Chapter Three

The Stakeholder Management Concept

CHAPTER OBJECTIVES

After studying this chapter, you should be able to:

* Define stake and stakeholder and describe the origin of these concepts.

* Differentiate among the production, managerial, and stakeholder views of the firm.

* Discuss the concept of stakeholder management.

* Identify and discuss the five major questions that capture the essence of stakeholder management.

It would take many books to describe how and why we got from that relatively simple period to the complex situation we face today in our society. Many of the factors we discussed in the past two chapters were driving forces behind this societal transformation. The principal factor, however, has been the recognition by the public, or society, that the business organization has evolved to the point that it is no longer the sole property of the founder, or the founder's family, or even a group of owner-investors.

The business organization todai7 especially the modern corporation, is the institutional centerpiece of a complex society. Our society today consists of many people with a multitude of interests, expectations, and demands as to what major organizations ought to provide to accommodate the people's life-styles. We have seen business respond to the many expectations placed on it. We have seen an ever-changing social contract. We have seen many assorted legal, ethical, and philanthropic expectations and demands being met by organizations willing to change as long as the economic incentive was there. What was once viewed as a specialized means of providing profit through the manufacture and distribution of goods and services has become a multipurpose social institution that many people and groups depend on for their livelihood and prosperity.

In a society conscious of an always-improving life-style, with more groups every day laying claims to their piece of the good life, business organizations today need to be responsive to individuals and groups that they once viewed as powerless and unable to make such claims on them. We call these individuals and groups stakeholders.

Business organizations must address stakeholders if they want to be profitable in the long run. Business must also address stakeholders because it is the ethical course of action to pursue. Stakeholders have claims, rights, and expectations that should be honored, and the stakeholder approach assists in that pursuit. It is for this reason that the stakeholder orientation is useful in the arena of business, society, and ethics.

ORIGIN OF THE STAKEHOLDER CONCEPT

The stakeholder concept is a central idea in understanding business and society relationships. The term grew out of the more familiar and traditional idea of stockholders-the investors in or owners of businesses. just as a private individual might own his or her house, automobile, or video recorder, a stockholder a portion or a share of one or more businesses. Thus, a stockholder is also called a shareholder.

What is a Stake?

To appreciate the concept of stakeholders, it helps to understand the idea of a stake. A stake is an interest or a share in an undertaking. If a group is attempting to go out to dinner and a show for the evening, each person in that group has a stake, or interest, in the group's decision. No money has yet been invested, but each member sees his or her own interest (preference, taste, priority) in the decision. A stake is also a claim. A claim is an assertion to a title or a right to something. A claim is a demand for something due or believed to be due. We can see clearly that an owner or a stockholder has an interest in and an ownership of a share of a business.

The idea of a stake, therefore, can range from simply an interest in an undertaking at one extreme to a legal claim of ownership at the other extreme. In between these two extremes is a right to something. This right might be a legal right to certain treatment rather than a legal claim of ownership such as that of a shareholder. Legal rights might include the right of due process (to get an. impartial hearing) or the right to privacy (not to have his or her privacy invaded or abridged). The right might be thought of as a moral right, such as that expressed by an employee: "I've got a right not to be fired because I've worked here 30 years, and I've given this firm the best years of my life." Or a consumer might say "I've got a right to a safe product after all I've paid for this."

As we have seen, there are a number of different types of stakes. Figure 3-1 summarizes what each means.

Figure 3-1 Types of Stakes

An Interest	A Right	Ownership
When a person or group will be affected by a decision, it has an interest in that decision.	Legal Right: When a person or group has a legal claim to be treated in a certain way or to have a particular right protected.	When a person or group has a legal title to an asset or a property.
Example: This plant closing will affect the community. this TV commercial demeans women and I'm a woman.	Example: Employees expect due process, privacy; customers or creditors have certain legal rights.	Example: "This company is mine, I founded it, and I own it. "Or, "I own 1,000 shares of this corporation."
	Moral Right: When a person or group thinks it has a moral right to be treated in a certain way or to have a particular right protected.

Example: Fairness, justice, equity.

What is a Stakeholder?

