Feature Article
At Work
March/April 1998

Why We Shouldn’t Manage Stakeholders

Ann Svendsen

As businesses become aware of the importance of stakeholders to their survival, they look for ways to manage them effectively. But this risks undermining the very relationships they need to cultivate. Here’s an alternative approach.

The theory of stakeholder management taught in most business schools today focuses on the mechanisms by which organizations understand and respond to the demands of their stakeholders. Theorists have argued that stakeholder relationships can be managed using techniques such as issue analysis, consultation processes, external communications, and contracts or agreements. The managerial role is to direct and control interactions between a corporation and its stakeholders, and to buffer the organization from the negative impacts of stakeholder activities, preserve goodwill, and avoid public relations fiascoes. The job of a public affairs or community relations manager, for instance, is to anticipate how the company’s activities will affect public stakeholders and minimize negative reactions by instituting damage control.

Within this more traditional perspective, responsibilities for various stakeholder groups are assigned to separate divisions. Marketing deals with customer relations, community relations deals with local organizations, public affairs deals with the media, and so on. The relationships that develop between managers and stakeholders are shaped by the interests and values of managers rather than by the company’s strategic business goals and corporate values. This idiosyncratic approach has arisen out of the belief that corporations need to take steps to defend themselves from the demands of stakeholders.

There is, however, another more dynamic approach to stakeholder relations that serves to create, rather than simply maintain corporate value. It is based on the view that companies are both defined by and part of their sociocultural environment. Within this context, relationships with stakeholders are as essential to survival as air or water. Rather than defending the company against the demands of stakeholders, managers are responsible for building collaborative, mutually beneficial relationships with stakeholders.

Here I focus on how companies can build such a network of positive, mutually reinforcing stakeholder relationships. This network of relationships is essential for corporate success in our information-based, global economy, and also creates an evolving structure within which companies can help solve, rather than create, social and environmental problems.

Relationship-Based Management

Relationship-based management is a new term I use to describe an emerging approach to management that focuses on building a value-based and collaborative web of relationships with stakeholders. This proactive collaborative approach recognizes the interdependence that exists between companies and society and assumes that business prosperity is linked to the well-being of local and global communities, employees, suppliers, and the environment.

Relationships between the organization and its stakeholders are two way, evolving, and mutually defined. The manager is not separate from the stakeholder relationship but is part of it. Thus the idea of managing relationships, which is the traditional approach to stakeholder relations, is not only untenable but counterproductive in the long run for both the corporation and its stakeholders.

Relationship-based management represents a fundamental shift in management philosophy and attention. A singular focus on the needs and interests of stockholders is replaced by a focus on understanding and responding to the interests and perspectives of all of a company’s key stakeholders. The primary job of the manager shifts from keeping these relationships under control to nurturing and expanding the relationships on which the corporation depends. As stewards of corporate and societal resources, managers have the challenge of building and maintaining collaborative and hence sustainable relationships

Stakeholder Management Versus Stakeholder Collaboration

Some corporations are already living this new reality of relationship-based management. But collaborative approaches are typically confined to specific parts of an organization—for example, companies having a participative and democratic approach to employee relations or companies that have developed trust-based, highly interdependent relationships with their suppliers and customers. The following are some examples of recent collaborations:

Supplier Relationships. Tight bonds between companies and their key suppliers have been created in industries as diverse as automobile manufacturing, furniture retailing, and industrial robotics. Dana Corporation, for example, delivers a complete truck chassis, incorporating parts from 125 different suppliers, to two U.S. Mack Trucks plants. IKEA, the Swedish furniture retailer, commits to long-term relationships with its suppliers, and helps the suppliers to improve their products by leasing them equipment, providing technical assistance, and helping to find sources of raw materials.

Two fast-growing companies, Motoman Inc. and Stillwater Technologies Inc., have developed a tightly integrated and highly successful collaborative relationship. Motoman, a leading supplier of industrial robotics systems, and Stillwater Technologies, a contract tooling and machining company, now occupy offices and manufacturing space in the same facility; their telephone and computer systems are linked; and they share a common lobby, conference room, and employee cafeteria. The ties between the two companies developed over several years. Initially, Stillwater performed relatively small contracts for Motoman. Trust developed further as senior employees moved between the two organizations. An expansion in Motoman’s operations led to a proposal to Stillwater to share space. This closer proximity eventually led to more information sharing, joint projects, and new opportunities.

Employee Support. Companies are increasingly recognizing the rewards of responding to the needs of their employees by altering work arrangements. For example, San Jose National Bank reduced turnover and the use of consultants by allowing new mothers to bring babies up to age six months to work, and Aetna’s flexible work arrangements led to a reduction of 50 percent in turnover. Hewlett-Packard’s Financial Services found that when employees began working compressed schedules, productivity doubled. First Tennessee Bank found that units run by managers who ranked highest in the “work and family” area, as measured by employee surveys, have a 7 percent higher customer retention rate.

