Centre for Innovation in Management

Building Collaborative Stakeholder Relationships
Published in Perspectives on Business and Global Change @1999
by Ann Svendsen

Ann Svendsen is a consulting sociologist, author, and speaker. This article is based on her book The Stakeholder Strategy: Profiting from Collaborative Business Relationships (Berrett-Koehler, 1998).

Business leaders and citizens have long argued that companies have a moral obligation to be socially responsible. Especially today, many argue that businesses should contribute to the communities where they operate, look after their employees, and treat their customers and suppliers well. That socially responsible companies such as The Body Shop and Ben and Jerry's Ice Cream are also financially successful simply adds to the conviction of those who lobby for socially responsible business.

While there are sound moral reasons for companies to develop long-term, collaborative stakeholder relationships, in today's highly competitive, global economy I believe there are just as strong business reasons. In fact, the financial success of some socially responsible companies may be directly related to their stakeholder-oriented management practises. While it seems like an anathema to business success, putting people ahead of profits in a knowledge based, networked economy might be just the ticket to corporate profitability and sustainability.

This article describes relationship-based management, an emerging values-based management philosophy that puts relationships ahead of profit maximization. In this article, I define relationship-based management, report on research that links strong stakeholder relationships with bottom line success, and explain why forging closer, trusting stakeholder relationships can have such a significant impact on the bottom line. I also lay out a six stage process that companies can use to build long-term, collaborative relationships with employees, customers, suppliers, and communities.

A New Management Philosophy

While a new relationship-oriented management philosophy is evolving, command-and-control management still holds sway in the majority of our corporations. In most North American companies, responsibilities for various stakeholder groups are still assigned to separate divisions. The marketing department deals with customer relations, the community relations department deals with local organizations, and public affairs deals with the media. Managers are expected to take steps to defend the corporation from the demands of various groups. Part of their role is to act as a referee between company and stakeholder interests to preserve goodwill towards the company and to avoid public relations fiascoes.

Relationship-based management reflects a fundamental shift in how a company defines itself and its role. The CEO and executives see themselves as serving the interests and perspectives of all of the company's key stakeholders, not just investors. Management as a whole is focused on building strategically important relationships with stakeholders inside and outside the organization. The primary role of managers, rather than commanding and controlling corporate resources, is preserving and extending the relationships upon which the corporation depends.

Relationship-based management takes an integrated, long-term, company-wide approach to identifying and building relationships with strategically important stakeholders. Efforts are focused on creating opportunities for mutual benefit rather than buffering or protecting the company from the demands of stakeholders. Relationship building is directly linked to corporate values and business strategy. Given the strategic value assigned to the relationship-building function, employees are rewarded for acting in concert with the company's core values and for identifying opportunities that serve both the corporation and its stakeholders.

Relationship-based management is based on the recognition that business prosperity depends on the well-being of local and global communities, employees, suppliers, and the environment. It reflects changing social values and pressures for greater corporate responsibility and accountability. Even more important, it is a strategic response to the demands of a changing and turbulent economy in which most of a company's value-creating assets are intangible.

As we will see, stakeholder relationships can be a source of competitive advantage. Strong relationships can stimulate innovation, increase flexibility, reduce costs, and allow companies to respond quickly to changing customer requirements. A good reputation, based on sound relationships with customers and communities, means that companies can attract and keep the best employees. Enhanced loyalty and support from employees, customers, investors, and business partners translates into bottom line profits and long-term growth

Relationships and the Bottom Line

We know that while stock markets may not always reward companies who are socially responsible, it punishes those who are accused of ethical wrong-doing. Evidence shows that stock prices go down following media reports of company misdeeds. How long prices stay down depends partly on what the company does to rebuild the trust of their stakeholders.

More interesting, however, is evidence that companies with strong stakeholder relationships are more profitable and sustainable than companies whose focus is exclusively on the bottom line. If we look at the most successful companies in North America today, many have established very powerful relationships with their stakeholders that are governed by deep social values. For example, Federal Express is renowned for its success in building employee commitment and loyalty, while IKEA excels in establishing profitable relationships with supplier and customers based on trust and true interdependence. British Petroleum builds strong community relationships.