A stakeholder, then, is an individual or group that asserts to have one or more of the kinds of stakes in a business .just as stakeholders may be affected by the actions, decision, policies, or practices of the business firm, these stakeholders also may affect the organization's actions, decisions, policies, or practices. With stakeholders, therefore, there is a potential two-way interaction or exchange of influence. In short, a stakeholder may be thought of as "any individual or group who can affect or is affected by, the actions, decisions, policies, practices, or goals of the organization."

WHO ARE BUSINESS'S STAKEHOLDERS?

In today's business environment there are many individuals and groups who are business's stakeholders. From the business point of view, there are certain individuals and groups who have legitimacy in the eyes of management. That is, they have a legitimate interest in or claim on the operations of the firm. The most obvious of these groups would be stockholders, employees, customers, and competitors. From the point of view of a highly pluralistic society, stakeholders might include not only those groups mentioned but other groups as well. These other groups might include the community, special-interest groups, and society or the public at large.

Production, Managerial, and Stakeholder Views

The growth of the stakeholder concept parallels the evolution of business. In what has been termed the traditional production view of the firm, owners viewed as stakeholders only those individuals or groups who supplied resources or bought products or services.2 As time passed and we witnessed the growth of corporations and the resulting separation of ownership from control, business firms began to see the need for interaction with major constituent groups if they were to be managed successfully. Thus, we had the managerial view of the firm. Finally, as major internal and external changes occurred in business, managers were required to undergo a major conceptual shift in how they saw the firm and its multilateral relationships with constituent or stakeholder groups. The result was the stakeholder view of the firm.3 In actual practice, however, many managers have not yet come to appreciate the need for the stakeholder view. Figure 3-2 depicts the evolution from the production view to the managerial view, and Figure 3-3 on page 64 portrays the stakeholder view of the firm.

In the stakeholder view of the firm, management must see its stakeholders as not only those groups management thinks have some stake in the firm but also those groups that themselves think they have a stake in the firm. This must be the perspective management takes at the outset, at least until it has had a chance to very carefully weigh the legitimacy of the claims and the power of the stakeholders. We should note here that each stakeholder group is composed of subgroups.

Primary and Secondary Stakeholders

Management may also think in terms of whether the individuals or groups are primary stakeholders or secondary stakeholders. 'We must use these terms cautiously, however, because secondary stakeholders probably think of themselves as primary stakeholders and prefer to be treated as such. This primary and secondary distinction is needed to help management rank the legitimacy of the claims the groups have or are making. Figure 3-4 portrays one possible ranking for a firm.

In this particular stakeholder classification, primary stakeholders are seen as those that have a formal, official, or contractual relationship with the firm, and all others are classified as secondary stakeholders.

Consequently, a secondary stakeholder can quickly become a primary one. This occurs often with the media or special-interest groups when the urgency of their claim (as in a boycott or demonstration) takes precedence over the legitimacy of their claim. In today's business environment, the media has the power to instantaneously transform a stakeholder's status with coverage on the evening news. Thus, it may be useful to think of primary and secondary classes of stakeholders for discussion purposes, but we should understand how easily and quickly those categories could shift.

STRATGIC VERSUS MULTIFIDUCIARY VIEWS

One challenge embedded in the stakeholder approach is whether it should be seen primarily as a way to manage better those groups known as stakeholders or as a way to more ethically treat those groups known as stakeholders. Kenneth Goodpaster has addressed this issue by distinguishing between the "strategic" approach and the "multifiduciary" approach.4

The strategic approach views stakeholders as primarily factors to be taken into consideration and managed while the firm is pursuing profits for the shareholders. In this view, managers might take stakeholders into account because offended stakeholders might resist or retaliate (for example, through political action, protest, or boycott). This approach sees stakeholders as instruments that may facilitate or impede the firm's pursuit of its strategic objectives.

The "multifiduciary" approach views stakeholders as more than just people who can wield economic or legal power. This view holds that management has a fiduciary responsibility to stakeholders just as it has this responsibility to shareholders. Here, management's traditional fiduciary, or trust duty, is expanded to embrace stakeholders on a roughly equal footing with shareholders. Thus, shareholders are no longer of exclusive importance as they would be under the strategic approach.

