Business and Society Review 110:4 407– 431

Toward a Comprehensive Model of Stakeholder Management

JOHN PREBLE Blackwell Oxford, Business BASR © 0045-3609 O 4 110 BUSINESS riginal 2005F.Center UK Article and Publishing, and Society for SOCIETY Business Ltd. Review REVIEW Ethics at Bentley College

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hile the stakeholder concept was first introduced in the 1960s (Stoney and Winstanley, 2001), it was not until the mid-1980s that the concept started to gain widespread acceptance in the United States, with the publication of Freeman’s (1984) book, Strategic Management: A Stakeholder Approach. Since then, numerous conceptual, theoretical, and empirical studies have been conducted with the stakeholder concept as a central theme. While this body of literature is indeed impressive, far less has been done to integrate and implement this knowledge into conceptual and process models that can facilitate the actual practice of stakeholder management within contemporary organizations. This paper will attempt to begin to fill this void by carefully constructing a comprehensive process model of stakeholder management. The model will draw on relevant articles in the extant literature on stakeholder management and corporate examples to provide a theoretically well grounded, yet practical approach for organizations to utilize in successfully managing their stakeholder relations. Recently, Logsdon (2004) utilized a similar type general process model to specify the steps in operationalizing the complex concept of global business citizenship. The paper will begin with a review of some of the early history of the stakeholder concept. This will be followed by a section on how

John F. Preble is associate professor at the Alfred Lerner College of Business and Economics, Department of Business Administration, University of Delaware.

© 2005 Center for Business Ethics at Bentley College. Published by Blackwell Publishing, 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.

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stakeholders can be systematically identified and sorted. Several rationales and supporting empirical evidence are then provided as to why organizations can benefit by adopting a stakeholder perspective. A detailed six-step stakeholder management process model is then developed and mapped out in detail. Included in the model and explanation are theoretical developments and examples taken from several visible organizations that have been experimenting with and developing effective multipronged responses to stakeholder challenges. A summary and conclusion is then provided.

STAKEHOLDER CONCEPT—EARLY HISTORY The historical roots of the stakeholder concept date back to the 1960s when academics at the Stanford Research Institute (SRI International, Inc.) first articulated what was considered at the time to be a controversial proposal (Stoney and Winstanley, 2001) and first used the actual word “stakeholder” (Freeman, 1984). The term stakeholder was chosen as a literary device to call into question management’s sole emphasis on stockholders (Freeman, 1999) and instead suggested that the firm be responsible to a variety of stakeholders, and that, without their support, the organization would not survive. During the 1970s firms began experiencing increased levels of change in their external operating environment. Corporations began responding to a more dynamic and uncertain external environment (often characterized as turbulent) by setting up formal environmental scanning systems (Preble, 1978). These systems were designed to act as “early warning systems” that would detect changes, events, and emerging issues early on in their development so that organizations could prepare effective and timely responses. Most of the changes detected by these systems were precisely those that underpinned Freeman’s (1984) call for managers to revise their conceptual maps and use the stakeholder framework to help interpret external events. Some of the external changes Freeman noted in this seminal work were as follows: • the emergence of consumer, environmental, and other activist groups • an increase in the scope of government (role as a watchdog)

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• a global marketplace and increased foreign competition • an increasingly hostile media • a loss of confidence in business (p. 246) These and other more recent trends, like improved communication and the emergence of the Internet, have only reinforced these developments and the need to manage organizations with an open-systems perspective by utilizing stakeholder management techniques. While numerous conceptual, theoretical, and empirical articles and books have been published since Freeman’s (1984) book appeared, our review must be limited. Thus, in discussing stakeholder management, only the most important ideas and conclusions that are relevant to advancing the aims of this article will be drawn from this immense body of material.

STAKEHOLDER IDENTIFICATION AND SALIENCE A key initial issue in stakeholder management is stakeholder identification, i.e., who are an organization’s relevant stakeholders? Stakeholders have been defined in various ways (Mitchell et al., 1997) with the broadest definition being given by Freeman (1984, p. 46): “A stakeholder in an organization is (by definition) any group or individual who can affect or is affected by the achievement of the organization’s objectives.” This definition is particularly important in highlighting a two-way relationship between the firm and its stakeholders. Stakeholders can impact whether or not a firm and its managers will achieve their objectives and, therefore stakeholders should be managed instrumentally, if profits are to be maximized. In the other direction, if firm decisions affect the well-being of stakeholders then managers have a normative obligation to stakeholders that is moral in nature (Berman et al., 1999). While the above definition of stakeholders is extremely useful, it is also somewhat problematic in that it may not narrow the field down sufficiently for many organizations to be able to decide whom a stakeholder might be. Clarkson (1995) defines stakeholders as persons or groups that have, or claim, ownership rights, or interests in a corporation and its activities, be they past, present, or future. The stakeholder perspective, in a normative sense, identifies stakeholders by their interest in the corporation, regardless of whether the organization

