11.1.1: Who is a stakeholder and why are they important?
In today’s challenging business environment, the private sector is increasingly being called upon to take responsibility for resolving some of the world’s most pressing problems – from climate change, to wider impacts of business operations on the environment and community, and the health of their employees. Effectively managing these responsibilities presents a new kind of challenge for many companies.
A stakeholder is “any group or individual who can affect or is affected by the achievement of the organization’s activities”. Stakeholders are important to businesses as they can exert influence on its business decisions and performance both directly and indirectly, through their roles as buyers, suppliers, advocates, sponsors, partners, employees, government organizations, investors, NGOs and so on.
Professor Ed Freeman is considered to be the founder of stakeholder theory and he discusses how for a business to be successful, it must create value for all its stakeholders. Managers must attend to the interests of all stakeholders, not each group in isolation. In other words, the interests of stakeholders hang together and where they go in the same direction, because each of these groups is important to the business, and make capitalism tick. Observe Professor Freeman’s explanation here (and explore the other YouTube links by him on various aspects of stakeholder theory):
Stakeholders are critical in business success. Without considering stakeholders, organizations may lose legitimacy and fail to implement important strategies.
Engaging with stakeholders can assist businesses to fully understand the problems they face and implement solutions to counter these problems. Strategic stakeholder management ensures the success of corporate programs, processes, and policies. It can also help businesses to identify new opportunities, build relationships and reduce the company’s negative impact on the natural environment and vulnerable social groups.
11.1.2: What is Stakeholder Analysis?
Stakeholder engagement is the process by which a company connects and communicates with its stakeholders, with the purpose of achieving agreed outcomes. To address this challenge, a company needs to be able to identify and prioritize key stakeholder groups and their concerns.
Roughly speaking, a company has both internal and external stakeholder groups. Internal stakeholder groups include the management and employees, the board of directors, and sometimes investors, partners, and consultants. External stakeholder groups are those beyond the firm boundaries such as costumers, government, local communities, NGOs, academics, and so on.
Types of Stakeholders
A company has many stakeholders; some of which are more central to the company than others. Primary stakeholders that are more central to the company have greater vested interests in the on-going actions of the company than the secondary stakeholders that lie on the fringes.
The figure above gives a general overview of possible stakeholders and their relative impact. Primary stakeholders (3 smallest ovals) encompass all parties that have immediate interests in the actions and performance of the company. These parties notably engage in direct economic and social transactions with the company.
Secondary stakeholders (2 largest ovals) are considered intermediaries. These intermediaries often do not consider themselves as stakeholders because they feel they are in control of the problem-solving process (i.e. regulators, governments, NGOs).
A stakeholder analysis is usually the first step in initiating stakeholder management. It is concerned with the identification of stakeholders whose participation and support are crucial to achieving project success. It identifies all primary and secondary stakeholders who have a vested interest in the issues with which the project is concerned. The goal of stakeholder analysis is to develop a strategic view of the human and organizational landscape, the relationships between the different stakeholders, and the issues that they care about most.
Broadly, stakeholder analysis can be used to:
– Identify and define the characteristics of key stakeholders
– Identify the interests of stakeholders in relation to the purpose of the project or the problems that the project is seeking to address (at the project identification stage)
– Identify conflicts of interests between stakeholders, to help manage such relationships during the course of the project/venture.
– Help identify relationships between stakeholders that may enable ‘coalitions’ on project sponsorship, ownership, cooperation, and collaboration
– Assess the capacity of different stakeholders and stakeholder groups to participate
– Help assess the appropriate type of participation by different stakeholders, at successive stages of the project cycle, e.g. inform, consult, partnership – all of these have different possible models of communication.
The importance of Stakeholder Analysis in business
Through stakeholder analysis, a company is able to establish which individuals or groups should be prioritized to work with, and define mutually agreeable approaches to achieve collective cooperation. In this way, a stakeholder analysis assists the company assess the social environments in which they will operate.
When a company fails to adequately consider they concerns of its stakeholders, it stands to lose its legitimacy to operate. This may be through its obliviousness to disaffections, an unwarranted illusions of invulnerability/unaccountability, or self-aggrandizement. It may also result the perception that the company is inattentive to the interests and concerns of stakeholders leading to stakeholder discontent.