Goodpaster recommends that business organizations take neither of these extreme postures but rather pursue a new stakeholder synthesis. This new view holds that business does have moral responsibilities to stakeholders, but they should not be seen as part of a fiduciary obligation. Thus, management's basic fiduciary responsibility to shareholders is kept intact, but it is also expected to be implemented within a context of ethical responsibility. This ethical responsibility is its duty to not harm, coerce, lie, cheat, steal, and so on.5

As we continue our discussion of stakeholder management, it should be clear that we are pursuing it from a balanced perspective. This balanced perspective suggests that we are integrating the strategic view with the multifiduciarv view such that they are both compatible. We should be managing strategically but morally at the same time. The stakeholder approach is not just a better way to manage-it should be an ethical way to manage at the same time.

STAKEHOLDER MANAGEMENT

Managers of a business firm have the responsibility for establishing the firm's overall direction (its goals, policies, strategies) and seeing to it that these plans are carried out. As a consequence, managers have some long-term responsibilities and many that are of more immediate concern. Before the social environment became as turbulent and rapidly changing as it is, the managerial task was relatively straight forward and the external environment was stable. As we have evolved to the stakeholder view of the firm, however, we see the managerial task as an inevitable consequence of the trends and developments we described in our first two chapters.

Stakeholder management has become important as managers have discovered the many groups that have to be relatively satisfied for the firm to meet its own objectives. Without question, we still see the primacy of and necessity for profits as a return to the stockholders' investments, but we also see the growing claims of other stakeholder groups and the success they have had in getting what they want.

The challenge of stakeholder management, therefore, is to see to it that the firm's primary stakeholders achieve their objectives and that other stakeholders are dealt with ethically and also satisfied. This is the classic win-win" situation. It does not always occur, but it is a legitimate goal for management to pursue to protect its long-term self-interests. Management's second-best alternative is to meet the goals of its primary stakeholders, keeping in mind the important role of the owners-investors. Even among the primary stakeholders we must have acceptable levels of profits. Without economic viability, all other stakeholders' interests are lost.

With these perspectives in mind, let us approach stakeholder management with the idea that we can become successful stewards of the stakeholders' resources by gaining knowledge about stakeholders and using this knowledge to predict and deal with their behavior and actions. Ultimately, we should manage the situation in such a way that we achieve our objectives ethically and effectively. Thus, the important functions of stakeholder management are to describe, to understand, to analyze, and, finally, to manage.

Five major questions may be asked to capture the essential information we need for stakeholder management:

I .Who are our stakeholders?

2. What are their stakes?

3. What opportunities and challenges do our stakeholders present to our firm?

4. What responsibilities (economic, legal, ethical, philanthropic) does our firm have to all its stakeholders?

5.. What strategies or actions should our firm take to best deal with stakeholder challenges and opportunitie?6

Who Are Our Stakeholders?

To this point we have described the likely primary and secondary stakeholder groups for a business organization. To manage them effectiveIy, each firm must ask and answer this question for itself- NN'ho are our stakeholders? To answer this question fully, management must identify not only generic stakeholder groups but also the specific groups. A generic stakeholder group is simply a broad grouping such as employees, shareholders, environmental groups, or consumers. Within each of these generic categories there may be a few or many specific groups. Figure 3-5 illustrates just some of the generic and specific stakeholder groups of a very large organization.

Stakeholder Identification: Nestle, S. A.

Two examples of stakeholder maps that have been developed to illustrate the process of stakeholder identification are useful. The first is the case of Nestle, S. A., the Swiss conglomerate that at one time dominated the marketing of infant formula in the Third World, or less developed countries (LDCs). Other companies also marketed infant formula in the LDCS, but Nestle was the major company.

Beginning in about 1970, Nestle became involved in a controversy over the morality of selling any infant formula in the Third World and of using specific promotional and marketing techniques considered immoral by some. The basic allegation against Nestle and the others was that in these Third World countries, infant formula was likely to be misused and therefore might lead to malnutrition, diarrhea, and death. Also, it was claimed that Nestle's aggressive marketing tactics encouraged women to choose bottle-feeding, thus resulting in a decline in breast-feeding, which is safer and more healthful, particularly in the Third World. Poor sanitation, impure water, inadequacy of water supplies, and inability to read, comprehend, and follow directions resulted in disease and malnutrition. Mothers who were poor (and most are in these countries) tried to save money and thus overdiluted the infant formula to make it go further.