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has any corresponding functional interest in them. The interests of all stakeholders are of intrinsic value, and each group merits consideration (Donaldson and Preston, 1995). An inclusive perspective of stakeholders, like the ones just described, is highly congruent with DaimlerChrysler Japan’s view of environmental stakeholders as encompassing all of humanity, extending to future generations, as well as to all plants and animals (Environmental Report, 2002). Similarly, Imperial Chemicals Industries (ICI) acknowledges obligations to all stakeholders, as part of its sustainable development agenda. A board member is held accountable, as stakeholder expectations are regarded as an integral part of commercial success (ICI Annual Review, 2001). A corporation’s survival depends on the continuing participation of its primary stakeholders, e.g., shareholders and investors, employees, customers, and suppliers. It also depends on its public stakeholders (e.g., governments and communities) to provide infrastructures and legal frameworks in which to operate. Secondary stakeholders are those who influence or affect, or are influenced or affected by, the corporation, but are not engaged in direct transactions with it and are not essential for its survival, e.g., the media and special interest groups (Clarkson, 1995). While these groups are not essential to the direct functioning of the organization, they can strongly influence how the organization is perceived by the public and various governmental entities and, therefore, have a major impact on an organization through the interaction of stakeholders. While the above definitions of stakeholders are believed by the author of this paper to be valid and will serve the purposes of this paper reasonably well, some recent conceptual and empirical work in the area of stakeholder identification and salience (the degree to which managers give priority to competing stakeholder claims) may also be useful in helping organizations sort out which stakeholder will command the most attention at particular points in time. Mitchell et al. (1997) developed a theory of stakeholder identification and salience which advanced the key proposition: Stakeholder salience will be positively related to the cumulative number of stakeholder attributes—power, legitimacy, and urgency—perceived by managers to be present. (p. 873) Agle et al. (1999, p. 508), in an empirical test of the above model, summarize these three stakeholder attributes as follows. Legitimacy

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is a claim on a firm, based upon a contractual or legal obligation, a moral right, an at-risk status, or a stakeholder having a moral interest in the harms and benefits generated by a company’s actions. Power is the ability to influence a firm’s behavior, whether or not the stakeholder has a legitimate claim. Urgency is the degree to which a stakeholder’s claim calls for immediate attention, adding a dynamic component for a stakeholder to attain salience in the minds of managers. The authors found strong empirical support for the above proposition. Since organizations have limited resources, the above findings provide additional sorting criteria for identifying and prioritizing stakeholders. Having just reviewed some ways in which management theorists suggest that stakeholders might be identified and sorted (as to their immediate importance) we will now turn our attention to reviewing the mutually reinforcing empirical evidence supporting the use of the stakeholder approach.

EVIDENCE IN SUPPORT OF USING A STAKEHOLDER APPROACH Why should management adopt a stakeholder approach? Evidence and logical arguments will now be provided from three different, yet mutually supportive, viewpoints. Adopting a stakeholder approach is instrumentally valuable, in that the financial performance of the firm will be enhanced. Managing stakeholders strategically is seen as the means for increasing the likelihood of achieving the ends of the corporation, namely, marketplace success/performance (Mellahi and Wood, 2003). Interestingly, a long-term Harvard study found that companies that explicitly put their shareholders first did less well for their shareholders than did companies that balanced the interests of all their stakeholders (Caulkin and Black, 1994; Kotter and Heskett, 1992). When Donaldson and Preston (1995) reviewed a large number of instrumental studies of corporate social responsibility (all of which made reference to stakeholder perspectives and used conventional statistical methodologies), they concluded that all of these studies generated “implications” that adherence to stakeholder principles and practices tended to achieve conventional corporate performance objectives (i.e., profitability, stability, growth) as well or better than rival approaches.

