Stakeholders’ Centrality in Modern Corporations and Their Management Antonio M. Chiesi Department of Social and Political Studies University of Milan Chiesi

Stakeholders’ Centrality in Modern Corporations and Their Management

Antonio M. Chiesi

Department of Social and Political StudiesUniversity of Milan

Chiesi for Politeia 2008-05-22/23

Definitions: a stakeholder is…

• any group on which the organization relies in its functioning (Stanford Research Institute 1963)

• a party who affects, or can be affected by, the organization’s actions (Freeman 1984).

• any actor who has a legitimate interest in the activity of an organization (Clarkson 1999).

• Voluntary or involuntary contributors to the activities of an organization, and therefore its potential beneficiaries and/or risk bearers (Post, Preston and Sachs 2002).


Stockholder and Stakeholder approaches


Shifting attention from stockholders to stakeholders interests implies a new definition of corporate strategy

• From principal-agent approach, according to which managers are appointed by stockholders in order to maximize their economic return….

• to multi-stakeholder theory, according to which managers, in the name of the firm and for its long term benefit, have to chose a “principal” stakeholder and pursue the balance of interests between a plurality of stakeholders.


Relation between multistakeholder theory and CSR

• 1.While in the principal-agent theory, managers have to pursue stockholders’ interests by law, in stakeholder theory their strategies can become indefinite, give them to much power and encourage their selfishness. A danger emerges that in a multi-stakeholder environment managers turn from agents to brokers.

• 2. While stockholders’ interests are (relatively) clear and protected by law, stakeholders’ interests are heterogeneous and not always protected by law, although legitimate. In order to state the strategic orientation of a firm: a) its mission should be declared, b) principles of stakeholder management should be applied, c) some basic values should be adopted (i. e. CSR).

• Therefore, while stockholder theory is based on selfish interests recognized and limited by law, stakeholder theory has to be derived from values and goes beyond laws (i. e. CSR).


A map of stakeholders


A more specific inventory of stakeholders

Stakeholder Global level National level Local levelStockholders Institutional investors (pension funds, investment

funds) small shareholders,Family ownership

Personnel All employees, transnational trade unions

Domestic employees, Trade unions at country level

Employees living around the plants, local unions

Public administration

International institutions (UN, EU, ILO, …)

National government (taxation and norms)

Local government (reciprocal influence)

Community Humanity at large and future generations (environmental implications)

The country (fiscal implications and compliance to law)

The organized community of persons and the environment around the factory

Customers, consumers

Transnational movements (Green Peace, NGOs, ..)

Domestic market, national consumers movements

Suppliers International division of labor and subcontracting

Domestic suppliers Local stable suppliers (i. e. industrial districts)


How to manage stakeholder relations (Donaldson & Preston 1995)

• Descriptive approach: mapping them and taking into account their positions,

• Instrumental approach: using stakeholders’ relations in order to pursue business “as usual”,

• Normative approach: identifying values within an axiomatic rationality approach (Weber 1922) and accepting limitations of property rights according to a principle of distributive justice.

Normative stakeholders’ management(modified from Clarkson 1999)

• Recognizing them and being informed about their interests (recognition of legitimate conflicts of interests),

• Communicating transparently with them (stakeholder dialogue),

• Adopting decisions taking into account their positions,• Balancing benefits among different stakeholders (distributive

justice),• Cooperating with them in order to minimize negative

externalities and encourage the production of public goods: trust, reputation, transparency, accountability (this means that also stakeholders are requested to behave following the same rules of reciprocity)

Theoretical problems in stakeholders’ management

• no rules to settle the trade-off between them,

• no rules to define a hierarchy of interests among them,

• Managers should replace profit maximization function with Pareto efficiency for all stakeholders (which is impossible to compute).

• BUT…..


..... In practice

These three problems are often by-passed in the actual practices adopted in managing every-day relations with stakeholders. Managers try:

• to satisfy dynamically all stakeholders, taking into account the relative intensity of their pressures (rather than abstract rules of distributive justice),

• to increase their reputation,• to improve the image of an organization, in terms of

morality, accountability, sustainability, transparency, fairness.


What is actually done in stakeholders’ management:

• Stakeholders have to gain recognition,• and to engage in negotiations in order to get a larger share of resources

coming from the organization (value added, transfers, benefits).

• Managers are encouraged to give priority to long rather than short term interests,

• and are drawn to take care of social and environmental consequences of the organization.

• All parties are drawn to conceive the organization as a collective good,• are encouraged to comply with practices of accountability, transparency,

reliability, fairness in order to gain reciprocal reputation,• know that unfair practices and moral hazard can destroy the intangible

asset everyone can enjoy: social capital (Coleman 1990, Lin 2001).


Documents

Stakeholders’ Centrality in Modern Corporations and Their Management Antonio M. Chiesi Department of Social and Political Studies University of Milan Chiesi