STAKEHOLDERS AND HOW THEY AFFECT YOUR BUSINESS
The concept ‘stakeholder’ is a variant of ‘stockholder’, which relates to ‘investors in’ or ‘owners in’ a firm or business. Stakeholders can be defined as ‘individuals and groups who are affected by the activities of an organisation. The most important stakeholders can be seen as those with most to lose from the organisation’s actions, but this does not always reflect their relative power.’. (Hannagan, T (2002), ‘Management: Concepts and Practices’ P142.) Their goals and objectives vary immensly, but all must be considered.
In the past it had been the common conception that businesses fundamentally rely upon, and in turn effect their economic capital, which is represented in the form of stockholders. The rise to prominence of stakeholders (through studies and reports) has allowed firms to realise that there are people and infrastructure beyond the company which are necessary to it and who must have their interests protected. An organisation’s stakeholders are all parties who can reasonably be understood to be affected by its decisions. They can be deemed to represent the businesses’ social and environmental capital as well as economic. Stakeholders can be of very different and varied guises and also harbour conflicting interests. In the main they can be categorised into three major groups: Internal, Connected and External Stakeholders.
Internal stakeholders include managers and employees and are those that are situated within the company and affect the ‘day-to-day’ running of the organisation. Connected stakeholders cover groups such as shareholders, suppliers and customers, and are parties which invest or have dealings with the firm. The third group, External stakeholders, are those not directly linked to the organisation but who can be influenced or influence activities of the firm through various means. External stakeholders include the Government, neighbours, pressure groups, local councils and the surrounding community.
As well as stakeholders, organisations and the people involved with them are expected to adhere to written and unwritten ethical boundaries. The degree to which these are adhered depends upon as varied a mixture as government enforced action to simply the moral fibre of a manager or employee. On occasions only the ‘eye of the beholder’ can truly acknowledge whether the moral considerations were taken on board when making a decision. This makes gauging an organisations ethical stance very difficult as the image they portray to the public may not match the internal reality. ‘The ethical environment refers to justice, respect for the law and a moral code. The conduct of an organisation, its management and employees will be measured against ethical standards by the customers, suppliers and other members of the public with whom they deal’ ( HNC / HND BTEC (2002) ‘BUSINESS COURSE BOOK: Organisations, Competition and Environment’ P267).
During the course of this study, the effect of stakeholders and ethical / moral issues on organisations will be investigated at depth using various theories and research
Stakeholders are found in all organisations, businesses or firms – from a local
grocer store to huge multinational companies such as Coca-Cola, McDonalds and Microsoft. The number of stakeholders per business will vary as will their importance and influence. The type of organisation or product / service it supplies will also determine its stakeholders. A Public Limited Corporation may have far more stakeholders than a family owned business due to its vast numbers of shareholders. As too might a Nuclear Power Station such as Sellafield which may have many more stakeholders from the environment groups (Greenpeace / ‘Save the World’ etc) / government / local residents / trade unions than a more ‘low risk’ facility or industry. However, as recent events such as the ‘Foot and Mouth Epidemic’ / BSE, and recent reports into colourings in packaged foods, it is impossible to predict when an organisation will gain new stakeholders – either of the wanted or unwanted kind.
The arrival of a new stakeholder often provides the company with an ethical dilemma of how to (or how not to) satisfy this new member’s needs, whilst avoiding conflict with the present stakeholders. In an ideal world a fine balance could be achieved to satisfy all stakeholders whilst obtaining the organisations goals in profit and sales (often profit maximisation and / or sales maximisation). However certain stakeholders may have completely conflicting measurements of success, resulting in one stakeholder being rewarded having a detrimental effect on another stakeholder.
Perhaps the main form of stakeholder approach / management is the “Stakeholder Corporation” concept. Its authors, Wheeler and Sillanpaa, argue that ‘In the future, development of loyal relationships with customers, employees, shareholders, and other stakeholders will become one of the most important determinants of commercial viability and business success. Increasing shareholders value will be best served if your company cultivates the support of all who may influence its importance’. This firmly supports the concept of ‘stakeholder symbiosis’ which believes all stakeholders are dependant upon one another when achieving success and financial well-being.
