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Managing for Stakeholders: Survival, Reputation, and Success

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Overview

Managing for Stakeholders: Survival, Reputation, and Success, the culmination of twenty years of research, interviews, and observations in the workplace, makes a major new contribution to management thinking and practice. Current ways of thinking about business and stakeholder management usually ask the Value Allocation Question: How should we distribute the burdens and benefits of corporate activities among stakeholders? Managing for Stakeholders, however, helps leaders develop a mindset that instead asks the Value Creation Question: How can we create as much value as possible for all of our stakeholders?

Business is about how customers, suppliers, employees, financiers (stockholders, bondholders, banks, etc.), communities, the media, and managers interact and create value. World-renowned management scholar R. Edward Freeman and his coauthors outline ten concrete principles and seven practical techniques for managing stakeholder relationships in order to ensure a firm’s survival, reputation, and success. Managing for Stakeholders is a revolutionary book that will change not only how managers do business but also how they recognize and evaluate business opportunities that would otherwise be invisible.

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Editorial Reviews

Jim Collins
"Ed Freeman is one of those great teachers who change the world by changing the way people think, and even how they think about thinking. He melds intellectual rigor with practical wisdom and inspired standards—an exemplar of the very best of what a modern professor should be."—Jim Collins, Batten Fellow at the University of Virginia, author of Good to Great and co-author of Built to Last
Tom Donaldson
“This book breaks the mold for the ‘management success’ literature. Forget what you’ve read in previous management books. Stop assuming that you have to trade off the interests of employees and customers for those of stockholders. Freeman, Harrison and Wicks show why smart managers succeed by adding value everywhere.”—Tom Donaldson, Mark O. Winkelman Professor, The Wharton School of the University of Pennsylvania
Jeffrey J. Diermeier
"Given the discussions that currently engage the market as to a US shareholder orientation versus a continental stakeholder focus, Freeman et al put forth a simple framework for stakeholder management and give a good argument for how ethical leadership is needed for the more complex times approaching us."—Jeffrey J. Diermeier, President & Chief Executive Officer, CFA Institute
John J. Castellani
“Freeman’s book, and the launch of this series, is an invaluable resource for current and future business leaders. Placing the leading thinking of top academics into the hands of managers will greatly contribute to positively shaping future business practice and the creation of value.”—John J. Castellani, President of Business Roundtable
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Product Details

Meet the Author

R. Edward Freeman is Elis and Signe Olsson Professor of Business Administration and director, Olsson Center for Applied Ethics, Darden School of Business, University of Virginia. He is the author or editor of ten books on business ethics, environmental management, and strategic management. He lives in Charlottesville, VA. Jeffrey S. Harrison is W. David Robbins Chair in Strategic Management, University of Richmond. He lives in Richmond. Andrew C. Wicks is associate professor and co-chair, Olsson Center for Applied Ethics, Darden School of Business, University of Virginia. He lives in Charlottesville.

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Read an Excerpt

Managing for Stakeholders
Survival, Reputation, and Success
By R. Edward Freeman Jerey S. Harrison Andrew C. Wicks
Yale University Press
Copyright © 2007 R. Edward Freeman, Jerey S. Harrison, and Andrew C. Wicks
All right reserved.

ISBN: 978-0-300-12528-3



Chapter One
Managing for Stakeholders

Bob Collingwood was president of Woodland International, a division of a large company headquartered in the United States with operations in fifty-five countries around the world. His twenty-year business career had been marked by significant changes at Woodland and in the business environment in which Woodland had grown and operated. Bob's responsibilities included overseeing manufacturing as well as public affairs, and he had bottom-line responsibility for the fully integrated Woodland operations. He was measured on "economic value added" as well as several other variables. As Bob checked his calendar for the upcoming two weeks, he could see that his schedule was even more hectic than usual. He had appointments with government officials at the national level to discuss some legislation that affected Woodland. He had to fly to Mississippi to discuss a potential new plant with state officials. He had a meeting with several environmentalists to discuss a joint venture on waste reduction that was a new partnership between industry and these activists. He had a day-long meeting scheduled to brainstorm how the company could take more advantage of its Web site and of the Internet in general. The new labor contract was up for renewal, and rumors of restructurings and layoffs were plentiful. In addition, he had important meetings with his counterparts at three customer accounts. In four days he had to be in Tokyo for twenty-four hours to launch a new office and a new marketing effort, only to jet back to Texas for a two-day strategy meeting.