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More recently, Preston and O’Bannon (1997) conducted a longitudinal study (1982–1992) of 67 large U.S. corporations that analyzed the relationship between indicators of corporate social and financial performance. Of course, Freeman (1984) had argued earlier, in advancing his view of stakeholder theory, that favorable social performance is a requirement for business legitimacy and that social and financial performance tend to be positively associated over the long term. A key result of the Preston and O’Bannon (1997) study, which computed 270 correlations (in both contemporaneous and lead-lag form), covered an 11-year time period, and used three social and three financial performance indicators, was that there wasn’t a single negative result. Thus, all the evidence suggested a positive association between social and financial performance and hence is broadly consistent with the stakeholder theory of the corporation. Berman et al. (1999) recently derived a “strategic stakeholder management model,” which rests on the premise that firms will address stakeholder concerns when they believe doing so will enhance firm financial performance, i.e., an instrumental approach. These authors found that fostering connections with key stakeholders and making sure they are allocated resources can help with firm profitability. Thus, taken together, all of the above studies lend support to the instrumental model of stakeholder management. Another viewpoint relates to what happens if stakeholders are ignored, mismanaged, or the organization acts in a socially irresponsible or illegal way. Downing (1997) has noted that stakeholder activists can disrupt shareholder meetings, organize consumer boycotts, smear brand names on the Web, lobby government officials for new protective legislation, participate in protest rallies, etc. In fact, the mismanagement of stakeholder activist issues can result in lost markets and revenues, a decline in share prices, large legal fees, as well as wasted management time. Similarly, a key finding of Whysall’s (2000) study of stakeholder mismanagement by three British retailers was that the fallout from stakeholder mismanagement was likely to be widespread, highly publicized, long lasting, and difficult to contain. Taking the argument one step further, what happens when a firm acts in a socially irresponsible and illegal manner? Frooman (1997) examined this issue using a meta-analysis of 27 event studies taken from the finance literature to track the stock market’s reaction to these types of behaviors. He concluded

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from this data that socially irresponsible and illegal corporate acts result in substantial decreases in shareholder wealth. The above study also provided support for our third viewpoint, the moral viewpoint. Frooman (1997) found empirical support for the concept of “enlightened self-interest,” that business and societal interests are closely intertwined. Normative stakeholder theory involves the specification of what firms ought to do or should do, from an ethical and moral standpoint, in the treatment of shareholders and stakeholders. Stakeholders have intrinsic value and, as such, ought to be treated as “ends” in themselves and not just as means to an end (Evan & Freeman, 1983) as in a strictly instrumental approach. Donaldson and Preston (1995) summarize the normative viewpoint as involving acceptance of the following: (a) Stakeholders are persons or groups with legitimate interests in procedural and/or substantive aspects of corporate activity. Stakeholders are identified by their interests in the corporation, whether the corporation has any corresponding functional interest in them. (b) The interests of all stakeholders are of intrinsic value. That is, each group of stakeholders merits consideration for its own sake and not merely because of its ability to further the interests of some other group, such as the shareowners. (p. 67) We have just examined a wide variety of evidence supporting the use or adoption by firms of the stakeholder approach. There is substantial evidence supporting the instrumental perspective, where using this approach enhances the financial performance of the firm. Conversely, we saw that ignoring or mismanaging stakeholders or acting socially irresponsible was costly to the firm, damaging to their reputations, and substantially reduces shareholder wealth. Also, the stakeholder approach was shown to be justified on moral/ethical grounds, in that it is the “right” thing to do. We will now present a comprehensive six-step process model of stakeholder management.

COMPREHENSIVE STAKEHOLDER MANAGEMENT PROCESS MODEL While the extant literature on stakeholder management discusses separately many of the elements of the stakeholder approach,

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surprisingly little effort has been made to construct a comprehensive stakeholder management process model that can facilitate the actual practice of stakeholder management within contemporary organizations. Thus, the synthesis of a wide array of stakeholder management theory, buttressed with examples of stakeholder initiatives taken by several visible organizations and integrated into a comprehensive stakeholder management process model, is considered to be a major contribution of this paper to the literature. This model and approach can greatly facilitate the task of introducing a stakeholder perspective into an ongoing organization. An organization and its managers must start using the process with the recognition that adopting a stakeholder perspective and pursuing proactive stakeholder management techniques will materially advance the functioning and health of their organization as they develop an improved and ongoing fit to an ever-changing external operating environment. An earlier section of this paper has provided extensive conceptual and empirical support for this position. The next step is to actively incorporate the stakeholder management process (see Figure 1) into an organization’s business processes and functions. While the stakeholder philosophy is fairly straightforward conceptually, the diagram illustrates that its implementation is much more complex. Thus a systematic step-by-step process is suggested to help assure successful implementation. Step 1: Stakeholder Identification Although there are a number of classification schemes suggested in the literature, for example, Whysall (2000) (internal, marketplace, external), Hitt, et al. (2001) (capital market, product market, organizational), we will use the Clarkson (1995) typology discussed earlier in the paper to assist in identifying stakeholders. The author chose this typology because it has the dual advantage of being both straightforward and comprehensive. Primary stakeholders are those whose continuing participation is required if an organization is to survive, e.g., shareholders and investors, employees, customers, and suppliers. Public stakeholders provide the firm with infrastructure and legal frameworks in which to operate, e.g., governments and communities. Finally, secondary stakeholders are those who influence or affect, or are affected by, the corporation, but are not engaged in direct transactions with it and are not essential for its survival, e.g.,

