Interesting blog post by Graham Kenny on the Harvard Business Review Blog on identifying stakeholders in practice!

Jungle Camp Stakeholder Management

I have watched the German jungle camp (“I am a celebrity…Get me out of here”; and the confessions end here). Much has been written and discussed on this broadcasting format in which more or less famous participants face nauseating tests in the jungle with the world watching. Let’s look at the jungle camp for a moment from the perspective of corporate stakeholder management. Stakeholder management aims at generating as much value as possible by including the stakeholders of an organization, in order to achieve what is called integrative or “win-win” results. In our thought experiment, let’s assume that RTL is the company we look at, which sells and broadcasts the product “jungle camp”.

Sustainability Reporting Today

Sustainability Reporting Today:

 With the advent of sustainability reporting, various indicators and standards have been developed to measure and evaluate sustainability and to anchor it in corporate reporting on value creation. A sustainable commitment to stakeholder relations on an economic, social and ecological level has a proven positive impact on value creation and ultimately also on the strategic success of a company. To make this transparent, the following principles for an integrated sustainability reporting - which are to a certain degree also part of standards such as the Global Reporting Initiative, Integrated Reporting and the European Foundation for Quality Management (EFQM) - can lead the way:

 

-         Strategic Focus: Sustainability should be embedded in a company’s purpose, in its derived vision and in its strategic objectives. This forms an essential basis for a periodic corporate sustainability reporting at a strategic level.

-         Embeddedness: Not only singular projects, but the entire strategy development and revision should be communicated comprehensively to make the company’s attractiveness visible for current and future partners. It is deliberately not about retaining information to calm down stakeholders and to secure competitive advantages over competitors, but about gaining strategic stakeholders for a mutual corporate value creation process.

-         Inclusion: When different stakeholders contribute to value creation, it is crucial to also recognize these stakeholders as owners of their contributed values. This is based on an extended understanding of ownership. Here, the concept of ownership refers not only to material goods or financial resources, but also to intangible issues such as knowledge and experience. With their knowledge and experience, stakeholders provide property for a company in a broader sense. Like the financial owners, they have therefore the right to be adequately involved in processes regarding their property and to be informed accordingly.

-         Commitment: In a purely economic view, profit distribution (residual profit) primarily targets shareholders. This is also predominantly reported on. Especially because the management has to make discretionary decisions about the shareholders’ compensations, e.g. how much of the profit is being distributed and how much is being retained (pay-out-ratio). When other stakeholders, in the sense of a broader concept of ownership, contribute significantly to the corporate value creation process, these stakeholders should also be a compulsory part of the distribution of tangible and intangible values as well as receive information accordingly.

 A sustainability reporting based on these principles suggests that companies can create more values with and for stakeholders.

 Sybille Sachs

 

Caring about the customer

 

 

In stakeholder management customers are regarded as primary stakeholders of the firm but also many a firm not pursuing general stakeholder management, does think it should be customer oriented. “Usability”, “ergonomics” and “human centred design” are no longer exceptions in strategic considerations. The customers are moving toward the core focus of business, which I think is a good development, because traditional customer orientation is not enough. A deeper and more honest relationship to the people who are buying your goods is necessary. As I see it, the primary focus should not be on how to sell more of a company’s products, but on what the person buying the product really wants (also resulting in selling more products).

I would like to illustrate this think shift: Many people like to eat healthy food. A snack company spots this customer need, puts some milk into the product and praises it as being a healthy snack, even though most nutritionists would assess the product to be of the contrary (heavily sugared and fatty). So just by recognizing and addressing the consumer need doesn’t make a customer centred firm. Another example: Consumers like the look of dark red meat (not grayish meat) because they have built the mental shortcut (heuristic) that intense color in food is a sign of freshness. This is why market research study participants would prefer the dark red meat to a grayish meat product. A company that follows what the consumer actually wants, will not sell the consumer a meat that was treated with a gas that keeps it red (but doesn’t keep it fresh), it will sell the consumer fresh meat. This is not only a shift in strategy, this will have wide implications for a company’s daily business in distribution, packaging, communication and so on.

