First coined in 1984 by R. Edward Freeman in his book, Strategic Management: A Stakeholder Approach, Stakeholder Theory brought a new and somewhat radical approach to the study of organizational management and business ethics. Radical in the sense that it became the first theoretical framework to secure a prominent position for the interplay of values, responsibilities, and ethical decision-making in managing a business.
In contrast to the traditional shareholder view, stakeholder theory promotes a way of business conduct that takes into account all the parties that come into contact with a company’s ecosystem . From shareholders and employees, to customers, suppliers and the local community. A ‘stakeholder’ is a person or group that can affect or be affected by the business in question.
Here are three key lessons that we can learn from Freeman’s Stakeholder Theory:
- – Businesses that effectively manage all stakeholder relationships are more likely to succeed in the long-run.
- – Stakeholders must be considered together and not in isolation, working together in the same direction.
- – In the long-run, all stakeholders are equally important for the future of a business.
At the end of the day, both internal stakeholders (such as employees, management, shareholders) as well as external stakeholders (customers, the local community and even governmental or non-governmental organizations) – all have the power to significantly damage, and in extreme cases, bring down a business that mistreats them.
Wise companies must recognize the value in a stakeholder-driven management approach.
Andrei Rogobete is a Research Fellow with the Centre for Enterprise, Markets & Ethics. For more information about Andrei please click here.
The inspiring session of the day came from Daniel Servitje, Chairman and CEO of the Bimbo Group, Mexico.
Bimbo is one of the world’s largest baking goods industry firms with a capitalisation of US$12bn and around 129,000 employees.
The company was described as ‘rooted in long-standing values,’ shaped by strong corporate governance and a determination that businesses and society must work together for human dignity and the common good. The company, he said, was both highly productive and deeply humane.
The aims of the company where shaped by a matrix:
| Economic | Social | |
| External | Providing valuable goods and services to society | Contributing to the development of society in a sustainable way |
| Internal | Compensating employees, members, investors | Contributing to personal and professional development of employees |
This was a powerful reminder that profitability and sustainability are not incompatible. However, it is entirely reasonable for a company to have aims and objectives that are not simply defined by shareholder value maximisation. Of course, a successful and sustainable company may well do just that.
Daniel pointed out that his company was involved in sectors of the economy which attracted criticism – baked goods and health. The companies social responsibility platform was built on four areas:
All employees were encouraged to take part in the 3-day company sponsored off-site development event, covering person, family, work, society, culture and spirituality.
The fascinating thing about the presentation was the holistic and integrated nature of the approach to sustainability. Social responsibility was not an add-on, but fully part of the company and its objectives – and not as an alternative to profitability. At the heart of the company’s purpose was providing goods and services at profit. Alongside that came creating jobs, investment, promoting a formal economy (in a country, Mexico, where much of the economy is ‘informal’ which denies extensive tax revenue to the government), developing and sharing knowledge and skills. The outcome was better people, companies and countries.
It would be great if more companies, large and small, thought about their aims and objectives, the role of profit and sustainability, with the same degree of intent.
Dr Richard Turnbull is the Director of the Centre for Enterprise, Markets & Ethics (CEME). For more information about Richard please click here.
Are values and profitability incompatible?
Values have taken a central role in the debate about how private companies ought to conduct business in the post-recession era.
The idea that businesses should go beyond the narrow measures of shareholder value maximization and embrace a wider role of a ‘responsible citizen’ that cares about the society it operates in, is certainly not a new one. The 16th to 18th centuries saw the Quakers establish household brands such as Barclays, Lloyds, Cadbury and Rowntree. They were successful precisely because ethical behavior and a deep understanding of their responsibilities were the foundation of how they conducted business. Far from hindering profit, these companies understood that responsible behavior actually increased profitability (for more on Quakers in business, please see here). In the post-recession era, the idea of a values driven company (whether encompassed within traditional models such as Corporate Social Responsibility (CSR) or more recent development such as ‘B’ corporation certification) should therefore not be seen as simply an operational cost, or an add-on necessary only for PR purposes, but as a critical part of the long-term business plan.
But what exactly do we mean by Corporate Responsibility? Given the rather elusive nature of the concept we can easily find ourselves lost in the myriad of ideas that come to mind. However, CSR is effectively a management concept whereby companies integrate moral, social and environmental concerns in their business operations and interactions with stakeholders (adapted from the UN Industrial Development Organisation, 2015). By stakeholders we mean all actors that come into contact with the business itself, from internal stakeholders such as employees and owners, to external stakeholders such as customers, creditors, the government and so on. Ultimately, Corporate Social Responsibility is a business management strategy that holistically takes into account a company’s entire operational ecosystem.
From a more theoretical and rather traditional standpoint, one could argue that the odds are stacked against any significant CSR-related engagement. After all, it was Milton Friedman who famously claimed that “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” (New York Times, 1970).
