Topic 2 Stakeholder Relationships

INTRODUCTION

In this topic, we will discuss the concept of stakeholders. We will also touch on the concept of stakeholder management and management of stakeholder relationships.

THE STAKEHOLDER CONCEPT

Before we delve into the definition and concept of stakeholders, let us first understand the definition of a „stake‰. A stake is an interest, claim or share in an undertaking or enterprise. A large organisation has many stakeholders. In business term, the definition given for stakeholders is as shown below:

„Individuals or groups who can affect or is affected by the actions, decisions, policies, practices or goals of an organisation‰.

(Freeman, 1984)

2.1

TTooppiicc

2Stakeholder Relationships

2

By the end of this topic, you should be able to:

1. Identify stakeholders, primary stakeholders and secondary stakeholders;

2. Discuss why organisations should subscribe to the stakeholders view based on the normative, instrumental and descriptive arguments;

3. Discuss the concept of stakeholder management;

4. Identify a firmÊs relevant stakeholder based on three elements; and

5. Explain the organisations responsibilities towards its stakeholders.

LEARNING OUTCOMES

TOPIC 2 STAKEHOLDER RELATIONSHIPS

21

2.1.1 Classification of Stakeholders

Generally, there are two categories of stakeholders based on the nature of their relationship with the organisation. Wheeler and Sillanpaa (1997) have categorised stakeholders into:

Market; and

Non-market stakeholders. Let us now look into each category in more details.

(a) Market stakeholders/Primary stakeholders

„Market stakeholders are individuals or groups which have a direct interest in the organisation as well as engaged in economic transactions with the organisation as it produces its goods and services‰.

(Lawrence & Weber, 2011)

Primary stakeholders include customers, shareholders, suppliers, creditors and employers. For example, a shareholder as a primary stakeholder contributes capital to an organisation in the form of investment in exchange for dividends. The shareholder can also influence the organisationÊs policies as the shareholder can elect members of a firmÊs board of directors. They also have the right to vote on firmÊs decisions such as mergers and acquisitions.

(b) Non-market stakeholders/ Secondary stakeholders

„Non-market stakeholders include individuals and groups who are not engaged in a direct economic transaction with the organisation but are affected by or can affect its actions‰.


Secondary stakeholders include communities, the media, business support groups, the government and the general public. The media can affect the organisation through news that a newspaper or magazine publishes. While for the community, it can also be affected by the organisationÊs policies and decisions. For example, the health of a community can be at stake when a firm decides to dump its toxic waste into the rivers and streams that the community uses.


22

On the other hand, the community can also affect the organisationÊs operations when the community does not welcome an organisation and object to its plans to set up operations in the communityÊs neighbourhood.

Let us now look at Table 2.1 which shows the examples of an organisationÊs market and non-market stakeholders.

Table 2.1: OrganisationÊs Market and Non-Market Stakeholders

Market stakeholders Non-Market stakeholders

Employees Local communities

Owners/Stockholders/Shareholder Social activists

Customers Media

Suppliers Business support groups (e.g. trade associations)

Competitors Government

Retailers/Wholesalers Federal, state and local governments

Creditors General public

SELF-CHECK 2.1

Answer the following questions.

(a) What is the definition for the term „stakeholder‰?

(b) Identify the two types of stakeholders.

2.1.2 Support for the Stakeholder Concept

Donaldson and Preston (1995) identified three arguments for the stakeholder concept. Organisations should follow the stakeholder concept based on these three stakeholder theory arguments: (a) Descriptive Argument

„The descriptive argument describes how organisations manage and interact with its stakeholders‰.

(Donaldson & Preston, 1995)


23

Although an organisationÊs financial performance is important, an organisation still needs to be concerned about these aspects:

(i) Producing safe and innovative products to its customers;

(ii) Providing a safe and healthy work environment to its employees; and

(iii) Comply with the governmentÊs regulations. (b) Normative Argument

„The normative argument says that taking care of its stakeholders is simply the right thing for organisations to do. As organisations have vast power and resources, they have a duty toward all those affected by the organisationÊs actions‰.


(c) Instrumental Argument

„The instrumental argument says that stakeholder theory is an effective corporate strategy. Companies that take into consideration the rights and concerns of their stakeholders tend to perform better in the long run over those who do not‰.


