Tuesday, May 2, 2017

Shareholders Aren't Your Only Stakeholders

When I was in undergraduate school, I recall my professors talking about the different stakeholder groups of businesses - customers, suppliers, employees, shareholders, the communities in which the businesses are embedded and the natural environment. Today, the almost universal mantra seems to be "maximize shareholder value," indicating a singular focus on shareholders and profits. If shareholder value is maximized, it likely requires that the value delivered to the other stakeholders is diminished. This is, to some degree, why businesses have so enthusiastically focused on automation as a cost-effective replacement for their employees. This is also why government regulations have increased over time - to protect employees, customers and the natural environment from the adverse effect of a singular focus on maximizing profits. 

This is not an indictment of capitalism. In fact, the adoption of some form of capitalism by developing countries has lifted a large portion of the world out of poverty and created a growing middle class. You can see strong evidence of this in China and India. 

Rather, this is a strong endorsement for a balanced scorecard. If businesses want less government regulation then they need to reconsider the expectations and needs of their other stakeholders - customers, suppliers, employees, communities and the environment. 

Extensive research has demonstrated that companies that treat their employees well and even put their employees first have achieved significantly better financial results over the long-term. Happy employees result in happy customers which results in happy shareholders. This is a virtuous cycle. On the flip side, businesses that only focus on the shareholders and the bottom line without deeply understanding and meeting the needs of their other stakeholders deliver sub-par financial performance in the long-run. 

Best practice companies focus on stakeholder insight and stakeholder engagement. This starts with stakeholder mapping to identify all of the stakeholder groups. This is followed by extensive stakeholder research to better understand stakeholder needs, hopes, fears and expectations. Then metrics are established for each stakeholder group. Finally, the organizations must establish and execute stakeholder engagement plans.

Remember, businesses only exist to meet human needs, not just the needs of top executives and wealthy shareholders, but the needs of all stakeholder groups. 

Some businesses have adopted ESOP (Employee Stock Ownership Plans), through which each employee is a part owner of the company and is committed to and shares in its financial successes. Some businesses share their profits with their customers in the form of rebates based on the business success. Other businesses take the form of co-ops in which employees and customers share in the business operation and ownership. And, fortunately, many businesses have charitable foundations or other mechanisms through which they give back to the communities in which they are imbedded. This includes robust United Way campaigns, employee days off for volunteer activities, gift matching to charities and organization-adopted charities. Many businesses have adopted environmental management systems to identify and mitigate the environmental impacts of operating their businesses. This often has the added benefit of reducing costs.

I hope this has helped you think about the multiple stakeholders whose needs and expectations businesses should strive to meet and even exceed.

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