Chapter 2 - Strategic Management of Stakeholder Relationships - Summary

Stakeholders refer to those people and groups who have a “stake” in some aspect of a

company’s products, operations, markets, industry, or outcomes. The relationship

between organizations and their stakeholders is a two-way street.

The historical assumption that the key objective of business is profit

maximization led to the belief that business is accountable primarily to investors and

others involved in the market and economic aspects of the organization. In the latter half

of the twentieth century, perceptions of business accountability evolved to include both

market constituencies that are directly involved and affected by the business purpose

(e.g., investors, employees, customers, and other business partners) and nonmarket

constituencies that are not always directly tied to issues of profitability and performance

(e.g., the general community, media, government, and special-interest groups).

In the stakeholder model, relationships, investors, employees, and suppliers

provide inputs for a company to benefit stakeholders. This approach assumes a relatively

mechanistic, simplistic, and nonstakeholder view of business. The stakeholder model

assumes a two-way relationship between the firm and a host of stakeholders. This

approach recognizes additional stakeholders and acknowledges the two-way dialog and

effects that exist with a firm’s internal and external environment.

Primary stakeholders are fundamental to a company’s operations and survival and

include shareholders and investors, employees, customers, suppliers, and public

stakeholders, such as government and the community. Secondary stakeholders influence

and/or are affected by the company but are neither engaged in transactions with the firm

nor essential for its survival.

 As more firms conduct business overseas, they encounter the complexity of

stakeholder issues and relationships in tandem with other business operations and

decisions. Although general awareness of the concept of stakeholders is relatively high

around the world, the importance of stakeholders varies from country to country.

A stakeholder has power to the extent that it can gain access to coercive,

utilitarian, or symbolic means to impose or communicate its views to the organization.

Such power may be coercive, utilitarian, or symbolic. Legitimacy is the perception or

belief that a stakeholder’s actions are proper, desirable, or appropriate within a given

context. Stakeholders exercise greater pressures on managers and organizations when

they stress the urgency of their claims. These attributes can change over time and context.

The degree to which a firm understands and addresses stakeholder demands can

be referred to as a stakeholder orientation. This orientation comprises three sets of

activities: (1) the organization-wide generation of data about stakeholder groups and

assessment of the firm’s effects on these groups, (2) the distribution of this information

throughout the firm, and (3) the organization’s responsiveness as a whole to this

intelligence.

Reputation management is the process of building and sustaining a company’s

good name and generating positive feedback from stakeholders. The process of reputation

management involves the interaction of organizational identity (how the firm wants to be

viewed), organizational image (how stakeholders initially perceive the firm),

organizational performance (actual interaction between the company and stakeholders),

and organizational reputation (the collective view of stakeholders after interactions with
the company). Stakeholders will reassess their views of the company on the basis of how

the company has actually performed.

Crisis management is the process of handling a high-impact event characterized

by ambiguity and the need for swift action. Some researchers describe an organization’s

progress through a prodromal, or precrisis, stage to the acute stage, chronic stage, and

finally, crisis resolution. Stakeholders need a quick response with information about how

the company plans to resolve the crisis, as well as what they can do to mitigate negative

effects to themselves. It is also necessary to communicate specific issues to stakeholder

groups, including remorse for the event, guidelines as to how the organization is going to

address the crisis, and criteria regarding how stakeholder groups will be compensated for

negative effects.

Companies are searching for ways to develop long-term, collaborative

relationships with their stakeholders. These relationships involve both tangible and

intangible investments. Investments and lessons learned through the process of

developing a dialog and relationship with one stakeholder should add value to other

stakeholder relationships. These efforts result in social capital, an asset that resides in

relationships and is characterized by mutual goals and trust.

The first step in developing stakeholder relationships is to acknowledge and

actively monitor the concerns of all legitimate stakeholders. A firm should adopt

processes and modes of behavior that are sensitive to the concerns and capabilities of

each stakeholder. Information should be communicated consistently across all

stakeholders. A firm should be willing to acknowledge and openly address potential

conflicts. Investments in education, training, and information will improve employees’

understanding of and relationships with stakeholders. Relationships with stakeholders

need to be periodically assessed through both formal and informal means. Sharing

feedback with stakeholders helps establish the two-way dialog that characterizes the

stakeholder model.