The complete controversy over marketing infant formula in the Third World requires a longer discussion, and we'll explore it in more depth in Chapter 6. Suffice it to say, however, that Nestle fought its critics for years, and its array of stakeholder groups became numerous. Picture, if you can, what the stakeholder map of Nestle might have looked like before the infant formula controversy. Most likely it was similar to the relatively simple managerial view of the firm shown in Figure 3-2. When Third World governments, social activist groups, and United Nations agencies got involved, the stakeholder map grew considerably. Figure 3-6 illustrates what Nestle's stakeholder map might have looked like after all these various groups got involved.

Do you think Nestle had any idea that its persistence in wanting to sell infant formula would have resulted in a situation as complex as this? Perhaps if Nestle had taken a stakeholder view of the firm before it got embroiled in this controversy, it would have saved itself years of grief and lost reputation.

FIGURE 3-5 Some Generic and Specific Stakeholders of a Large Firm

Owners	Employees	Governments	Customers
Trusts Foundations Mutual funds Board members Management owners Employee pension funds Individual owners	Young employees Middle-aged employees Older employees Women Minority groups Handicapped Special-interest groups Unions	Federal EPA FTC OSHA CPSC State Local	Business purchasers Government purchasers Educational institutions Special-interest groups consumers' union
Community	Competitors	Social Activist Groups
General fund raising Uniteed Way YMCA/YWCA Middle schools Elementary schools Residents who live close by All other residents Neighborhood associations Local media Chamber of Commerce	Firm A Firm B Firm C	PUSH (People United to Save Humanity) Friends of the Earth MADD (Mothers Against Drunk Driving) American Civil Liberties Union

STAKEHOLDER IDENTIFICATION: HOOKER CHEMICAL COMPANY

The second example worth considering is the case of Hooker Chemical Company and Love Canal.7 Love Canal was really just a partially dug canal in the southeast corner of the city of Niagara Falls, New, York, in the late 1800s. Originally the canal was to be used for generating and transmitting' hydroelectric power from the falls to the businesses in the city, but the project was abandoned.

Hooker Chemical Company now a subsidiary of Occidental Petroleum Company, built its first plant in the area in 1905. In the 1940s, the abandoned section of Love Canal became a toxic waste dump for a number of chemical companies. In 1942, Hooker received permission to use the site for chemical dumping. In 1947, Hooker purchased the Love Canal site from Niagara Power and Development CompanN7 . In 1953, the canal, filled with N'ears of toxic waste accumulation, was closed and sealed with an impermeable clay top. Figure 3-7 shows what Hooker Chemical's stakeholder map might have looked like in the period of 1920 tol953-the time spanning the active operation of the dump.

Subsequently, the land encompassing and surrounding Love Canal was purchased by the Niagara Falls School Board, even though Hooker Chemical advised against it. The board built a school adjacent to the dump site and sold some of the property to Developers, who then built a tract of homes. During the construction of the homes, thousands of cubic yards of soil were removed from the surface of the sealed canal. Figure 3-8 represents what Hooker's stakeholder map might have looked like during the period 1953 to 1971, which corresponds to the active settlement of the Love Canal area. Note that the first and second stakeholder maps indicate only slight changes of stakeholder interests in the Love Canal situation.

Apparently the construction work damaged the seal on the Love Canal dump. This, combined with water from heavy rains and snow, resulted in water seeping into the clay-lined basin, which eventually overflowed, causing toxic waste seepage into the homes and basements of nearby, residents. By 1978, evidence of toxic chemicals was found in the living area of many homes. After lengthy investigations, a variety, of health problems like liver damage, miscarriages, birth defects, and other ills began showing up. The following description of the area in 1979 illustrates why the Love Canal incident became a national crisis and disgrace:

Today the Love Canal area of Niagara Falls looks like a war zone. The 235 houses nearest the landfill are boarded up and empty, surrounded by an 8-foot-high cyclone fence that keeps tourists and looters away. Still other houses outside the fenced area are also boarded up and deserted, their owners having fled the unknown. Here and there throughout the neighborhood, newly erected green signs mark the pickup points for emergency evacuation in case there is a sudden release of toxins. An ambulance and a fire truck stand by in the area as workers struggle to seal off the flow of chemicals and render the area once again safe-if not exactly habitable.8

It is little wonder that the Love Canal incident now stands in the annals environmental history as the crisis that awoke the United States to the problems of toxic waste disposal and was the impetus behind the national Superfund clean-up legislation.

