A Stakeholder Approach to Business

 

Critique of Business

In recent years, increased education, affluence, and awareness in the general public have put more societal pressure on businesses to improve their social performance and become better corporate citizens. Impetus for this movement has also come from numerous corporate scandals since the beginning of the 21st century and the 2007 recession, which has been blamed on corporate greed by many economists and analysts.

It has also been realized that corporations, through their products, advertisements, and political activities, affect our lives probably more than any other entity in our society. Take the example of fast food. In the 1980s, fast food changed the way we eat. Companies like Apple and Microsoft have changed the way we communicate, work, and even socialize. Therefore, businesses affect society and individual lives in many ways and in several spheres, i.e., economic, social, individual, technological, environmental, and political. This realization of the influence and power of business, with the recent knowledge of major corporate ethical debacles, has created an environment in which different groups and entities in the society have taken upon themselves to criticize and pressurize businesses to be socially responsible and pursue sustainable business practices.

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Business Response

As illustrated by the Nike case, businesses do detect a change in their environment and understand that several entities and groups within the society want to influence them. Therefore, to maintain a good relationship with the society, firms have made efforts to understand and cater to the reasonable demands of societal entities.

One way of understanding and meeting societal demands is to understand the social contract between the business and the society. A social contract represents a set of reciprocal expectations between institutions or groups. In our case, this means reciprocal expectations between the society and corporations. But we have seen that society is composed of many entities, and it would be safe to assume that societal expectations of business, based on myriad interests of different entities, are dynamic and change all the time. Therefore, the important question is that if the business environment is composed of several entities, and their individual interests result in a dynamic set of demands from business firms, then what should be the business strategy to deal with this ever-changing environment? 

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Stakeholder Management

The answer to the above question comes from stakeholder management. Edward Freeman, in his seminal work Strategic Management: A Stakeholder Approach (1984), argues that the business environment has become extremely volatile. He further argues that the business environment is now composed of several entities that are interested in what firms do. As a result, the boundaries of business organizations are not as sacrosanct as they used to be. These entities that he calls "stakeholders" individually and sometimes collectively attempt to influence organizations and put pressures on them to cater to their interests. Finally, according to Freeman, business organizations can deal with their environment more effectively and strategically if they are more cognizant of their multiple stakeholders and are able to ascertain their interests and find ways to reconcile organizational interests with them.

Stakeholder management argues that it provides managers tools to interact with their dynamic environment. More precisely, stakeholder management guides managers in identifying and recognizing organizational stakeholders. Once identified, it further guides managers in how to interact with stakeholders in a way that managers create value for the firm and the stakeholders.

Finally, it must be appreciated that stakeholder management is a complex process. Organizational stakeholders can be numerous with demands that might coincide or contradict each other. This issue will be discussed later in Lesson 3. Here it is sufficient to outline principal stakeholders and their interests, as given in Table 1.

Table 1.1: Stakeholders and Their Expectations

Principal Stakeholders	Main Interests & Expectations
Shareholders	Profits (stock valuation, dividends)
Managers	High compensations and fringe benefits
Employees	High salaries, wages, and benefits
Customers	Value for their purchases
Suppliers	Continuous profitable business relationships
Government (Federal, State, and Local)	Business following regulations, receiving taxes
Community	Employment, social contributions from firms