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Topic X Stakeholder

Relationships

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1."

Identify stakeholders,
stakeholders;

primary

stakeholders

and

secondary

2."

Discuss why organisations should subscribe to stakeholders view

based on normative, instrumental and descriptive arguments;

3."

Discuss the concept of stakeholder management;

4."

Identify a firms relevant stakeholders based on three elements; and

5."

Explain an organisations responsibilities towards its stakeholders.

X" INTRODUCTION
In this topic, we will discuss the concept of stakeholders. We will also touch on
the concept of stakeholder management and the management of stakeholder
relationships. "

2.1

THE CONCEPT OF STAKEHOLDER

Before we delve into the definition and concept of stakeholders, let us first
understand the definition of stake. A stake is an interest, claim or share in an
undertaking or enterprise. A large organisation has many stakeholders. In
business terms, the definition of stakeholders is as shown below:
Individuals or groups who can affect or is affected by the actions, decisions,
policies, practices or goals of an organisation.
(Freeman, 1984)

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2.1.1

Classification of Stakeholders

Generally, there are two categories of stakeholders based on the nature of their
relationship with an organisation. Wheeler and Sillanpaa (1997) categorised
stakeholders into:
x"

Market stakeholders; and

x"

Non-market stakeholders.

Let us now look into each category in more detail.

(a)

Market stakeholders/Primary stakeholders

Market stakeholders are individuals or groups which have a direct
interest in the organisation as well as engaged in economic transactions
with the organisation as it produces its goods and services.
(Lawrence & Weber, 2011)
Primary stakeholders include customers, shareholders, suppliers, creditors
and employers. For example, a shareholder as a primary stakeholder
contributes capital to an organisation in the form of investment in exchange
for dividends. The shareholder can also influence the organisations policies
as the shareholder can elect members of a firms board of directors. They
also have the right to vote on a firms decisions such as mergers and
acquisitions.

(b)

Non-market stakeholders/ Secondary stakeholders

Non-market stakeholders include individuals and groups who are not
engaged in a direct economic transaction with the organisation but are
affected by or can affect its actions.
(Lawrence & Weber, 2011)
Secondary stakeholders include communities, the media, business support
groups, the government and the general public. The media can affect the
organisation through news that a newspaper or magazine publishes. While
for the community, it can also be affected by the organisations policies and
decisions.
For example, the health of a community can be at stake if a firm decides to
dump its toxic waste into the rivers and streams that the community uses.

TOPIC 2 STAKEHOLDER RELATIONSHIPS

21

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On the other hand, the community can also affect the organisations
operations when the community does not welcome an organisation and
objects to its plans to set up operations in the communitys neighbourhood.
Let us now look at Table 2.1 which shows examples of an organisations market
and non-market stakeholders.
Table 2.1: Organisations Market and Non-Market Stakeholders
Market stakeholders

Non-Market stakeholders

Employees

Local communities

Owners/Stockholders/Shareholder

Social activists

Customers

Media

Suppliers

Business support groups (e.g. trade associations)

Competitors

Government

Retailers/Wholesalers

Federal, state and local governments

Creditors

General public

"
SELF-CHECK 2.1
Answer the following questions.
(a)"

What is the definition of stakeholder?

(b)" Identify two types of stakeholders.

2.1.2

Support for the Concept of Stakeholder

Donaldson and Preston (1995) identified three arguments for the concept of
stakeholder. Organisations should follow the concept based on three stakeholder
theory arguments:
(a)

Descriptive Argument
The descriptive argument describes how organisations manage and
interact with its stakeholders.
(Donaldson & Preston, 1995)

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Although an organisations financial performance is important, the

organisation still needs to be concerned about these aspects:
(i)

Producing safe and innovative products for its customers;

(ii)

Providing a safe and healthy work environment for its employees; and

(iii) Complying with government regulations.

(b)

Normative Argument
The normative argument says that taking care of its stakeholders is simply
the right thing for organisations to do. As organisations have vast power
and resources, they have a duty towards all those affected by the
organisations actions.
(Lawrence & Weber, 2011)

(c)

Instrumental Argument

The instrumental argument says that stakeholder theory is an effective

corporate strategy. Companies that take into consideration the rights and
concerns of their stakeholders tend to perform better in the long run over
those who do not.
(Lawrence & Weber, 2011)

ACTIVITY 2.1"
Discuss why organisations should subscribe to the stakeholder
view based on these arguments:
(a)"

Descriptive;

(b)" Normative; and

(c)"

"

Instrumental.

