Week Two: Managing Stakeholders > Introduction to Stakeholder Management > Welcome to Second Week
- In this session, we will be looking at two very interesting ideas.
- In the first, part we will examine an increasingly influential called managing for stake holder value, which means going beyond conventional norms of maximising shareholder value.
- In the second part, we will look at how a firm’s performance may be moderated by actors with whom it had no intent to engage with in the first place.
Week Two: Managing Stakeholders > Introduction to Stakeholder Management > The Example of the Burger
- Does this price reflect the true cost of a burger? What are the hidden costs associated with the production of burgers that are not paid by the final customers but rather absorbed along the way? Let’s find out the impacts of each ingredient.
- The main ingredient of the burger is the meat patty.
- What if we try to look at the broader picture? According to NPD, a global information company, in the year 2014 alone, US restaurants and food service outlets served 9 billion burgers.
- Does this amount reflect the hidden cost of burger manufacturing, such as the global warming caused by the huge emissions of greenhouse gases during the growing, transportation, and treatment of each ingredient? And now that you have learned about the stakeholder theory of the firm, what do you think are the impacts of burgers, both positive and negative, on each stakeholder? We let you reflect on that.
- Prof: Wait! Before you eat this burger, let’s try and visualise who would be impacted by the company that makes this burger.
- Let me start with an obvious one-consumers, people like us who are interested in eating this burger.
- Why don’t we spend a few minutes and try and write down all those entities who might be influenced by the manufacturer of this burger.
- Student 2: all the vegetable that you find inside the burger.
- Student 3: How about activists? Like, animal right activists who are worried about how the animals are filled in a chicken burger or in a hamburger.
- Student 4: Probably the supply chain handlers who want to provide all the ingredients.
- Student 4: The bakery or the company which makes the burger.
- Let’s spend a few minutes put down as many of these actors… Student 1: Okay.
- Let’s put different… Prof:.as possible and let’s put them on way.
- We have… Student 2: Let’s include the environmental organisation and the social organisation.
- Student 1: Some local groups that don’t want fast food.
- Obviously not all of these actors influence the company that makes this burger equally.
- Can we reorganise this such that those who are most interested in this company are located closest to the burger? Shall we do that? Students: Yes.
- Student 2: I would say this would include regulatory because they have an active role in… Prof: Let me put that in.
- Student 4: I don’t think these people will have any, say the activists, direct… Prof: Activist would have a say but, you know, you can move them one level further.
- Student 3: What about competitors? Prof: What do you think? Student 1: I think put them close.
- Student 1: Healthcare and hospitals, it would be-it not be close I think.
- Student 4: Professor, what do you think about pharma firms? Prof: What do you think? Student 4: Yes.
- They are not directly connected, unless they consume the burgers, they don’t.
- What about plants and animals? Do you think they are stakeholders? Student 4: Of course, they go into the burger, right? Prof: They go into the burger.
- Student 1: But where are they? Student 4: They are here.
Week Two: Managing Stakeholders > The Stakeholder Theory of the Firm > Who Is a Stakeholder?
- We will call those in the inner circle as primary stakeholders and those on the outer circle as secondary stakeholders.
- The stakeholder view emerged from a variety of disciplines including corporate planning, systems theory and corporate social responsibility.
- In other words, stakeholders depend on the organisation to fulfil their own goals and in turn the organisation depends on them.
- External stakeholders include shareholders, customers, suppliers, financial institutions and unions.
- Stakeholders can also be described, as I just pointed out, as primary and secondary.
- Primary stakeholders include customers, suppliers, employees, investors and communities.
- In our diagram, the outer ring has stakeholders we may call as secondary because while they influence a corporation, they do so by influencing the relationship of the primary stakeholder with the corporation.
- Are they stakeholders? I will let you reflect on this question for a while, and we come back and address this at a later part of this lecture.
Week Two: Managing Stakeholders > The Stakeholder Theory of the Firm > The Stakeholder Management Theory
- Why should firms be concerned about stakeholders? The first reason is that our ability to predict the trends in the external environment improves if we monitor stakeholders.
- Two, a stakeholder perspective enriches the information based for decision making.
- Three, there would be higher levels of trust, transparency and accountability leading to increase social legitimacy if a stakeholder approach is followed.
- Four, a stakeholder perspective allows a firm to outperform its competition.
- Finally, there could also be moral arguments for adopting a stakeholder approach.
- Because paying attention to stakeholders is so important, stakeholder analysis becomes even more important.
- In analysing stakeholders, we ask the following questions.
