Key Factors of Stakeholder Management

2.0 Introduction.

The aim of this chapter is to review the existing literature relevant to stakeholder management in a general sense and then to focus on publications which cover stakeholder issues related to large scale construction/development projects. By following this sequence I can give an outline in stakeholder management in general and then focus on the topics relative to my investigation.

To start with, I will define exactly what a stakeholder is and the evolution of stakeholder management from being an abstract business theory to the pivotal role it now plays in determining the success of a modern day project.

I will then cover the best practices in modern stakeholder management and its relationship to project management and how it is linked to value management.

Through the course of the literature review I hope to be well informed and well placed to conduct relevant research which will lead to useful and significant findings and recommendations.

2.1 Origin and Definition of Stakeholder

The origin of the word stakeholder can be traced back to the 1530s where stake was defined as “to risk, wager” or that which was placed at hazard. (CHAMBERS , 1999). This is used in a betting context but is derived from driving a stake into land and claiming it, as in to “stake a claim”. It first appeared in business parlance in the early 1960s by Stanford Research Institute, who proposed a definition of stakeholders as “groups without whose support the organization (sic) would cease to exist” (FREEMAN, Edward R Et Al, 1983).

Edward Freeman is credited with advancing the notion of stakeholder theory in his seminal work “Strategic Management: A Stakeholder Approach”. In this book he stated that current business strategy theories were inconsistent with the business environment of the 1980s. The established theory at the time was a stockholder approach which suggested that as business was owned by those who held shares in it, the managements was principally obligated to run the organisation so as to maximise value for the shareholders. The influential free-market economist Milton Friedman argued that a corporation had a responsibility to maximise value to shareholders and to comply with legislation of the country it operates in (FRIEDMAN, Milton, 1970). He goes on to state that a business entity cannot have social responsibilities, that only individuals can. One of his main arguments was that an unhindered free market environment would address most societal and social problems and the government would be responsible for the rest. It was not the place of business to be involved in social responsibilities. Friedman was a professor in the University the Chicago’s school of economics. His free market ideologues became a doctrine informing a series of right wing U.S government’s domestic and foreign policy throughout the 1970s and 1980s. He was a member of President Reagan’s Economic Policy Advisory Board in 1981 and his ideas were incorporated into the pro-business agenda of the 1980s in American where many regulations governing and regulation businesses activities and taxation were relaxed (NISKANEN, William A, 1988) .

Freeman’s book, when published in 1984, was the most important work to date in advancing the notion of stakeholder theory. He sets out the dynamics of the relationship between a firm and the different players in the firm’s external environment. His diagram, depicting the firm at the centre and the stakeholders connected to it has been reproduced and amended in countless textbooks and journals since then.

He also defined a stakeholder as “any group or individual who can affect or is affected by the achievements of organisations objectives”. He advocated the categorisation of stakeholders into direct and indirect stakeholders. He was a pragmatic business strategist who advocated the consideration of diverse stakeholders not for purely altruistic or ethical reasons. His advice to a firm was to know “what it stands for” when formulating strategy. This means aligning the firm’s business activities to the expectations of the principal stakeholders. As different stakeholders have different expectations and wants, a trade off has to be made. By advocating this type of analysis, Freeman embraces the concept of value in strategy formulation and stakeholder management.

The trade off between differing stakeholders is the difficult aspect of stakeholder management. It would be a perfect world if every stakeholder could be completely accommodated and no trade-off between the firm’s objectives and that of all the stakeholders were needed. The reality is that there is a significant trade-off required and Freeman suggested a methodology to inform an organisation of its particular stakeholder landscape.

He categorises the stakeholders based on the effect that they have on the firm and the effect the firm’s activities have on them. These are social, political, economic, managerial and technological. He quantifies the power each stakeholder yields as economic, socially influential, or equity. These terms and categories and their emphasis have evolved in later literature but Freeman was the pioneer who gave us most of the concepts of modern stakeholder management.

