(iStockphoto/Krle)Advocates for stakeholders—including employees, customers, suppliers, the “community,” and investors—have dominated the discussion of leadership and management over the past two decades. They believe that enlightened decision-making should consider the interests of all.
Some have concluded that this thinking gained momentum after the scandalous failure of organizations like WorldCom and Enron 20 years ago. These companies supposedly were led and managed for the primary benefit of shareholders (and the top executives themselves).
My intent here isn’t to revive the age-old debate between economists such as the Chicago school’s Milton Friedman, who argued that the sole purpose of business is to generate profit for (and presumably transfer wealth to) shareholders by any legal and ethical means, and Yale’s James Tobin, who advocated for a broader group of stakeholders.
"One difference between shareholder and stakeholder management may be in the identification of those carrying the greatest weight in a decision."
In fact, the late management professor H. Jeff Smith, in his classic article, questioned whether stakeholder and shareholder management are antithetical. In order to maximize shareholder wealth, consideration has to be given to the welfare of other stakeholders, particularly if one is thinking about long-term performance.
Interest in stakeholder management has been around for a while. It goes back at least to the 1930s. The subject was codified in a 1984 book by Edward Freeman. Roland Marchand may or may not have helped the notion along when he wrote about it as an element of the “corporate soul.”
Wikipedia provides one notion of how the concept works in practice: “Stakeholder management is a four-step process of identifying stakeholders, determining their influence, developing a communication management plan, and influencing stakeholders through engagement.”
One difference between shareholder and stakeholder management may be in the identification of those carrying the greatest weight in a decision. At the risk of oversimplifying, the priorities of shareholder management are clear: shareholders have the loudest voice and the greatest influence. Some may argue that this notion became distorted by an element of agency theory that advocated outsized incentives for managers who maximized results—both short-term and long-term—for shareholders.
Stakeholder management requires prioritizing various constituencies and their influence on a strategic decision. For example, one approach to prioritization involves identifying the power and interest of each constituent. A constituent with high levels of power and interest has the greatest influence on the decision.
That’s all well and good—until factors like cultural issues and employee power begin to creep into the picture. For example, the state has had power but only now seems to be exhibiting higher levels of interest in business decisions. When Disney management spoke out in opposition to Florida legislation viewed as antithetical to the LGBTQ community, the state ended some of Disney’s taxing and property authorities over its Disney World Florida theme park. Suddenly, Disney is confronted with two opposing constituents with power and influence—the state and employees.
"To make matters even more complicated, each stakeholder group contains members who both support and oppose the issue at hand."
Similarly, when Levi Strauss, Citigroup, Microsoft, and others announced that they will fund employees—a constituency empowered by a historic talent shortage—who have to travel to procure an abortion, management is confronted again with the same dilemma. To make matters even more complicated, each stakeholder group contains members who both support and oppose the issue at hand.
What’s the solution? When advocates of stakeholder management are confronted with decisions involving two or more constituents with both power and interest, should they postpone action? Should they act but do it quietly with as little publicity as possible, hoping that the decision will go unnoticed? Should they decide, act boldly, and hope that, on balance, the result will benefit everyone and ultimately be reflected in long-term earnings and benefit for shareholders? Should they resolve the dilemma in some other way?
What do current trends and experiences say about the future of stakeholder management? Is it becoming too complex for leaders and their boards of directors who have been trained primarily to serve shareholders?
Is stakeholder management facing new headwinds? What do you think?
Share your thoughts in the comments below.
Editor's note: Heskett explores the leader's role in his book, Win From Within: Build Organizational Culture for Competitive Advantage.
References:
- Edward Freeman, Strategic Management: A Stakeholder Approach (Harpercollins, 1984)
- Roland Marchand, Creating the Corporate Soul (California University Press, 1998)
- H. Jeff Smith, “The Shareholders vs. Stakeholders Debate,” MIT Sloan Management Review, 2003
- “Stakeholder Management,” Wikipedia
Your feedback to last month’s column
Can the Case Method Survive Another Hundred Years?
The column generated profound comments but little debate. Responses, taken as a whole, represented a love fest for the case method with little question that it will survive another hundred years. Katherine Lawrence captured the spirit of respondents when she said, “For Harvard Business School to give up on the case method would be a step backward, not forward.”
Reminding us that the method was adapted from teaching techniques practiced at Harvard Law School in the early 20th century, Lawrence notes that a film set at Harvard Law refers to the case method as an important element of “brain surgery.” Rita Murray concurred, citing MIT professor Edgar Schein’s notion of the method as “humble inquiry—asking, probing, learning.”
Nick C. commented on the currency of a teaching and learning method that doesn’t go out of style: “The topics may be changing and doctrines of the past subject to change or reversal, but well-framed questions and diverse examination of case collateral, done well, creates a discovery mindset and challenges a knowing mindset … helpful in the context of the many possible futures we face.”
Washington Kinyanjui summed it up by saying, “This is a method that sends the students to task, and while at it their creative thinking juices flow, and much as their ideas may differ one from another, the engagement will leave everyone in the room more knowledgeable than (when) they first walked in. The Harvard Case method has withstood 100 years, and I believe it will withstand the next 100 years and even more.”