An organization that develops effective corporate governance and understands the

importance of business ethics and social responsibility in achieving success should

develop some processes for managing these important concerns. Although there are many

different approaches, we provide some steps that have been found effective to utilize the

stakeholder framework in managing responsibility and business ethics. The steps include

(1) assessing the corporate culture, (2) identifying stakeholder groups, (3) identifying

stakeholder issues, (4) assessing the organization’s commitment to social responsibility,

(5) identifying resources and determining urgency, and (6) gaining stakeholder feedback.

The importance of these steps is to include feedback from relevant stakeholders in

formulating organizational strategy and implementation.

The Reactive-Defensive-Accommodative-Proactive Scale provides a method for

assessing a company’s strategy and performance with one stakeholder. The reactive

approach involves denying responsibility and doing less than is required. The defensive

approach acknowledges only reluctantly and partially the responsibility issues that may

be raised by the firm’s stakeholders. The accommodative strategy attempts to satisfy

stakeholder demands. The proactive approach accepts and anticipates stakeholder

interests. Results from this stakeholder assessment should be included in the social audit,

which assesses and reports a firm’s performance in fulfilling the economic, legal, ethical,

and philanthropic social responsibilities expected of it by its stakeholders.

CHAPTER 2 Strategic Management of Stakeholder Relationships

2 Chapter Objectives To define stakeholders and understand their importance To

distinguish between primary and secondary stakeholders To discuss the global nature of
stakeholder relationships To consider the impact of reputation and crisis situations on
social responsibility performance To examine the development of stakeholder
relationships To explore how stakeholder relationships are integral to social responsibility

3 Building effective relationships is considered one of the more important practices of

business today. Building Effective Relationships

4 Stakeholders Those people and groups to which an organization is responsible Those

with a stake, or claim, in some aspect of a company’s products, operations, markets,
industry, or outcomes

5 Primary Stakeholders Groups fundamental to a company’s operation and survival

Balancing the needs and perspectives of primary stakeholders is a strategic imperative

6 Secondary Stakeholders Groups that may influence and/or be affected by the company,
but are not engaged in economic exchanges with the firm These groups are not
fundamental to an organization’s daily survival They can place significant pressure on a
business and therefore, cannot be ignored

7 Stakeholder Orientation There is a two-way relationship between the firm and a number
of stakeholders. This approach recognizes other stakeholders and explicitly acknowledges
the dialog that exists between a firm’s internal and external environments.

8 Stakeholder Orientation (cont.) The degree to which a firm understands and addresses
stakeholder demands. Comprises three sets of activities: 1.The organization-wide
generation of data about stakeholder groups and assessment of the firm’s effects on these
groups 2.The distribution of this information throughout the firm 3.The organization’s
responsiveness as a whole to this intelligence

9 Stakeholder Attributes Power Legitimacy Urgency

10 Reputation Management The process of building and sustaining a company’s good

name and generating positive feedback from stakeholders

11 Reputation Management Process Identify how the organization wants to be viewed by

stakeholders. Determine how stakeholders evaluate the company and their impressions of
its image. Evaluate others’ impressions of organizational performance. Understand the
company’s reputation.

12 Crisis Management The process of handling a high-impact event characterized by

ambiguity and the need for swift action
13 Crisis Management Stages Prodromal stage Acute stage Chronic stage Resolution

14 Development of Stakeholder Relationships Relationships are founded on principles of:

–Trust –Commitment –Communication

15 Social Capital An asset, which resides in relationships, that is characterized by mutual

goals and trust

16 Implementing a Stakeholder Perspective in Social Responsibility 1.Assessing the

corporate culture 2.Identifying stakeholder groups 3.Identifying stakeholder issues
4.Assessing the organization’s commitment to social responsibility 5.Identifying
resources and determining urgency 6.Gaining stakeholder feedback

17 Link Between Stakeholder Relationships and Social Responsibility Reactive behavior

Defensive behavior Accommodative behavior Proactive behavior