2.2 Stakeholder vs. Stockholder

The view that stockholders had preference over all other stakeholders was enshrined and test in U.S law from the early 20th Century. In 1919 the Michigan Supreme Court issued a ruling in the Ford Motor Company V Dodge case which articulated the legal position in relation to stockholder supremacy. Henry Ford, majority shareholder and founder of the Ford Motor Company had built up significant profits ($60m) in the company and wanted to invest them in back into the business in areas of employment rates and improvements in quality and design. The Dodge brothers, who were minority shareholders at the time, successfully argued that this was at the detriment of stockholders and therefore against corporate law. In the adjudication speech the judge stated that “the business corporation is organised and carried on primarily for the profit of stockholders, the powers of the directors are to be employed for that end” (ANANT K SUNDARAM, Andrew C. Inkpen, 2004)

Milton Friedman’s statement that the corporate social responsibility of an organisation was the pervasive ideology up to and including the Reagan/ Thatcher era. However there were some dissenting voices in the academic community most notably in the aftermath of the great depression. Some scholars attempted to re evaluate the nature of an organisation and its constituent parts. Dodd argued that if a corporation can be given its own identity and rights then it should also have citizenship responsibilities similar to individuals. He went on to argue that if this was the case then the role of management and directors could not just be to serve the stockholders and increase profits. The citizenship responsibilities of an organisation obliged the management of a firm to consider other stakeholders such as consumers, employees and the environment (DODD, M.E, 1932).

There is an alternative view which is not formed from the right wing neo-liberal school of thought and is worth considering in this review. In the corporate world the value that shareholders derive from their investment is in the form of a residual claim. By this I mean that the shareholder is entitled to the profits from a firm’s activity only after all other claimants have been addressed and should be the ultimate controllers of an organisation (A.A ALCHAIAN, H Demsetz, 1972). Other stakeholders have a claim to these profits before the shareholder gets a dividend. These stakeholder claims include wages to employees, government and local authority taxes, costs of complying with legislation directors salaries and cash re-invested into the business to benefit customers in order to gain market share. It is only after all these activities that the shareholder comes into view. This means that only shareholders have the incentive to maximise the value of the firm. Other stakeholder groups only have the incentive to maximise value from the organisations activities to the extent that they themselves will benefit. They have no in-built concern for the other stakeholders who make subsequent claims on firm’s profits.

This argument is further advanced by Macy where he separates stakeholder claimants into fixed and variable claimants. Most stakeholders have a fixed claim to a business’s revenue and this does not necessarily change if a firm does reasonably well and holds its market position or does exceptionally well and eats into the market share of a competitor. In order to maximise value a firm may have to take risks, it is in the interests of the stockholders to control the direction of the company and take these risks. Taking controlled and calculated risks has lead to an advancement of civilisation in terms of technology and in a social sphere Stockholders have the most to gain from entrepreneurial risk taking and should therefore have the controlling influence of an organisation in preference to other stakeholders (MACY, J.R, 1991). In a slight contradiction he further argued that this would lead to maximising the value of an organisation for the eventual benefit of other stakeholders.

There is a long running debate with advocates of stakeholders on one side and stockholders on the other. It is my belief that this is incorrectly framed. Stockholders are stakeholders as well and their interests should not be mutually exclusive. Freeman argued that if a firm applies stakeholder theory to the process of devising a high level business strategy then the argument of maximising value for shareholders or stakeholders becomes an irrelevant argument.

Freemans work which linked stakeholders to strategic management is credited with bringing about an alternative view in the stockholder theory that dominated the business world up until the end of the 20th Century. There was a move away from an obsession with shareholder value and its dilution to appease other stakeholders. Stakeholder theory in relation to strategic management meant that stakeholders objectives must be integrated into the firm’s objectives and vice versa (R.E FREEMAN, J McVey, 2001). This meant that firm’s activities must be to develop relationships, create communities and facilitate a culture where all stakeholders strive to maximise value for the firm which will then be shared among the stakeholders in a reciprocal arrangement. The shareholders are important stakeholders as they provide in initial funding for the firm to achieve its objectives and are the ultimate monetary owners of the firm. Freeman argues that if all stakeholders worked together to achieve the firms objectives then shareholder value would be increased although this was not the motivating reason of his theory.