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FIGURE 1 Comprehensive Stakeholder Management Process Model

the media and special interest groups. The goal initially is to identify all stakeholders in which the organization has an interest, as well as those who have an interest in the firm and could, therefore, influence it either directly or through interactions with other stakeholders. The proper attitude to adopt, as argued by Donaldson and Preston (1995), is that the interests of all stakeholders are of intrinsic

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value and merit consideration by the firm. For example, U.S.-based Nike Corporation, one of the world’s largest apparel/footwear companies operating on all six continents, according to its first Corporate Responsibility Report (Nike Corp., 2001), historically considered only stakeholders with which they had a financial relationship (i.e., employees, consumers, retailers, suppliers, investors, and recipients of corporate giving) in their business decisions. More recently, activist groups have made allegations that Nike has committed human and labor rights abuses and environmental damage in its foreign subcontractor factories. As a result, Nike has faced negative media exposure, college student protests, legal challenges, and an Internet protest site that advocates boycotting Nike products. Thus, Nike has been persuaded to open up beyond its primary stakeholders and to include environmental organizations, human rights groups, students, colleges, unions, socially responsible investor groups, governments, academia, and consumers (Nike Corp., 2001). While Clarkson’s (1995) typology and Nike’s illustration are instructive as to whom a company’s stakeholders might be, it should be noted that the actual stakeholder groups identified will be dependent on a firm’s size, industry, and the location of its headquarters and operations. Once the stakeholder identification process is complete, it is often useful then to construct a stakeholder map to get a visual picture of the stakeholder set that is relevant to the organization (see Figure 2). It needs to be recognized at this point that this map is merely illustrative and represents a simple, visual depiction of an organization’s stakeholders. More complex and comprehensive maps are possible, as shown in Freeman (1984), and stakeholder maps may be constructed based solely on a key issue that is of interest to the firm and the stakeholder. As reported in Nike’s 2001 corporate responsibility report, Nike has recently realized a need for a more formalized approach to stakeholder engagement as a consequence of connecting with an overwhelming 100-plus external nonprofit stakeholder groups and has collaborated with SustainAbility, Ltd. (a UK-based sustainable development consultancy) to create a stakeholder framework (i.e., map) similar to the one presented here in Figure 2. Step 2: General Nature of Stakeholder Claims It is useful once stakeholders have been identified (step 1) to make an initial assessment as to the general nature of the various claims

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FIGURE 2 Stakeholder Map

Source: Freeman (1984). or expectations that these stakeholders might have on the firm. These stakes help to define what type of power a stakeholder possesses and what kind of a response would be appropriate for the firm to consider relative to each stakeholder. The nature of a stake in the firm can range from an equity stake to that of an influencer with groups in the middle of the continuum having an economic or market stake in the firm (Dill, 1975; Freeman, 1984). Shareholders have a financial equity stake in the firm, which gives them voting power, economic power in that they can sell their stake, and political power, which could be exercised at the company’s annual meeting as in the case of a dissident shareholder. Customers have economic power vested in their purchasing decision and their ability to file product liability lawsuits when a product fails or endangers or injures its user. Aggrieved consumers can also exercise political power by filing complaints with consumer or government agencies. In line with recognizing the general nature of stakeholder claims,

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Royal Dutch/Shell Group of Companies, in its Statement of General Business Principles (Shell International Limited, 1997), recognizes responsibilities to these categories of constituents: shareholders, customers, employees, contractors, suppliers, and joint venture partners, and society. For example, Shell vows to protect shareholders’ investment and provide an acceptable return, and with respect to customers, it intends to win and maintain them by developing and providing products and services that offer value in terms of price, quality, safety, and environmental impact, which are supported by the requisite technological, environmental, and commercial expertise. Governments represent another claimant that can have a strong influence on the organization formally and economically, for example, in the United States, through the Securities and Exchange Commission, the Environmental Protection Agency, and the Occupational Safety & Health Administration. Additionally, consumer advocates like Ralph Nader in the United States and the UK-based group Ethical Consumer (an alternative consumer organization) can have a direct influence on the firm should they decide to lead a consumer boycott of a firm’s product(s), thus inflicting economic pain or by lobbying the government for protective legislation. Lastly, influencers are said to have a social stake in the firm by simply being interested in its activities (Harrison and St. John, 1996). The above examples are not meant to be exhaustive, but are rather illustrative of the kinds of stakes and power implications that need to be examined as part of the proactive assessment of stakeholder positions. To be effective, however, this analysis must be pushed further to examine the precise expectations of stakeholders and to what extent these goals and needs are being met by the organization. Step 3: Determine Performance Gaps This step involves assessing each stakeholder’s expectations, needs, and/or demands on various issues and comparing them to an organization’s behavior on these dimensions to see if performance gaps exist (see Figure 1). Frooman (1999) argues that the stakeholders’ theory is fundamentally about managing divergent interests of managers and their stakeholders. Initially then an organization must learn what their stakeholders want from the firm and determine if it is different than what the organization is providing. Once gaps are identified, strategies can be devised to reduce these gaps and therefore