ACTIVITY 2.1

Discuss why organisations should subscribe to the stakeholder view based on these arguments:

(a) Descriptive;

(b) Normative; and

(c) Instrumental.


24

EXERCISE 2.1

1. What is the difference between a market stakeholder and a non-market stakeholder?

2. Read the following situation.

You are a fruit juice manufacturer. You just learned that a few customers have become sick from drinking your product. You suspect that the juice was not properly pasteurised. You need to ensure this incident causes minimal damage to your reputation.

Identify the stakeholders affected by this incidence.

STAKEHOLDER MANAGEMENT 2.2

Do you know that an organisation has many stakeholders whom it is accountable to? Managers have to manage their relationships well with their organisationÊs stakeholder. Failing to address the concerns of their stakeholders can damage a firmÊs reputation and ultimately affect its bottom line. Hence, stakeholder management has become increasingly important as managers discover that their organisation stakeholder groups have to be relatively satisfied for the firm to meet its objectives (Carroll & Buchholtz, 2006). Do you know the meaning for the term „stakeholder management‰? Let us look below to know its meaning.

Stakeholder management refers to the process of managing the expectations of the individuals and groups who have an interest in your organisation or will be affected by the organisationÊs activities.

Organisations that want to implement a stakeholder management must first identify the firmÊs relevant stakeholders. We will discuss this issue in the next section.


25

EXERCISE 2.2

Do you think it is important for an organisation to engage in stakeholder management? Provide reasons for your answer.

2.2.1 Identifying the Firm’s Relevant Stakeholders

An organisation must identify its relevant stakeholders. We have discussed earlier of the two main types of stakeholders. However, not all stakeholders are relevant to an organisation. For example, a company like Amazon or Dell which sells its products directly to its customers would not have retailers or distributors. However, distributors would be an important stakeholder for a company like Nestle which sells its products mainly through supermarkets and sundry shops. In order to identify stakeholders who are relevant to an organisation, managers must understand the characteristics of their stakeholders. A manager may identify a firmÊs relevant stakeholder based on these elements:

Stakeholder power

Stakeholder legitimacy

Stakeholder urgency

2.2.2 Stakeholder Power

What is the meaning of the term „stakeholder power‰?

„Stakeholder power refers to the ability to use resources to make an event happen or to secure a desired outcome‰.



26

Stakeholders may have coercive, utilitarian or symbolic power over the organisation. (a) Coercive power

„Coercive power involves the use of physical force or violence‰.

(Thorne, Ferrell, & Ferrell, 2008)

Stakeholder groups such as environmental activists can have coercive power when they protest against an organisationÊs policy or action and destroy the organisationÊs facilities during their protest. Figure 2.1 shows some environmentalists gathering support for the cause of the planet.

Figure 2.1: Environmentalists gathering support for a cause

Source:http://static.guim.co.uk/sysimages/Environment/Pix/columnists/2010/6/11/12

76265770877/Environmental-activits-at-005.jpg

(b) Utilitarian power

„Stakeholders can have utilitarian power when they have the power to control the organisation resources such as financial or materials‰.

(Thorne et al., 2008)

(c) Symbolic power

„Stakeholders can possess symbolic power when they have access to or are able to use symbols or prestige‰.



27

For example, a letter written by a minister on a ministry letter head would have symbolic power compared to a plain letter. The Internet can also be a form of symbolic power when it is able to command the attention of the media or government.

EXERCISE 2.3

Identify at least five stakeholders in your organisation. Explain the types of power these stakeholders have over your organisation.

2.2.3 Stakeholder Legitimacy

Do you know the meaning for this term „stakeholder legitimacy‰? Let us refer below to know its meaning.

„Stakeholder legitimacy refers to whether the stakeholderÊs claims are justified or proper within a given context. A stakeholderÊs claim can be considered legitimate when their claims are judged to be reasonable by other stakeholders and society.‰


For example, it would be legitimate for consumers to expect an organisation to produce safe products for their consumption. Therefore, an organisation would want to address the consumersÊ concerns if they are faced with criticism of unhealthy food. Shareholders, institutional investors and board of director members who own shares all have legitimate claims of ownership because they are all owners of the organisation.