Whilst this appears an ideal scenario theory, it takes little account of conflicting stakeholders, whose personal perspectives of success may be situated at complete opposite ends of the spectrum. In a theoretical situation it may seem viable to appease all stakeholders with a fine balance of benefits and concessions, but human behaviour tends to diversify over time – with certain parties deeming themselves ‘winners’ or ‘losers’ in the scale of organisational fairness. The Premiership footballer is a prime example of a stakeholder in an organisation (club) who carries extreme power and often gets what he wants even if it has a detrimental effect. Despite his obvious privileges over other stakeholders such as fans, ground staff and the local community, he will often not be content unless his financial gains are on a par with fellow team-mates, and the finance is in the hands of this select minority. Operations and activities at the club may be designed around satisfying the present ‘high profile’ stakeholders with little consideration for the long-term effect. The fall from grace and into bankruptcy of Leeds United Football Club being the most widely publicised case.
‘Stakeholder Power: Four Gates of Engagement’ is a theory put forward by Steven Walker and Jeffrey Marr. It presents a practical framework for assessing stakeholder group commitment levels. It is their view that organisations must be proactive in their approach to relationships with potential stakeholders in order for the stakeholder to want a relationship back. In order to achieve this the framework suggests the organisation / stakeholder relationship should pass sequentially through the ‘four gates’ of Awareness, Knowledge, Admiration and Action. Each time a gate is passed, the relationship gains attributes, hopefully ultimately resulting in an Action relationship where the two strive towards multi-beneficial goals and aims. Similarly to ‘The Stakeholder Corporation’, in theory it appears common sense, but for firms with many stakeholders, as with any relationship, the more groups or individuals involved the higher the possibility of conflict. It may be viable to maintain a strong ‘Action’ relationship if the company has few stakeholders, but to keep hundreds of stakeholders happy must be at the expense of others.
Another approach to stakeholder management, described by Freeman, is to analyse to what extent an organisation has developed its Stakeholder Management Capability (SMC). Similar to the above fore-mentioned approach, SMC provides three levels in which an organisation can address its stakeholders – Level 1: The Rational Level, Level 2: The Process Level and Level 3: The Transactional Level. At the level 1 stage a company simply identifies its stakeholders and what their stakes maybe. Level 2 organisations have actually developed and applied processes or procedures to collate data and information on their stakeholders. This information is then used for decision-making. Level 3 organisations are in a position were their managers interact with stakeholders and form relationships. ‘At this highest level of SMC, the management must take the initiative in meeting stakeholders face to face and attempting to be responsive to their needs’. (Hannagan, T (2002), ‘Management: Concepts and Practices’ P87.) An organisation deemed to be in the Transactional level must be open to criticism and willing to respond if it is to keep strong relationship ties with its stakeholders. However stakeholder demands or actions which are detrimental to the company, its operations or other stakeholders must be dealt with in a strong managerial style as and when they occur.
In the case of organisations and in particular multi-national firms, it is increasingly the case that stakeholders are aware of what that company does in other countries in which it operates. Therefore concessions or benefits which have been readily agreed in one country may be demanded in another, yet cannot be afforded as easily. For years, companies such as Nike have used ‘cheap’ and sometimes ‘child’ labour to manufacture their products in countries such as China and India. Whilst extremely profitable to the company in financial terms and providing the employees in these developing countries probably a better lifestyle than they would otherwise expect, the firms ethics have been continuously called into question. Perhaps a more long-term approach would have recognised earlier the stakeholder potential of large developing countries like China, India and Malaysia.
Ethical issues between employees and management can have serious effects on a company. Unethical employment practices such as discrimination (by creed, age, sex etc), harassment (sexually, physically etc) and poor standards of health and safety can severely damage an organisations image. Poor employment relations can lead to loss of reputation, low productivity, poor morale amongst staff and heavy financial costs resulting from tribunals and compensation pay-outs. Firms, which seek to exploit cheap labour in underdeveloped countries, risk alienating both their customers and the governments in their home and host countries. An ethical and socially responsible employer should recognise that a safe working environment with pleasant conditions has a motivational effect on staff and thus increases their loyalty and commitment towards the firm in general.
