Why should a business be concerned with stakeholders?

A stakeholder is an individual or group that has a legitimate interest in a company, organization, or business; the Stanford Research Institute defines stakeholders as “those groups without whose support the organization would cease to exist. Stakeholders can affect or be affected by the actions (or inactions) of a business, and they can exist both within and outside of a business.

The impact of a business on its stakeholders is a bit like the effect of dropping a stone into a pond. The decisions and actions of the business have a ripple effect that can extend beyond the pond and even reach those who are standing far away on the shore.

Internal Stakeholders

Internal stakeholders are groups or people who work directly within the business, such as managers, employees, and owners. Managers and employees want to earn high wages and keep their jobs, so they have a vested interest in the financial health and success of the business. Owners want to maximize the profit the business makes as compensation for the risks they take in owning or running a business.

Figure 1. The picture shows the typical stakeholders of a company. The stakeholders are divided into internal and external stakeholders.

External Stakeholders

External stakeholders are groups outside a business or people who don’t work inside the business but are affected in some way by the decisions and actions of the business. Examples of external stakeholders are customers, suppliers, creditors, the local community, society, and the government. Customers want the business to produce quality products at reasonable prices. Shareholders have an interest in business operations since they are counting on the business to remain profitable and provide a return on their investment in the business. Creditors that supply financial capital, raw materials, and services to the business want to be paid on time and in full. Federal, state, and local governments need businesses to thrive in order to pay taxes that support government services such as education, police, and fire protection. The local community has a stake in the business because it provides jobs, which generate economic activity within the community. Society as a whole (as well as the local community) is concerned about the impact that business operations have on the environment in terms of noise, air, and water pollution. Society also has an interest in the business with regard to the safety of the goods and services produced by the business. Suppliers need the business to continue to buy their products in order to maintain their own profitability and long-term financial health.

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Since it was popularized by Edward Freeman in his 1984 book, Strategic Management: A Stakeholder Approach, the concept of stakeholders became a term commonly used in business, management, communication and even politics. The strength, and perhaps also the weakness, of the concept lies in its simplicity. The intricacies of clearly identifying who these stakeholders are will not be addressed here as it will highly depend on industry and context. Suffice it to say that the concept challenges the conventional way we think about businesses.

Stakeholder management refers to the process of dealing with stakeholder concerns and handling relationships with them. However, I prefer to use “stakeholder mindset” or “the stakeholder approach” to business and management (Freeman et al., 2010). This is because I believe the focus is not about managing the stakeholders per se such as to ensure that they are happy and continue to provide support or social license to the business. Instead, the concept becomes much more powerful if understood as a state of mind where stakeholders are always taken into consideration before making any business decisions, and, as such, it should be embedded in all management functions of an organization.

The stakeholder “theory” is based on a simple idea: successful sustainable businesses are those that are able to continuously meet and balance the expectations of all its key stakeholders, be it employees, customers, regulators, shareholders or else. Hence, managers must understand who these stakeholders are and what their expectations will be. This exercise of constantly identifying, monitoring, analyzing and engaging with stakeholders is unfortunately still undervalued by businesses and thus its potential is not used to the full. Based on experience, I believe there are three main reasons why having a “stakeholder mindset” builds competitive advantage:

a)     It strengthens the ability of organizations to have a peripheral vision and manage risks;

b)     It helps address social responsibility and sustainability issues;

c)      It helps build meaningful two-way communications that bolster and maintains good relationships.

Strengthening peripheral vision

Business and management literature has raised that organizations should always be vigilant and be able to scan its periphery (Day and Schoemaker, 2005; 2006). Having a peripheral vision, as opposed to a tunnel vision, enables managers and companies to be more alert of “weak signals” about new trends and, by doing so, anticipate changes that are about to happen. These weak signals can come from a wide variety of domains such as socio-cultural trends, political and regulatory landscape, or technological innovations.

