions often lack precision, and that this is a good feature of language for most purposes. For instance, much is written about the definition of “stakeholder.” “Does it include NGOs or competitors? Yes or No? Once and for all, let’s get it right,” they say. My response is that it depends on what problem you are trying to solve. For certain problems, like governance at the board level, you may want a narrow definition, while for some societal problems, you may want a broader one. There is no one right definition, as the definition in use depends on the problem one is trying to solve, whether theoretical or practical.

First of all we could define the term fairly narrowly to capture the idea that any business, large or small, is about creating value for “those groups without whose support, the business would cease to be viable.” Almost every business is concerned at some level with relationships among financiers, customers, suppliers, employees, and communities. We might call these groups “primary” or “definitional.” However, it should be noted that as a business starts up, sometimes one particular stakeholder is more important than another. In a new business start-up, sometimes there are no suppliers, and therefore paying a lot of attention to one or two key customers, as well as to the venture capitalist (financier), is the right approach.

There is also a somewhat broader definition that captures the idea that if a group or an individual can affect a business, then the executives must take that group into consideration in thinking about how to create value. Or, a stakeholder is any group or individual that can affect or be affected by the realization of an organization’s purpose.

Much value can be gained by examining how the stakes work in the value creation process and what the role of the executive is.

Executives play a special role in the activity of the business enterprise. On the one hand, they have a stake like every other employee in terms of an actual or implied employment contract. And, that stake is linked to the stakes of financiers, customers, suppliers, communities, and other employees. In addition, executives are expected to look after the health of the overall enterprise, to keep the varied stakes moving in roughly the same direction, and to keep them in balance.

No stakeholder stands alone in the process of value creation. The stakes of each stakeholder group are multi-faceted, and inherently connected to each other. How could a bondholder recognize any returns without management paying attention to the stakes of customers or employees? How could customers get the products and services they need without employees and suppliers? How could employees have a decent place to live without communities?

Stakeholder interests are joint. That is why business works. Many theorists argue that stakeholder interests are essentially in conflict, but this misses the basic idea of capitalism. It is a system of cooperation whereby customers, suppliers, employees, communities, and financiers cooperate together to create value that no one of these groups could create alone. The primary responsibility of the executive or the entrepreneur is to create as much value as possible for stakeholders. (And this directive is at least as clear as the one given by the dominant model to maximize shareholder value.) Where stakeholder interests conflict, the executive must find a way to rethink the problems so that these interests can go together, so that even more value can be created for each. If trade-offs have to be made, as often happens in the real world, then the executive must figure out how to make the trade-offs, and immediately begin improving the trade-offs for all sides. Managing for stakeholders is about creating as much value as possible for stakeholders, without resorting to trade-offs.

To create value for stakeholders, executives and entrepreneurs must see business as fully situated in the realm of humanity. Businesses are human institutions populated by real live complex human beings. Stakeholders have names and faces and children. They are not mere placeholders for social roles. Most human beings are complicated. Most of us do what we do because we are self-interested and interested in others. Business works in part because of our urge to create things with others and for others. Working on a team, or creating a new product or delivery mechanism that makes customers’ lives better or happier or more pleasurable all can be contributing factors to why we go to work each day. And, this is not to deny the economic incentive ...