 

We use these mental shortcuts (here: intense color equals fresh food) because they mostly lead us to making good decisions (read publications by Gerd Gigerenzer for more on this topic). Shortcuts make life easier; especially in this fast paced, information-overloaded environment. These heuristics are good because they are often based on experience and implicit knowledge. But the shortcut only works if it is not tampered with by others. Robert Cialdini, a social psychologist, wrote several books on persuasion, summarizing his findings based on many experiments he had made in his research on e.g. selling tactics. But he states “Just because a given [powerful psychological] principle is successful does not mean we are ethically entitled to commission its persuasive power to create change.” I think this misusing psychological mechanisms such as heuristics is not only unethical it is also a strategy that won’t lead to sustainable business success. A company that shares its purpose (the “why” of a company) with its customers and therefore wants the same thing, will be able to engage the people they call their customers and conquer the challenges (such as resource scarcity) together in an innovative way, and of course sell their products.

 

Vanessa McSorley

Tales from the “Real World” – how much ethics can the world of business tolerate?

In my last blog post I described a concrete example of a moral dilemma that I faced while I worked in the international business arena (and I use the word “arena” for a reason…). I posed the question as to what realistic options are available to business leaders should they like to take the moral high road. The answer hinges upon, I think, how we should like to define “realistic”.

Would it have been “realistic” for me to go sign up the fledgling start-up as our distributor in Tunisia, foregoing engaging the established Dutch firm? As much as I am loath to admit it, I think not. The company I worked for was operating in a highly competitive industry where thin profit margins provided for very little largesse in choices that were not tightly aligned to short-term profitability. In another industry, with a pioneering product with no immediate competitors, or in a domestic market artificially shielded by high entry level costs or tariffs, there might have been more room to maneuver. But when one was competing tooth and nail for survival, this was not a viable option.

Prior to working in the low profit margin apparel industry, however, I worked in a radically different industry for a medical laser manufacturer where profit margins hovered around 60%. While obviously also a competitive industry (after all, everybody was scrambling at getting a piece these dream margins…), there certainly was more room for maneuver from a moral point of view. Regrettably, this option was not always exercised. A case in point: over the course of several years I had the pleasure – and it was indeed a pleasure – to nurture a start-up firm in Russia to be our distributor in this promising market. They were highly motivated and worked endless hours. Even though they had very limited resources, they sent one of their engineers over to the United States for a one week product training program we offered to our distributors. After two years of major investments and working the market, the company was finally poised to make some important sales. This was, however, also the point in time when the medical laser company I worked for was bought by another medical device company and consequently overnight we had two distributors in virtually all of our markets.

Our new owners insisted on using their own distributors in all of the countries where they themselves were present or alternatively forced our distributors to become sub-distributors, which for our distributors essentially meant giving up all control of the business and taking a major cut in their earnings. I remember being on the phone with a manager at our new parent company and him telling me to terminate the sales agreement we had with our Russian partner. When I explained to him that our Russian partner had worked for two years to build up the necessary relations in a market that had very long decision making procedures, he told me that “first cut him, bring him to his knees and then we renegotiate our terms with him from a position of strength.” So the basic strategy was to first make him desperate (he would lose two years worth of investments!) and then try to squeeze the max out of him so that he could salvage at least a pittance of what he had invested. Hardly a win-win strategy.

While many people sincerely tried to do their best to remain “humane” in an essentially a-moral system and things seem – at least in public discourse - to be changing somewhat these days, many of the things I saw and heard while in the business world were diametrically opposed to a human centered, win-win, stakeholder approach. A few of the ones I still remember I wish to share with you here (some are paraphrased by me, their essence is however retained):

·         “There is no ethics in the business world”

·         “If we don’t do it, somebody else will”

·         “No matter how much you may like somebody and how close you get to them in your work dealings, never make the mistake to think that they are your friends”

·          “The [neo-liberal] economic system as it is today reflects a deeper reality that is inherent in all of nature and therefore cannot be changed: just look at Communism!"