Having a stakeholder mindset ultimately strengthens the ability to identify and anticipate these changes. For instance, understanding government concerns and priorities can give insights on policy or regulatory trends. Following public issues raised by activists or the media can help uncover potential industry challenges and public criticisms ahead of time. Thinking about how industry trends affect suppliers and distributors can help predict future dynamics in the value chain. Similarly, understanding how a strategic shift will impact employees, an often overlooked stakeholder group, can maintain a good workplace environment in the midst of difficult changes. In other words, companies will be better able to maintain their edge and innovation because the stakeholder perspective will broaden their attention beyond just consumers, competitors or the bottom line. Having a stakeholder mindset will encourage managers to understand a diverse range of issues and, as a result, avoid being stuck with a tunnel vision.

Addressing social responsibility and sustainability

The concept of stakeholders has become a central idea in corporate social responsibility and sustainability discussions. The reason is simply because a stakeholder view will prompt managers to understand not only those who can affect but also, if not more importantly, those who are affected by the business. In other words, managers will be provoked to think about what impacts, positive and negative, their business will have on a range of stakeholders (including, some argue, animals, plants and their habitat). Thinking about impacts is what CSR and sustainability are all about.

It is no wonder that stakeholder engagement is a crucial component in the ISO 26000 Guidelines on Social Responsibility. According to this guideline, social responsibility is defined as “the responsibility of an organization for the impacts of its decisions and activities on society and the environment” that, among others, “contributes to sustainable development” and “takes into account the expectations of stakeholders”. The entire ISO 26000 guideline is built on the basis of this definition and, consequently, the stakeholder mindset becomes a constant throughout the document.

Similarly, the GRI Sustainability Reporting Standards, the first and most popular global standard for sustainability reporting, requires companies to address what it calls “material topics”. A topic is considered material if it relevantly reflects the impacts a reporting organization has on society. Stakeholder concerns and expectations are one of the factors used to consider and prioritize these material topics. Furthermore, GRI also requires companies to engage stakeholders and include the results of these engagements in the report.

One of the key questions companies have about CSR is what their responsibilities actually are. Often companies will find themselves being overburdened by demands and expectations from too many stakeholders. In some cases, companies are asked to fulfil public services that should normally be the government’s job. Even after all that, they might still face tremendous CSR and sustainability issues. So, more practically, the stakeholder approach with its continuous analysis and engagement with stakeholders can help companies truly understand its main impacts and social responsibilities. Through a stakeholder mapping, for instance, managers will be able to prioritize stakeholders and focus on social responsibility issues that are the most significant.

Maintaining good relationships based on meaningful communications

Last but not least, the stakeholder mindset is essential for managing corporate communications and public affairs strategically. As it is often the case, communication activities within organizations are divided between several departments, each with their own stakeholders and audiences. As an example, a company may have employee relations, investor relations, government relations, community relations and media relations departments. Although these divisions may make sense at the tactical level, at the strategic level, managers must grasp a more global picture of the various expectations of stakeholder groups, both internal (shareholders, employees) and external (government, communities, pressure groups etc.). If an organization wants to build strong relationships with its many stakeholders and be able to effectively balance their demands, then it must communicate strategically and with one voice.

Furthermore, each stakeholder group increasingly want to have an interactive two-way communication with companies. However, some issues may be more relevant for a specific stakeholder group while other subjects are less important. Indeed, different stakeholders will want to know different aspects of a company’s operations. It then becomes important for managers to understand what, when, why and how some issues will need to be communicated and stakeholders engaged. This is why stakeholder identification and analysis are key elements for devising an appropriate communication strategy that supports an organization’s strategic objectives. A stakeholder approach will help managers clearly understand the communication needs of each single stakeholder group. In today’s world, companies must above all be good listeners to be able to build lasting relationships with stakeholders and, as a result, have a good business reputation.

As argued above, the stakeholder mindset will help an organization be better at what they do than others. However, applying a stakeholder mindset is easier said than done. Managers must avoid having a subjective bias when identifying and prioritizing stakeholders, such as the tendency to overestimate stakeholders that have power or those that we frequently interact with. So, applying a stakeholder mindset to the fullest will require the capacity to empathize with a diverse range of perspectives, needs and motivations that we might be unaccustomed with. Having empathy may not be emphasized enough in business. Fortunately, the ability to put yourself in somebody else's shoes can be honed through experience and training.

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