"

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EXERCISE 2.1
1."

What is the difference between a market stakeholder and a nonmarket stakeholder?

2."

Read the following situation.

You are a fruit juice manufacturer. You just learned that a few
customers have become sick from drinking your product. You
suspect that the juice was not properly pasteurised. You need to
ensure this incident causes minimal damage to your reputation.
Identify the stakeholders affected by this incident.

"

2.2

STAKEHOLDER MANAGEMENT

Do you know that an organisation has many stakeholders to whom it is

accountable? Managers must manage their relationships well with their
organisations stakeholders. Failing to address the concerns of their stakeholders
can damage a firms reputation and ultimately affect its bottom line. Stakeholder
management has become increasingly important as managers discover that their
organisations stakeholder groups have to be relatively satisfied for the firm to
meet its objectives (Carroll & Buchholtz, 2006).
Do you know the meaning of stakeholder management? Let us look below to
know its meaning.
Stakeholder management refers to the process of managing the expectations
of the individuals and groups who have an interest in your organisation or
will be affected by the organisations activities.

Organisations that want to implement stakeholder management must first

identify their relevant stakeholders. We will discuss this matter in the next
section.

"

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EXERCISE 2.2
Do you think it is important for an organisation to engage in
stakeholder management? Provide reasons for your answer.

"

2.2.1

Identifying a Firms Relevant Stakeholders

An organisation must identify its relevant stakeholders. We have discussed earlier

two main types of stakeholders. However, not all stakeholders are relevant to an
organisation.
For example, a company like Amazon or Dell which sells its products directly to
its customers would not have retailers or distributors. However, distributors
would be an important stakeholder for a company like Nestle which sells its
products mainly through supermarkets and sundry shops.
In order to identify stakeholders who are relevant to an organisation, managers
must understand the characteristics of their stakeholders. A manager may identify
a firms relevant stakeholder based on these elements:
x" Stakeholder power;
x" Stakeholder legitimacy; and
x" Stakeholder urgency.

2.2.2" Stakeholder Power

What is the meaning of stakeholder power?

"

S
Stakeholder power refers to the ability to use resources to make an event
happen or to secure a desired outcome.
(Lawrence & Weber, 2011)
Stakeholders may have coercive, utilitarian or symbolic power over the
organisation.
(a)"

Coercive power
C
Coercive power involves the use of physical force or violence.
(Thorne, Ferrell & Ferrell, 2008)

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25

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Stakeholder groups such as environmental activists can have coercive power
when they protest against an organisations policy or action and destroy the
organisations facilities during their protest. Hkiwtg" 403" ujqyu" uqog"

gpxktqpogpvcnkuvu"icvjgtkpi"uwrrqtv"hqt"vjg"ecwug"qh"vjg"rncpgv0"

Figure 2.1: Environmentalists gathering support for a cause

Source: http://static.guim.co.uk

(b)" Utilitarian power

Stakeholders can have utilitarian power when they have the power to
control the organisation resources such as financial or material resources.
(Thorne et al., 2008)
(c)"

Symbolic power
Stakeholders can possess symbolic power when they have access to or are
able to use symbols or prestige.
(Thorne et al., 2008)
For example, a letter written by a minister on a ministry letter head would
have symbolic power compared to a plain letter. The Internet can also be a
form of symbolic power when it is able to command the attention of the
media or government.

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ACTIVITY 2.2
Identify at least five stakeholders in your organisation. Explain the
types of power these stakeholders have over your organisation.

"

"

2.2.3

Stakeholder Legitimacy

Do you know the meaning of stakeholder legitimacy? Let us refer below to know
its meaning.
S
Stakeholder legitimacy refers to whether the stakeholders claims are justified
or proper within a given context. A stakeholders claim can be considered
legitimate when their claims are judged to be reasonable by other stakeholders
and society.
(Thorne et al., 2008)
For example, it would be legitimate for consumers to expect an organisation to
produce safe products for their consumption. Therefore, an organisation would
want to address the consumers concerns if they are faced with criticism of
unhealthy food. Shareholders, institutional investors and board of director
members who own shares all have legitimate claims of ownership because they
are all owners of the organisation.

2.2.4

Stakeholder Urgency

Urgency refers to how fast an organisation responds to its stakeholders needs.