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minimize the potential conflict that could result in disruptive and costly stakeholder actions against the firm. Determining stakeholder expectations can be a complex process. For remote stakeholders like environmental activists, open channels of communication may not exist and, therefore, expectations may need to be forecasted (Polonsky, 1995). More recently, however, organizations can carefully analyze the Web sites of “special interest groups” to help determine remote stakeholder expectations. Additionally, an organization may need to determine the expectations of even dangerous stakeholders (e.g., disgruntled employees, terrorists) where dialogue is deemed undesirable (Mitchell et al., 1997) or impossible. For example, McDonald’s has often experienced bombings and trashing of its international locations. In this case, the firm should strategize to reveal opportunities for meeting the expectations of those stakeholders or at least mitigating the dangers posed by them and thus increase organizational preparedness. McDonald’s endeavors to make its international locations appear as local as possible by hiring all locals in order to reduce antiglobal or anti-American sentiment. The expectations of other stakeholder groups might be more easily discerned. In the case of unions, organizations are aware through prior negotiations, policy statements, and ongoing dialogue precisely what the union wants and needs and how well these are being provided by the management. Thus, performance gaps can more easily be identified by management. Similarly, in the case of hospitals, key stakeholders can often be readily identified (medical staffs, patients, hospital managements, professional staffs, board of trustees), and expectations can then be directly discerned via open communication (Kumar and Subramanian, 1998). For example, the medical staff (physicians and nurses) wants to be able to deliver high-quality clinical care, which may require expensive, technologically advanced services and facilities, while patients require highquality clinical care and service at reasonable costs. Social and environmental stakeholder groups may have both specific expectations for firm behavior like a maximum amount of pollutants to be emitted and general desires such as a firm should be operating in a socially responsible manner. Social audits have evolved as a method for organizations to accurately identify stakeholder expectations in such cases and continually monitor changes in organizational performance with respect to those expectations. Downing (1997) advocates a “triple bottom line” approach to public

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accountability (economic, environmental, and social performance) in order to satisfy key stakeholders’ social aspirations and adequately measure the wealth-producing capacity of a company for its key stakeholders. Additionally, eight quality principles have been developed for social and ethical auditing by the UK-based Institute for Social and Ethical Accountability (Zadek 1998). Analytically, some organizations may wish to push the process further by looking not just at what stakeholders expect or want, but at the question of what means they might use to get it, i.e., stakeholder influence strategies. This requires looking not only at organizational attributes or stakeholder attributes, but also at the relationship between the firm and the stakeholder. Frooman (1999) does this by examining the resource relationship (who is dependent on whom) and develops four types of stakeholder influence strategies: direct withholding, direct usage, indirect withholding, and indirect usage. Similarly, Rowley (1997) uses the social network theory to construct his own theory of stakeholder influences, which takes into account multiple, interdependent stakeholder demands, and describes and predicts how organizations respond to the simultaneous influence of multiple stakeholders. Friedman and Miles (2002) recently developed a stakeholder model (drawing on a realist theory of social change and differentiation) that highlights the range of organizational/stakeholder relations (including extremely negative and highly conflicting relations) and the dynamics of these relations over time. These authors provide a rich and detailed illustration of how and why the global environmental group, Greenpeace’s corporate relationship has evolved over the last three decades. In the most recent phase 4, the Greenpeace/corporate relationship is characterized by compromise on both sides and is concerned with finding workable solutions to various environmental problems and issues through collaboration and joint ventures, despite the parties possessing incompatible interests generally. Finally, Fineman and Clarke (1996) detail the following methods that can be used by “green” pressure groups: conservative persuasion (“environmental care is good for business”); moral exhortation (“it’s your duty to care for the environment”); and direct confrontation/sabotage (“ecotage”). The reader is referred to the above articles should they desire to explore these approaches further. Through the above methods, organizations can determine stakeholder expectations and demands, compare these with their

