What is stakeholder theory? Stakeholder theory holds that company leaders must recognize and account for all of the organization’s stakeholders — the constituencies that impact its operations and/or are impacted by its operations.
Stakeholders include employees, shareholders, customers, suppliers, creditors, the environment and society at large. Most stakeholders do not hold shares in a company. Rather, they are invested in a different way. Customers are the source of top-line revenue, and have always been recognized as essential business stakeholders. It is time now to also incorporate employees, the environment, suppliers and society as accepted and respected stakeholders to successfully manage an organization in an increasingly Volatile, Uncertain, Complex and Ambiguous (VUCA) world.
Businesses should care about groups beyond their investors, particularly since we have advanced beyond Peak Trust. A primary motive behind the growing corporate support for stakeholder capitalism is the erosion of trust in business. In recent years, the well-known Edelman Trust Barometer has been tracking this decline, observing that “trust is in crisis”.
We’re not just referring to the outrage that can readily appear on social media. For example, it wasn’t until a massive push from environmental activists that nuclear testing in the Pacific was declared illegal, or that international ivory trade became off-limits for all countries. Due to living in a networked world, civil society holds formidable power as communication technologies have increased transparency and the ability to coordinate activism. Civil society acts not only as the moral conscience of our societies, but also a reservoir of innovations waiting to be tried, tested and improved.
Citizens are rebelling against what they perceive to be a rigged economic system. Income and wealth inequality have surged in recent decades, as middle-class incomes have stagnated, and as labor markets have become more polarized. Has your company experienced community outrage? If you’re not engaging with stakeholders, then you need to start preparing for costly delays to projects, adverse media attention and hits to your share price.
Civil society (comprised of non-governmental organizations, private citizens and informal groups), weighs in on the debate by making their voices heard, and by swaying public opinion in their favor. Through a multitude of actions and channels, these stakeholders have been able to reorient governments’ priorities, funds and agendas.
These conditions are highly reminiscent of the period leading up to the Progressive Era of reform at the turn of the twentieth century, when policymakers broke up monopolies, introduced new protections for natural resources, and strengthened participatory democracy. Today, business leaders are rightly concerned that citizens will press for a new era of progressive policies that will curtail their company’s freedom to operate. To influence such efforts, leading companies are seeking ways to demonstrate their commitment to the communities where they do business. Yet, it is about more than just defending self-interest…
Long-Term Vision, Planning and Strategies
This approach isn’t just focused on preventing costly community outrage. Leading companies also realize that co-creation facilitates innovation. When organizations commit to working with stakeholders on common interests, they learn from one another’s diverse perspectives and expertise. This collision of ideas catalyzes the development of new products and services to strengthen competitive advantage.
That requires a shift from focusing solely on the short-term.
Today, organizations operate in an environment characterized by an accelerating rate of change (Volatility), a lack of predictability (Uncertainty), an interweaving of technological, societal and environmental forces (Complexity), and a strong potential for misinterpretations (Ambiguity). In this context, it can be too easy to focus on resolving urgent, but relatively unimportant, issues as they arise… and to do so at the expense of long-term issues of strategic and commercial significance.
Consequently, VUCA has a long-term outlook. Successfully meeting the challenges of our climate crisis also requires a long-term outlook. Workers benefit from a long-term outlook. They develop trust when they understand the company has a plan for their future. A long-term outlook retains investors who are in it for the long haul, and dissuades those seeking short-term profit taking. Customers benefit from a long-term outlook that examines their needs and invests in R&D to meet those needs with innovative products and services. Suppliers, if included in the development of long-term plans, benefit from a decrease in uncertainty around what they will need to deliver over time. Creditors can see how they will be repaid when they are informed of what the company is planning over the next years. Society as a whole would benefit as long-term allows for environmental, social and corporate governance (ESG) and sustainable development goals (SDG) which benefit the environment and reduce greenhouse gas emissions. Boards and C-suite members should want to manage long term – less stress and more room for creativity.
A long-term outlook enhances the viability of an organization. Investment motivated by environmental, social and governance concerns has risen to $30 trillion in recent years, and now accounts for one-third of funds under professional management. Pension funds, asset managers’ biggest clients, are increasingly using ESG rankings as a guide to portfolio decisions. There is mounting evidence that strong ESG performance correlates with higher equity returns.
In order to succeed in confronting our climate crisis and other significant issues, your organization needs the support of its stakeholders to achieve its business goals. That means potentially developing shared visions, plans and strategies. That may be challenging to some corporate cultures. However, when stakeholders feel that decisions are being imposed upon them, without their input, resistance is the likely result.
So the task becomes not only planning for the long-term, but partnering with stakeholders in the development and delivery of those plans, and in communicating to them what is planned and why… and how those long-term goals will be achieved.
Target Your Engagement and Communications
Strong leadership communication is key to building the relationships and trust required to succeed in a VUCA world. Leaders need to communicate regularly with target audiences (whether that’s customers, employees, suppliers, shareholders, or the local communities where they do business), to convey shifts in priorities, what to expect amidst change or how they intend to recover from unforeseen setbacks. Don’t forget the power of storytelling as we noted in our last article. The most powerful means to engage stakeholders is via relevant stories that engage and evoke emotion.
Attempting to communicate with all stakeholders, blanketing them with a one-size-fits-all approach, is doomed to fail. Key to efficient stakeholder management is targeted engagement of your “influencers”, those stakeholders with interest in your activities and power to create havoc (or harmony). As these influencers are receiving frequent and varied communications from multiple sources every day, you need to cut through the clutter and deliver your message. Bespoke messaging designed for each target stakeholder group is the key.
Effective, authentic and collaborative stakeholder management, backed by clearly articulated strategy and well-informed planning can ensure business continuance, socio-political license to operate, and stability in a VUCA world.
NOTE: This is the sixth article in our series about managing business in a Volatile, Uncertain, Complex and Ambiguous (VUCA) world. With our ongoing Corona virus issues, the resulting recession, plus our developing climate crisis, VUCA is the new normal. Our next article focuses on the need for reskilling of employees to successfully meet the challenges of rapid changes in many aspects of the operating environment.