·         “Survival of the fittest”

·          “Markets always know best”

·          “If you can’t beat them, join them”

·         “The corporate world is essentially one of war without weapons”

·         “Money is success and success is no coincidence”

·         “Make money first, then do good”

·         “Too much ethics is a weakness and we have no place for weak people in our management team”

·         “The business world is the only real world and we who actually operate in it have nothing much to learn from researchers and intellectuals as they live – at best - in a naive utopian, imaginary one”

What all these quotes reveal is that, at the end of the day, there was a widely prevalent attitude (even if not voiced thus publically) that ethics, a humane stakeholder approach and the competitive business world simply don’t mix. Regrettably, the way our current economic system is set up and the widespread normative mantra of “profit and shareholder value maximization” inculcated into students, employees and managers, this has become in many ways a self-fulfilling prophecy.

In my next blog posts, we shall take a look at these proclamations and how they fit or don’t fit into a sustainable economic system.

Manuel Heer Dawson

Walmart – Civilizing the Chinese?

Your first reaction to reading this title may well be one of bafflement (what does Walmart have to do with civilizing anything?!), or if you happen to be Chinese, of likely indignation (how can a fifty year old American retail megastore contribute anything to our august, thousand year old civilization?!). But – as preposterous as it may seem – there is indeed a kernel of truth in this proposition. Let me explain.

The word “civilize” has its etymological roots in the French word “civilité”, which initially denoted the refined manners and decorum at French aristocratic courts. With repeated initiatives to – yes, “civilize” – the Chinese (as in their “no spitting on the street” campaign), the Chinese leadership is keen at molding the behavior of its citizens for the better. Recent outrage involving food manufacturers deliberately fortifying food with poisonous substances in order to cut costs, with employee unrest and even suicides (such as at Foxconn) in response to poor working conditions, as well as the omnipresent environmental pollution scandals, has the Chinese regime become increasingly edgy and aware that things need to change.

Enter Walmart.

Much as the Chinese regime, Walmart has seen itself confronted by a customer base ever more bent on better quality food, disgruntled employees (as with a high publicity class-action suit by female employees) and a questionable environmental record driven by aggressive rock bottom pricing on many of its throw-away products. So starting in 2004, Walmart’s then CEO Lee Scott proactively contacted environmentalist NGOs such as the Rocky Mountain Institute and the Environmental Defense Fund for assistance as to how to better manage its environmental track record.

What resulted is no less than remarkable. Wall-Mart has, since its entry to the Chinese market in 1996, become the leader in China as pertains to food quality, implementing rigorous food quality standards for its suppliers and launching an ambitious – and well received – organic food initiative. Moreover, the company has significantly reduced its packaging material volume and pressured its suppliers to cut energy consumption and pollution. The Chinese suppliers, while at first skeptical, are now keen to advertise their environmental objectives and successes. The Chinese shoppers, for their part, are delighted to get better quality food and organic produce, trusting a big company like Walmart more than smaller shops which are – in their eyes – more prone to cheat them and offer inferior quality products. And the Chinese regime is pleased to have such a potent partner in addressing these pressing problems and “civilizing” its companies and citizens. In sum, we have an excellent example of numerous stakeholders working in sync to achieve a win-win situation for all.

So all is good that ends well? Well, it may be too soon to bring out all the trumpets. While Walmart in China serves de facto as an extension of the Chinese government’s regulatory efforts and as a “civilizing” factor for its citizens, it is legitimate to question the long-term sustainability of such an in the end effect still purely instrumental objective. Nonetheless, there is reasonable hope that at least parts of it may be sustainable due to an interesting insight that the sociologist Norbert Elias outlined as part of any civilizing process. Therein, he posits that to become “civilized” entails individuals to restrain their drives and affects. In a first phase, this is achieved through a permanent outside authority and on pain of punishment. With time, however, in a second stage, there arises a moral code that is upheld by individuals even in absence of the threat of punishment, driven by people suffering from a bad conscience in light of failure to adhere to these mores. In the last phase, then, even such self-constraints dissipate, and individuals are intrinsically motivated in a very natural manner to adhere to the involved normative standards.