Without question, Hooker Chemical was not exclusively responsible for what happened at Love Canal. Others, such as the school board, the developers, and the health department must shoulder part of the blame for what happened. As is so often the case, however, the business firm bore the brunt of the responsibility, especially in the media. Figure 3-9 illustrates what the stakeholder map of Hooker Chemical might have become during 1971 to 1982, the period during which the Love Canal issue became a national problem.

The purpose of this discussion has been to illustrate the evolving nature of the question, 'Who are our stakeholders" In actuality, a firm's stakeholder identification is an unfolding process over time. However, by recognizing early, the potential of failure if one does not think in stakeholder terms, the value and usefulness of the stakeholder idea can be readily seen.

Many businesses do not carefully identify their generic stakeholder groups, much less their specific stakeholder groups. This must be done, however, if management is to be in a position to answer the second major question, "What are their stakes?"

What Are the Stakeholders' Stakes?

Once stakeholders have been identified, the next step is to determine the stakes of the various groups. Even groups in the same generic category frequently have different specific interests, concerns, perceptions of rights, and expectations. Management's challenge here is to identify the nature/legitimacy of a group's stake(s) and the power that the group possesses to affect the organization.

Identifying the Nature/Legitimacy of the Group's Stakes.

Let's consider an example of stakeholders who possess varying stakes. Assume that we are considering corporate owners as a generic group of stakeholders and that the corporation is large, with several million shares of stock outstanding. Among the ownership population are these more specific groups:

1. Institutional owners (trusts, foundations, churches, universities)

2. Large mutual fund organizations

3. Board of director members who own shares

4. Members of management who own shares

5. Thousands of small, individual shareholders

For all these groups, the nature of stakeholder claims on this corporation is ownership. All these groups liane legitimate claims-they are all owners.

Identifying the Power of a Group's Stakes.

When we get to power, we see significant differences. Which of the groups in the above example are most powerful? Certainly not the thousands of small, individual investors, unless they have found a way to organize to wield power. The powerful stakeholders in this case are (1) the institutional investors and mutual funds because of the sheer magnitude of their investments and (2) the board and management shareholders because of their dual roles of ownership and management (control).

However, if the individual shareholders could somehow form a coalition because of some interest they have in common, they could exert significant influence on management decisions. This is the day and age of dissident shareholder groups filing stockholder suits and proposing shareholder resolutions. These shareholder resolutions address issues ranging from complaints of excessive executive compensation to demands for firms to leave South Africa, to improve environmental protection, or to cease illegal campaign contributions.

Identifying Specific Groups Within a Generic Group.

Let us now look at a manufacturing firm in an old-line industry in Pennsylvania that is faced with a generic group of environmental stakeholders. Within the generic group of environmental stakeholders might be the following specific groups:

1. Residents who live within a 10-mile radius of the plant

2. Other residents in the city,

3. Residents who live in the path of the jet stream hundreds of miles away (some in Canada) who are getting acid rain

4. Environmental Protection Agency, (federal)

5. Pennsylvania Environmental Protection Division (state)

6. Friends of the Earth (social activist group)

7. The Wilderness Society (social activist group)

8. Pennsylvania Against Smokestack Emissions (PASE)

It would require some degree of care to identify the nature, legitimacy, and power of each of these specific groups. However, it could and should be done if the firm wants to get a handle on its environmental stakeholders. Furthermore, we should stress that companies have an ethical responsibility to be sensitive to legitimate stakeholder claims even if the stakeholders have no power or leverage with management.

What Opportunities and Challenges Are Presented to Our Firm?