The main proponents of the pro stockholder group in this debate are Inkpen and Sundaram. They now accept the influence stakeholders have on the continued success of an organisation. “Our position is by no means that firms should ignore other stakeholders or that there are no boundary conditions to the manner in which shareholder value creation logic has been applied in practice.” (ANANT K SUNDARAM, Andrew C. Inkpen, 2004).

There is significant evidence that a stakeholder theory informed business strategy is decidedly pro stock holder also. Many firms now seriously engage with customers allowing large numbers of them to participate in design briefings and focus groups in the course of developing new products. This creates customer loyalty and brand identification which not only benefits the non –equity holding stakeholders but the shareholders as well. A good example of this is the Apple Corporation. It entered into a period of exponential growth which started in the late 1990s. This is the result of a new strategy which was extremely customer focused. This constant feedback from customers and user groups informed the design of new products including the IPod and Iphone which have been huge successes. Each new version of their products is an almost guaranteed success as it has already been market tested by a large number of Apple customers. Customers identify with the Apple brand and as a result, Apple Inc has a brand loyalty unrivalled in corporate history and this has been a major driver of their success. (T BECKMAN, G Harris, 2008). This is reflected in their share price since this strategy was adopted. The share price has increased from $8 per share at the end of 2001 to almost $250 by the middle of 2010. (GOOGLE FINANCE, 2010)

As a result of this stake Apple have also made great strides in their environmental stewardship standards. In response to critisisms from environmental groups, Apple have made significant strides in eliminating toxins from their products and making them more sustainable (GREENPEACE, 2010). This image is important as consumers become ever more aware of environmental and ethical issues.

2.3 Stakeholder Theory and its evolution

We have established the meaning of the word stakeholder and Freeman’s book in 1984 put forward a theory on the rights, roles and responsibilities of various different stakeholders in a business and social environment. Essentially Stakeholder theory as defined by Freeman involves a firm keeping the following questions in mind when formulating a high level business strategy:

What is the purpose of the firm? – This focuses manager’s minds on the true objectives and long-term aspirations of a firm. It allows them to gain an understanding of the value they aspire to create for customers, employees, shareholders etc.

What responsibilities does the firm have to its stakeholders? – This encourages managers to consider all stakeholders in the business and the dynamics of the relationship between different stakeholders and the firm itself. It highlights their mutual interests.

From its genesis in 1984 stakeholder theory has been developed and advanced by Freeman and others. The theory suffered from an issue of clarity where differing stakeholders had different objectives and serious questions arose regarding the treatment and preference of these stakeholders. If differing language and terminology is used in a debate to illustrate similar concepts and ideas, the purpose and meaning of the debate itself can be lost in an ever increasing amount of definitions and variations (BRUMMER, J.J, 1991). In order to have a consistent debate on stakeholder theory it is necessary to classify these stakeholders and the differing schools of thought relating to stakeholder theory.

In 1995 Donaldson and Preston divided the differing arguments within stakeholder theory into 3 categories-. The meaning of these categories related to the behaviour and attitude of the firm in relation to stakeholders

Descriptive/empirical

This is research based on evidence within firms of their attitudes to stakeholders and stakeholder issues. It is descriptive in the sense that it researches how managers/directors and shareholders think about stakeholder theory and how this informs their actions, the activities of the firm and its strategic direction

Instrumental

This branch of theory is concerned with making connections between stakeholder management and traditional metrics of corporate performance. It aims to highlight links (or lack of them) between a firms stakeholder management techniques and the success or otherwise of the firm. It is instrumental in the sense that the stakeholder’s management is viewed as a corporate instrument or management process used to enhance the performance of a firm. This type of research can be used in conjunction with descriptive/empirical research. An important work in this area linked the performance of Hewlett Packard and Wal-Mart and their stakeholder perspective. “almost all their managers care strongly about people who have a stake in the business- customers, employees stockholders, suppliers, etc” (KOTTER, J., & Heskett, J., 1992)

Normative

This is the branch of stakeholder theory research that looks at the ethical and philosophical issues of the theory. Furthermore it looks at the role of corporations in society and the principals they are guided by. Friedman’s position paper, which was mentioned earlier, on corporate responsibility, is a good example of this type of research (FRIEDMAN, Milton, 1970).