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organization’s behavior, and thus determine where key gaps and conflicts exist. Additionally, organizations may explore during this step not just what stakeholders want, but how they might intend to get it through stakeholder influence strategies. Since organizations may not possess sufficient resources to simultaneously address all gaps, the next step will be to prioritize where efforts will be initially focused. Step 4: Prioritize Stakeholder Demands While this paper has taken the position that all stakeholder entities merit consideration, and has tried initially to identify all relevant stakeholder groups, it is also recognized that managers and organizations have limits on their time, cognitive information processing capabilities, and resources. Thus, this step will focus on ways to help sort out which stakeholder groups will command or deserve managerial attention at different points in time, i.e., be perceived as having priority status. As discussed earlier in the paper, Mitchell et al. (1997) advanced a theory of stakeholder identification and salience (the degree to which managers give priority to competing stakeholder claims) based on the extent to which managers perceived stakeholders to possess power, legitimacy, and/or urgent claims. Agle et al. (1999, p. 508) later provided partial empirical support for this model using data from CEOs of 80 large U.S. firms. Similarly, an empirical study of four UK industries (supermarkets, automotives, power, and chemicals) with regard to green stakeholders, conducted by Fineman and Clarke (1996), is also broadly supportive of this model. In highlighting the manager as an interpreter of stakeholder influence (based on industry culture and management values), these authors found environmental campaigners and industry regulators to be recognized by managers to be highly salient stakeholders based on their perceived legitimacy and ability to pose a threat to injure or embarrass the industry. On the other hand, customers, creditors, employees, and environmental accreditation schemes were not influential with respect to influencing an industrial green agenda as they didn’t possess or hadn’t developed multiple-attribute salience. Mitchell et al. (1997) developed seven stakeholder types based on whether they possessed one, two, or three of these attributes in

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various combinations. Latent stakeholders have little salience to management as they possess only one attribute. For example, dormant stakeholders have power, discretionary stakeholders possess legitimacy, and demanding stakeholders have only urgency, but no power or legitimacy. However, should one of these stakeholder entities gain access to another attribute their salience would increase markedly. Expectant stakeholders possess two attributes and moderate salience to managers as a consequence. Thus, dominant stakeholders possess power and legitimacy and form the “dominant coalition” of the enterprise (Cyert and March, 1963) e.g., owners, employees, large creditors, community leaders, etc. Dependent stakeholders, like oil spill victims, lack power, but have both urgent and legitimate claims. Gaining access to government agencies and the courts could provide these stakeholders with the power they lack initially. Dangerous stakeholders have both urgency and power, but lack legitimacy. However, because they are potentially dangerous to the firm they must be managed carefully, as discussed earlier. Finally, definitive stakeholders have a high degree of salience as managers perceive power, legitimacy, and urgency to be present simultaneously. For example, institutional investors holding large blocks of company stock that is plummeting in value, require immediate attention by management as a very high priority stakeholder. Of course, nonstakeholders are at the other end of the continuum as these entities have no power, legitimacy, or urgency in relation to the firm and, therefore have little or no salience to the firm’s managers. An alternative framework for determining which stakeholders are the most important at a given point in time and thus deserve priority status by management was recently developed by Harrison and St. John (1996). They suggest an increased need to manage stakeholders more strategically (i.e., partnering) based on recent changes in firm operating environments. These changes include a decline of the traditional management hierarchy, a hollowing out of corporations and an emphasis on boundaryless organizations. Stakeholders are considered to be strategically important (priority) to the extent that they can influence the amount of environmental uncertainty faced by the firm. For example, environmental/community activists often possess political power, and large suppliers of unique materials and/or high switching costs have considerable economic and bargaining power. Firm strategic choices/decisions can result in

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higher levels of dependence on various stakeholders and thus result in a relationship that is strategically important to the firm. For example, if the company decides to outsource a critical component or pursue an aggressive growth strategy, then suppliers and financiers, respectively, become more important as levels of interdependence have been increased. Using this framework, stakeholders can be classified as having a high/low strategic importance (priority). Harrison and St. John (1996) then suggest the increased use of strategic partnering tactics for high priority or traditional stakeholder management techniques for low priority stakeholder entities. These methods will be discussed in the next section of the paper dealing with specific organizational responses to stakeholders. Step 5: Develop Organizational Responses Having just identified the firm’s stakeholders, their claims, expectations, and goals and compared them with the organization’s behavior and performance to reveal gaps and then prioritized stakeholders, we are now in a position to develop policies, strategies, and organizational responses to minimize those gaps and attend to those priorities. However, since the number of response strategies possible is some multiple of the number of stakeholders times the number of issues of concern times the number of novel ideas generated, it will be necessary to limit the discussion to several generic approaches that could be employed on multiple stakeholder types, issues, and industry situations. One approach likely to have wide applicability is for an organization to use direct communication or open dialogue with their stakeholders (Freeman, 1984; Harrison and St. John, 1996; Polonsky, 1995). Business policies can be written for the firm that explicitly encourages employees to engage in open dialogue with external constituencies. For example, in British Petroleum’s (BP) Business Policies (British Petroleum, PLC, 2002), they express the general policy expectation with respect to relationships: . . . engage in dialogue and build relationships with may different groups to promote understanding and seek new ways of conducting our business to greater mutual advantage. And at the business unit level, BP’s business policy for ethical conduct specifically directs its leaders to:

