Shedding light on stakeholders

The concept of the “stakeholder society” is not new (1) but has been developed over time by management gurus and politicians alike. The simple view of stakeholders as shareholders has been widened extensively to embrace the customer, the employee, the supplier, the taxpayer, the member of the local community and so on.

The early wisdom was that “If you look after the customers, the shareholders will be looked after too”. And so the spotlight shifted from the latter to the former. Then, as customer satisfaction became a key business objective, so the stake that a company has in customer loyalty and goodwill was seen to reciprocate that which employees had in their “careers” with the company.

Just as customers have been encouraged to have a “loyalty” stake in a company so exponents of the “supply chain” have encouraged companies to recognise the stake of suppliers and business partners. At the same time, legislation on equal opportunities, environmental pollution and so on reflects the ever-present role of government as a stakeholder in the companies’ activities.

So the spotlight has not settled on any one stakeholder for long. Indeed more players have been introduced for special attention from time to time.

What implications does this have for management who are trying to achieve a balancing act (2) between requirements of different and diverse interests?

How can they manage a business while the spotlight is continually shifting?

We can illustrate how the various stakeholders and their interests fit in by charting the creation and development of a business enterprise(3).

In this way we may shed light on all the stakeholders at once so that they can be addressed together rather than one at a time.

The foundations of any business enterprise are the idea or vision of the entrepreneur. This is the inspirational element that provides the potential for adding value to an ultimate customer and thereby profitable reward to the entrepreneur. The first step is to assess potential demand for the idea. This step in the process, let’s call it strategic management, will require a business plan to envisage both the product and the building – a sort of “artist’s impression” – in such a way as to test the viability of converting the idea into a commercially viable reality. This step also represents the first stages of market research in testing for value and product differentiation.

If the plan looks viable the entrepreneur will be prepared to commit his own resources to the venture. These may comprise his time, effort, intellectual energy or finances. He may also need to raise additional resources from elsewhere. Step two is to harness these resources through selling the merits of his business plan, backed by his own commitment, to potential investors. Where this involves borrowing money his success will be measured by the cost at which he has to borrow or the attendant conditions or sacrifices he has to make (such as providing security on his home or patents).

Having secured a level of resources sufficient to establish the infrastructure for his business, the next decision is how to deploy them most effectively.

The ultimate test for their effectiveness is the extent to which they contribute to meeting the requirements of the customer for whom the product or service is designed. The extent to which these are clearly known may determine the level of resource commitment that the company should make at this stage. For example, if customer requirements are not clear (and even potential customers may not know these clearly) then it may be wise to resist the temptations for economies of scale in favour of flexibility in design. At this stage, as in the first, market research is key. Too many companies have ignored the characteristics of their marketplace in building an infrastructure that is designed purely for production, or have invested too heavily without anticipating changing requirements among their customers.

Having deployed resources the company is now ready to produce and deliver to the customer. This stage in the process focuses on the value that is added to the customer and at what cost. It takes regard of the the consumables used in production and delivery of the product or service and the people involved. Second, it focuses on the ability of the company to assess the value received by the customer, particularly compared to alternatives available on the market. Product differentiation, marketing and selling are therefore key components of this process in enabling a company to price as close to the value received as possible and therefore maximise profits.

Unfortunately, there is no getting away from the demands of the tax man.

However, companies can have a pretty good try. Their success in doing so, through either reducing or delaying their tax liability, is the next step in the management process. It is designed to maximise disposable profit besides helping to defer demands on cashflow.

The final step is the decision on how best to utilise disposable profit.

A company has a choice-distribute or reinvest. Distribution can now take the form of repurchase of share capital as an alternative to granting dividends. The significance of this final step is in providing for future growth. Retained earnings clearly provide one source of financial resources for growth and this should deliver capital growth for shareholders. However, the challenge here is to recognise and respond to their requirements for a cash return while at the same time providing sufficient interest cover to lenders. Both shareholders and lenders represent the alternative source of financial resources for future growth and therefore realisation of future ideas.

This process applies equally to the creation of a business, to the development of a new idea within an existing business, or to the ongoing management and translation of an existing vision into reality.

Now that we have painted a picture of a business process architecture, where do the stakeholders fit in? Let’s take the key stakeholders in turn as they each have a unique interest in the company.

Shareholders, who provide the “owner’s investment”, if not the ideas that gave birth to the business, will expect a return from their investment.

This may be in the form of dividend payments or capital growth. Thus shareholders cannot be assumed to be a homogenous group. They may have differing requirements or priorities, particularly in relation to risk, and it is important for management to understand their shareholders when selecting the level of dividend or reinvestment. By the same token they should aim to be chosen by the kind of investor that best complements the company’s chosen path of growth.

Customers need to be closely researched in both the business plan and asset management processes. The value add of a company is effectively shared between the company and the customer according to the price it charges. The focus of interest for the customer therefore, certainly in the short term at the point of sale, is in the value add that the company offers them through its product or service.

Competitors may be regarded as stakeholders in a sense. They will take a keen interest in what value the business is adding to customers who are common to them so that they can evaluate relative value and product differentiation. They are also likely to be competing over assets such as sites or employees so they will also have a stake in that sense.

Suppliers will similarly be most closely involved in contributing to value add. However they are becoming increasingly key to asset management decisions which consider the possibility of outsourcing activities as an alternative to the company tying up resource in its own infrastructure.