Corporate social responsibility is in the normative branch of the research and stakeholder theory has been successfully applied to this area. The evolution of stakeholder theory can easily be tracked though articles in academic journals and business publications. In 1985 it was found that there was no link between corporate performance and the attitudes of managers toward stakeholders and corporate social responsibility (ULLMANN, Arieh A., 1985). By 1992 when a similar study was carried out, a link was established between companies adapting stakeholder informed business strategies and economic performance and corporate image (ROBERTS, Robin W., 1992).The results of a study was published in 1995 which tracked the corporate social performance of large multinational firms and found that the corporate landscape had changed. It was established that a corporation is a system of primary stakeholders (employees, managers, customers and shareholders) and all parties must be satisfied if the firm is to survive and thrive in the new business environment (CLARKSON, Max B E, 1995). This evolution is evident in the growth of ethical consumerism, the free trade movement and public awareness of international social issues.

2.4 Stakeholder Management Strategy.

Stakeholder management is the process of identifying and engaging with all parties who have a stake in a project or firms success. There are many processes and guides advocated in business literature but they are all similar in nature and quite intuitive in theory. A successful stakeholder management exercise will:

• Correctly identifies stakeholders and analyse their wants and needs
• Clarify their role within the project and their level of influence
• Devise a strategy to deal with individual stakeholders to gain their support for the project
• Anticipate and plan for conflicts between different stakeholders
• Devise a suitable communications plan.

A good way to evaluate these stakeholder management processes and to gain an understanding into the mindset of the author is to look at the wording he/she uses to describe different stakeholders and their attributes. The earlier stakeholder management plans focused on dealing with stakeholders according to their position within the business environment and their potential to affect the project and uses corporate and aloof language. In early literature a stakeholder could be classified as having a “potential for cooperation with an organization (sic)” or a “potential for threat to an organization(sic)” (GRANT T. SAVAGE, et al, 1991)This 4×4 matrix has been widely used since with different terminology but broadly the same principal. In a case study of Eastern Airlines in the above article they advocated transforming the relationship between hostile stakeholders and an organization.

Similarly a more sympathetic and inclusive framework was put forward and this involved the identification of the stakeholders and their appraisal and categorisation based on the awareness, their attitude and their influence of the project. This assessment informed the subsequent management plan. In particular his classification of the awareness of stakeholders has particular relevance to this study as does his use of psychological studies to show that external project stakeholders can be ill informed about a project and can have great difficulty changing their minds and attitudes despite organisations best efforts. (TURNER, J.R, 1999)

By using both types of matrices outlined above stakeholders can be identified and an appropriate strategy can be devised to manage and deal with stakeholders with an eye to both party’s satisfaction and project success.

2.5 Ethical considerations in stakeholder management

Once stakeholders have been identified and categorised according to their attitude to the organisation/project, their level of influence etc a suitable strategy needs to be devised to actively manage and deal with them throughout the lifetime of the project or during the course of an organisations normal business activity.

There can be perception within the general public that stakeholder management is “management speak” for the manipulation by large and powerful organisations of individual members of the public or specific communities. In 2007 the UKs local government association include the term “stakeholder” in the top 10 of a list of 200 words not be used by local authorities as it is a” barrier to public engagement with local government (ROHRER, Finlo, 2008).