Relationships with Customers. The way Saturn works with its customers epitomizes a relationship-driven approach to marketing and management. Besides believing that their cars are well engineered, designed, and priced, Saturn car owners say they are loyal because of the company’s no haggle policy in showrooms, community involvement, and social values. The company has helped organize local Saturn car clubs, set up an Extended Family Database on its web site with testimonials from over 9,000 car owners, and organized community events in which Saturn owners, employees, and affiliates participate—such as the recent playground-building event in Toronto. Materials were donated by local businesses, and Saturn owners provided the muscle.

Community Investment. Seafirst Bank has formed partnerships with Indian Nations in Washington State to support tribal economic development through business education, employment development, and lending. Seafirst helped develop a series of education programs to provide the skills and knowledge needed for personal financial management and tribal economic development, encouraged children’s interest in science through a festival in 1995, developed a curriculum for Native Americans at Northwest Indian College, and provided training for Seafirst employees to better understand Native cultural issues central to building business relationships with this community.

Environmentally Sustainable Practices. CP Rail, a large Canadian transportation company, recently responded to the challenge of keeping rail-bed weeds under control without herbicides. After an enterprising employee suggested using steam to kill weeds, the company invested the dollars and time needed to develop a prototype steam machine. Not only did this innovation put an end to protesters flinging their bodies in front of trains and reams of negative media coverage, the steam machine saved the company money in chemical costs, reduced environmental impacts to zero, and created very positive community and media relations. The use of steam also circumvented tightening government herbicide regulations. However, one potential barrier to the continued use of the steam machine has arisen: the weeds have adapted to the steam treatment, causing CP Rail to go back to the drawing board.

A Comprehensive Approach. Rare is the company that adopts a comprehensive and strategic approach to building relationships with its stakeholders. Nortel (Northern Telecom) has embarked on this pathway. In its 1996 Environment, Health and Safety Report, the company laid out its commitments to stakeholders and the reasons why it believes these relationships are critical to long-term success.

In the early 1990s, shareholders were the number one priority for Nortel, one of North America’s largest telecommunications firms. Customers were also important, but less attention was focused on employees, suppliers, and communities. This ordering of stakeholder priorities began to shift in 1994 when the results of an employee opinion survey were matched up with customer surveys, indicating the existence of a strong positive correlation between employee satisfaction and customer satisfaction.

At the same time, Nortel was reviewing its Code of Conduct and held focus groups with staff to solicit input into the revision of the Code. Staff from all areas of the company were vocal in their recommendation that the company improve relationships with employees, communities, and suppliers and incorporate these goals into the Code of Conduct.

The fact that Nortel’s environmental management and reporting programs, established in the early 1990s, had paid dividends in terms of cost savings as well as public image provided senior managers with a level of comfort in considering broader stakeholder needs and interests. Although the staff still needed to present a business case for stakeholder relationship building, senior management was more willing to consider how such a shift in orientation could have short- and longer-term benefits and would be important for ethical as well as managerial reasons.

There were barriers, however. Employees and managers were already stressed and under pressure trying to meet demands for quality, timeliness, and innovation. They needed to be convinced that relationship building was worth their time and effort and to see that such efforts would be rewarded in terms of performance reviews. So the committee leading this initiative started an internal communications process to raise awareness and solicit feedback. Concerns were identified and communicated across departments. This communication process was effective, partly because the change processes around Total Quality Management had instilled in employees the idea that relationship building was everyone’s responsibility.

Other difficulties still have to be overcome. The company has to develop new measures to assess the impacts of stakeholder relationships and to define the company’s own objectives and limitations. Also, while commitments have been made with respect to the company’s impact on the environment and the health and safety of workers, they have not been formally adopted by other divisions of this large company. Extending these commitments to other stakeholders such as investors and suppliers will likely present unforeseen challenges and pressures.

A Holistic Approach

Collaborative relationships with stakeholders can increase an organization’s stability in a turbulent environment, enhance its control over changing circumstances, and expand an organization’s capacity rather than diminish it. For example, suppliers will be more likely to show optimal responsiveness to company needs (as well as flexibility in demanding payment in times when cash flow is limited) if there is a trusting relationship. Similarly, if a company has a good working relationship with the community, it is more likely to get cooperation when it comes time to expand facilities or engage in activities that will affect the community. An integrated, companywide approach to identifying and building strategically important stakeholder relationships offers the greatest benefits. In addition to increasing organizational effectiveness and consistency of response, this kind of holistic approach also allows the organization to build on the synergies that occur when positive relationships with one stakeholder group, such as a local community, start to have a beneficial impact on another stakeholder group, such as customers.

When a company establishes collaborative relationships with stakeholder groups it is much like the process individuals go through to find and develop lasting interpersonal relationships. We decide what we want from a relationship, consider how our existing relationships measure up or fall short, and decide whether there is some obvious gap. 

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 while retaining his or her own 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” and friends. The same is true with building long-term corporate-stakeholder relationships.

