What are stakeholders?
The concept of stakeholders is complicated by different meanings and uses dependent upon both context and association.
In traditional usage a stakeholder is a third party who temporarily holds money or property while the issue of ownership is being resolved between two other parties eg a bet on a race, litigation on ownership of property. (Further information at http://en.wikipedia.org/wiki/Stakeholder)
In business usage there are over 20 definitions in Google from simply searching on the words 'stakeholder+definition'. These appear to have a number of traits some of which are shared.
- The notion that a 'stake' equates with an 'interest' implying that anyone with an interest in an outcome is a stakeholder regardless of motive such as a competitor, journalist or politician.
- The notion that a person affecting an outcome is a stakeholder regardless of motive implying that criminals, terrorists and others with a malevolent intent are stakeholders
- The notion that a person influencing an outcome is a stakeholder regardless of motive implying that those who abuse their power to exert undue influence are stakeholders
- The notion that a person being affected by an outcome is a stakeholder regardless of their contribution, implying that any person in the local or global community affected by an organisation's actions such as noise, pollution or business closure is a stakeholder.
- The notion of contributors to an organisation's wealth-creation capacity being beneficiaries and risk takers, implying that those who put something into an organisation either resources or a commitment are stakeholders. (Post, Preston, and Sachs)
The significance of beneficiaries
It is therefore difficult if not impractical in some cases for organisations to set out to satisfy the needs and expectations of all these interested parties. There needs to be some rationalisation. We may find the answer if we look to the purpose of organisations, an example of which is that expressed by Post, Preston, and Sachs as follows:
'The corporation is an organisation engaged in mobilising resources for productive uses in order to create wealth and other benefits (and not to intentionally destroy wealth, increase risk, or cause harm) for its multiple constituents, or stakeholders.'
This accords with the traditional view that businesses exist to create profit for the shareholders but also recognises that there is more than one beneficiary. However, Drucker's view was that the purpose of a business is to create customers and this is also true as the business could not exist without customers. That there is more than one beneficiary shows that organisations cannot accomplish their purpose and mission without the support of other organisations and individuals who generally want something in return for their support.
By making a contribution these beneficiaries have a stake in the performance of the organisation. If the organisation performs well, they get good value and if it performs poorly, they get a poor value at which point they can withdraw their stake.
Post, Preston, and Sachs make the assumption that organisations do not intentionally destroy wealth, increase risk, or cause harm. However, had organisations not known of the risks, their actions might be deemed unintentional but some decisions are taken knowing there are risks which are then ignored in the interests of expediency.
Enron, WorldCom and Tyco are recent examples where serious fraud was detected and led to prosecutions in the US. There are many other much smaller organisations deceiving their stakeholders each day some of which reach the local or national press or are investigated by the Consumer Association, Trading Standards and other independent agencies.
Some useful definitions
The Concise Oxford Dictionary includes the following on stakeholders:
A person with an interest or concern in something, esp. a business. This definition is somewhat unhelpful as it takes no account of those whose only interests are directly opposed to those of the organisation and would make cooperation between them an absurdity.
The stakeholders in a corporation are the individuals and constituencies that contribute, either voluntarily or involuntarily, to its wealth-creating capacity and activities, and that are therefore its potential beneficiaries and/or risk bearers. This definition postulated by Post, Preston, and Sachs amalgamates the idea of contributors, beneficiaries, risk takers, voluntary and involuntary parties thus indicating that there is mutuality between stakeholders and organisations.
A person or an organisation that has freedom to provide something to or withdraw something from an enterprise. This definition postulated by Hoyle is shorter but also recognises the idea of a voluntary contributor and more clearly brings out the role of censor as a corollary of the former definition.
A presentation from Princeton University (http://web.princeton.edu/sitesnotioin ppo/PMOverview.ppt) primarily dealing with project management but with equal relevance to general management, embodies similar principles to the former definitions:
Any person or group that, if their support were to be withdrawn, could cause the project to fail.
In the drafting of ISO 9000:2000 the term stakeholder was considered because it was a term used with the excellence model and the principles on which the model was based were being incorporated into ISO 9000 at the time. However, the traditional meaning of the term stakeholder still pertains in some countries, so it was decided to use the term interested party instead and define this as
a person or group having an interest in the performance or success of an organisation.