This shows that there is already public scepticism when an organisation or project team attempts to “manage “them. For a stakeholder management exercise to be effective it needs to be transparent, entered into on good faith by both parties and not be a “tick box” exercise. From 1993 until 1997 Max Clarkson, as a part of the Centre for Corporate Social Performance and Ethics at the University of Toronto held four conferences on stakeholder theory and management and business ethics. From these conferences emerged the 7 Clarkson Principals. These were overarching principals to give guidance to managers in how to act ethically in business and in their dealings with customers, employees, society, interest groups and the environment.

Managers should acknowledge and actively monitor the concerns of all legitimate stakeholders, and should take their interests appropriately into account in decision-making and operations.

Managers should listen to and openly communicate with stakeholders about their respective concerns and contributions, and about the risks that they assume because of their involvement with the corporation.

Managers should adopt processes and modes of behaviour that are sensitive to the concerns and capabilities of each stakeholder constituency.

 Managers should recognize the interdependence of efforts and rewards among stakeholders, and should attempt to achieve a fair distribution of the benefits and burdens of corporate activity among them, taking into account their respective risks and vulnerabilities.

Managers should work cooperatively with other entities, both public and private, to insure that risks and harms arising from corporate activities are minimized and, where they cannot be avoided, appropriately compensated.

Managers should avoid altogether activities that might jeopardize inalienable human rights (e.g., the right to life) or give rise to risks which, if clearly understood, would be patently unacceptable to relevant stakeholders.

Managers should acknowledge the potential conflicts between (a) their own role as corporate stakeholders, and (b) their legal and moral responsibilities for the interests of all stakeholders, and should address such conflicts through open communication, appropriate reporting and incentive systems and, where necessary, third party review. (CLARKSON., Max, 1998)

If these principals are followed in stakeholder engagement, a rewarding and mutually beneficial relationship can be fostered. If the stakeholder management process is not addressed to a satisfactory level and external stakeholder “buy in “is not forthcoming the project as a whole can suffer in numerous ways. As stakeholders will attribute value to a project, it can be unclear what the exact definition of project success is if the stakeholders are hostile to it. This can lead to lack of direction and a low morale within the project team. A negative reaction to a project by external stakeholders can have political implications which may hinder a firm’s reputation and their future prospects (AL, Jergeas G.F et, 2000). Less time and resources are required to engage with positive stakeholders than those who seek to hinder and delay a project. Stakeholders should be informed and included in project from the earliest practical opportunity to foster a spirit of co-operation and trust (KARLSEN, Jan Terje, 2008). An example of how not to engage with stakeholders and how difficult it can be to repair relationships with them can be seen in the Shell Corrib Gas project in Co. Mayo (SIGGINS, LORNA, 2009)

2.6 Stakeholder Analysis & Stakeholder Influence Mapping

In the previous section I have mentioned that the first stage in any successful stakeholder management exercise is the identification of stakeholders. Once identified it is important to classify them according to certain project related parameters. This is known as stakeholder analysis and can be used as a tool in strategic planning and competitive analysis. The very action of identifying stakeholders and assessing their likely impact and attitude on a project can inform managers and planners about possible future problems and opportunities that up until now have not been considered.

What distinguishes the different methods of stakeholder analysis is the classification system used in the initial stakeholder identification stages and the subsequent appraisal of the stakeholders with regard to their relationship with the project or organisation.

There are numerous ways to classify stakeholders but most are broadly similar in nature. The most simple classification system is internal and external stakeholders. Internal stakeholders would include the management, employees and stockholders of an organisation (this can be translated into a project team, PMO, project sponsors and senior management in a project environment). External stakeholders would be customers, suppliers, interest groups, and the general public and regulatory authorities (including local and national government) (HARRISON, Jeffrey S., 1996).The concept of internal and external stakeholders is a popular one probably due to the use of an internal/external point of you in relation to strategic management literature. This definition evolved in order to recognise the importance of the role a customer plays. As the customer plays a central economic role within a firm, they were now considered to be internal. This led to use of primary and secondary classes for stakeholders. The criteria for inclusion into the primary category were that a stakeholder performed a function which was central to a firm’s success. This now included employees, management, stockholders suppliers and customers. Secondary stakeholders were those who did not have a direct financial dealing with the firm (CLARKSON, Max, 1995). Another system put forward was the notion of vested and non vested stakeholders. A vested stakeholder was one who had a “vested” interest in the success of an organisation or project (supplier, employee ECT) in contrast to a non vested stakeholder who had the potential to affect or be affected by a project but did not stand to gain financially from a project (general public, regulatory authorities etc) (M. DURRENBURG, B Nelson, S. Spring, 1996).

