In this course we will be discussing the emergence of a new story about business. This new story locates business within a societal framework. Almost every business creates or destroys value for customers, suppliers, employees, communities and society, in addition to shareholders and other financiers. A number of new models of business can be built on this idea such as corporate responsibility, philanthropy, shared value and sustainability. Profits and stakeholder value go together, and this course explains how. The final session explores the idea of how to become a stakeholder entrepreneur and create a business that makes money and makes the world a better place.
The Emergence of a Stakeholder Approach to Business
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From the course by University of Virginia
New Models of Business in Society
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From the lesson
Creating Value for Stakeholders
In our third module, we look at the stakeholder approach to business, it's purpose and what it looks like to create value for stakeholders.
Meet the Instructors
R. Edward FreemanUniversity Professor; Elis and Signe Olsson Professor of Business Administration
Darden School of Business
[MUSIC].
So far, we've talked about problems with the dominant story of business.
And we've outlined a number of ways to think about business as set in society.
Some new models of business and society.
Based on corporate philanthropy, based on corporate social responsibility,
and based on multiple ways of understanding the environment.
What I'd like to do now is put these
in perspective and suggest there is a more comprehensive
way to reorient the dominant story of business.
And this depends on the emergence of the idea of stakeholders.
Now most of you have probably heard of the idea of stakeholders, but I
can tell you, thirty years ago, almost no one had heard of the idea.
It really grew out of, people thinking about business strategy.
And as the business environment
began to change and get more global and, people
began to be aware of things, outside of their companies.
There needed to be a way to organize this same thinking.
And so a group of people at the Stanford
Research Institute in the 1960s, came up with this idea.
Well let's organize it by customers, suppliers, employees,
communities and financiers, the people with the money.
And let's call those
groups stakeholders.
A second thing happened in
the Scandinavian countries primarily in Sweden.
A thinker named Eric Renman began to worried about not only the environment
and how changes in the environment changed what you needed to in a company.
But also began to be worried about the role of employee.
and the whole movement in Scandinavian countries of industrial democracy.
And so, from this, came the idea that businesses needed
to pay attention to its stake holders. Now there are lots of reasons for this.
You can think businesses need to pay attention to stakeholders, because
it's the right thing to do, and I think it is.
You could think business needs to pay attention
to stakeholders, because it's the smart thing to do.
And it is, I think that's right, or you might have some other reason.
It doesn't depend on a particular political ideology
one way or the other. What's important here
is that what I've called stakeholder theory comes from what companies
actually do. This is not some theoretical exercise.
I developed a lot of the ideas based on my own observations in the
late 1970s and 80s on how companies dealt with their stakeholders.
I define stakeholder as any group or individual who can affect or
be affected by the achievement of a company's purpose.
Now, sometime it's useful to think very broadly so
that NGOs, interest groups, governments, media, even competitors are stakeholders.
And sometimes it's useful to think more narrowly.
to think about really just
customers, suppliers, employees, communities and financiers.
How you define stakeholders depends on in part on what you're trying to do.
If you want to get a broad scan of who can affect you, you need to think broadly.
If you want a more narrow idea, then you need to think more narrowly.
A picture might be helpful here. We could think about, put the firm in the
middle. And think about customers, communities,
employees, suppliers, and the people with the
money, financiers, right? And then
[SOUND]
we might think about those groups that can affect these.
NGOs, governments, the
media, competitors, and lets just say others.
Every company has a picture roughly like this.
I like to play you a short
clip of an interview that I did about what is stakeholder theory.
Stakeholder theory is an idea about how business really works.
It says, that for any business to be successful it has
to create value for customers, suppliers,
employees, communities and financiers, shareholders, banks.
And others to people with the money.
It says that you can't look at anyone of those stakes or
stakeholders, if you like in isolation. Their interest has to go together.
And a job of a manager or an entrepreneur is to figure out how
the interest of customers, suppliers, communities, employees and
financiers go in the same direction. Now,
think about, how, important, each of these groups is for a business
to be successful.
Think about a business that's lost it's edge, with its customers,
that has products and services, that it's customers don't want as much.
Or, that they don't want at all.
That's a business in decline.
Think about a business who manages suppliers in
a way that the suppliers don't make them better.
The suppliers just take orders and sell stuff, but the suppliers aren't trying to
make a business more innovative, more creative.
That's a business that's in a holding pattern and probably in decline.
Think about a business whose employees don't want to be there everyday.
Who aren't using 100% of their effort and their energy and
their creativity to make the business better, that's a business in decline.
Think about a business that's not a good citizen in their community, that routinely
ignores or violates local custom and law.
That doesn't pay attention to the quality of life in the community.
Doesn't pay attention to issues of corporate responsibility,
of sustainability of its effects on civil society.
That's a business that's soon to be regulated into decline.
And think about a business that doesn't create value, doesn't create profits for
its financiers.
Its shareholders, banks, and others, that's a business in decline.
So, stakeholder theory is the idea that each one of
these groups is important to the success of a business.
And figuring out where their interests go in the same direction
is what the managerial task and the entrepreneurial task is all about.
Stakeholder in theory says, if you just focus on financiers,
you miss what makes capitalism tick. What makes
capitalism tick is that shareholders and financiers,
customers, suppliers, employers, communities can
together create something that no one of them can create alone.
So there's some basic ideas here. All businesses create or sometimes
destroy value for its stakeholders.
And knowing where how that value is created and what it
is, turns out to be important, I don't mean just financial value.
The second principle is, successful companies, constantly
look for the intersection of stakeholder interest.
I remember a conversation with a fast-moving consumer goods
company in Europe who was very near to bankruptcy.
And that they ask me they said look in our situation we're really hurting.
Why should we worry about stakeholders?
Should we worry about them and I said well look of course you have to.
You haven't done a very good job
with customers, with your suppliers, with your employees.
You haven't found the sweet spot, the interception of those interests, and
you need to rethink your business model. How you create
value for stakeholders, is in effect what your business model
turns out to be. The stakeholder idea sets this firmly in
society. Now, of course, you can also think
about the stakeholder idea personally. So, you could put
yourself in here.
Here, I'll just do one for me, I'll put Ed in here.
and I'll think about my students as a stake, as a stakeholder.
I'll think about my family. I'll think
about my colleagues.
I'll think about the media, because I have to deal with them some.
I'll think about the university.
I'll think about other universities where I might go,
I'll think about some businesses that I work with, and you can think
about in a sense a personal stakeholder map.
Now what's important here is that I might have some purpose.
My case, it's to try and inspire my students
and I try to think about who can affect that.
What I'd like you to do for an engagement question and to talk about, if you
feel comfortable in the discussion forums. Is to draw a stakeholder map for yourself.
Who can affect or be affected by what you do?
Do you have a purpose?
You can answer this for an organization you belong
to, or just
for yourself.
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