We have shown that there are problems with this definition as it does not limit these parties to those making a contribution or supporting the organisation, although the list of examples appending the definition does attempt to do this.
Reconciling the different parties
If we settle on stakeholders being the parties that contribute to an organisation's wealth-creation capacity and benefit from it, we cannot dismiss all the other interested parties because they don't qualify as stakeholder as we have defined it above. Their influence needs to be managed. For example it is important to:
- win support from the media as bad press can destroy reputations
- keep co-workers on your side as their cooperation might be essential to your success
- not to alienate other managers as they might limit the availability of resources you need
- build rapport with Trade Associations, Unions and other organisations from which you might need help
A useful technique for managing these interested parties is described at http://www.mindtools.com/pages/article/newPPM_07.htm but on this site, all parties are referred as stakeholders.
Who are stakeholders?
Following on from the above, organisations depend on support from a wide range of other organisations and individuals. Some are merely different terms for the same thing. These can be placed into five categories.
- Shareholders including investors, owners, partners, directors, people owning shares or stock, banks and anyone having a financial stake in the business
- Customers including clients, purchasers, consumers and end users. (ISO 9000 also includes beneficiary but this term can apply to any stakeholder. Purchasers also include wholesalers, distributors and retailers).
- Employees including temporary and permanent staff and managers. Some texts regard management as a separate stakeholder group but all managers are employees unless they happen to be owners who also manage the organisation
- Suppliers including manufactures, service providers, consultants and contract labour
- Society including people in the local community, the global community and the various organisations set up to govern, police and regulate the population and its interrelationships.
These labels are not intended to be mutually exclusive. A person might perform the role of customer, supplier, shareholder, employee and member of society all at the same time. An example of this is a bartender. When serving behind the bar he can be an employee or a supplier if he contracts with an employment agency, but on his day off he might be a customer and since acquiring shares in the brewery he became a shareholder. He also lives in the local community and therefore benefits from the social impact it has on the community. He is a contributor, he affects the outcomes and is affected by those outcomes. Although stakeholders have the freedom to exert their influence on the organisation there is often little that one individual can do, whether or not that individual is a shareholder, customer, employee, supplier or simply a citizen. The individual may therefore not be able to exercise their power but they can lobby their parliamentary representatives, consumer groups, trade associations etc, and collectively bring pressure to bear that will change the performance of the organisation.
What do stakeholders bring to and take from the organisation?
Each stakeholder brings something different to an organisation in pursuit of their own interests, takes risks in doing so and receives certain benefits in return but is also free to withdraw support when the conditions are no longer favourable.
- Shareholders provide financial support in return for increasing value in their investment but may withdraw their support if the actual or projected financial return is no longer profitable. Shares are sold, loans called in, government funding stopped.
- Customers provide revenue in return for the benefits that ownership of the product or service brings but may demand refunds if the product does not satisfy the need and are free to withdraw their patronage permanently if they are dissatisfied with the service. Offcom recently stated in the context of broadband services that
competition is only effective where customers can punish 'bad' providers by taking their custom elsewhere, and reward 'good' providers by staying where they are.
- Employees provide labour in return for good pay and conditions, good leadership and job security but are free to withdraw their labour if they have a legitimate grievance or may seek employment elsewhere if the prospects more favourable.
- Suppliers provide products and services in return for payment on time, repeat orders and respect but may refuse to supply or cease supply if the terms and conditions of sale are not honoured or they believe they are being mistreated.
- Society provides a licence to operate in return for benefits to the community as a whole and a respect for ethical values, people and the environment but can censure the organisation's activities through protest and pressure groups and ultimately regulatory bodies if these activities are believed to be detrimental to the community.
There is no doubt that customer needs are paramount as without revenue the organisation is unable to benefit the other stakeholders. However as observed by Post, Preston, and Sachs:
'Organisational wealth can be created (or destroyed) through relationships with stakeholders of all kind - resource providers, customers and suppliers, social and political actors. Therefore, effective stakeholder management - that is, managing relationships with stakeholders for mutual benefit - is a critical requirement for corporate success.'
Why are stakeholders important?