This is, in essence, what is beginning to occur in China in part with the help of Walmart (and also other parts of the world in other contexts), where social and environmental responsibility by corporations and individuals is becoming ever more part of the discussion, part of the regulatory and legal fabric and as well as public awareness in form of a normative “should”. Normative change, while it may initially have to be forced upon individuals and corporations, may in due time become second nature to them. We as a global civilization, as is apparent also in China, seem to be “primed” for a major normative paradigm change towards greater social and environmental responsibility. And, as we have seen, even a major multinational corporation such as Walmart can play a significant role in this “civilizing” process, if the necessary extrinsic motivation is there and a society is ready to reward such a change.

Manuel Heer Dawson

 For a fascinating and detailed account of Walmart’s social and environmental impact in China, read the “How Walmart is Changing China”, by Orville Schell in The Atlantic: http://tinyurl.com/bopuxsa

New path to innovation In an article titled “The Pharmaceutical Industry Faces a Horror Year,“ a Zurich newspaper (http://snipurl.com/21qcbem) writes, that leading pharmaceutical firms like Pfizer, Sanofi as well as Novartis are facing the loss of patent protection for important top products this year, and are therefore facing major revenue losses. Interestingly, these firms are confronting the situation with drastic personnel cuts in different areas, which includes such as how to respond to clinical developments. Cost saving has to begin immediately. However, proceeding this way raises questions. First, investigations show[i] that personnel cuts, particularly in the long run, do not bring about the desired success, unless a strategic reorientation occurs at the same time. In an extensive empirical study the authors were able to show that the size of the employee cuts is not a factor in explaining the post-downsized performance. A further point concerns “survivor sickness” studies[ii]. They show that personnel cuts have an array of negative consequences, also for those who remain at the firm: “Research indicates that survivors exhibit a plethora of problems, such as demotivation, cynicism, insecurity, demoralization, and a significant decline in organizational commitment”[iii]. One also speaks of the difficulty in diagnosing dysfunctional side effects of personnel cuts. They often lead to slumps in productivity. In addition, if one considers that in the knowledge oriented society of today, knowledge is often a more important success factor than capital. There is then the danger that for every cut in personnel, the know-how networks will be destroyed and important knowledge bearers will be discarded. Indispensible resources for future core competences may be lost. It is also striking that the only reasons given for the personnel cuts are the costs, but never the revenue side of the coin. By strengthening R&D capacity, setbacks could be absorbed. Is it therefore sensible to dismiss people in the area of research and development? Wouldn’t it make more sense to encourage targeted cooperation with stakeholders that possess special knowledge, in order to stimulate the innovative productivity of the firm’s own R&D?[iv]. Also in our own empirical investigations, we have always found impressive examples of cases, where firms that work together with their stakeholders have been able to substantially increase their license to innovate (see Sachs, Rühli 2011, page 114 ff). In this regard an interview partner (page 118) mentions, “The suppliers are creative and often involved as they try to find new solutions for the market….They act as accelerators who give us new ideas….And very often the supplier is also a strategic thought leader….” Especially in the area of innovation, firms should not only engage in professional stakeholder management when the turnover drops. Our examples show in fact that not only the firms improve their license to innovate but also the involved stakeholders, which motivates them to further cooperation. Based on the above, we can conclude that managers, practicing personnel cuts with the argument of saving costs, have an obligation to demonstrate that they also have the above mentioned consequences under control, e.g. the benefits. It should be carefully examined if the multifaceted disadvantages and damage of personnel cuts are not, in fact much higher than the advantage of short-term cost savings. Sybille Sachs

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[i] Garry D. Bruton, Kay Keels,  Christopher L: Shook, Downsizing the Firm: Answering the Strategic Question, Academy of Management Executive 1996, Vol. 10, No2, pp- 38-45

