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Thursday, June 6, 2013

Unearthing the origins of stakeholder management

by Henry J. Lindborg
Stakeholder analysis has become standard practice among quality practitioners. Whether conducting strategic planning, exploring an organization’s leadership and governance using the Baldrige criteria, chartering Six Sigma projects, assessing enterprise risk or auditing corporate social responsibility, it’s important to identify individuals or groups affected by an organization’s actions. In light of volatility and complexity in organizations’ internal and external environments, stakeholder analysis can guide them to act responsibly and mitigate risk.
A stakeholder approach is enshrined in ASQ’s body of knowledge for quality managers. It is practiced by revenue-driven corporations and nonprofits alike—including the United Nations and the World Bank. The Malcolm Baldrige National Quality Award requires applicants to identify and differentiate the needs of various stakeholders to ensure alignment with strategic objectives. Higher education’s Academic Quality Improvement Program of the Higher Learning Commission has a similar requirement. As management tools and approaches become more sophisticated and commonplace, we may forget their origins and broader implications. This month, let’s take a look at the discipline of stakeholder management.
Modern stakeholder thinking arose in the 1930s in midst of a legal debate on the responsibilities of corporations to their stockholders and other constituencies. Society began to ask, "What do corporations owe those who aren’t investors?" Legally, stockholders came first. As health, safety, environmental and community relations evolved, other stakeholder groups were included. Few CEOs today would repeat J.P. Morgan’s statement, "I owe the public nothing," even if they privately agree.1
Though the Stanford Research Institute is credited with first using the modern definition of stakeholder in 1963, the concept wasn’t fused with management thinking until R. Edward Freeman published his influential book, Strategic Management: A Stakeholder Approach, in 1984.2 Freeman remains a thought leader in stakeholder management. Recently, I interviewed Freeman and we discussed stakeholder theory and its connection to quality.
Freeman, a professor at the Darden School of the University of Virginia in Charlottesville, studied mathematics and philosophy at Duke University in Durham, NC, before earning a doctorate in philosophy from Washington University in St. Louis. Postdoctoral work took him to the Wharton School of the University of Pennsylvania in Philadelphia, where he realized stakeholder theory was underdeveloped and deserved attention. "I never looked back," Freeman said.

Separation fallacy

In the 1980s, concerns about economic competitiveness led corporations and government to embrace strategic formulas, such as Michael Porter’s "five forces" model.3 Freeman sought to understand the ethics of strategic decisions and wondered if it was possible to integrate ethics with organizational strategy. He discovered widespread "separation fallacy"—business decisions were separate from ethical considerations. Making decisions without factoring in ethics can lead to dire consequences, as we’ve witnessed in dramatic instances of corporate misconduct—from Enron and WorldCom to Lehman Brothers Holdings Inc. and Bernie Madoff.

Everyone counts

To Freeman, the essence of business is value creation. Maintaining relationships with customers, suppliers, employees, financiers and communities encourages leaders to spark conversations about how their companies create value and manage the needs of all stakeholders. Tradeoffs never work. "Great companies figure out a win-win strategy," he said.
Freeman’s thinking evolved as quality gained ground in the United States. He sees his work as complementary to the quality movement. When I asked Freeman for his opinion on W. Edwards Deming, he called him a hero and a true philosopher. "Deming’s principles of driving fear out of the workplace and supporting human dignity have a moral basis," he said. While Freeman thinks Deming’s teachings are "incredibly important," he finds it interesting that the core principles of his work are continually revisited. "Have we become so messed up that we need to be told what 5-year-olds know?" he said.
Our conversation shifted to risk management and its entry into the quality arena. "Risk isn’t interesting," he said. "What’s more interesting [and important] is how organizations engage multiple stakeholders. [Risk] enters the equation when shareholder value needs to be maximized to satisfy Wall Street." Freeman said he thinks risk and profit hold too much power. "It’s as if one were to say the purpose of life is to make red blood cells. We need them, but they are not our purpose. Risk takes our eyes off of what we want to do. We have to remain engaged, open, committed to purpose and answer the key question: Is this worth doing?"
Freeman hopes stakeholder management will continue to integrate with other disciplines. "We don’t need more theory. We need more stories where we don’t see tradeoffs," he said. Freeman cited the conscious capitalist movement and values-based vision outlined in Whole Foods co-founder John Mackey’s book, Conscious Capitalism: Liberating the Heroic Spirit of Business,4 as an example.
Quality professionals sometimes forget the profound knowledge embedded in stakeholder management and Deming’s approach to quality and the potential for transformational change when putting those principles in action. They may find their passion for service and organizational change in the deeper dimensions of stakeholder management, which is gathering new energy in business thinking and practice.

References

  1. Roland Marchand, Creating the Corporate Soul, University of California Press, 1998.
  2. R. Edward Freeman, Stakeholder Theory: The State of the Art, Cambridge University Press, 1984.
  3. Michael E. Porter, Competitive Strategy, Free Press, 1980.
  4. John Mackey and Rajendra Sisodia, Conscious Capitalism: Liberating the Heroic Spirit of Business, Harvard Business School Press, 2013.

Henry J. Lindborg is executive director and CEO of the National Institute for Quality Improvement in Fond du Lac, WI, which provides consulting in strategic planning, organizational development and assessment. He holds a doctorate from the University of Wisconsin-Madison and teaches in a leadership and quality graduate program. Lindborg is past chair of ASQ’s Education Division and of the Education and Training Board. He also chairs the IEEE-USA’s Career Workforce Policy Committee.

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