Each day Bob had several hundred e-mail messages, most of which his staff could handle, and his voice mailbox was constantly full. He received an average of forty-five faxes a day. He had a committed team of people, most of whom he had been personally able to select, and each of whom experienced roughly the same level of work and resulting stress as he did.

As Bob thought about the enormous amount of effort that went on to prepare himself and Woodland for the upcoming two weeks he couldn't help but wonder how things could be more hectic. Collingwood had risen rapidly at Woodland International and was headed for "stardom" in company headquarters, mentioned frequently as a candidate for future CEO. He did not feel prepared to handle the diverse mix of situations he now faced, and furthermore, he had a sinking feeling that the air of crisis that seemed to hang over him and his staff would never go away. He had missed his children's last two Little League games and a piano recital, and he increasingly felt that both his professional and personal lives were spinning out of control.

Although Bob and his people had the skills and abilities to meet each situation and to manage the crises as they came up on a daily basis, they were unable to preempt the situations. Bob knew that he needed a framework, a mindset, and some different methods and processes for leading the organization forward. He needed to somehow redefine the idea of constantly being behind the eight ball each and every day. He knew that he had to escape the crisis-reaction-crisis cycle or risk burning out both his people and himself.

This book is about Bob and the thousands of managers around the world like him who meet all the criteria for good managers and leaders, yet who do not seem to be able to get ahead of the curve in today's fast-changing business environment. It explains a framework for business and management, "managing for stakeholders," which offers a mindset for Bob and his colleagues to begin to interpret their world differently and to lead in a more positive fashion.

MANAGING FOR STAKEHOLDERS: THE BASIC IDEA We need a new way to think about business. Executives in the past twenty-five years have witnessed unprecedented changes, and the dominant models and frameworks that we use to understand business cannot easily account for these changes. From the globalization of capital markets to the emergence of powerful information technologies, the very nature of the modern corporation has changed virtually beyond recognition.

The purpose of this book is to set forth a new conceptualization of business and the role of the executive. This new view, which we call managing for stakeholders, has emerged during the past twenty-five years from the work of many business thinkers and the actions of executives around the world.

The basic idea is quite simple. Business can be understood as a set of relationships among groups that have a stake in the activities that make up the business. Business is about how customers, suppliers, employees, financiers (stockholders, bondholders, banks, and so on), communities, and managers interact and create value. To understand a business is to know how these relationships work. The executive's or entrepreneur's job is to manage and shape these relationships, hence the term "managing for stakeholders."

Customers, suppliers, employees, financiers, communities, and managers are all key parts of today's business organization. If we understand capitalism as how business really works (rather than how theorists want us to believe it works) it will become obvious that this has always been true. Building and leading a great company has always been about managing for stakeholders. The idea that we need to pay attention to only one of these groups, the people that supply the capital (stockholders or financiers), if we want to build and sustain a successful business is deeply flawed. The very nature of capitalism itself is putting together a deal, a contract, or a set of relationships among stakeholders so that all can win continuously over a long period of time.

BUSINESS REALITY

There is a very pragmatic reason to adopt a "managing for stakeholders" view: it is what any successful business really does. Managers have to concentrate on creating and sustaining value for key stakeholders, no matter what the overall purpose or direction of a particular business is. So, even if the ideologues who insist that the only legitimate purpose of a business is to maximize shareholder value or maximize profits, the only way to do that is to create great products and services that customers want to buy. Even in these narrowly defined businesses, managers must pay attention to supplier and employee relationships, and if they are at all clever they will understand that paying attention to community can help prevent activists, regulators, and others from using the political process to prevent their companies from pursuing profits. And, of course, executives do have to pay attention to pursuing profits for stockholders or financiers and creating value for other stakeholders at the same time. Business, indeed any business, just is creating value for stakeholders. The day-to-day life of any business consists of interactions with a broad range of stakeholders, and these relationships need to be managed in a thoughtful way.