A brief description of the stages an organization will likely go through in establishing collaborative relationships with key stakeholders is given in the adjacent box. Given the growing importance of such alliances, and the limited amount of time that is available for such initiatives, companies must ensure that their efforts are as efficient and effective as possible. By making the steps involved in building relationships more apparent and the potential pitfalls and opportunities involved in this process more defined, organizations can achieve greater success. 

Ann Svendsen is a senior partner with CoreRelation Consulting, Vancouver, Canada. This article is adapted from her forthcoming book, The Stakeholder Strategy: Building Profitable, Sustainable Organizations (Berrett-Koehler),. She can be reached at 604-437-6112 or svendsen@istar.ca.

Stakeholders Defined

Stakeholders have been defined by R. E. Freeman in his book Strategic Management: A Stakeholder Approach as “any group or individual who can affect or is affected by the achievement of the firm’s objectives.”

Primary stakeholders have interests that are directly linked to the fortunes of a company. They typically include shareholders and investors, employees, customers, suppliers, and residents of the communities where the company operates. Some have also added the natural environment, nonhuman species, and future generations to this list.

Secondary stakeholders have an indirect influence on an organization or are less directly affected by its activities. They include the media and pressure groups, regulators, competitors, and others that form the social ecology of an organization.

Stakeholder groups can also be differentiated by the type of interests or stakes they hold. Stockholders’ and directors’ stakes, for example, are based on equity. Individual stockholders have invested money in the company, while directors and senior managers have invested their time and reputations. Other stakeholders (customers, competitors, suppliers, debt holders, and unions) have economic stakes or interests in a company. They can affect or be affected by a corporation’s financial success.  Community groups, environmentalists, and consumer advocates, on the other hand, have “sustainability” interests. Their stake is in the company’s impact on people and the environment.

Good Stakeholder Relations Pay Off

Research is showing that companies that establish a good reputation, trusting relationships with suppliers and community members, and sustainable environmental practices are more profitable.

• In a recent prize-winning research paper, Sandra Woddock and Samuel Graves established the link between stakeholder relations, financial performance, and quality of management. Their analysis of the Fortune 500 reputation survey results shows that building positive stakeholder relationships is not a zero-sum game but that solid financial performance is consistent with good treatment of other stakeholders such as employees, customers, and communities. They also found that companies that treat their stakeholders well are also rated by their peers as having superior management.
  
• John Kotter and James Heskett, Harvard researchers and authors of a recent book, Corporate Culture and Performance, note that successful, visionary companies such as Hewlett-Packard, Wal-Mart, and Dayton Hudson share a stakeholder perspective: “All their managers care strongly about people who have a stake in the business (customers, employees, stockholders, suppliers).” Their study showed that over an 11-year period, stakeholder-balanced companies showed four times the growth in sales and eight times the employment growth when compared to shareholder-focused companies.
  
• A study by Max Clarkson, director of the Centre for Corporate Social Performance and Ethics at the University of Toronto, indicated that over the longer term, firms that rate highest on ethics and corporate social performance make the most money. His research suggests that companies that concentrate exclusively on the bottom line often make poorer decisions, perhaps because they lack the information to anticipate opportunities and to solve problems before they become large and costly to remedy.
  
• A 1997 national study of consumer attitudes conducted by Cone/Roper found that 76 percent of consumers would be likely to switch to a brand associated with a good cause. In 1993, 63 percent responded this way.
  
• A 1995 survey of Canadian consumers by the Market Vision Group indicated that 26 percent of Canadians were actively involved in boycotting goods or services for reasons that had nothing to do with price or quality (the companies were simply viewed as bad corporate citizens).

Steps for Building Collaborative Stakeholder Relationships

1. Establish a foundation for relationship building

• Assess relationship building as a strategic direction
• Review and refine social mission, values, and ethics
• Communicate corporate commitment

2. Develop a relationship-building strategy and action plans

• Inventory and assess existing relationships
• Identify strengths and weaknesses and gaps
• Set priorities and goals
• Benchmark best practices
• Consult with stakeholders
• Refine goals and prepare outreach strategy
• Form stakeholder teams

3. Align systems and structures to support collaboration

• Assess organizational readiness
• Identify gaps and inconsistencies
• Assess systems and structures
• Make changes as needed

4. Form a collaborative group

• Invite stakeholder leaders to meet
• Exchange information and clarify expectations and perspectives
• Develop organizational structures
• Clarify roles and responsibilities
• Develop and implement projects

5. Harness the power of long-term relationships

• Deepen mutual understanding
• Explore and integrate ideas
• Generate new options and solutions
• Manage expectations
• Identify and resolve areas of conflict
• Ensure availability of resources

6. Evaluate and continuously improve relationships

• Design and conduct stakeholder audits
• Celebrate successes
• Learn from failures

• The Business Case
• New Growth: Building Collaborative Business Relationships (PDF)
• Social Audits Good for Bottom Line
• Stakeholder Engagement: A Canadian Perspective
• When More Than Profits Count: What we Know About Social Accounting
• FOSTERing Collaborative Stakeholder Relationships
• Managing the Human Side of Partnerships
• Why We Shouldn't Manage Stakeholders
• Building Collaborative Business Relationships
  

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