In their acclaimed book Corporate Culture and Performance, Harvard researchers John Kotter and James Heskett present the results of their survey of 700 executives of U.S. companies. Their study showed that over an eleven-year period, sales and employment growth at stakeholder-oriented companies were significantly higher than at shareholder-focused companies. Stakeholder-oriented companies reported four times the growth in sales and eight times the growth in employment.1

The authors note that successful, visionary companies such as Hewlett-Packard and Dayton Hudson, although very diverse in other ways, share a stakeholder perspective. These companies put a lower priority on maximizing shareholder wealth and greater emphasis on serving the interests of a broader mix of stakeholders.

A recent study conducted by Royal Dutch Shell and reported in the award-winning book The Living Company also supports this view.2 Their research shows that companies who survived for more than 25 years displayed great sensitivity to their environment--including their stakeholders. Arie de Geus, author and noted Shell strategist, suggests that stakeholder-oriented companies, or, as he calls them, "river" companies, remain in harmony with their environment by keeping their "feelers" out and by developing strong relationships. He also notes that long-lived companies tend to be cohesive, conservative in their financial dealings, and more likely to have decentralized decision-making.

A study by Max Clarkson, director of the Centre for Corporate Social Performance and Ethics at the University of Toronto, indicates that over the longer term, firms that rate highest on ethics and corporate social performance make the most money.3 Clarkson's research suggests that companies that concentrate exclusively on the bottom line often make poorer decisions. This may be because they lack the information from stakeholders and the environment to anticipate opportunities and to solve problems when they are small and less costly to remedy.

Ethicists and management theorists also insist that ethical behavior that contributes to strong relationships is a good business investment. Ethical behavior builds trust that is a prerequisite for loyalty, innovation, and long-term cooperation. As ethics specialist Larue Hosmer notes:

There is a long-term cost to unethical behavior that tends to be neglected. The cost is to the trust of the people involved. Companies today--due to increasing global competition and advancing technological complexity--are much more dependent than previously upon the trust of workers, specialists, managers, suppliers, distributors, customers, creditors, owners, local institutions, national governments, venture partners, and international agencies. People in any of those groups who believe they have been misgoverned by bribes, sickened by emissions, or cheated by products, tend, over time, to lose trust in the firm responsible for those actions.4

Synergistic Effects

A corporation's dealings with stakeholders can have direct as well as indirect impact on bottom-line profitability. For example, companies that ensure their staff behave ethically will be subject to lower court-imposed fines. Providing a desirable set of benefits for employees will reduce turnover, and companies that can reduce waste in their operations will lower their costs and increase profits.

Positive stakeholder relationships can also affect profitability indirectly and synergistically. This is because intangibles like trusting relationships with suppliers, employee learning and growth, reputation and goodwill are key drivers of corporate competitiveness and profitability. For example, environmentally sound business practices can help to create a positive reputation, stronger customer support, and ultimately investor confidence. Companies that establish a positive reputation in a community will find it easier to attract and keep good employees. Employees who feel positive about their jobs and their employer will be more motivated and loyal.

A company's relationship with one stakeholder group, such as employees, has a significant impact on several other groups, such as customers and investors. Committed and energized employees will create satisfied and loyal customers. By implementing a comprehensive and consistent stakeholder strategy, companies can compound the benefits. Improvements in one stakeholder relationship will undoubtedly create a positive spin in other key relationships and ultimately on bottom-line profits.

Relationship-Based Management and Value Creation

A new approach to managing relationships is vital in a new economy because it allows companies to create value from their intangible assets. Research shows that 60 percent of corporate value is now tied up in intangible assets like employee creativity and commitment, reputation, long-term alliances, and brand equity.5

Relationships are crucial because, unlike managing material assets like equipment, land, and capital, managing intangible assets involves gaining the cooperation of others.
Companies cannot, on their own, create customer loyalty, long-lasting supply chain relationships, high levels of innovation, or a positive reputation. Creating these intangible assets requires the active participation and the engaged hearts and minds of customers, employees, suppliers, and individual citizens.