In summary, even if the executives and directors of a firm believe that creating shareholder value is the only legitimate objective for business, they must concentrate on stakeholder relationships to accomplish the creation of shareholder value. The logic is simple. The business world today is very complex and there is a great deal of uncertainty. It consists of interconnected networks of customers, suppliers, communities, employees, and financiers that are vital to the achievement of business success. The company that manages for shareholders at the expense of other stakeholders cannot sustain its performance. A system of economic activity based on such exclusive attention to shareholders is rife for social activism and regulation in a free society on behalf of the other stakeholders.

WHAT BUSINESS CAN BE

Many critics of the idea of managing for stakeholders suggest that it encourages business leaders to focus their attention on non-business activities. Nothing could be further from the truth. There is really no inherent conflict between the interests of financiers and other stakeholders. If we are correct, there is simply no way to maximize value for financiers without paying attention to the other stakeholders. But, there is more.

The past century and surely the next one will yield unprecedented economic and technological progress. That progress is largely due to the ability of entrepreneurs and other business leaders to create value for their stakeholders. Thinking about business more broadly, in stakeholder terms, is an idea that potentially frees capitalism from its position as a social institution that is morally and ethically suspect simply because "it's all about the money." Of course, the money is important, but so is the value created for customers, employees, suppliers, and communities.

Some businesses really do try to maximize value for financiers, but most do not. Most have a different sense of purpose or what they stand for that usually includes creating value for at least customers and employees. Some businesses even have a more "noble cause" approach and are trying to change society. Most want to create value that allows people to improve their lives and to flourish. Managing for stakeholders is a multifaceted idea that allows us to see that there are many ways to successfully manage a business. If business as an institution is to be healthy, thrive, and make our lives better, this diversity of management methods and ideas is good in itself.

CAPITALISM AND THE LOGIC OF VALUES

Business works because of the "logic of values," the way that values form the very foundation of economic activity. In the business world of the twenty-first century the very purpose of a business in society is connected with creating value for stakeholders. We can better understand business by seeing it as an institution for stakeholder interaction. Corporations are just the vehicles by which stakeholders are engaged in a joint and cooperative enterprise of creating value for each other. Capitalism, in this view, is primarily a cooperative system of innovation, value creation, and exchange. Indeed it is the most powerful method of social cooperation we have ever invented. Competition is a second-order, emergent property that adds fuel to the fire of innovation. Business works, in this "stakeholder capitalism" view, because people want to innovate and create together, not simply because they are competitive.

MANAGING FOR STAKEHOLDERS: THE BASIC PICTURE

Figure 1.1 depicts this basic idea for adopting a "managing for stakeholders" view. First of all, we have defined a stakeholder as any group or individual who can affect or is affected by the achievement of a corporation's purpose. Those groups in the inner circle, which we will call primary stakeholders, define most businesses. Clearly, managers need to pay a special kind of attention to these groups. They need to understand the values and purposes that are at stake among customers, suppliers, financiers, communities, and employees. The interests of these groups go a long way in explaining whether or not a company is built to last, whether it can achieve and sustain extraordinary performance. It would be difficult to understand a framework that did not take into account relationships among customers, suppliers, employees, and financiers, as our main model of business and management is built on better serving these groups. At least in a relatively free and open society, however, community must also be on that short list of primary stakeholders. The litany of community members using the political process to regulate the firm is long and dreary, and it exists largely because our framework of business has ignored community as an important stakeholder.

The outer ring of the diagram in Figure 1.1 shows another set of groups that can affect or be affected by the corporation. Each of these can influence the relationship of the corporation with the primary stakeholders. Environmentalists can influence how a corporation deals with community or with a segment of customers. Government can drastically alter the design and delivery of products and services, and it affects each of the primary stakeholder relationships since it regulates the flow of information to financiers as well as the set of permissible practices with employees.

Figure 1.1 represents those thinkers and managers who believe that we should define stakeholders in very narrow terms, by including only those groups who have high legitimacy (primary stakeholders). It takes into account those strategists who have argued that if a group can affect the corporation, even indirectly, then the company needs to think strategically about its relationship with that group.

