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STAKEHOLDER THINKING AND MANAGEMENTPRACTICES IN NORTH AMERICA

Tim Rowley, Ph.D. John Hovland, LLB

Rotman School of ManagementUniversity of TorontoToronto, ON

Canada

Contact Information for Tim RowleyTEL: 416-978-6859FAX: 416-978-4629rowley@mgmt.utoronto.ca

Copyright Tim Rowley, 1999

mailto:rowley@mgmt.utoronto.camailto:rowley@mgmt.utoronto.ca

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Introduction

In North America, as is the case in other regions of the world, organizations, especiallynot-for-profit organizations (NFP) are important institutions for achieving a wide numberof societal goals. NFP, more than any other type of organizations do not exist in isolationand there have always been other groups that have a stake in their activities. Often, theydo not own the resources required to accomplish their goals and must access them fromother organizations and individuals. To manage and oversee NFP means balancing theinterests of multiple stakeholders. Doing so, however, is no easy tasks. Manyorganizations have endured unnecessary problems because of their failure to address theclaims of powerful stakeholders and many others have profited by working withstakeholders for common gain. NFP must coordinate conflicting interests among manystakeholder groups with different levels of power and importance, all ofwhich areimportant for NFP's missions.The purpose of this paper is to provide a brief overview of some of the current thinkingon managing and understanding stakeholder environments As well, I will describe someof the frameworks, tools and lessons North American managers/ directors have gainedthrough their efforts to effectively deal with their stakeholder environments.This knowledge is important for boards ofNFP because understanding and managing thestakeholder environment is fundamental to building and implementing strategies. Thus,directors require this knowledge to make many decisions - to select and evaluate themanaging director, set measures and benchmarks and choose new directors.Who is a Stakeholder?

Before we can discuss stakeholder frameworks and before managers can use stakeholderconcepts in their decision making, the definition of a stakeholder - how to identify astakeholder - must be clearly stated. Where should we draw the boundary so that weknow who to include and who to exclude as a stakeholder? I f managers say they mustinclude "everyone and anyone", then stakeholder management would be too general andincoherent to be of any value. I f the answer is "employees, donors and

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customers/clients", then it is too narrow to capture all the interactions and influences inthe environment.In addition, while it is important to balance the interests of surrounding stakeholders, it isoften impossible to satisfy all stakeholder groups. For example, some youth centersmust deal with neighboring businesses that don't want runaway teens "loitering,"teenagers who will not visit centers outside the downtown cores, donors who know andare influenced by local business owners, and local politicians who are attempt to mediatedisagreements. In this case, how should youth centers prioritize these stakeholders 'interests in order to achieve their missions? Who is not a stakeholder and can bedisregarded? Who is the most important player without whom the mission is lost? And,how do we get enough support from the right mix of stakeholders?In North America, stakeholders have been both broadly defined ("any group or individualwho can affect or is affected by the achievement of the organization's objectives,,)i andnarrowly defined (anyone who has something at risk in the organization's activities,whether because they have invested financial or human capital in it or because they areaffected by it). ii

However, recent North American academics have attempted to synthesize thesedefinitions and have identified three attributes of stakeholders which allow for theiridentification and a rough measurement of their importance to the organization. Thiswork suggests that a person or entity must posses one or more of the attributes of power,legitimacy and urgency in order to be considered a stakeholder (See Figure 3):

1. Power: A stakeholder has power over an organization if it can coercethe organization to act as the stakeholder wishes. This power can bebased on control over resources essential to the organization (e.g. abank's ability to call a loan) or the ability to confer a desired status(e.g. a government body's ability to grant or withhold a license). Theidentification of stakeholders based on power is similar to the broaddefinition of stakeholder set out above, in that it looks at who canaffect an organization, rather than who should be able to affect it; iii

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2. Legitimacy: A stakeholder's claim has legitimacy if it involves aninterest which legal or social nonns require the organization toconsider. Legitimacy and power are not identical; a minorityshareholder is a legitimate stakeholder because the law requires thecorporation to be managed in the interests of alI shareholders, but mayhave little or no power. Legitimacy is closer to the narrow definitionof stakeholder, as it focuses on whose interests should be consideredregardless of their power; iv and

3. Urgency: A stakeholder can be considered to have urgency withrespect to an organization if their relationship or claim is of a timesensitive nature and if it is particularly important to the stakeholder.Urgency can also be defined as the degree to which a stakeholderclaim cal1s for immediate attention. v

A stakeholder is then defined as any person or entity which possesses power, legitimacyor urgency, and managers should scan their environments based on these criteria. Thepriority of any stakeholder's concerns to an organization wilI depend on how many ofthese attributes they possess. If they have only one attribute, they can be characterized as"latent" stakeholders - management wilIlikely give their claim a low priority and theywill take little interest in the organization. If they have two attributes, they will likelyadopt an active stance in asserting their claim against the organization and can be thoughtof as "expectant" stakeholders. If they have all three attributes, then their claim wilI be atthe centre of management's attention and they can be viewed as a "definitive"stakeholder. There are seven potential combinations of these attributes (See Table I):

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Figure 3: Stakeholder Classification Scheme

Stakeholder Class Attributes Description

DefinitivePower. legitimacy and urgency DEFINITIVE they will commandmanagement 's full and immediate

attention -- CustomersPower and legitimacy DOMINANT they have legitimateclaims and the power to act on them- Long term creditor

ExpcL'lwlf Legitimacy and urgency DEPENDENT they must dependon others for the power to asserttheir claims - Factor workersPower and urgency DANGEROUS they may usecoercion to assert their claims