[ii] E.g. Firns, I., Travaglione, A. and O'Neill, G. (2006), Absenteeism in times of rapid organizational change. Strategic Change, 15: 113–128. doi: 10.1002/jsc.757

[iii] Ibid, p. 2

[iv] E.g. with lead-users, see Christopher Lettl, Cornelius Herstatt, Hans Georg Gemuenden,, Learning from users for radical innovation, International Journal of Technology Management, 2006, 33 (1), 25-45

 Governing governance

Recent events emphasize the need to reflect on our governance systems at different levels:

At the state level different EU countries, especially Greece but also Italy, were not able to govern their economic risks adequately. At the corporate level, this forced particularly system relevant banks to increase their equity ratio in EU countries. To succeed in increasing the equity ratio, without reducing the incentive bonuses of managers or dividends for shareholders, these banks are now even more conservative in lending money to small and medium enterprises (SMEs). However, SMEs are in turn vital for a prospering economy.  A spiral of interconnectedness has thus been activated that is obviously going in the wrong direction.  

It must be kept in mind that it is not simply single actors that are relevant, but rather networks of actors. One of the major challenges for governance systems under today’s conditions is developing mutuality and network interactions (see Sachs, Rühli 2011, p. 173-178).

At the level of corporate governance, this network view should also be incorporated in an appropriate way so that internal structures and processes are aligned to support mutual value creation with and for stakeholders. In a recent empirical investigation, it was demonstrated that different forms of stakeholder participation existed in the decision making processes of firms. (see Spitzeck, H., & Hansen, E. G. (2010), Stakeholder Governance: How Stakeholders Influence Corporate Decision Making, Corporate Governance, 10(4), 378-391). As an example, stakeholder councils could not only act as sounding boards for system relevant banks, but could also play a role in strategy development and implementation.

Such governance systems, rooted in a stakeholder perspective, will require adaptations of the current legal basis in areas such as property rights, competition law, bankruptcy law, taxation law, corporate law and the responsibilities of the diverse actors in firms and stakeholders. The recent adaptation to limit the power of a few worldwide rating agencies by the EU is an attempt in this direction (http://www.ft.com/intl/cms/s/0/5f8db28c-03ac-11e1-864e-00144feabdc0.html#axzz1dyg7FVCt  ).

Governance at the state, but to a lesser degree also international level, can also be developed further in a stakeholder perspective. The corresponding steps in the political sciences merit more attention and support (see e.g. Reich, R. B. (2009), Government in Your Business, Harvard Business Review, July-August, 94-99).

Sybille Sachs

Welcome!

Business legitimacy depends on public confidence in corporations and in their leaders and is one of the major problematic issues we face in this first decade of the 21^st century. Guided by an exaggerated notion of shareholder value maximization, business executives took on enormous amounts of risk in finance and operations alike. This in turn has led to widespread mismanagement, market failure and even crimes that have often dominated the news headlines. It has become evident, that the methods from yesterday do not suffice to solve the problems of today and tomorrow.

 We are a group of academics who have extensive experience in engaging firms and stakeholder groups through our teaching and research. Fully committed to unleash the tremendous potential of value creation of people for people, we see strategy as value creation in a sense of mutuality in networks of firms and their stakeholders. This new, more comprehensive understanding of strategy aims to not only improve the quality of life for human beings, but by virtue of more accurately reflecting our reality as pertains to our natural world, it will also ensure its sustainability. It is not the invisible hand of impersonal markets and endless regulation that create value, but the visible hands of leaders in both firms and stakeholder organizations.

 We invite practitioners from diverse firms and organizations, as well as scholars and students from various fields, to support us in our research and as educators of the leaders of tomorrow. There are numerous ways you can contribute. Check out our “Purpose” page for more details on how you can get involved and directly benefit from this project. Leave us your comments to our posts. Or submit to us your suggestion for a post that either we will take up or you yourself will write based on your own experience. We will then publish it right here on this blog.

We need to rise beyond simply analyzing and criticizing and work to creating solutions for a better tomorrow.

 We look forward to hearing from you!

 

Sybille Sachs