- Who are my stakeholders? Are they located where we expect them to be? It’s important to recognise that stakeholders are not homogenous groups.
- In some cases, single powerful stakeholders may often act differently or act beyond their assigned role.
- Can we reposition some stakeholders either by reducing or increasing their role or power? Are we meeting the demands of the stakeholders to be kept informed or kept satisfied as required? There are two alternate dominant perspectives on managing a business.
- As you can see that multiple stakeholders plays conflicting demands on the corporation.
- Is the stakeholder a problem or an opportunity? Traditional approaches a stakeholder management were based on the assumption that we depend on the stakeholder for resources, and there are persuasive moral arguments for managing stakeholders to achieve cost reduction, differentiation or legitimacy.
- New thoughts in stakeholder management argue that there is a potential to use the stakeholder perspective to understand changes in the external environment and therefore improve your long-term success.
- Remember, if you don’t manage the stakeholders, they will manage you.
Week Two: Managing Stakeholders > The Stakeholder Theory of the Firm > Thought Leader Insights
- Prof. P D Jose: Let me start by thanking you for agreeing to speak to our students So, the first question is can you tell us briefly about the genesis of the theory and how it challenged conventional norms of decision making in business? Prof. R. Edward Freeman: Well, stakeholder theory really started as dare as I can tell especially with the word stakeholder in two places, Eric Rhenman, who was the father of industrial democracy in Sweden and studied the work of Herbert Simon and Chester Barnard and those sort of folks had the idea.
- I’m not sure of his connection with Stanford but the Stanford Research Institute, people that did strategic planning did a report every year called the business planning report, and as I’m told the story, it was started by Charles Ainger from Cambridge; they were sitting around trying to figure out what they were going to call these groups in the environment-customers, suppliers, employees, interest groups, etc.
- What are they going to call all these groups that have a stake in this? And a technical writer, a woman, by the name of Marion Doscher said well, you mean these stakeholders? And then she knew the ancient Scottish origins of the word as people that held the stakes in a gamble.
- The people who took it seriously were people who did business ethics and corporate social responsibility because again there’s a long tradition dating earlier to Mary Parker Follett in the early part of the century and then later to a guy named Bowen who had called out these interest groups, etc.
- It became a kind of more accepted idea, a quick story, I wrote a working paper in 1978 called Stakeholder Management with a colleague of mine, James Emsaw, early mentor and we sent it to a journal to be listed as a working paper and journal editor called me and said, well, we’ll list your paper, not publish, just list as a working paper.
Week Two: Managing Stakeholders > Managing for Stakeholder Value > Thought Leader Insights
- Prof. P D Jose: But it’s also true that when you look at stakeholders, different stakeholders hold different levels of influence on the organisation and managers certainly need to respond to some stakeholders quicker and faster than others.
- You need to figure out how to create value for customers and this interest group or how to create value for customers that also creates value for suppliers and employees or how you create value for shareholders that also creates value for communities.
- We need to figure out as business school professors, how we get our students to exercise their imagination and make it richer so they can figure out how to solve problems that solve-that satisfy multiple stakeholders simultaneously.
- Prof. P D Jose: Yeah, that’s really powerful insight, the point that you make that purpose and stakeholders go together, and there have been number of studies, as you know, which really have shown that firms with purpose and underlying values tend to survive for long periods compared to others.
- I’m also interested in knowing any examples that you may have, you know, where stakeholder approaches may have failed and why they must have failed? Prof. R. Edward Freeman: Well, I think there are lots of examples.
- I remember one example I have written about and which-we had a team, an internal team of stakeholder experts who were responsible for interacting with the actual stakeholder.
- The stakeholder idea is just the framework for thinking about business, and it’s not a framework that’s, you know, one size fits all.
- You really have to think about what kind of problem you’re trying to solve before you launch off and say, “Well, the real issue here is we have some stakeholders we haven’t identified.
Week Two: Managing Stakeholders > Managing for Stakeholder Value > Corporate Stories (1)
- Let’s look at a few stories of how firms have engaged or refused to engage with stakeholders, and what has been the impact of their actions.
- The McLibel case began in the mid-eighties in the UK when a group of activists called the London Greenpeace decided to take on McDonald’s and circulated a brochure which said what’s wrong with McDonald’s? As we see in the slide they identified a number of issues that were caused by the excessive consumption of the McBurgers, ranging from rainforest destruction to obesity, exploitation of children, health impacts, bad employee practices, litter, waste and so on.
- Another positive example of a stakeholder management process is that of Nestle.
- As you can see, this matrix maps stakeholder’s concerns against possible impacts on Nestle.