Business partners are a class of suppliers to the extent that they provide contributory or complementary products or services to a company’s customers.

Their stake in the company may comprise investment in the relationship, in a tangible or intangible way. Siting one company’s packaging plant alongside another company’s manufacturing facility or providing a business loan can be regarded as tangible investments between business partners.

Investing one’s reputation and goodwill with customers by being closely associated with another company is an example of an intangible stake.

Employees are heralded by many companies as their most valuable asset.

However, their absence from the balance sheet (except as a liability when providing for redundancies) is a warning message against taking decisions, particularly in the area of asset management, without due regard to them.

Benefits in productivity are readily taken into account in the financial evaluation of business cases. However, implications on morale and skills of such investments can be equally critical in enabling employees to meet customer requirements and thereby realise revenue at an appropriate return.

The community at large is interested in two particular aspects of a company as a responsible citizen. First it will expect a fair contribution to the tax burden. This may influence the extent to which a company embarks on tax avoidance measures which might be detrimental to its image. Second, the public is scrutinising more and more the social and environmental policies and practices of companies in the way that they manage their assets, for instance in the areas of equal opportunities, treatment of effluent and use of recycled materials.

Finally, the requirements of the entrepreneurial spirit for resources to enable research and development of future ideas can be critical to the ongoing vitality and survival of a company. Kaplan and Norton (4) originally described this in their “balanced scorecard” as an “innovation and learning” perspective. Since this aspect and part of the process is about the realisation and scale of realisation of the dream or vision which provides the basic inspiration for the business, this is most closely identified with the entrepreneur himself.

We have now painted a picture of the business, its stakeholders and the way we are used to measuring it. This helps us to envision the new world of “the business society”, but how does it help us handle the complexities that arise?

Some recent examples of developments that have reflected the new world show how we can address developments as yet unrealised.

The recent announcements which herald a new impetus for employee shareholders is a case in point. In recent years the incentive of profit-related pay has encouraged employees to look to what they can do to increase profits (their part in the value add management process of the model). Profit may be a difficult concept for many employees to relate to. But what about share values which are notoriously at the whim of the stock market and which the employee may feel that he is unable to influence significantly?

If PRP is to be superseded by share options, how can this be presented as an incentive to employees?

In the world of the knowledge-worker the employee does have a direct influence on the asset management process. Employees not only represent a valuable asset in themselves but can be key to maximising the value, for example through utilisation, of assets in their care. Even while the average employee may indeed be unable to influence the tax management process it may help if he understands the reason for decisions arising from it. For instance, the decision over the location of company premises may be influenced by regional allowances which could directly affect after-tax profits, and thereby his stake.

The entrepreneurial spirit is hopefully alive in more stakeholders than the founder. In reality many visions may abound among the many stakeholders (employees, suppliers, customers, even shareholders), who contribute to the growth and innovation potential of the company. So a role of management is to seek to align these visions in such a way that they create synergy and not conflict. One application is to match the preference of shareholders between dividends and capital growth with the needs of the business to grow from either internally or externally generated funds. The growth management process is a precursor to the funding management process.

The community (not least the European Community) is having a stronger influence (for example, on effluence) over the running of companies.

Such disciplines as environmental accounting have arisen in response to the recognition of the growing maturity of this stakeholder, exercised through more and more institutional bodies.

Customers and suppliers have long been recognised as long-term stakeholders in the enterprise. They form the links in the value chain. By focusing on the value add management process they are peering into the heart of the building and, if they wish to build a long-term relationship, will be concerned about the long-term health of the business in all other parts of its body as well.

Competitors and business partners can sometimes change hats. A recent example is of ferry operators who have been fiercely competitive with one another for decades on cross-channel routes. With the emergence of the channel tunnel they have recognised their common objective in attracting customers to surface transport (or “cruising”) in competition to attractions of speed. A motorcycle retailer may be competing with another in the same town but be a fellow exponent of two wheels rather than four.

Finally, when we consider the shareholders, the model helps us to see that their interest covers the length and breadth of the “building”.

However, it is not enough to compare what shareholders put in with what they get out. The discerning shareholder will be concerned about the robustness of the entire fabric of the building. One weak point in the edifice and the whole building could collapse. The shareholders’ attitude to risk, and the company’s response to managing it, runs right through its organisation.

A business can perhaps be regarded as a family, comprising many relations or stakeholders. As in a family, such stakeholders may represent different generations. They may have different goals to aspire to as well as contributions to make. If a business is to endure and be successful, all the interests and expectations of all its stakeholders need to be recognised, not only by management but ideally by each other. In this way there is a real opportunity, not just for addressing each of their requirements in turn as the spotlight moves among them, but for sustained achievement of their requirements simultaneously.

Richard Bull is a senior consultant with World Class International.

He can be contacted on 01730-893394

1 See, for example, the Bullock Report on Industrial Democracy, 1977.

2 See, for example, “Balancing Act” by Colin Bainbridge; Management Consultancy, July/August 1996.

3 For an examination of the integrity of a financial perspective of the model see “A Window on Performance Management”, Management Accounting, April 1993.

4 Kaplan and Norton: “The balanced scorecard-measures that drive profitability”, Harvard Business Review, Jan-Feb 1992.