Stakeholder (corporate)

• 1. Introduction

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  The corporate stakeholder began as a phrase in a 1963 internal memorandum at the Stanford Research Institute. The memo defined stakeholders as groups "without whose support the organization would cease to exist". That single sentence of definition later spread far beyond one research institute. It now shapes strategic management, corporate governance, ideas about business purpose, and corporate social responsibility. But a definition this broad raises awkward questions. Who exactly counts as a group whose support a company needs? Are some of those groups more important than others? And does a company owe the same thing to its owners as it owes to the people who live beside its factory? The answers have been argued over for decades, and they begin with a surprisingly simple sorting exercise.

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• 2. Primary, Secondary, Excluded

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  Stockholders, customers, suppliers, creditors, and employees make up the usual list of primary stakeholders. These are mostly internal stakeholders, the ones who take part in economic transactions with the business.

  Secondary stakeholders sit one step further out. The general public, communities, activist groups, business support groups, and the media do not trade directly with the company. Even so, they are affected by its actions, or they can affect it.

  A third category is the excluded stakeholder. Children and the disinterested public were originally left out because they had no economic impact on business. Today some groups, such as the general public, may be recognized, while others stay outside the circle.

  The reason is that the concept looks at the world from a human point of view. Plants, animals, and even geology get no voice as stakeholders. They count only for their instrumental value to human groups or individuals. How long the resulting list should be is itself a matter of choice, and companies draw it very differently.

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• 3. Mapping the Circle

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  A narrow map of a company's stakeholders runs to about ten names. It lists employees, communities, shareholders, creditors, investors, government, customers, owners, financiers, and managers.

  A broader map keeps all of those and adds many more. Suppliers and distributors join the list, along with labor unions, industry trade groups, and professional associations. Government splits into three separate roles: regulatory agencies, legislative bodies, and tax-collecting agencies.

  The wider version also reaches people who are not yet involved with the firm at all. Prospective employees and prospective customers appear on it. So do competitors, schools, analysts and media, and research centers.

  Communities are stretched across three scales: local, national, and the public at large, described as the global community. The broad map ends with its least obvious entry, future generations. Whether every one of these names deserves equal weight is exactly what the debate over corporate responsibility is about.

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• 4. The Case For Stakeholders

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  Supporters of the stakeholder view usually rest their argument on four assertions. The first is about joint outcomes. Value is best created by trying to maximize results for several groups at once, so a program that serves both employees and stockholders is doubly valuable. There is evidence that the combined effect is multiplicative rather than merely additive. When a company also addresses what customers want, both employees and stockholders benefit from the increased sales.

  The second assertion challenges the preeminent role that many business thinkers, especially in the past, gave to stockholders. Debt holders, employees, and suppliers also contribute to a successful firm. In doing so, they also take risks.

  The third assertion concerns control. Arguments about who deserves priority would matter little if stockholders had full command of the firm. Many people believe that, because of certain board of directors structures, top managers such as CEOs are mostly in charge.

  The fourth assertion treats image and brand as a company's greatest value. By meeting the needs of the local population, customers, employees, and owners, a firm can avoid damage to its reputation. It can also avoid lost sales, disgruntled customers, and costly legal expenses. The approach carries an extra cost. Many firms have still concluded that it improves their image, raises sales, and lowers the risk of liability for corporate negligence. It also makes them less likely to become targets of pressure groups, campaigning groups, and NGOs.

  Shareholders remain the party with the most direct and obvious interest in business decisions. Still, they are only one subset of stakeholders. In the most developed sense of corporate responsibility, the list even includes the bearers of externalities, meaning people who absorb the side effects of a company's choices.

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• 5. Beyond the Boardroom

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  In the last decades of the 20th century, the word stakeholder drifted from its older meaning toward a person or organization with a legitimate interest in a project or entity. The traditional stakeholders were the directors or trustees on a governing board. The newer usage covers institutions of every kind, including large business corporations, government agencies, and non-profit organizations.

  On this wider view, vendors, employees, and customers all count. So do members of a community whose local economy or environment is touched by an office or a factory. The word borrows from gambling. Stakeholders are all those who paid into the figurative stake, and all those to whom it may be paid out. The payout echoes the idea of a payoff in game theory, meaning the outcome of a transaction.

  For management, this creates a practical task. The organisation must know who its stakeholders are and understand their wants and expectations. It must also gauge whether each one is supportive, neutral, or opposed. Then it must rank them, because scarce resources can only be focused on the most significant ones.

  Consider a professional landlord refurbishing rented housing while tenants still live in it. The residents are key stakeholders, and so are the neighbors, for whom the work is a nuisance. The landlord's tenancy-management team and housing-maintenance team are also on the list. Funders and the design-and-construction team complete the picture.

  Each separate kind of interest is called a constituency. There might be a constituency of stockholders, one of adjoining property owners, and one of the banks the entity owes money to. In that usage, "constituent" simply means stakeholder.

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• 6. Defining the Theory

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  R. Edward Freeman championed stakeholder theory in the 1980s, and a definition from his 1983 work included competitors among a corporation's stakeholders. A later definition, from Post, Preston, and Sachs in 2002, drops them. It describes a stakeholder as "A person, group or organization that has interest or concern in an organization."

  The same authors add that stakeholders can affect or be affected by the organization's actions, objectives and policies. Their examples include creditors, directors, employees, government and its agencies, owners, suppliers, unions, and the community from which the business draws its resources.

  Their definition then makes a pointed claim: "Not all stakeholders are equal." Customers are entitled to fair trading practices. They are not entitled to the same consideration as the company's employees. Stakeholders are those who contribute, voluntarily or involuntarily, to the firm's wealth-creating capacity. That makes them its potential beneficiaries or risk bearers.

  Robert Allen Phillips gave the theory a moral foundation in Stakeholder Theory and Organizational Ethics. He defends a "principle of stakeholder fairness" built on the work of John Rawls. He also separates normative legitimate stakeholders from derivative ones.

  Phillips argues that stake owners own and deserve a stake in the firm. On that basis, stakeholder reciprocity could become a criterion for deciding who earns representation on a company's board. Corporate social responsibility, in this view, should mean corporate stakeholder responsibility.

  Not everyone accepts the framing. Critics say that sorting corporate duties by stakeholder class creates a false dichotomy between a "shareholder model" and a "stakeholder model". They also say it sets up a false analogy between obligations to shareholders and obligations to other interested parties.

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• 7. What Each Group Wants

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  Governments, in one illustrative list of a company's stakeholders, care about taxation, VAT, legislation, employment, truthful reporting, legalities, and externalities. That is the longest chain of concerns outside the company itself.

  Employees care about rates of pay, job security, and compensation. They also want respect, truthful communication, appreciation, acknowledgement, and recognition.

  Customers look for value, quality, customer care, and ethical products. Suppliers provide the products and services that go into what the customer finally buys, and they want equitable business opportunities. Creditors watch their credit score, new contracts, and liquidity.

  The community wants jobs, involvement, environmental protection, shares, and truthful communication. Trade unions focus on quality, worker protection, and jobs. Investors are mainly after return on investment and income.

  The owner's list is the most varied of all. It includes profitability, longevity, market share, market standing, raising capital, and growth. It also names succession planning and social goals, a sign that even the owner is one stakeholder among many.

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