The role of stakeholders

The first question most people ask when the subject of the role stakeholders is raised is, ’who or what are stakeholders?’ This is probably the most important question concerning the role stakeholders, because if you don’t know who they are, then you cannot understand the role they must play – so we must first define who they are. Basic stakeholder theory states that the business owes a responsibility beyond their shareholders to those who have a ‘stake’ in how the entity performs its functions i.e. whomever the business impacts whilst completing its business.

Depending on what theoretician you subscribe to, these stakeholders include the shareholders, employees, governments, non-governmental organisations, customers, suppliers, creditors, the local community and even future generations. Thus you can see that there are many potential stakeholders in a business and this is because there are many people that can be impacted by how the business is operated. Employees are often considered the primary stakeholders as their economic wellbeing is tired directly to the company, even more so than shareholders for whom their investment might be a small one.

The suppliers and creditors of a firm are also important stakeholders as their business can be dependent on one large customer and the business it brings to them. As the circle of stakeholders broadens out, we can also see that the local community is often dependent on the salaries and peripheral business which a large business brings to them. However, the local community and future generations can also suffer if the environmental impact a business has on the local area is detrimental and reduces the quality of life. With this definition of stakeholders at hand, we can now fully begin to understand the role of stakeholders, which can be reduced down to three key functions; to ensure accountability, fairness, and transparency. Stakeholders must ensure that a business is held accountable for the full impact of their actions which they have in the setting they operate in. The stakeholders in the community around chemical plants, for example, must ensure that the business does not impose a ‘cost’ on them by polluting. Fairness requires that the stakeholders ensure that the business treats all those it interacts with ‘fairly’, this is a broader concept than legality and implies a moral element to their dealings. Stakeholders need, for example, to convince Tesco of the need to pay its suppliers and creditors as quickly as is feasible rather than on the last day that is legally possible. The latter criteria, transparency, reflects a need for stakeholders, such as the government, to ensure that businesses honestly portray their financial position rather than using accounting to simply portray the ‘best picture’ that is possible whilst staying within governing rules. This might have avoided the worst of the credit crisis from occurring by alerting the broader community to the mounting financial problems with banks. Thus we can conclude that the overarching role of stakeholders is to ensure that businesses comprehend the broader long-term impact its business has in the society in which it operates and how working together with these stakeholders is in its own long-term interest.

It is worth elaborating here on some of the issues raised in the first paragraph. It is often suggested that the model that focuses on the role of stakeholders rather than shareholders are at odds with each other. In other words, a business that attempts to satisfy stakeholders does so at the detriment of shareholders. However, this is not necessarily so. The role of stakeholders is to ensure that the business prospers in the long-term whilst also addressing their own specific needs and concerns – it is not the role of any stakeholders to do long-term damage to a business because whatever stake they have in the business would cease to exist and this is cannot be in their interest. Parties which seek to do irreparable damage to a business are unlikely to be classified as stakeholders by any theoretician. A business that remains in business over the long-term because it satisfies all of its stakeholders will likely be a consistently profitable business and this is also beneficial to the shareholders who obtain a share of the profits. Thus we can see that the role of stakeholders is also to highlight those shareholders and stakeholders interests should be complimentary in the long run not necessarily in conflict with each other. Often this is not understand and, in the short term, serious conflicts can occur between shareholders and stakeholders when the stakeholders, exercising their role of fairness, accountability or transparency, jeopardise the short-term profits of the company and so potentially affect shareholder’s income. This can occur, for example, with issues involving pollution control. The stakeholders in the local community can demand expensive solutions to limit the impact on their local environment; however the shareholders would obviously be concerned about the impact of this on profits. The process of resolving the conflict between the role of stakeholders and those of shareholders ultimately falls to the management of the business. Skilful management is able to mediate and negotiate between these competing demands by ensuring that the stakeholders are legitimately carrying out their role and then explaining to the shareholders the long-term benefits to the business of accommodating stakeholders.

It is worth concluding this piece by additionally examining the differing roles of stakeholders throughout the business world. The Anglo-Saxon business model practiced in the US and UK tends to set the role of stakeholders as a definite second-place to the concerns of shareholders and this is reflected in a ‘hire and fire’ mentality and a more short-term concern for profits. Whereas the European Social-Market model most definitely places the role of stakeholders on par with shareholders; employee’s representatives often have a place on the board of directors where they can better carry out their functions. Furthermore, there is much more consultation with and consideration of the concerns of the various stakeholders through the use of supervisory boards placed above the board of directors. It could be said that the role of stakeholders are much more clearly defined in the European model and integrated into the decision making process. The tendency in the Anglo-Saxon is to pay lip-service to stakeholders but to firmly limit their role once difficult decisions have to be made.  Thus, to conclude, the ultimate role of stakeholders is actually to explain and define their important role to management and shareholders.

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• SWOT analysis
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• PEST Analysis
• Product Life Cycle
• The role of stakeholders

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