Most business schools around the world have adopted Friedman’s notions defining the purpose of enterprise solely in terms of ‘maximizing shareholder value’. We’ve heard this definition many times before and at least for the time being, it provides us with a clear purpose of what all private sector entities should ultimately be aiming for, i.e. making profit.
However, it is within this pursuit of profit that divisions begin to arise. The goal itself has an embedded sense of urgency that could (and has done in the past – prior to the financial crisis) compromise future returns in exchange for short-term gains. So at the very least the concern should be with long-term shareholder value. More importantly, how is shareholder value to be defined? Contrary to popular belief, Milton Friedman did believe that ‘CSR’-type expenditure such as local community investments, employee training or involvement in charitable activities are justifiable since they contribute to the long-run interests of a firm, whist also generating corporate goodwill (Hernandez-Murillo, 2014). It is therefore crucial that perception surrounding CSR or similar spending is changed from being seen as a cost, to an investment, a commitment to the medium and long-term goals of a company. Academics sometimes refer to this as ‘profit-maximising CSR’, whereby the firm’s ethically-driven activities are aligned with the firm’s self-interest (ibid). It ultimately leads to a win-win situation whereby both the firm, as well as the stakeholders gain from the strategy.
This leaves us with two questions that seek to answer CSR alignment on one hand, and real impact on the other. In other words: 1. Is the strategy aligned with the overall aims of the firm? And 2. Is it achieving the desired impact?
Nike, the shoe and sports clothing manufacturer is a perfect example of a CSR strategy that was not just limited to charitable donations or environmental issues, but was brilliantly in tune with the overall strategy of the firm.
Known as ‘NIKE +’, the company shifted its focus from promoting its products to helping its customers. “Instead of putting up another campaign of billboards with celebrities saying ‘buy our shoes’…NIKE + actually helps you become a better runner” (Levick, 2012). Through products such as the Nike FuelBand (a wristband which monitors your physical activity) and personalized customization through Nike iD, the firm is effectively trying to say “we care more about you and your personal fitness goals than we do about advertising our products”. This was a serious customer focused strategy which contributed – alongside the traditional CSR values type activity – to show the company strategically interested in aligning itself with the interests of its customers. Profitable too.
The result? Nike’s share price almost doubled over the last 24 months from $64 per share to $115 per share while its closes competitor Adidas, dropped from $84 to $64 over the same period of time. Of course, one could argue that there are other contributing factors to the success of Nike and apparent decline of Adidas, but the commitment and focus on a morally-guided strategy of placing the customer’s interests first have clearly paid off.
Values, corporate responsibility and profitability are not juxtaposed as alternatives – they are two parts of the whole. A concept such as CSR and its wide-ranging type of activities and approach to business should therefore not be seen as a cost, but a crucial part of the long-term business plan. As a strategy that holistically takes into account the entire business ecosystem and if aligned correctly, it can produce tremendous results indeed.
Andrei Rogobete is a Research Fellow with the Centre for Enterprise, Markets & Ethics. For more information about Andrei please click here.
The market economy is not perfect. However, we do sometimes forget that it is the market that has delivered significant prosperity to the world and lifted millions of people out of poverty. Improvements in literacy and sanitation have contributed to a significant reduction in the number of people existing on the benchmark measurement of $1 a day. Enterprise, trade, micro-credit and social venture capital are, however, foundational to a global reduction in poverty. This reminds us that there is a moral case to be made for the market.
Capitalism is built upon four moral principles. These principles are rooted in the Judeo-Christian tradition upon which a market based enterprise economy is constructed.
First, the principle of creativity. This idea is expressed through the creation of wealth and the flourishing of human creative skill. Wealth creation is about the harnessing of human capital, skills and innovation to add value to the productive capacity of the economy. So, the combining of raw materials to make goods for sale, the delivery of services, entrepreneurial skill in developing and applying new ideas lie at the heart of enterprise. Wealth creation has to precede the debate on distribution.
Second, the principle of responsibility. Encouraging dependency denies the essence of humanity. Human flourishing means recognising humanity’s uniqueness and capacity for innovation and learning.
Third, the principle of freedom. Free human expression is only possible within a context of both economic and political freedom. That is one reason why Marxist command economies don’t work. It is also why excessive economic control constrains enterprise and innovation. Entrepreneurial skill and risk needs recognition and reward.
Fourth, the principle of fairness. The fairness of the capitalist system stems from the fact that the market allocates goods and services fairly and efficiently between willing buyers and sellers at agreed prices. Excessive levels of taxation in this respect are intrinsically unfair.
The market economy also generates moral problems. Issues of greed, excess, monopoly and oligopoly mean that there is a proper place for regulation. However, because we seem to have lost sight of the intellectual case for the market, regulation and taxation seem to have become ends in themselves, rather than as means or tools to act as moral restraints in an essentially free economy in a free society.
Dr Richard Turnbull is the Director of the Centre for Enterprise, Markets & Ethics (CEME). For more information about Richard please click here.