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. . . engage in open dialogue and consultation with local communities and their representatives, nongovernment organizations, and government at all levels to ensure that potential issues arising from our operations are identified and the risks addressed. (British Petroleum, PLC, 2002) Thus, dialogue and engagement are recommended for definitive stakeholders (discussed earlier), for strategically important stakeholders where high levels of dependency exist, for dangerous stakeholders who threaten direct confrontation/sabotage, and for stakeholders who aren’t clearly understood by the firm. Informal, open communication on key issues where potential conflicts or gaps are perceived to exist can allow each party to more clearly define their position or situation (i.e., how they are being impacted or what resource constraints they might face) leading to an increased understanding as well as the uncovering of areas of common ground. The firm is then in a position to suggest initiatives and goals toward improving their performance/behavior on an issue and the stakeholder, as a result of new knowledge and increased understanding of the firm’s situation, is in a position to modify or refine their expectations. Both parties moving positions should substantially reduce the gap and avoid negative events like stakeholder protests or boycotts. However, if conflicts arise between the two parties that do not appear to be easily resolvable, then negotiation might be facilitated with the use of a mediator. Mediation is a nonadversarial approach to resolving disputes/conflicts with the aid of a neutral, third-party mediator who works with the disputants to facilitate cooperation and compromise (Lampe, 2001). Another strategy for managing firm–stakeholder interactions increasingly being used by today’s organizations is collaboration or partnering (Harrison and St. John, 1996; Savage et al., 1991). As discussed earlier, an organization’s external environment has increasingly become more complex and uncertain and webs of interdependencies among stakeholders have been created. Pfeffer and Salancik (1978) suggest increasing mutual control over each other’s activities as a typical solution to problems of uncertainty and interdependence. Harrison and St. John (1996, p. 53) present a wide array of stakeholder partnering techniques, including joint ventures, cooperative product development efforts with suppliers, and collective lobbying campaigns that are likely to bring the firm in closer alignment with its critical stakeholders. An additional

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consideration is that partners should follow the same high standards as the company they are partnering with. BP operates in 100 countries with numerous business partners and in its Business Policies (British Petroleum, PLC, 2002) manual, it is clear that BP fully expects its partners live up to their commitments: . . . In joint operations, we will apply these policies where we are operators; where we are not, we will seek to influence our partners such that the joint operation adopts similar policies. A similar typology of stakeholders developed by Savage et al. (1991) includes the “mixed blessing stakeholder,” which has both a high potential to threaten the firm as well as a high potential to cooperate with it. The strategy suggested as best for managing this type of stakeholder is to maximize cooperation and reduce the risk of opposition through collaboration, e.g., joint ventures and mergers. General Motors’ joint venture with Toyota in the Freeman, California, plant was an example of an early auto industry collaboration followed later by dozens of strategic alliances (e.g., Ford and Mazda, Renault and Nissan) among competing automobile companies. The overarching strategy here is to change the relationship with stakeholders to make them more dependent on the firm and therefore, more willing to cooperate with it. Earlier, Freeman (1984) had classified this type of stakeholder as a “swing” stakeholder and suggested that firms adopt a strategy that attempts to change or influence the rules of the game that govern firm–stakeholder influences. McDonald’s partners with potentially adversarial environmental groups like Environmental Defense on issues like packaging, and consults with the Natural Step to help them achieve sustainability goals. They also collaborate in the UK with Oxford University and the Royal Society for the Prevention of Cruelty to Animals in support of the future of farming and animal welfare projects (McDonald’s Corporate Press Release, 2002a). Setting performance goals and targets with respect to the concerns and expectations of key stakeholders is emerging as an important means for managing firm–stakeholder relations. In a recent survey of hospital executives it was found that each of the 11 performance goals, which were designed to satisfy the expectations of key stakeholder groups, was considered “important” to them (Kumar and Subramanian, 1998). And as hospital stakeholders are increasingly demanding a voice in the planning process, some stakeholders have been invited to participate in the planning process itself, while

