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Why is stakeholder management important?

Why is stakeholder management important?

In a world where the importance, influence and impact of myriad stakeholder groups is becoming ever greater, businesses need to be able to manage their relationships with those stakeholders. Having an effective stakeholder engagement plan creates competitive advantage, cements customer loyalty, and renews the social contract

What is stakeholder management?

Stakeholder management is the process of nurturing reciprocally beneficial relationships between a business and its stakeholders. The creation of shared value for all parties.

Each group of stakeholders, from employees to investors, customers, the media and suppliers, is identified and characterised. Their needs and expectations are evaluated. And a stakeholder management strategy is established.

Few things are truly simple, however, and the practice of stakeholder management can become quite complex, requiring the employment of intelligent management tools and solutions. Stakeholder mapping is the start of the process. This allows a business to understand who its various stakeholders are, the health of its existing relationships, and the relationships it aspires to have.

Each group might be ranked against its influence, interest and impact on the business and its activities. This type of stakeholder analysis will help a business to map the relationship stakeholder groups have to each other, as well as to itself, and strategise how to prioritise each. The result is a stakeholder management plan.

As an aside, although in common usage, the term ‘management’ is not entirely appropriate in this context. No organisation has the ability to overtly manage – read control – their stakeholders. Customers have the freedom to go elsewhere, employees can quit, investors can sell up. A more accurate term would be stakeholder influencing, which better reflects process of listening to, understanding, engaging with stakeholders and responding in an informed manner.

The result is a stakeholder engagement plan. To be effective, this needs to align the priorities of different stakeholder groups with what’s right for the business. Leadership should be clear on what the purpose of the company are, and how it aims to achieve and honour them. This then informs its approach to managing stakeholder expectations in a transparent, authentic way. This isn’t about trying to please everyone all the time.

Why stakeholder management is important

No organisation is an island. The way it does business impacts a broad spectrum of individuals and groups. In 2021, a new era of stakeholder capitalism is gaining traction and represents a shift away from the tenet that the shareholder is always king.

Its guiding principle is that business activity should create shared social and economic value for all stakeholders, and society as a whole. The endgame is sustained value creation for all.

Against this backdrop of greater shareholder-centricity, it has never been more important to understand and respond to the needs of all stakeholders. With the hyper-connectedness of the modern world, one employee’s opinion can quickly shape the opinion of others.

NGOs can easily expose the climate-damaging behaviour of a particular business. Regulators are demanding ever-greater levels of corporate compliance and standards of business ethics. There is an expectation for corporate behaviours to support the good of society, not just the good of the P&L sheet.

Why stakeholder management matters to your business

The ability to engage with, speak to, and if necessary, diffuse the negative perceptions of your company’s stakeholders is inextricably linked to its success. Thanks to social media, each one has a public platform, and what they have to say can have a direct impact on your business.

Done well, stakeholder management can create a virtuous circle.

By focusing on the issues of high interest to their stakeholders, companies can engender goodwill, expand their business and improve their bottom line. The growing focus on ESG (environmental, social and governance) issues among investors, consumers and employees has given companies an opportunity to grow their stakeholder capital by being proactive in these areas.

Making commitments around sustainability, corporate social responsibility and good governance, and being a force for good in society can endear them to stakeholder groups. Particularly those which might previously have regarded them with mistrust – campaigning NGOs, for example.

That trust is fragile, however. With ambitious intentions come greater expectations, and a harsher backlash if you fail to live up to them. There is greater opportunity for firms to be called out by their stakeholders when their actions don’t match their declarations. Staying close to stakeholders, and understanding how quickly their opinions can shift, is vital to avoid falling foul of them.

The lesson here is to avoid hypocrisy. ESG commitments, and any other management strategies undertaken to appease stakeholders, need to avoid spin and be authentic.

Stakeholder management cannot be a PR exercise.

The benefits of stakeholder management

There are benefits to stakeholder management beyond diluting the vitriol of dissatisfied stakeholders.

Proactively developing and maintaining relationships with influential individuals and communities will garner increased stakeholder support. This could make the difference between getting planning for a new plant or being unable to expand your business. It can reduce risk, and increase opportunities, because you know what your stakeholders are saying about you as they say it.

This could boost a brand that manages to reach out to consumers just as their positive media coverage peaks. Or even result in the creation of a new product or service at the very moment there is a demand for it.

This type of proactive stakeholder management can reduce business costs and maximise the value of communications strategies. It can boost corporate reputation if your company is being seen to do the right thing by its stakeholders.

It can improve corporate governance if you recognise what your employees feel about the business and how to engage them. It can increase competitive advantage, putting you one, or more, steps ahead of the rest of your sector.

Perhaps most importantly in this era of stakeholder capitalism, it reaffirms your organisation’s contract with society, thereby renewing your social licence to operate.

The principles of stakeholder management

A stakeholder engagement plan will be unique to your business, and should be developed with a clear view of the business’s purpose and its stakeholders’ priorities. View the following principles through that lens.

  • Managing risk: Stakeholder management is an important part of your corporate risk management strategy. If stakeholders aren’t viewed as sources of both risk and opportunity, those risks and opportunities might be missed.
  • Prioritising: Inevitably, some stakeholders will have a greater influence and potential to impact your business than others. Establish which are the most important stakeholders in relation to particular areas of your businesses, and weight their expectations accordingly using a power interest grid.
  • Communication: In order to be positively engaged, stakeholders need to understand the impact of corporate actions and the reasons behind them. Communicating with stakeholders effectively requires an understanding of the channels that will reach different groups. This is not a one-time activity. Borrow from the world of project management with a project plan and a project sponsor for each project stakeholder to ensure regular engagement.
  • Building relationships: Be conscious of who your stakeholder groups are and how you connect with them. This builds trust, reduces uncertainty, and makes them more likely to positively support future activities. Communication should be direct, timely, and truthful and wording and imagery needs to be targeted to appeal to them. 
  • Consultation: The most accurate way to understand how stakeholders perceive a given topic is to ask them. Regular consultation will open up dialogue, make stakeholders feel that their priorities are acknowledged, and achieve a resolution which is acceptable to all.
  • Factoring in human frailty: Stakeholder behaviours may not be rooted in logic. Sentiments formed about a product, service or behaviour could be a visceral rather than rational reaction. Assess the actual cause of stakeholder opinion to understand it better.