Transforming information into knowledge, and then creating value from that knowledge, is the root of competitive advantage. The ability to create value from knowledge depends on relationships. Let me explain why.

Innovation's Dependence on Relationships

Today companies must constantly innovate or lose out to the competition. In this environment, engaging and supporting employee creativity and innovation is of fundamental importance to bottom-line success.

In this new economy, the old-style command-and-control management techniques simply do not work. Highly skilled workers value their independence, demand the right to influence decisions that affect them, and are difficult and expensive to replace. So companies must create new, more egalitarian and flexible relationships with their employees.

The experience of business leaders along with the latest academic research shows that innovation requires more than employee know-how. A highly innovative workforce, for example, depends as much on establishing positive relationships both between management and employees, and between employees themselves, as it does on adding to the raw material of employee knowledge.

Research shows that no matter how knowledgeable employees are, if they are working in a hostile, low-trust environment they will hoard information, avoid collaborative ventures, and display very low levels of creativity. On the other hand, employees who are motivated by a common vision and set of goals, trust their colleagues, and are linked into diverse and stimulating information networks will be highly creative.

Relationships are necessary to transform an intangible asset (knowledge) into a tangible, value-producing product (innovation). Intrinsic motivation, trust-based relationships, and the social capital that such relationships produce allow the knowledge that exists inside an employee's head to be converted into ideas and solutions that have real value. So while increasing knowledge or intellectual capital is an important task in this new economy, companies must also develop a new management approach that allows them to build relationships, trust, and commitment.

Trust: The Key to Strong Supply Chain Relationships

The same is true of supply chain relationships. For many companies, however, supply chain relationships remain an untapped resource, and in some cases even a liability. In traditional companies, managers spend scarce time and financial resources trying to control the behavior of partners, and when contract terms are not met, attempting to remediate the problem and resolve inevitable conflicts.

Managing supplier relationships in our highly competitive, turbulent economy requires radically different management. To create value and competitive advantage from supply chain relationships, companies must adopt a new cooperative, values-based approach to management. Even ten years ago, most supply chain relationships were arms-length and based on explicit contracts. Today, however, supply chain relationships are more likely to be based on implicit, trust-based contracts that are negotiated and renegotiated as the demands and opportunities change.

To transform arms-length, contract-based relationships with suppliers, an organization's leadership must first believe that long-term relationships will be good for the bottom line. They must behave ethically and ensure that their employees also are honest and fair in their dealings with suppliers. They must behave in a trustworthy fashion to attract and keep the best partners.

They must also take the time to understand what their suppliers want and expect from the relationships, be willing to share information, and strive to keep their promises. The bottom-line benefits arising from these kinds of relationships are significant.

Reputation's Dependence on Relationships

Recent research shows that a company's reputation is valuable--as good as money in the bank, or land or inventory. A 1997 national study of consumer attitudes by Cone/Roper found that 76 percent of consumers would be likely to switch to a brand associated with a good cause. This represents an increase from 63 percent in 1993.6 Other studies show a dramatic downturn in the value of a company's stock when a company is accused of ethical wrongdoing. The rapid growth of the ethical investment market demonstrates the need for companies to be concerned about their social performance.

Technology and the increased power of the media to influence public opinion has contributed to a rise in the importance of reputation. Companies are starting to recognize that their reputation depends on developing credible relationships with their employees, customers, nearby residents, and suppliers. This is especially true in a networked world where everything about a company can be known instantly.

A good reputation, in these days of instant communication and employee empowerment, can not be won through high-priced advertisements. Simply throwing more money at a reputation problem is bound to fail. Disgruntled employees, unhappy customers or frustrated citizens can too quickly garner media attention and undo the glitziest of public relations campaigns.