2.2.4 Stakeholder Urgency

Urgency refers to how fast the organisation responds to their stakeholdersÊ needs. The more powerful the stakeholder and the higher the legitimacy of the stakeholder issue, the faster the organisation needs to respond to the particular issue at hand.


28

According to Mitchell, Agle and Wood (1997), the urgency of an issue will depend on these factors: (a) Time sensitivity

Time sensitivity refers to the degree to which managerial delay in attending to the claim or relationship of the stakeholder.

(b) Criticality

Criticality refers to the importance of the claim or the relationship to the stakeholder.

SELF-CHECK 2.2

Briefly explain on the following elements:

(a) Stakeholder power;

(b) Stakeholder legitimacy; and

(c) Stakeholder urgency.

RESPONSIBILITIES OF THE FIRM TOWARD ITS STAKEHOLDERS

2.3

When the manager has identified the organisationÊs relevant stakeholders, the next logical question asked would be this:

What are my firmÊs responsibilities to these stakeholders?

The organisationÊs responsibilities toward its stakeholders can be thought of as the companyÊs corporate social responsibility (CSR) which will be discussed in Topic 6. An organisationÊs social responsibility includes its economic, legal, ethical and philanthropic responsibilities as shown in Table 2.2 below.


29

Table 2.2: OrganisationÊs Responsibilities toward its Stakeholders

Responsibilities Explanation

Economic Be profitable; maximise sales and minimise costs. Provide investors

with adequate and attractive returns for their investments.

Legal Obey all laws and regulations such as environmental, employment and

consumer laws.

Ethical Do what is right, fair and just. Assert ethical leadership in the

organisation. Operate the minimum legal requirement.

Philanthropic

Be a good corporate citizen; engage in volunteerism. Give support to the

community by providing education programmes, healthcare services,

cultural and arts programmes.

Source: Carroll & Buchholtz (2006)

ACTIVITY 2.2

Imagine that you have your own firm. Explain your organisationÊs responsibilities towards its stakeholders. Provide some examples to support your explanation.

MANAGING STAKEHOLDER RELATIONSHIPS

2.4

Carroll and Buchholtz (2006) identified three strategic steps that can lead organisations to manage their stakeholder relationships successfully and they are: (a) Integrate stakeholder management into the firmÊs philosophy, values and

vision Identify your organisationÊs missions, values and norms. Then, specify

which stakeholder groups and issues are relevant to your organisation. (b) Create vision statements or value statements that include stakeholders Reinforce your organisationÊs commitment to its stakeholders in a public

statement. (c) Implement a stakeholder performance measurement system

Such a system should be auditable, integrated and monitored as stakeholder relations are improved. Measurement indicates that there is serious intent to achieve results and the presence of such a system will ensure the stakeholderÊs sustainable commitment to the organisation.


30

Stakeholders are individuals or groups who can affect or is affected by the

actions, decisions, policies, practices or goals of an organisation. Stakeholders can be categorised into two: market stakeholders and non-

market stakeholders. Organisations should follow the stakeholder concept based on these three

stakeholder theory arguments: descriptive argument, normative argument and instrumental argument.

Managers have to be in good terms with their organisationÊs stakeholder.

Failure in meeting the needs of their stakeholders can damage the firmÊs reputation and ultimately affect its bottom line.

An organisation must clearly identify its relevant stakeholders in order to

ensure the continuity of the organisation. A manager may identify a firmÊs relevant stakeholder based on these

elements: stakeholder power, stakeholder legitimacy and stakeholder urgency. The organisationÊs responsibilities toward its stakeholders include the

following: economic, legal, ethical and philanthropy responsibilities. The strategic steps that can lead organisations to manage their stakeholder

relationships successfully are:

(i) Integrate stakeholder management into the firmÊs philosophy, values and vision;

(ii) Create vision statements or value statements that include stakeholders; and

(iii) Implement a stakeholder performance measurement system.


31

Descriptive argument

Instrumental argument

Market stakeholder

Non-market stakeholder

Normative argument

Stakeholder

Stakeholder legitimacy

Stakeholder management

Stakeholder power

Stakeholder urgency

Documents

Topic 2 Stakeholder Relationships