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other stakeholder viewpoints (determined during scanning) are also incorporated into the planning process (Daake and Anthony, 2000). Similarly, Imperial Chemical Industries (ICI) conducts stakeholder opinion leader research and sets global standards and continuous improvement targets with respect to safety, health, and the environment (SHE Report, 2002) that attempts to satisfy stakeholder expectations. Achieving environmental performance targets forms a partial basis for determining senior manager compensation, and business unit managers must submit an annual report (letter of assurance) to the board and ICI audit committee detailing compliance with SHE policies and standards. Setting goals with respect to stakeholders’ interests sets the stage for devising specific programs and tactics to be employed in achieving those objectives. Freeman (1984) discusses a wide variety of strategic programs, such as advocacy advertising, negotiating with activist groups, lobbying for deregulation, labor–management cooperation, stockholder interviews, etc., all designed to either meet or change stakeholder expectations. Similarly, Harrison and St. John (1996) detail a large number of traditional stakeholder management tactics like customer service departments, long-term contracts with suppliers, competitive price cutting, government relations departments, community relations officers, financial donations to activist groups, etc. Of course, it is important that new programs and initiatives designed to help achieve goals directed at stakeholder expectations be adequately funded. Lorange (1983) argued early on that new strategic programs need to be treated separately from the operating budget so as to give clarity and urgency and thus assure that sufficient resources will be devoted to these programs. Freeman (1984) discusses the resource allocation process for funding stakeholder strategies in some detail, as well as the paramount need for top management support for these types of proposals. Many of the global firms cited here have a board member responsible for oversight of these types of activities. With all of the above steps completed it is an opportune time to reflect on an organization’s “statement of purpose” or “mission statement” and to assess how well stakeholder relations are reflected in it. Campbell (1997), in arguing the case in favor of stakeholders, says that a statement of purpose should include an explanation of the nature of the “deal” each stakeholder might expect from its relationship with the organization. David (1999) expresses a similar belief that key stakeholder concerns be covered in the “mission statement” of an

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organization. At this juncture, after dialogue with and strategy making toward various stakeholders, these statements should be revised to include the organization’s current position on various stakeholder issues. As discussed earlier, Shell specifies its responsibilities to various constituents in its set of nine general business principles. Step 6: Monitoring and Control Stakeholder positions on issues are likely to change, sometimes dramatically, over time calling for continuous monitoring of stakeholder expectations lest the organization could be caught off-guard or be pursuing stakeholder strategies that are no longer relevant. From the firm’s perspective, stakeholder programs need to be constantly evaluated and monitored to assure that progress toward goals is actually being made. The strategic control process (Preble, 1992) is ideally suited for incorporating this task. Strategic control monitors progress on strategies along the way as they are being implemented, not just at the end of a budget or planning cycle. This process checks if programs are on track and if strategies are still relevant, or if the assumptions upon which the strategies are based have changed, calling for new strategies/programs to be devised. Social and environmental audits (discussed earlier) should also be employed as part of the monitoring and control process. In 2002, McDonald’s issued its first Worldwide Social Responsibility Report focused on four broad categories: community, environment, people, and marketplace. Going beyond economic indicators, the 46-page report details the goals, performance, and progress of McDonald’s to date in these key areas (McDonald’s Worldwide Social Responsibility Report, 2002b). Utilizing the feedback obtained in step 6, the stakeholder management process then recycles back to step 1 for periodic reexamination and continuous improvement purposes. With the firm restarting the process at step 1, the detailed explanation of the six key steps necessary to pursue the comprehensive stakeholder management process model depicted in Figure 1 is now complete.

SUMMARY AND CONCLUSION The paper began by reviewing the early history of the stakeholder concept. This was followed by a section of the paper that examined

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how stakeholders might be identified and sorted. Several rationales and related empirical evidence were then provided as to why organizations should adopt a stakeholder perspective. Then the emphasis shifted to the actual development of a new comprehensive process model of stakeholder management that synthesized disparate pieces of stakeholder management literature with examples of effective responses to stakeholder challenges, taken from several contemporary organizations. The result of this integration is a detailed six-step process model that provides a comprehensive, theoretically well-grounded, yet practical approach for managers to utilize in anticipating stakeholder concerns and in providing early effective responses to constituent demands. Thus, the model that was developed incorporates many elements of previous stakeholder management theory and concepts and provides a rich set of examples taken from contemporary organizations that have started to develop effective responses to stakeholder concerns. As such, the systematic six-step process detailed in this paper can provide practicing managers with a template for employing stakeholder management concepts/practices in their organizations. Adopting such an approach should ultimately increase the legitimacy and operating performance of an organization as it reduces stakeholder performance gaps and forges a tighter fit with the demands and expectations of their numerous stakeholders.

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