A specific company's stakeholder map may differ from Figure 1.1. Companies in the defense industry have governments as primary stakeholders. Companies in the toxic waste disposal business may need to consider environmentalists as primary stakeholders. Who is a primary stakeholder and who is an instrumental stakeholder depends in large part on the company's overall purpose.

Our argument is simple. The stakeholder framework depicted in Figure 1.1 and sketched in the remainder of this book must underlie any practical theory or model about business-at least in today's world filled with change. There are many ways to define and depict the stakeholders in a business, and we shall return to this point in Chapter 3.

THE ROLE OF CHANGE

There are at least four major trends, each of which has had profound effects on business. First, few people are arguing that we need more government planning and control of private business. Indeed, around the world, governments have been exiting markets, leaving business to private parties, and selling their stakes in industry after industry through privatization, while often retaining intense regulatory control. Markets have become much more open and liberal, and while there is still steady pressure for regulation, most policy makers around the globe realize that basic processes of markets, companies, and investments are the keys to prosperity.

Second, along with the liberalization of markets has come a liberalization of political institutions around the world. The fall of communism, the pressure for more market-oriented reform in countries as different as Japan and Indonesia, the market reforms in China, the openings of once closed societies have all had a tremendous impact on the opportunities available for businesses. Business today is global in unprecedented ways.

Third, over the past few decades we have discovered that we need to take better care of our environment. This environmental awareness, led by nongovernmental organizations (NGOs), has spread around the world, and it has led to a wealth of innovation in business. 3M sells products from its waste stream. Companies like Patagonia make useful products out of what once would have been garbage. Even the U.S. automobile manufacturers are inventing new technologies that make the internal combustion engine cleaner. In addition, many have argued that environmental values are only the start. Businesses can and should pay attention to other societal issues like public health, education, and other issues where the effects of business matter to broader "civil society." One trend that has exploded is the whole field of social investing. More than $2 trillion has been invested specifically in companies that meet criteria relating to their effects on society.

Finally, these three trends are fueled by a fourth one: the impressive advances in information technology. The information revolution has made it possible for businesses around the globe to see vast improvements in productivity and innovation. Today's world is connected, plugged in, turned on, and wireless. Information technology has changed the very nature of the way that we work with each other, emphasizing knowledge over place.

Each of these trends has added a layer of complexity and intensity to stakeholder relationships. Whether, as IBM says, it is an "on demand" world, or whether the interconnections among stakeholders make communication much easier, there are few secrets in today's world. Executives live in the fishbowl, on full display. They need a way of thinking that easily integrates the many changes that they face. Focusing simply on stockholders and shareholder value is not helpful.

(Continues...)



Excerpted from Managing for Stakeholders by R. Edward Freeman Jerey S. Harrison Andrew C. Wicks Copyright © 2007 by R. Edward Freeman, Jerey S. Harrison, and Andrew C. Wicks. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents


Preface     vii
Acknowledgments     xi
Managing for Stakeholders     1
Business in the Twenty-first Century     20
The Basic Framework     47
Stakeholders, Purpose, and Values     74
Everyday Strategies for Creating Value for Stakeholders     103
Leadership and Managing for Stakeholders     133
Frequently Asked Questions about Managing for Stakeholders (MFS)     157
Notes     165
Further Reading     171
Index     173
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  • Posted August 3, 2009

    more from this reviewer

    A practical approach to business management

    Good business leaders know they can help their firms succeed by connecting to their communities and by improving their relationships with employees, suppliers and customers. Yet, many executives still make the grave mistake of focusing solely on their shareholders and bankers, ignoring other important stakeholders. R. Edward Freeman, Jeffrey S. Harrison and Andrew C. Wicks provide new thinking and techniques to help you best manage stakeholder relationships and boost your firm's success. They offer practical advice for balancing the needs of your financiers with those of other stakeholders. getAbstract recommends this book to all managers and business thinkers. Board members and other professionals who want to understand their new roles and responsibilities in the globalized world of commerce will also value the authors' take on business ethics.

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