In many respects, opportunities and challenges represent opposite sides of the coin when it comes to stakeholders. Essentially, the opportunities are to build good, productive working relationships with the stakeholders. Challenges, on the other hand, usually present themselves in such a way that the firm must handle the stakeholders well or be hurt in some way-financially (short term or long term) or in terms of its public image or standing in the community. Therefore, it is understandable why our emphasis is on challenges rather than on opportunities posed by stakeholders.

These challenges typically take the form of varying degrees of expectations or demands. In most instances, they arise because stakeholders think or feel that their needs are not being met adequately. The challenges also arise when stakeholder groups think that any crisis that occurs is the responsibility of the firm or that the firm caused the crisis in some way. In addition to the Nestle and Hooker Chemical crises described earlier, examples of other stakeholder crises include:

* The 1980 Procter & Gamble (P&G) Rely tampon crisis, in which P&G withdrew the product from the marketplace in the midst of charges that the product was associated with the sometimes fatal disease called toxic shock syndrome.

*The 1982 Johnson &Johnson (J&J) Tylenol crisis, in which someone had replaced Tylenol Extra-Strength capsules with cvanide-laced capsules, resulting in the horrible deaths of seven unsuspecting purchasers.

*The 1984 Union Carbide tragedy in Bhopal, India, where a leak of the poisonous gas methyl isocyanate resulted in the death of more than 2,000 people and serious injury to an estimated 200,000 people.

*The 1989 Exxon Valdez oil spill disaster in which I 1 million gallons fouled close to 2,600 miles of beaches in Alaska's Prince William Sound. Groups wanting Exxon to pay up included the state of Alaska, shareholders, environmentalists, consumers, and local businesses. This is regarded as America's worst environmental disaster.

If one looks at the business experiences of' the past two decades, including the crises mentioned above, it is evident that there is a need to think in stakeholder terms to fully understand the potential threats that businesses of all kinds face on a daily basis.

Opportunities and challenges might also be viewed in terms of potential for cooperation and potential for threat. Savage, et al. leave argued that such assessments of cooperation and threat are necessary so that managers might identify strategies for dealing with stakeholders.9 In terms of potential for threat, Savage, et al. assert that managers need to consider the stakeholder's relative power and its relevance to a particular issue confronting the organization. In terms of potential for cooperation, the firm needs to be sensitive to the possibility of joining forces with other Stakeholders for the advantage of all parties involved.

The authors cite how Ross Laboratories, a division of Abbott Laboratories, was able to develop a cooperative relationship with some critics of its sales of infant formula in Third World countries. Ross and Abbott convinced these stakeholder groups (UNICEF and the World Health Organization) tojoin them in a program to promote infant health. Other firms, such as Nestl6, did not develop the potential to cooperate and suffered from consumer boycotts.10

Figure 3-10 presents a list of the factors that Savage, et al. claim will increase or decrease a stakeholder's potential for threat or cooperation. By carefully analyzing these factors, managers should be able to better assess potentials for threat or cooperation.

What Responsibilities does Our Firm have to Our Stakeholders?

Once threats and opportunities of Stakeholders have been identified and understood, a next logical question is, "What responsibilities does our firm have in our relationships with all stakeholders?" Responsibilities here could be thought of in terms of the concepts presented in Chapter 2. What economic, legal, ethical, and philanthropic responsibilities do we leave to each Stakeholder? Because most of the firm's economic responsibilities are principally to itself, the analysis really, begins to focus on legal, ethical, and philanthropic questions. The most pressing threats present themselves as legal and ethical questions.

We should stress, however, that the firm itself has an economic stake in the legal and ethical issues it faces. For example, J&J was faced with the Tylenol poisoning incident, it had to decide what the legal or ethical action to take was and what was in the firm's best economic interests. J&J probably, judged that recalling the Tylenol products was not only the ethical action to take but also would ensure its reputation for being concerned about consumers' health and well-being. Figure 3-11 on page 78 illustrates the stakeholder/responsibility matrix management faces when assessing the firm's responsibilities to stakeholders.