A historical perspective
As was stated above, no organisation can accomplish its purpose and mission without the support of others. However, this belief has not always been so. In the 19th century, the only stakeholder of any importance was the owner who ran the business as a wealth-creating machine with himself as chief beneficiary. Workers had no influence and customers bought what was available with little influence over the producer. Suppliers were no more influential than the workers and society was pushed along with the advancing industrial revolution. The successful owners were often philanthropic which is how their wealth was distributed.
Workers were the first to exert influence with the birth of trade unions but it took a century or more for workers rights to be enshrined in law. Customers began to influence decisions of the organisation with the increase in competition but it was not until the western industrialists awoke to competition from Japan in the 1970s that a customer revolution emerged. Then slowly in the 1980s and on through the millennium, the green movement began to exert influence resulting in laws and regulations protecting the natural environment. Lastly the human rights act gave strength to the rights of all citisens including disadvantaged people.
There is now a greater sensitivity to the environmental impact of organisations' actions upon the planet. Workers are more aware of their rights and more confident of censuring their employer when they feel their rights have been abused. The wealth creating organisations now distribute their wealth through their stakeholders rather than through philanthropy but this remains a route for the biggest corporations as evidenced by Microsoft founder Bill Gates.
The relative importance of stakeholders
It follows therefore that companies must try to understand better what their stakeholders' needs are and then deal with those needs ahead of time rather than learn about them later.
Organisations need to attract, capture and retain the support of those organisations and individuals it depends upon for its success. All are important but some more important than others.
- Shareholders put up the capital to get the business off the ground. This makes the shareholders of prime importance during business start up or regeneration, but once operational it is customers and not shareholders that keep the business going.
- Without customers there is no revenue and without revenue there is no business. Customers are therefore the most important stakeholder after start up but before there are customers there are:
- Employees who provide the human resources that power the engines of marketing and production. Without human resources the business is unlikely to function even if there are shareholders and potential customers waiting to buy the organisation's outputs.
- Next in importance are suppliers of products and services upon which the organisation depends to produce its outputs. Without suppliers, the engines of marketing and production will run short of fuel.
- Finally in importance is society. Society gains economic benefit from organisations but also want protection from unjust, unethical, irresponsible and illegal acts by organisations. By use of protest, pressure groups and ultimately the legal system, society regulates (sanctions and censures) organisational behaviour. The organisation does not have a choice other than moving to another country where the laws are less onerous.
An organisation ignores anyone of these stakeholders at its peril which suggests that there has to be a balancing act.
Balancing stakeholder needs
There is a view that the needs of stakeholders have to be balanced because it is virtually impossible to satisfy all of them, all of the time. On face value this might appear to be a solution but balancing implies that there is some give and take, a compromise, a trade-off or reduction in targets so that all needs can be met. In reality, if the customer requires X and the organisation agrees to supply X, it is under an obligation to do so in a manner that satisfies the other stakeholders. If the organisation cannot satisfy the other stakeholders by supplying X, it should negotiate with the customer and reach an agreement whereby the specification of X is modified to allow all stakeholders to be satisfied. If such an agreement cannot be reached the ethical organisation will decline to supply X under the conditions specified.
In practice, the attraction of a sale often outweighs any negative impact upon other stakeholders in the short term with managers convinced that future sales will redress the balance. Regrettably, this uncontrolled approach ultimately leads to unrest and destabilisation of the business processes as employees, suppliers and eventually customers withdraw their stake. The risks have to be managed effectively for this approach to succeed.
What factors are critical in managing stakeholder expectations?
After an organisation has established what it wants to do (purpose, vision, mission), identified its stakeholders and determined what they need to contribute, there are several key factors that are critical in managing stakeholder expectations.
- Stakeholder needs and expectations ie what these parties will expect in return for their contribution.
- Stakeholder success measures ie what these parties will look for to judge performance.
- Critical success factors ie the factors affecting the organisation's ability to achieve these goals.
- Corporate values ie the principles that will guide the organisation in achieving these goals
- Business outputs ie the outputs that will deliver successful outcomes for all stakeholders
- Business process capability ie the capability of the processes that will deliver these outputs
- Managerial competence ie the ability of those who will design, resource, measure, review and improve these processes
- overview of managing stakeholder expectations
- how to identify stakeholders
- how to determine stakeholder needs and expectations
- how to determine stakeholder measures of success
- how to align business process outputs with stakeholder needs and expectations
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