The more powerful the stakeholder and the higher the legitimacy of the
stakeholder issue, the faster the organisation needs to respond to the particular
issue at hand. According to Mitchell, Agle and Wood (1997), the urgency of an
issue will depend on these factors:
(a)"

Time sensitivity
This refers to the degree to which there is managerial delay in attending to a
claim or relationship of a stakeholder.

(b)" Criticality
This refers to the importance of a claim or relationship to a stakeholder.

"

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SELF-CHECK 2.2
Briefly explain the following elements:
(a)"

Stakeholder power;

(b)" Stakeholder legitimacy; and

(c)"

Stakeholder urgency.

"

2.3

RESPONSIBILITIES OF A FIRM TOWARDS

ITS STAKEHOLDERS

When a manager has identified an organisations relevant stakeholders, the next

logical question asked would be this:
What are my firms responsibilities to these stakeholders?
The organisations responsibilities towards its stakeholders can be thought of as
the companys corporate social responsibility (CSR) which will be discussed in
Topic 6. An organisations social responsibility includes its economic, legal, ethical
and philanthropic responsibilities as shown in Table 2.2 below.
Table 2.2: Organisations Responsibilities towards its Stakeholders
Responsibilities

Explanation

Economic

Be profitable; maximise sales and minimise costs. Provide investors

with adequate and attractive returns for their investments.

Legal

Obey all laws and regulations such as environmental, employment and

consumer laws.

Ethical

Do what is right, fair and just. Assert ethical leadership in the

organisation. Operate the minimum legal requirement.

Philanthropic

Be a good corporate citizen; engage in volunteerism. Give support to the

community by providing education programmes, healthcare services,
cultural and arts programmes.
Source: Carroll & Buchholtz (2006)

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TOPIC 2 STAKEHOLDER RELATIONSHIPS

ACTIVITY 2.3
Imagine that you have your own firm. Explain your organisations
responsibilities towards its stakeholders. Provide some examples to
support your explanation.

2.4

MANAGING STAKEHOLDER
RELATIONSHIPS

Carroll and Buchholtz (2006) identified three strategic steps that can lead
organisations to manage their stakeholder relationships successfully and these
are:
(a)

Integrate stakeholder management into the firms philosophy, values and

vision
Identify your organisations missions, values and norms. Then, specify
which stakeholder groups and issues are relevant to your organisation.

(b)

Create vision statements or value statements that include stakeholders

Reinforce your organisations commitment to its stakeholders in a public
statement.

(c)

Implement a stakeholder performance measurement system

Such a system should be auditable, integrated and monitored as stakeholder
relations are improved. Measurement indicates that there is serious intent to
achieve results and the presence of such a system will ensure the
stakeholders sustainable commitment to the organisation.

"

EXERCISE 2.3
State whether the following statements are True or False:
1."

Stakeholders are divided into two categories; primary stakeholders

and secondary stakeholders.
(____)

2."

An organisation only has the following responsibilities towards its

stakeholders:
(a)"

Economic responsibility

(b)" Legal responsibility

(c)"

Ethical responsibility

(____)

"

TOPIC 2 STAKEHOLDER RELATIONSHIPS

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x" Stakeholders are individuals or groups who can affect or be affected by the
actions, decisions, policies, practices or goals of an organisation.
x" Stakeholders can be categorised into market and non-market stakeholders.
x" Organisations should follow the stakeholder concept based on three
stakeholder theory arguments: descriptive, normative and instrumental.
x" Managers have to be on good terms with their organisations stakeholders.
Failure in meeting the needs of stakeholders can damage a firms reputation
and ultimately affect its bottom line.
x" An organisation must clearly identify its relevant stakeholders in order to
ensure the continuity of the organisation.
x" A manager may identify a firms relevant stakeholders based on stakeholder
power, legitimacy and urgency.
x" An organisation has economic, legal, ethical and philanthropy responsibilities
towards its stakeholders.
x" The strategic steps that can lead organisations to manage their stakeholder
relationships successfully are:

"

" Integrate stakeholder management into their firms philosophy, values

and vision;
" Create vision statements or value statements that include stakeholders;
and

"
"

"

Implement a stakeholder performance measurement system.

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TOPIC 2 STAKEHOLDER RELATIONSHIPS

Descriptive argument

Stakeholder

Instrumental argument

Stakeholder legitimacy

Market stakeholder

Stakeholder management

Non-market stakeholder

Stakeholder power

Normative argument

Stakeholder urgency

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