Green Peace (Shell issue)Power DORMANT they will not usetheir power because they do nothave an urgent or a legitimate claim

- Government agency

[alcntLegitimacy DISCRETIONARY there is nopressure on managers to address

these claims and they do so at theirdiscretion - e.g., community groupsUrgency DEMANDING these stakeholders

are mere irritants and there is nopressure on managers to addresstheir claims. - Terrorist group

Table 1: Stakeholder Types

Definitive stakeholders usually include, but are not restricted to customers/clients,employees, volunteers and suppliers and sometimes donors. I will not discuss all of theother categories individually, but it is important to note that directors and managers oftenrecognize these differences and respond to stakeholders differently depending on thesecategories. In addition, managers must be aware of the dynamic nature of stakeholdersenvironments. Stakeholders will move from one classification to another - e.g., from

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donnant to definitive - due to changing circumstances surrounding a particular issue oracross different issues. For example, while Greenpeace often has an urgent claim (withvarying levels of power and legitimacy) with respect to environmental issues, they areless interested in employee rights issues. Also, a stakeholder's legitimacy will depend onthe type of claim they are trying to assert. In some situations, there will be no law ornonn which requires that their claim be considered or the law or nonn may change overtime, conferring or denying legitimacy. Management calU10t assume that the cast ofstakeholders is fixed and must constantly assess them. vi

Achievine Goals through Stakeholder ManagementMany managers take a reactive approach to their stakeholders and deal with stakeholderissues only when they arise. Or, they view their stakeholders as merely actors withwhom they fonn anns-length transactions rather than tightly cOlU1ected partnerships.Directors and managers utilizing a stakeholder view tend to treat their exchange partnersas part of their organization -as valuable partners - which builds trust, leads to loyalty,innovation and long-tenn cooperation. vii The benefits of this approach are many. Withrespect to suppliers, an atmosphere of trust and loyalty reduces contract monitoring anddispute resolution costs. viii Treating employees as stakeholders can increase satisfactionand reduce turnover, which will reduce recruiting, training and retention costs.Stakeholders and Social IssuesA failure to understand and manage stakeholder claims regarding social issues can oftenlead to significant business problems, and even failure. This often arises in situationswhere the organization's activities are a matter of social or public interest. Managers arefrequently taken by surprise when their organization becomes the target of activist groupsand the subsequent media and government attention. Organizations may be at seriousrisk if they refuse to recognize non-economic stakeholder interests in dealing with socialissues. The struggle between Hydro-Quebec and the Native Canadian Cree of James Bayoffers a good example. Hydro-Quebec is the monopoly electricity provider in the

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province of Quebec and is owned by the provincial government. Since the early 1970s,Hydro-Quebec has launched several ambitious projects to dam or divert rivers draininginto James Bay and use them to power hydro-electric generating plants.

The first phase of this project was completed in the 1970s. In 1986, Hydro-Quebecannounced its intention to proceed with the second phase which would involve dammingthe Great Whale River. The Cree opposed the Great Whale project because of the hugeeffect which it would have had on their lands, the damage to the surroundingenvironment and because they believed it violated certain provisions of a 1975 agreementconcerning the James Bay developments.Ignored by Hydro-Quebec and the federal and provincial governments, the Creeembarked on an aggressive influence strategy focused on allying their legitimacy andurgency with other stakeholders who possessed power. First, they obtained an order froma Canadian federal court requiring an environmental assessment of the Great Whaleproject. Next, they developed ties with U.S. environmental groups and worked with themto lobby legislatures in the United States which would have been the consumers of thepower generated by Great Whale. The Cree emphasized the negative environmentaleffects of Great Whale as well as highlighting opportunities for the states to meet theirenergy needs in less expensive ways. This coalition was able to secure some significantvictories, such as the passage of legislation in New York State requiring anenvironmental assessment of the state's proposed contract with Hydro-Quebec. Instakeholder terms, the Cree formed links with other stakeholders, increased the density ofthe network, communicated their norms, and created a common front against the centralorganization, Hydro-Quebec. By increasing the density of the stakeholder network andusing it to their advantage, the "powerless" Cree were able to organize a coalition ofpowerful stakeholders in opposition to the Great Whale project.The end result? Many U.S. states cancelled their contracts with Hydro-Quebec for theeconomic and environmental reasons advanced by the Cree and their U.S. allies. Facedwith the loss of the market for Great Whale's power, the Quebec government cancelledthe project in 1994. Had Hydro-Quebec taken a more inclusive, stakeholder management

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approach it might have been able to neutralize (balance or pacify) Cree opposition to theGreat Whale project. Its failure to do so resulted in the formation of a strong opposingcoalition which contributed to the ultimate failure of the project.

i Freeman, p. *.ii M. Clarkson, "A risk-based model of stakeholder theory" in Proceedings ofthe Second TorontoConference on Stakeholder Theory (Toronto: Centre for Corporate Social Performance and Ethics,University of Toronto, 1994) at p. 5.iii R.K. Mitchell, B.R. Agle & DJ. Wood, 'Toward a Theory of Stakeholder Identification and Salience:Defining the Principle of Who and What Really Counts" (1997) 22:4 The Academy ofManagement Review853 at p. 865.iv Mitchell, Agle & Wood, p. 866.v Mitchell, Agle & Wood, p. 867.vi Mitchell, Agle & Wood, pp. 868-870.vii Svendsen, pp. 18-19.viii Svendsen, p. 20.