A solid, value-creating reputation is grounded in relationships that corporate leaders establish with others inside the company. Is the company managed ethically? Is there a cohesive corporate culture? Are people treated with respect? These corporate values are translated into the myriad of implicit and explicit rules governing the behavior of employees. Corporate reputation is built or destroyed as employees interact with others inside and outside the corporation. Especially in this era of instant communication, reputation is based on these thousands of interactions between people: Reputation is created in relationship.

How to Build Collaborative Stakeholder Relationships

When a company establishes collaborative relationships with stakeholder groups it is similar to the process individuals go through to find and develop lasting interpersonal relationships. Enduring relationships are based on a foundation of common values and history--the sense of "we." In successful marriages or friendships, the partners develop mutual interdependence but also define their boundaries so that each benefits from the success of the other but retains his or her identity. Partners in successful relationships also learn how to deal with conflict, resolve power struggles, and come to some agreement about behavior with the "in-laws" or other mutual friends. The same is true with building long-term corporate-stakeholder relationship.

The acronym "FOSTER" represents each the six steps involved in building stakeholder relationships. "F" is for establishing a solid foundation of values and ethics, "O" is for organizational alignment, "S" is for strategy development, "T" is for the process of building trust, "E" is for evaluation, and "R" is for renewal. The word "FOSTER" is chosen deliberately as it means "to nourish, to bring up with care, and to help grow or develop."

Stage One: Establish a Foundation

If we are dishonest, self-centered, or motivated by greed or jealousy, our relationships tend not to last long. If we have not clarified our needs, we become enmeshed in relationships that are unsatisfying and not aligned with our life goals. The same is true of relationships between a company and its stakeholders.

Companies must decide what they stand for, what they want from their stakeholder relationships, and what they expect to get back. They must also develop and operate from a set of values and ethical principles that supports the growth of long-term relationships. A company's values provide a solid foundation for improving existing relationships and for creating new, positive stakeholder relationships. They also serve as the DNA of the organization, allowing the unique aspects of the corporate culture to be transferred from employee to employee and from one generation of the company to the next.

Corporate values start at the top with the company's leaders who have--and demonstrate--a clear and compelling vision for the organization along with a strong set of values. They care about people, and are able to clearly communicate a vision that is driven by their ethical principles. They create a corporate culture that fosters reciprocity, ethical behavior, and mutual respect.

Corporate Values That Support Collaboration

An organization's corporate culture and the values it embodies can support or discourage productive collaboration. Corporate values will define how relationships are developed and, to a large extent, if they are successful. The following are some of the values that are most essential for companies engaged in strengthening collaborative relationships.

· Systems Thinking - Connectedness. Systems thinking is central to collaboration, placing the organization within the web of relationships that define and sustain it. A systems view of the world implies a focus on the whole--not just the constituent parts. To identify and establish productive relationships, an organization and its employees must understand how they fit into the larger systems of which they are a part. Sometimes this way of thinking is expressed in spiritual terms.

Systems thinking also assumes that individuals are actively involved in constructing reality, in interpreting information, and making meaning for themselves and with others. Systems thinking acknowledges the role managers and employees play in constructing relationships with stakeholders, the dynamic nature of those relationships, and the importance of creating a shared understanding of each other's assumptions and beliefs.

· Stewardship. Stewardship involves a set of beliefs that puts service over the pursuit of self-interest. Within this set of values and beliefs, employees, for example, see themselves as stewards of the organization, and beyond that, the community. Individuals who see themselves as stewards are naturally committed to ensuring the well-being of others and the sustainability of the enterprise and the broader society.

Stewardship is also aligned with the notion of reciprocity--the idea that give and take are necessary and desirable sides to every relationship, even in business. Reciprocity is fundamental to building collaborative relationships with stakeholders.

