A big problem with the concept of the stakeholder is that it is so elastic. The general idea is that a person or group that may not actually be a shareholder in a corporation is nevertheless intimately and directly affected by the activities of the corporation. This term was initially used to encompass rather obvious members extending from shareholders themselves to employees and communities.
But the theoretical foundation of the concept is intended to justify the exercise of power over an organization by groups that had not been anticipated by traditional legal and regulatory methods, and in ways that had been viewed as restricted to owners. And in public reaction to an environment of apparently widespread corporate corruption and scandal, topped off with a blithely detached culture of extraordinary compensation for senior executives, the idea has found traction.
The term is part of the vernacular, now. And the original range of groups it encompassed continues to grow. It is not at all unusual to see included in it, for example, non-governmental organizations, interest groups - even competitors. Some go further and count those who only potentially could find themselves in such groups as effectively under the baleful influence of the organization after all - thus, a potential stakeholder becomes a stakeholder.
This black-hole concept is not through drawing in whatever attracts its notice. In today’s climate of politically-hypersensitive discourse, it shouldn’t be surprising to find polar icecaps, blue whales, or even celestial objects identified as stakeholders of some unfortunate organization or another. It can seem at times to be a vast Lillipution conspiracy tossing one constraint after another over these presumptively guilty Gullivers, overturning, in the process, traditional legal and regulatory approaches to corporations’ non-contractual relationships.
But the questions still remain: at bottom, what does the concept really mean? Does the overreach in its application threaten a basically sound idea? What role will the notion play in the developing corporate governance debate? Indeed, perhaps we should begin to come to grips with inputs like these to that debate before we get too deeply embroiled in it.
Briefly, we can see that shareholders seek out and literally purchase a responsibility, or active risk, in exchange for the rights in and the rewards they take from their organizations. Stakeholders don’t (we are not counting employees here - their relationship to the organization is closer to that of shareholders in that it is consensual, contractual, and well recognized in traditional legal theory).
Stakeholders have a “stake” in the sense that they inadvertently are affected by what an organization does - that relationship arose circumstantially, as a consequence of the organization’s existence and its activities. Its stakeholders (again, not counting shareholders and employees) didn’t seek it out and intentionally merge their fates with that of the organization. And yet, they can be profoundly affected by it.
What is the organization’s responsibility - and what are its rights - in such an event? Conversely, what are these so-called stakeholders’ rights? Do they even have any responsibilities, and if so, what are they?
The stakeholder movement makes bold claims about how organizations should be run - and even about who should run them. It is a phenomenon that managers will do well to keep an eye on, and it is one we will continue to follow, here. Please do join us.
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Today’s tip: One early winner of stakeholder status is the customer. This is a natural development from the early “customer is king” days. But it is also one that has flaws, perhaps in both senses. Please see this excellent post by Alexander Kjerulf, the Chief Happiness Officer, about the problems with this concept (my favorite is the first - which is yours?).
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4 Comments
This is interesting.
I wonder if the drive to expand the definition of stakeholder stems from a wariness that a company must benefit those who are not owners, since they still peddle influence with those whose responsibilities directly affect the company in question.
Frederick Bastiat comes to mind here, for some reason. Companies must keep one eye towards the horizon, whilst keeping the other watchful threats from outsiders, whom we may call “stakeholders.”
Hello Cam,
I think a lot of this movement is driven by a diverse cast of non-corporate elements motivated by a broad range of interests. Nevertheless, the force of the underlying argument has proven rhetorically compelling, and in a narrower sense is fundamentally sound, minus some of the more extreme conclusions it assumes.
As for the corporations themselves, I think one important way they should look at the movement is as a fortuitous communication to them of various environmental (in the business sense) threats just down the road or at the horizon. It is like the opportunity that one finds in customer complaints - many of the issues raised by this movement have a lot of force to them on the face of it - others are there and will be pursued however obvious or obscure their merit may be. It is useful for corporations to be apprised of all of these, and even to be engaged in many ways offered by the movement.
Frederick Bastiat! Wow! I am familiar, in a general sense, of the “Candlemakers’ Petition,” but that’s not good enough. You’ve just added some valuable items to my reading list.
Thanks again, Cam!
Please take into account that customers, as stakeholders, in fact do seek out specific companies and by doing so intentionally do merge their fates with that of the organization. Other stakeholders that actively ‘choose’ in this manner, besides shareholders, employees and customers, are suppliers; even governmental bodies make strategic choices by undertaken policies that actively shape interaction with different stakeholders (read: different kind of companies). Moreover it is the actual contribution (or investment) of the stakeholder involved that differs from stakeholder to stakeholder. Roughly said stakeholders are generally ranked accordingly to the depth and value of investment made (and risk taken): shareholders, debt holders, employees, customers, suppliers, governmental bodies.
Sander,
Thank you for your visit and for adding this entirely germane angle to the topic. I especially appreciate the reference to ranking of stakeholders.
I agree that the term is generally useful, and - more than merely that - helpful for an organization and its owners and directors. I would hesitate at the notion that customers merge their fates with organizations in a manner and with the consequences that shareholders and employees do - I think there is a more distinct threshold, there (do you think that is right, or no?) - but it is not necessary to do so to accept your thesis.
My concern with the use of the stakeholder concept here is primarily in the context of corporate governance. If stakeholders, as is increasingly argued, should have a say over the decisions and actions taken by an organization which affect them, how will that influence the behavior of directors and managers? How should it? Moreover, what force will it impart on the current reappraisal, internationally, of the theory and practice corporate governance?
Your excellent elaboration of how these “stakes” form - and especially how they become intertwined - to produce stakeholders with mutual dependence to one degree or another among themselves is a very important point - a sophisticated approach to the topic that needs to be explored for the corporate governance debate to intelligently and productively move forward.
Thanks so much, again, for your insightful observations, and for stopping by and offering them to us!
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