- On the right hand top corner, you see water availability, water concerns mapped as a key concern both for stakeholders as well as in terms of the possible impact on Nestle.
- This type of a mapping will help the firm prioritise its action plans for the future in terms of managing its stakeholders.
- In order to manage stakeholder issues better, Nestle proposes to update this matrix every year and so that stakeholders can benchmark the company’s progress in these areas.
- This probably allows the company to prioritise on key stakeholder concerns and strategic actions that maybe required.
- This materiality analysis has helped Nestle to find its existing commitments to its stakeholders.
- Here is a positive example of addressing stakeholder concerns and at the same time improving the sustainability outcomes for the company.
- From Nestle to McDonald’s to a large number of organisations, almost every organisation is faced with the challenge of accommodating stakeholder interests.
- Not all the stakeholders engage with the firm directly and that makes it even more difficult for corporates to anticipate and engage with stakeholders.
- I’m sure, since you’ve been working, you’ve been here for a long time, you’ve come across firms that have created innovative ways of pinning stakeholders.
- Would you have any examples to share with us? Prof. R. Edward Freeman: Well, uh, Whole Foods, which is one of my favorite companies, a grocery store here in the U.S. manages every two or three years to have a kind of stakeholder conclave.
- They get representatives of their stakeholders to come together and they have a two- or three-day meeting talking about what were the big projects that they launched two or three years ago, what happened to them, what are the-which were successful, which were not, what new project should they have, is there a purpose still relevant, do they need new pieces to that, and I think that’s a pretty interesting idea.
- The idea is if I can make my suppliers’ community stronger, it’s going to make my suppliers stronger, it’s going to benefit in the other stakeholders as well.
- Now in both these cases, these interactions with multiple stakeholders are absolutely driven by purpose.
- I think it’s ironic that in my old stakeholder book I get so much credit for, nobody ever reads the chapter on purpose.
- There’s lots of other things going on with how you reach stakeholders via social media, via new technology, and that’s really changing how we thing about stakeholder engagement.
Week Two: Managing Stakeholders > Stakeholders and Non-Market Strategies > The Importance of Non-Market Stakeholders
- You’re now thinking, who are non-market stakeholders? To understand that, we’ve got to go back and examine what the market and non-market environment of a business is.
- When we refer to the non-market environment, we refer to a sociopolitical, legal arrangements that might structure interaction outside of, but in conjunction with, markets and private agreements.
- Non-market stakeholders are usually those who do not engage in a direct economic exchange with the business.
- Firms are likely to have considerably more freedom of action in how, if at all, they respond to demands from non-market stakeholders that conduct no economic transactions with them.
- The non-market theory of the firm was studied by David Baron who wrote a set of wonderful papers on non-market strategies.
- Why is non-market strategy important? The choices that you make in the marketplace with respect to products, customers or technologies influence certain elements of the non-market and create a non-market environment for you.
- When we talk about non-market theory, we are really talking about politics, law, psychology and ethics in forming your decision making.
- To understand non-market stakeholders better, let’s go back and revisit the stakeholder map that we created some time ago in this session.
Week Two: Managing Stakeholders > Stakeholders and Non-Market Strategies > How to Deal with Non-Market Stakeholders?
- In this article, she maps a portfolio of stakeholder management strategies using the three criteria of power, resource dependency and urgency.
- Let me clarify here that power here refers to the firm’s power and not stakeholder power as we saw in the frameworks before.
- Here I have drawn three circles with high urgency, high power and high resource dependency.
- To understand the kind of stakeholder strategies that we need to adopt, we can look at the intersections between these circles.
- In the intersection, between high urgency and high power, the strategy that Lawrence suggest is to wage a fight.
- This involves opposing the stakeholder demands and continuing with your existing strategy.
- The third strategy, the intersection between high resource dependency and high power, the suggested strategy is wait.
- The final segment which is the intersection between high urgency and high resource dependency.
- If it finds that the issue is not amenable to resolution, then the best suggested strategy would be to withdraw from that arena or that location and explore other locations.
- We are talking about this because over the last few decades, we find that society has been placing more and more pressure on businesses to perform in a socially responsible manner.
- It has to end the goodwill of the stakeholders, The only way a corporation can exhibit longevity and succeed over a long time is if it has the goodwill of the society.
- In the recent past, particularly in the last three decades, some of the corporate leaders have forgotten this important idea and have been overcome by greed and have been less than fair to the society and therefore this has come to the front burner.
- At the end of the day, the primary responsibility of a corporation is to maximize shareholder value while ensuring fairness, transparency and accountability to every one of the stakeholders.
