Traversing the Avalanche: the importance of stakeholders - The Finance Team

Our Blog

Traversing the Avalanche: the importance of stakeholders

There is often talk about the role of stakeholders in business success, and the role of the board in ensuring stakeholders are engaged. Why is this? and who are your stakeholders anyhow? Well here is an extract from Carl Bates‘ new book, Traversing the Avalanche, on who stakeholders are and why they are so important to your success.

A stakeholder is any group or individual who can affect or is affected by an enterprise and the achievement of its objectives. Internal stakeholder groups include employees, customers, suppliers, creditors, shareholders and the community directly impacted by the business. External stakeholder groups include trade unions, the media, environmental and social interest groups, government and the market in general. In stakeholder theory, focus is placed on: the promise of the company; who can influence strategy; and how the company meets the diverse needs of its stakeholder groups and integrates those requirements into the way it creates and distributes value.

Stakeholder engagement is therefore strongly driven by an ethical and values-based approach to business management, and, over time, the enterprise can generate long-term value through the integration of stakeholder value in strategic thinking 1. According to King III 2, there are two very different approaches that enterprises can take in engaging with their stakeholders. In the more traditional or shareholder-centric view, stakeholders are only considered to the extent to which doing so serves shareholder interests. In the stakeholder-inclusive approach, the legitimate interests and expectations of stakeholders are viewed in light of what is in the best interests of the company. In cases where there is a conflict between stakeholder and shareholder interests, the best interests of the company are the deciding factor. While this may seem simple in theory, in reality it can be extremely challenging to reconcile the conflict that arises when a shareholder-manager’s best interests do not serve the best interests of the company. As such, a stakeholder-inclusive approach requires absolute clarity on the distinction between being a shareholder, director and manager in order to create long-term shareholder value.

For some shareholder-managers and executives, this stakeholder-inclusive approach might require a fundamental adjustment in the way they think about stakeholders. For SMEs where survival and taking care of immediate needs is the primary goal, it can be challenging to understand and recognise the importance of stakeholders in the midst of managing the next crisis. Yet, it is often through serving stakeholders and receiving their support and active participation that a business can prosper and grow.

 

1. Schlierer, H.-J. et al. How Do European SME Owner–Managers Make Sense of “Stakeholder Management”?: Insights from a Cross-National Study. J. Bus. Ethics 109, 39–51 (2012).

2. Institute of Directors in Southern Africa. King Report on Corporate Governance in SA.

CTA Banner - Traverse the Avalanche

The Do’s and Don’ts of financial planning
How to successfully plan your business turnaround strategy