STAKEHOLDER

ENGAGEMENT
AND VALUE
CREATION
 • Firms make money by creating value.

HOW DO FIRMS • To do so, they must be efficient in terms of their use of

MAKE MONEY? resources and control of costs.

• They must also be effective in delivering value to

stakeholders.
 • Value is the measure of the total benefit provided,
economic and social
• Typically seen as a bilateral transaction, but should be
VALUE seen in terms of the value created for all stakeholders
• Failure to create value for one stakeholder leads to
externalities
 • ‘A person, group or organisation that has interest or
concern in an organisation’ (Post et al., Redefining the
STAKEHOLDERS Corporation, 2002)
• A stakeholder is any entity that is affected by the
organisation and its operations, positively or negatively.
STAKEHOLDE
RS
 • Until the late 19th century, most firms were owner-
managed (in fact, most still are (Facebook))
• Catalogue of abuses, the Robber Barons
• The separation of ownership and control (Rathenau,
‘TRADITIONAL’ Ripley, Berle and Means, Burnham)

GOVERNANCE • Principal-agent model of governance

• Transactional
• Power depends on ability/interest of principal to get
involved in governance
• Agents/manager tend to dominate – nature abhors a
vacuum
STAKEHOLDER CAPITALISM
Companies should be
governed in the interests of
all stakeholders, not just
shareholders
• OECD
• World Economic Forum
• Business Roundtable
Perceived benefits Back to the future?
• Curbing managerial • Confucius
abuses (excessive pay, • Plato
etc) • Ibn Khaldun
• Greater social and • Saint Thomas Aquinas
environmental
responsibility
• More long-term view
(Dominic Barton)
STAKEHOLDER GOVERNANCE

Representatives of stakeholder groups are directly

involved in governance, usually as non-executive directors

Worker representatives: John Lewis, Mondragón, German

supervisory boards

Customer representatives: the Co-op

Society representatives: local government represented on

boards of universities
 • Stakeholders participate in governance indirectly, through
processes of consultation. Their voices are (sometimes) listened
to but they do not have a vote

• Worker engagement: works councils, works committees

STAKEHOLDER (Cadbury)
ENGAGEMENT
• Customer engagement: customer co-creation groups (LEGO,
NHS Patients Forums)

• Community engagement: community forums (Anglian Water)

 • More diversity

BENEFITS OF • Fewer missing voices

STAKEHOLDER
GOVERNANCE
• Better decision-making
AND
ENGAGEMENT
(1) • What happens when voices are missing: groupthink,
lack of challenge, closing ranks against the outside
 • Risk reduction

BENEFITS OF • More information from diverse sources

STAKEHOLDER
GOVERNANCE
• Better understanding of risk by looking in the right
AND places (universities, Islamophobia and anti-Semitism)
ENGAGEMENT
(2)
• Better decision-making when it comes to dealing with
risk
 • More trust and better relationships with stakeholder
groups
BENEFITS OF
STAKEHOLDER
GOVERNANCE
• More loyalty from key groups such as customers and
AND workers (John Lewis)
ENGAGEMENT
(3)
• Clearer and stronger sense of purpose (Nationwide)
 • Most companies that profess to be in favour of stakeholder
governance only pay ‘lip service’ to the concept

ARGUMENTS
AGAINST • It is impossible to balance the needs of all stakeholders, so some
voices will be louder than others (stakeholder salience)
STAKEHOLDER
GOVERNMENT • The interests of shareholders, who have capital invested in the
AND business, will be squeezed out, which is unfair to them
ENGAGEMENT
• Too many competing voices can pull management in different
directions, leading to poorer decision making.
 • Lack of time and ability to invest: companies may want
to have more stakeholder engagement, but can’t figure
out how to do it
• Requires sharing of information and best practice
(Institute of Directors)
POTENTIAL
BARRIERS
• Lack of trust: the company can’t disclose sensitive
information to stakeholders
• Little evidence to bear this out
 • Lack of knowledge: stakeholder representatives don’t see the big picture, or
don’t know enough about business, so are incompetent
• Can be a problem, but selection and training can overcome this

• Getting too close: stakeholder representatives can become too close to the

POTENTIAL board and lose sight of the interests of stakeholders

• Depends on the person and the culture of the board
BARRIERS
• Lack of interest: most stakeholders only care about their own interests and
don’t care about the wider picture
• Again, potential problem that can be overcome through selection and
training
RISKS OF NOT ENGAGING

Failure to understand and manage risk (BP and

Deepwater Horizon, Oxfam)

Failure to challenge irresponsible management,

‘nodding dog’ syndrome (Royal Bank of
Scotland, Uber)
Tendency to assume that ‘we know best’, can be
accompanied by the Dunning-Kruger effect
(McKinsey and opioids, Big 4 accounting firms)
 • A commitment to diversity and inclusion, because otherwise
stakeholder voices, even if heard, will not be acted upon

• A place of psychological safety where people can speak freely

REQUIREMENTS • Education and training in areas such as board responsibility

• Commitment by stakeholder representatives to the good of the

whole organisation (is this always possible or desirable?)
 • What do you think are the benefits of stakeholder
engagement?
• How might some of the barriers to stakeholder
DISCUSSION engagement be overcome?
• Should stakeholder representatives sit on boards of
directors, or should they be consulted in an advisory
capacity? Justify your reasoning either way
 • You are board advisors to Octopus Energy, the UK-
based renewable energy supplier. You have been asked
to advise the board on a plan to create greater
stakeholder engagement.
EXERCISE • Who are Octopus’s stakeholders and what value do
they want from the firm?
• Decide how you would engage the most important
stakeholder groups and think about tactics for creating
the best possible engagement.