These classification systems are useful tools in order to identify stakeholder but the classifications are somewhat arbitrary. Each stakeholder is a person or group with different needs and points of view and one can invent as many classification systems as there are individual stakeholders. The real value of stakeholder analysis comes with a firm or project team empathising with a stakeholder and trying to view the project from that individual’s point of view. It can be argued that this process is an extension of the classification system used to identify the stakeholder initially.

There are various methods used to analyse stakeholders and are generally based on the amount of influence a particular stakeholder has on a project or organisation. This is what Mitchell et al called “who or what really counts” (RONALD K. MITCHELL, Bradley R. Agle and Donna J. Woo, 1997). Mitchell et al put forward an inclusive and scientific system which can be replicated in many disparate industries and still retain relevance in business theory and strategic management. They classify stakeholders based on one of three attributes regarding their relationship with an organisation or project: power legitimacy and urgency. The stakeholders are classified according to the number of attributes they possess and this is represented on a Venn diagram.

They proposed that a stakeholder saliency or importance was directly related to the number of catagories they belonged to. The stakeholders who possess one characteristic are know as “latent” stakeholders. In areas 4, 5 and 6, the stakeholders are referred to as “expectant” stakeholders as they are expecting something from a business or project. The stakeholders in area 7 are known as “highly salient” stakeholders as they possess all the attributes judged relevant in this study. A useful inclusion in this diagram is the concept of “non stakeholder” which is defined as a party which has no power, legitimacy or urgency regarding the project. This is useful as it allows an organisation or project manager to prioritise who is the most relevant stakeholders and who have no legitimate interest in a project. This allows for the allocation of valuable time and resources on building relationships and dealing with the stakeholders who are the most salient. The scope of this review precludes me from discussing all the stakeholder catagories used in this important analysis method but by giving a brief explanation of the 3 elemental catagories, I can outline the most important points from this paper.

Mitchell explains that dormant stakeholders are those who possess only one of the three characteristics- power. They need to be managed as they can acquire either one or two more characteristics if their relationship with the organisation is perceived as problematic. If managed correctly their power remains latent and unused.

Discetionary stakeholders are of particular interest to this study because they most closely represent the external stakeholders interviewed in this study. They have a legitimate stake in a project but have no control over the strategic activities of a firm in the general sense. From the diagram above it can be seen if a discretionary stakeholder is not managed correctly they can develop new attributes such as power and/or urgency which will transform the relationship with that stakeholder usually in a negative way. In a similar vein a demanding stakeholder are some of the least important, they have no legitimacy or power and are usually ignored. This groups could include extremist interest groups who do not enjoy the support of the wider population.

Mitchell mentions that the particular names attributed to each stakeholder group are not the most important or noteworthy aspect of this paper. I would take issue with some of the examples used to describe the different categories of stakeholder. Most of them are not based on the usual stakeholder relationships that are found in modern business, e.g “power is held by those who have a loaded gun” or “religious or political terrorists using bombings, shootings, or kidnappings to call attention to their claims.” (RONALD K. MITCHELL, Bradley R. Agle and Donna J. Woo, 1997).While these examples do illustrate the different stakeholder categories, they are so far removed from the type of stakeholder relationships encountered today in the developed world that they have lost relevance. The important aspect of this paper is the three main stakeholder attributes; power, legitimacy, and urgency. They provide the manager with an important tool to understand the stakeholder landscape and to devise a meaningful and effective strategy to deal with stakeholders.

Ramirez takes a different approach (RAMIEREZ, Ricardo, 1999), he suggests that stakeholders should be cla