FIGURE 3-10 Factors Affecting Potential for Stakeholder Threat and Cooperation

	Increases or Decreases Stakeholder's Potential for threat?	Increases or Decreases Stakeholder's Potential for Cooperation
Stakeholder controls key resources (needed by organization) Stakeholder does not control key resources	Increases Decreases	Increases Either
Stakeholder more powerful than organization Stakeholder as powerful as organization Stakeholder less powerful than organization	Increases Either Decreases	Either Either Increases
Stakeholder likely to take action (supportive of the organization) Stakeholder likely to take nonsupportive action Stakeholder unlikely to take any action	Decreases Increases Decreases	Increases Decreases Decreases
Stakeholder likely to form coalition with other stakeholders Stakeholder likely to form coalition with organization Stakeholder unlikely to form any coalition	Increases Decreases Decreases	Either Increases Decreases

Source: Grant T. Savage, Timothy W. Nix, Carlton J. Whitehead, and John D. Blair, "Strategies for Assessing and Managing Organizationsl Stakeholders, Academy of Management Executive (May, 1991), 64.

What Strategies or Actions Should Our Firm Take ?

Once responsibilities have been assessed, a business must pursue strategies and actions for dealing with its stakeholders. In every decision situation a multitude of alternative courses of action are available, and management must choose one or several that seem best. MacMillan and Jones state that management has before it a number of basic strategies or approaches in dealing with stakeholders. Important questions or decision choices are:

*Do we deal directly or indirectly with the stakeholders?

*Do we take the offense or the defense in dealing with the stakeholders?

*Do we accommodate, negotiate, manipulate, or resist stakeholder overtures?

*Do we employ a combination of the above strategies or pursue a singular course of action? 11

Savage et al. argue that specific strategies may be developed based on classifying stakeholders according to the earlier presented concepts of potential for support and threat. If we use these two dimensions, four stakeholder types and

FIGURE 3-11 Stakeholder/Responsibility Matrix

resultant strategies emerge.12 Stakeholder Type 1-the supportive stakeholders high on cooperation and low on threat. This is the ideal stakeholder type. To a well-managed organization, supportive stakeholders might include its board, managers, employees, and customers. Others might be suppliers and service providers. The strategy here would be one of involvement. An example of this might be the strategy to involve employee stakeholders through participative management or decentralization of authority Figure 3-12 presents this stakeholder classification.

Stakeholder Type 2-the marginal stakeholder-is low on both potential for threat and potential for cooperation. For large organizations, these might include professional associations of employees, consumer interest groups, or stockholders, especially those who are not organized. The strategy here is for the organization to monitor the marginal stakeholder. Monitoring is especially called for to make sure circumstances do not change. Careful monitoring could avert later problems.

Stakeholder Type 3 is termed the nonsupportive stakeholder. This group is high on the potential for threat but low on cooperative potential. Examples of this group could include competing organizations, unions, federal or other levels of government, and the media. The recommended strategy here is to defend against the nonsupportive stakeholder.

F I G U R E 3-12 Diagnostic Typology of Organizational Stakeholders

Stakeholder Type 4 -- the mixed blessing stakeholder-is high on both potential for threat and potential for cooperation. Examples of this group, in a well-managed organization, might include employees who are in short supply, clients, or customers. A mixed blessing stakeholder could become a supportive or a nonsupportive stakeholder. The recommended strategy here is to collaborate with the mixed blessing stakeholder. By maximizing collaboration, the likelihood is enhanced that this, stakeholder group will remain supportive.

The authors summarize their position regarding these four stakeholder types as follows:

... managers should attempt to satisfy minimally the needs of marginal stakeholders and to satisfy maximally the needs of supportive and mixed blessing stakeholders, enhancing the latter's support for the organization. 13

The four stakeholder,, types and recommended strategies are what was referred to earlier in the chapter as the "strategic" view of stakeholders. By taking stakeholders' needs and concerns into consideration, we are improving our ethics. We must go beyond just considering them, however. Management still has an ethical responsibility to stakeholders that extends beyond the strategic. We will develop a fuller appreciation of what this responsibility is in Chapters 5, 6, and 7.