Some firms have set procedures which outline the ethical responsibilities
the company has to certain stakeholder groups. The car manufacture Daimler-Chrysler has recently implemented an ‘employment pact’, thus demonstrating the importance the company places in ethical responsibility to its employees. The Daimler-Chrysler web-site quoted ‘The Daimler-Chrysler Company illustrates that companies can balance the needs of different stakeholders if alternative arrangements are put in place…They have negotiated an ‘employment pact’ which effectively guarantees 6000 jobs in their German plants until 2012, in addition to structures allowing for an increase in productivity and the long-term competitiveness of the Mercedes car group’. Taken from Daimler Chrysler’s website. By agreeing such a pact, the management of Daimler-Chrysler are removing the burden of redundancy from their employees for a set period of time, thus increasing a sense of importance, self-worth and security amongst the workers. However, a large scale slump (although unlikely) in the sales of these vehicles could see the company paying ‘idle’ workers, which would most certainly displease other stakeholders, in particular shareholders.
The main question that has arisen from my research is whether or not the theories, which have been put forward, are realistic. The various economists, researchers and theorists have suggested many models and structures which supposingly represent ‘best practice’, but in how many organisations is this actually the case or is likely to be the case in the future? International economy trends suggest that the complete opposite to an ‘ethical stakeholder economy’ may be developing. ‘The growth of multinational corporations, with their ability to move finance and production to wherever it is most profitable, has weakened the power of employees, local interest groups and even national governments’. (Sloman, John & Sutcliffe, Mark (2004) ‘Economics for Business’, 3RD Edition– Prentice Hall P286).
The expansion of multinational organisations can result in employees of very different backgrounds with few common bonds or interests. This, I feel, makes them less likely to join together to promote common beneficial goals and in extreme cases leads to employees vying against each other for a limited number of positions.
For example, the company for which I am employed has become increasingly disillusioned with the lack of employees willing to work overtime at weekends. As a result and with the aid of an agency, the company has brought several workers of Polish origin to the organisation. These employees have limited contracts, receive less remuneration and are not entitled to the normal workforce privileges of ‘time and a half’ on Saturdays and ‘double time’ on Sundays. However, the early results in terms of profitability look promising and unfulfilled customer orders are now being met. This is against an offset of varying displeasure amongst the original workforce and local community, with some employees aggrieved over the loss of overtime and potential job vacancies for local friends and family.
As highlighted above, many firms are employing larger numbers of temporary, part-time, casual and agency workers. This is part due to their high availability under the new ‘flexible labour markets’ created by the EU and government deregulation in the mid 1990’s. These workers have very little say in the way the company is run due to the ease in which they can be ‘hired and fired’. Couple this with share incentive schemes for managers (resulting in increased emphasis on profits), the present and future scenario appears one where ethical duties and less powerful stakeholders are given very little consideration or in fact their opinions dismissed!
A higher emphasis must also be placed on organisations to provide precise and honest information, particularly were it affects the public good. Extreme penalties must be inflicted on those who flaunt the truth if repeats of the Enron scandal are to be avoided. Firms cannot simply be content with providing the information the clients want to hear when the actuality is a far different scenario. Perhaps a part solution to this would be for every Public Limited Company (PLC) and Private Limited Company (Ltd) to annually be audited by an external independent accountant. This Accountant / Specialist would be given a ‘free hand’ in regards to all company figures. A confidentiality clause would be in place and only illegal or fraudulent activities would be reported.
Perception questionnaires and audits are common practice in many modern organisations as they attempt to gauge their image amongst customers. These audits, perhaps, should be more widespread to include all stakeholders and, in the case of many firms, the general public and their opinions.
Scandals such as the Enron Power Company ‘cover-up’ and similar smaller scale scandals have seriously affected public confidence like that at the telecommunications firm OneTel. Lack of public confidence can endanger key structures of our everyday lives, such as democracy and the market place. No organisation, firm or society can function to its full potential when trust is continuously being eroded by cynicism.