- Who are those? Customers, employees, investors, vendor partners, government of the land and the society.
- In a pluralistic society such as India, isn’t it difficult for a corporate to manage these conflicting demands from stakeholders? N. R. Narayana Murthy: Not really.
- There is one fundamental question that every corporate leader has to ask before taking any decision and that is-will this decision of mine enhance respect and trust for my corporation and for myself? If each of the corporate leaders ask this question, then I have no doubt at all that we will do everything right by every one of the stakeholders because then customers will be happier, employees will be happier, society will be happier, government will be happier, vendor partners will be happier, investors will be happier.
- The simplest way of reducing this complexity is to ask a question-will my decision enhance respect and trust for my corporation? Prof. P D Jose: Do you think it’s even desirable for a corporation to play an activist role in helping transform society? N.R. Narayana Murthy: Well, I think there are areas.
- The quality of higher education in this country is one area which has tremendous impact on us and also, it has value to the society.
Week Two: Managing Stakeholders > Stakeholders and Non-Market Strategies > Corporate Stories (2)
- How does non-market environment influence corporate strategy and impact corporate performance? Let me illustrate the two very interesting cases.
- The first is that of Chiquita bananas in Colombia and the second of Shell in Nigeria.
- Our second story is that of Royal Dutch Shell which began its operation in Nigeria in the late 50s. Shell had a long history of working very closely with the Nigerian Junta which was a government that was probably despised by several of its citizens.
- While Shell claimed innocence in these matters, the activist backlash was almost immediate and directed at Shell at its various operations at the time.
- Both in the case of Chiquita and Shell, you find that the market strategies in the industry that they operated in, oil industry in the case of Shell and banana industry in the case of Chiquita, were significantly influenced by the non-market environment.
- The fact that Shell chose to operate in Nigeria created a non-market environment which influenced Shell’s policies and practices and sales opportunities in every other market that it operated in.
- How do you analyse these strategies? Fortunately for us, David Baron from the Stanford Business School has created a framework to help understand how non-market strategies and non-market issues may be analysed.
- As Baron states, non-market strategies are really important for a corporation’s survival and success.
Week Two: Managing Stakeholders > Stakeholders and Non-Market Strategies > Non-Market Strategies
- What are the four Is? Issues, interest groups, institutions and information.
- What are issues? Any political, social or legal concern that confront the industry or the economy is an issue.
- The key questions that you ask are: how is it defined, what are the measures and who is affected? Note that not all issues are threats.
- Interests are groups, both organised and unorganised, who are affected by or concerned with the issue.
- It’s often at the core of what interest groups plan to do and therefore provides a mean for resolving the issue.
- In an interesting article titled “What every CEO needs to know about non-market strategy”, which appeared in SMR, David Bach and David Allen developed these ideas further using the3 framework.
- The3 framework is built around the analysis of issues, actors, interests, arenas, information and assets.
- What is the issue? Who are the actors? What are their interests? In which arena do these actors meet? What information will move the issue in this arena? What assets do the actors need to prevail in this arena? It’s important to understand it’s just not information but other assets that also matter, such as reputation, networks, knowledge or relationships with key actors.
- By drawing a strategic map, a company can plot what information and assets it may need to shape the issue’s evolution in a way that favours its business interest”.
- Also think about how the different approaches and strategies that we have discuss so far can be applied in the cases it-two instances that we talked about, the case of Shell and that of Chiquita.
- How high was the firm power in both these cases? What was the extent of their dependency for resources on the stakeholders? And how urgent was the issue to be resolved? You might then get a clue as to what would have been an appropriate strategy in solving the problem that Chiquita and Shell faced in Colombia and in Nigeria.
- How does a firm accommodate the demands placed on it from both the market and non-market environments? It requires what David Baron called as an integrated strategy.
- That’s how you build a strategy that dominates both the non-market and the market environment.
- Along with that we will look at theories related to issues management, crisis management and how do firms evaluate, assess and manage sustainability risks.
Week Two: Managing Stakeholders > Bhopal Case Study > Introduction to Bhopal Case Study
- Now you have understood much of the theory that goes beyond stakeholder analysis and non-market strategies.
- The Bhopal gas tragedy is regarded as the biggest man-made industrial disaster of all times.
- On December 3rd, 1984, a Union Carbide subsidiary manufacturing pesticides accidently released 42 tonnes of methyl isocyanate gas into Bhopal exposing more than 500,000 people to toxic gases.
- Finally, I recommend that you watch this really interesting video of my students sitting together doing a role-play of various Bhopal stakeholders.
Week Two: Managing Stakeholders