Effective Stakeholder Management

Effective stakeholder management requires the careful assessment of the five core questions we have posed. To deal successfully N6tl-i tl-iose who assert claims on the organization, we must understand these core questions at least at a basic level. It is tempting to wish that all of this was not needed. However, such wishing would require management to accept the production or managerial view of the firm. This is no longer possible. Business today cannot turn back the clock to a simpler period. Business has been and will continue to be subjected to careful scrutiny of its actions, practices, policies, and ethics. This is the real world in which management lives, and management must accept it and deal with it. Criticisms of business and cries for corporate social responsibility have been the consequence, and the stakeholder management approach to viewing the organization has become one needed response. To do less is to refuse to accept the realities of business's plight in the modern world and to fail to see the kinds of adaptations that are essential if businesses are to prosper in the present and in the future .

In fairness, we should also note that there are criticisms or limitations of the stakeholder management approach. One major criticism relates to the complexity of identifying, assessing, and responding to stakeholder claims, which becomes an extremely difficult and time-consuming process. Also, the ranking of stakeholder claims is no easy task. Some managers continue to think in stockholder terms because this is easier. To think in stakeholder terms increases the complexity of decision making, and it is overly taxing for some managers to determine which stakeholders' claims take priority in a given situation. Despite its complexity, however, the stakeholder management view is most consistent with the environment that business faces today.

A stakeholder is an individual or a group that asserts to have one or more stakes in an organization. Stakeholders may affect the organization and, in turn, be affected by the organization's actions and decisions. The stakeholder approach extends beyond the traditional production and managerial views of the firm and warrants a much broader conception of the parties involved in the organization's functioning and success. Both primary and secondary stakeholders assume an important role in the eyes of management.

Five key questions aid managers in stakeholder management. (1) Who are our stakeholders? (2) What are the stakeholders' stakes? (3) What challenges or opportunities are presented to our firm by our stakeholders? (4) What responsibilities does our firm have to our stakeholders? (5) What strategies or actions should our firm take with respect to our stakeholders? Although the stakeholder management approach is quite complex and time consuming, it is a way of managing that squares with the complex environment that organizations face today.

DISCUSSION QUESTIONS

1. Explain the concepts of stake and stakeholder from your perspective as an individual. What kinds of stakes and stakeholders do you have? Discuss.

2. Differentiate between primary and secondary stakeholders in a corporate situation. Explain how you determine which individuals or groups are primary or secondary. Can there be movement between the primary and secondary categories? Explain.

3. Explain in your own words the differences among the production, managerial, and stakeholder -views of the firm.

4. Choose any group of stakeholders listed in the stakeholder/responsibility), matrix in Figure 3-1 1, and identify the four types of responsibilities that the firm has to that stakeholder group.

5. What do you see as the major problems or limitations to the stakeholder management approach? Discuss.


ENDNOTES

1. This definition is similar to that of R. Edward Freeman, Strategic Management: A Stakeholder Approach (Boston: Pitman, 1984), 25.
2. Freeman, 5.
3. Freeman, 24-25.
4. Kenneth E. Goodpaster, "Business Ethics and Stake holder Analysis," Business Ethics Quarterly, Vol. 1, No. 1 (January, 1991), 53-73.
5. Ibid.
6. Similar questions are posed by Ian C. MacMillan and Patricia E. Jones, Strategy Formulation: Power and Politics (St. Paul, MN: West, 1986), 66.
7. The description of this incident comes from Martha W. Elliott and Tom L. Beauchamp, "Hooker Chemical and Love Canal' in Tom L. Beauchamp, Case Studies in Business, Society and Ethics (Englewood Cliffs, NJ: Prentice-Hall, 1983), 107-115; and Steve Michalove, "Love Canal and Hooker Chemical: The Stakeholder Dilemma," unpublished paper (March 1985).
8. Thomas H. Maugh, II, "Toxic Waste Disposal a Growing Problem," Science 204 (May 25, 1079), 820.
9. Grant T. Savage, Timothy w. Nix, Carlton J. Whitehead, and John D. Blair, "Strategies for Assessing and Managing organizational Stakeholders," Academy of Management Executive, Vol. V, No. 2 (May 1991), 61-75.
10. Ibid., 64.
11. MacMillan and Jones, 66-70.
12. Savage, Nix, Whitehead, and Blair, 65.
13. Ibid., 72.