· Authenticity and Trust. For relationships to thrive, partners must have a sense that the other party has their best interests at heart, and that they will act honorably and fairly. Studies show that ethical behavior is a precursor of trust, and trust is essential for building strong relationships with customers, suppliers, employees, and the public.

Honest and respectful communication is essential for creating trust. Sharing ideas in a collaborative relationship requires that people are vulnerable and are exposed to conflict and ambiguity. People need to trust each other to allow this sharing to occur.

Organizations that encourage authentic, honest, and respectful dialogue create an environment in which disagreements and conflict become a valuable source of learning. When individuals can communicate their thoughts and feelings honestly and without fear, the creativity and productivity of collaborative ventures increase exponentially.

· Wisdom of the Individual. Everyone has a contribution to make. Each of us has inner wisdom and holds a part of the truth. This belief is key to establishing productive relationships with stakeholders. It broadens leadership and results in more decentralized decision-making within the organizations and more egalitarian relationships between staff at different levels. Believing in the wisdom of the individuals creates an employee mind-set that external stakeholders have an important and meaningful contribution to make.

· Spirit of inquiry and experimentation. Companies that encourage their employees to take risks and support them in learning from situations and experiences will be more likely to benefit from stakeholder relationships. Staff involved in building relationships inside and outside the organization will be more likely to identify opportunities, develop innovative solutions, and continuously adapt to changing realities if the corporate culture is dynamic and supports experimentation.

Stage Two: Aligning Systems and Structures

Creating internal structures and systems that support collaboration will help to ensure effective relationship-building. A great deal of time and resources can be wasted, despite good intentions of skilled employees, if an organization's system and structures discourage collaboration. This can happen, for instance, by limiting communication, creating unnecessary time delays, or making it difficult to obtain the resources needed for new partnership development.

Ensuring that individual staff members who are involved in relationship-building have the motivation and skills to identify partnership opportunities and communicate and negotiate effectively with others can also substantially increase the impact of relationship-building initiatives outside the organization. It is important to identify the overall level of awareness and understanding of key issues as well as the skill level and motivation held by individual employees.

Collaboration skills are also important for internal collaboration. For example, a cross-functional team with representatives from community relations, marketing, human resources, and operations could play a pivotal role in planning and implementing an employee volunteer program. Staff members from sales, product development, finance, and marketing may need to collaborate to plan and carry out a joint venture development project with a supplier. Employees, just like organizations, can be more or less ready for collaboration.

Like all imperfect human beings, no organization can ever hope to reach a state of complete readiness for relationship-building. Often it is through the process of learning and growth with our partners that we build strengths and overcome our weaknesses.

Nevertheless, assessing and reaching a certain level of organizational readiness will make success more likely. This involves aligning internal systems and structures to remove barriers and add or strengthen incentives and support mechanisms. The alignment begins with a review of existing systems to identify areas where changes are needed.

Essential systems to support collaboration include:

· rewards and recognition for collaborative initiatives,
· information systems to promote and support group dialogue,
· 360-degree communication to foster cross-functional, multi-level internal partnerships,
· training and mentoring to ensure staff have the necessary attitudes and skills, and
· participative decision-making so that employees can respond quickly to the opportunities and needs of stakeholder partners.

Stage Three: Develop a Stakeholder Strategy

Corporate-stakeholder relationships, like interpersonal relationships, are based on trust and governed by implicit and explicit contracts that exist between partners. These contracts are often unspoken and are subject to on-going negotiation. They specify what both parties expect from the relationship and what they will give in return.

A stakeholder strategy is the mechanism by which companies define their stakeholder goals, expectations, and commitments. It is based on the company's core values, the overall business plan, information about the external environment, and dialogue with stakeholders. Through dialogue, the company gains a better understanding of the expectations and perceptions of employees, customers, and other key stakeholders. Goals are established for each stakeholder group.

During this stage, companies identify potential partners. Compatibility between organizations is probably the most important factor in determining the longevity of a business relationship. To identify compatible partners, questions can be asked like, Are corporate cultures similar? Is your potential business partner willing to share information and plan activities jointly? Are relationships within their organization fractious or harmonious?

