Can Organizations Afford to Ignore Key Stakeholders?

The stakeholder view of the publics of an organization has been a useful framework for the management in identifying and building, mutually beneficial long-term relationships with them. However, in the current environment, there are greater expectations from an organization’s consumers and the public, in general, to be more responsive socially and environmentally.

In this steadily evolving environment there is an urgent need for the management to broaden its view of the stakeholders. The dominant view of the stakeholders based on the notion of risk (stake) and the nature of the risk, limits the field of the stakeholders to key stakeholder groups such as investors, employees, consumers, government, suppliers and media.

Stakeholder identification based on financial motives like profit maximization, reputation building, and obtaining support for the organization would no longer be sufficient in providing the competitive edge.

Also, this approach  tends to regard stakeholder groups–the society and the environment–with legitimate interest as discretionary responsibilities even though they might able to influence the functioning of the organization.

Stakeholders that tend to receive the management’s attention typically possess one or  more of the following attributes—Power, Legitimacy and Urgency. If one were to examine the society’s and environment’s claim as organization’s key stakeholders based on these three attributes, it would be evident that these two classes of stakeholders deserve the senior management’s attention in strategic decision-making processes.

Legitimacy

The legitimacy of organization-stakeholder relationships are based either on formal or legal contracts, or transactional interactions. However, underlying latent relationships can be as crucial and as vital as the formal relationships. The environment and the society are undeniably  impacted in the attainment of an organization’s goal and in turn have the ability to affect the organization’s viability and success.

Therefore, even in the absence of a formal or legal relationship between the organization and the society, there is an interdependence over one another for survival and/or for success. And based on the legitimacy of the society’s moral interests in the organization’s functioning, it is vital to evaluate an organization’s impact on the environment and the society; and how the social and environmental issues might influence the management’s practices.

Power

Power has been an important differential in the management’s identification of the stakeholders and their interests. Typically, stakeholders who control the resources or who are in a position to either reward or punish the organization are viewed as being powerful[1]

Even though the society or the environment might not appear to have the same level of power as other key stakeholders, situations can change unpredictably and tip the power in the favor of the society or the environment.

Moreover, stakeholder relationships are not entirely based on the notion of reciprocity and synchronicity. The directionality of the relationship, whether  uni-or bi-directional, does not undermine the power or the legitimacy of the relationship between an organization and its stakeholders—specifically, the society or the environment.

Urgency

Organization and stakeholder relationships are dynamic and change with time. Stakeholders who ordinarily appear latent can become active in certain situations and make an urgent claim/demand on the resources of an organization.

Urgency in organization and stakeholder relationships is evident typically during a crisis situation when lack of timely attention to stakeholder issues can disrupt the normal flow of business, hurts its reputation or even its viability.

The recent global public health issue—the COVID-19 pandemic– quickly shifted from being a public health concern to an organizational issue requiring urgent top management attention.

Corporate Citizenship

Related organizational initiatives that focus on fulfilling an organization’s  commitments to the  society and the environment such as Corporate Social Responsibility (CSR)/Corporate Citizenship, ESG (Environmental, Social and Governance) Reporting, Sustainability and Stakeholder Capitalism-have gained currency with the senior management.  

These initiatives have been a step in the right direction in giving back to the  environment and the society in which they operate but the motivation behind them sometimes might be political and economic. Also, these initiatives while considered important—due to the investment of valuable organizational resources-time, money and personnel—are not integrated into the business strategies. They are viewed as being ancillary commitments with an expectation of an indirect benefit for the organization.  

It is time to move an organization’s responsibility to the environment and the society  from secondary to primary business focus. This can be achieved by approaching the environment and the society as key stakeholders. Many organizations already have some form of formal or informal programs that contribute to the environment and the society. These programs need to be closely aligned with the core business areas/practices for it to be a mutually beneficial relationship.

Research within academic and professional settings have consistently demonstrated  that businesses that make the society and the environment a part of their core decision-making processes have observed an increase in their long-term value, even if it might be painful in the short-term.

Dick Sporting Goods’ announcement in 2018 to restrict gun sales had the predictable outcome of hurting its sales and lowering  its yearly revenues ( by nearly 2 percent); however, the company’s stock climbed 14 percent in a little over a year following the decision.[2]

It’s a good sign that CEOs of major U.S. corporations have recognized the need to bring the corporate responsibilities to stakeholders such as customers, employees, suppliers, society and environment on par with the shareholders. As more organizations recognize the value of integrating social and environmental outcomes in their strategic decision making processes, they will experience a better overall outcome in the mid-to long-term.

[1] Pfeffer, J. (1981). Power in Organizations. Marshfield, MA: Pitman Publishing.

[2] Henisz, W., Koller, T., & Nuttal, R. (2019). Five Ways that ESG Creates Value. McKinsey Quarterly, Nov. 14,

2019. Retrieved from

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/five-ways-that-esg-creates-value