Stage Four: Harnessing the Power of Long-Term Relationships

Establishing powerful collaborative relationships is not easy or quick. Time is needed for people to get to know one another, build trust, deal with organizational issues, negotiate agreements, and manage the logistics of working together.

Partners must clarify their expectations (what's in it for me?); develop structures, roles, and responsibilities that work for everyone; and establish milestones to evaluate progress. They must also be willing to learn from each other and have the skills to communicate effectively. Communication ground rules should be set early in the process to create a safe environment within which individuals feel free to express their views. Power issues must have been sorted out and the partners must have developed effective strategies for resolving conflict.

As the relationship deepens, expectations and values are clarified, shared language develops, and a vision for the partnership emerges. The "we" of the relationship is established. To reach this deeper level, the collaborative group must create the conditions that build commitment, foster innovation, and encourage win-win solutions. If this environment is created, the "collaborative mind" develops, with shared language, a common vision, and the potential for developing creative solutions.

Stage Five: Evaluating Relationships

Occasionally, it is a good idea to ask our friends or lovers how they think the relationship is going. Are they happy? Are their needs being met? Are there problems that have been brewing but never talked about or resolved? A regular relationship check-up can often avoid major problems down the line. It can also help to open lines of communication and help each of the partners gain a better understanding of the other.

Companies also can benefit from a regular assessment of their relationships. Using a stakeholder audit, companies can:

· monitor their performance on key social-relationship goals,
· consult with stakeholders to gain an understanding of how they view the company's commitments, the relationship-building process, and the outcome of those relationships,
· clarify and improve "social" performance,
· build employee and stakeholder support, and
· increase transparency through the reporting of this information.

Stage Six: Renewal

Relationship-building involves on-going effort and a commitment to continuously learn from and respond to the interests and needs of partners. This is why I have included the "renewal" stage--there is no end of the road in relationship building.

To nourish relationships and help them grow, solicit regular feedback from partners. Evaluation will inevitably lead back to the beginning of the process: Are we still committed to this relationship? How can we resolve tensions or barriers? What will it take to establish greater levels of trust with our partners?

Conclusion

Relationship-based management offers a practical and effective approach to managing in a new economy. It also provides an integrated framework for managing intangible assets like reputation, brand equity, employee know-how, and long-term alliances. Visionary leaders who want to transform their organizations may find they can use this values-based management framework to establish positive long-term stakeholder relationships. In so doing, they will help their companies become more profitable and sustainable.

Members of boards of directors, investors and other stakeholders may find relationship-based management concepts useful. They can use the ideas to develop a business case for a new, responsible approach to managing stakeholder relationships. Boards and investors have an important role to play in convincing business leaders that responsive and responsible companies will be more successful.

Finally, line managers in departments such as human resources, public relations, marketing, and finance may find that relationship-based management offers a framework for aligning their company's vision, values, relationships, and information management systems.

1. John Kotter and James Heskett, Corporate Culture and Performance. New York: Free Press, 1992.

2. Arie de Geus, The Living Company. Boston: Harvard Business School Press, 1997. See also "The Shell Study: Lessons in Longevity," Perspectives on Business and Global Change, Vol. 11, No. 2, June 1997, pp. 81-90.

3. Max Clarkson, "Good Business and the Bottom Line." Canadian Business Magazine, May, 1991, p. 28.

4. Larue Tone Hosmer, "Do Good Ethics Always Make for Good Business?" Strategic Management Journal, Vol. 17,1996, p 501.

5. Margaret Blair, Ownership and Control: Rethinking Corporate Governance for the Twentieth Century. Washington, DC: Brookings Institute, 1995.

6. Cone/Roper, Cause-Related Marketing Trends Report, 1997.

Ann Svendsen can be reached at CoreRelation Consulting. Phone: 604-437-6112. E-mail: svendsen@istar.ca. Website: www.CoreRelation.com.