Monday, August 14, 2006

The Stakeholder Paradox - extract from Sir John Sunderland's keynote at Henley this year



Extract from the

HENLEY PARTNERSHIP

KEYNOTE LECTURE SERIES 2006

The Stakeholder Paradox


Sir John Sunderland

13 July 2006



In the twentieth century government became a player in business life: sometimes as owner or customer but more often in the form of taxer and regulator. All these new relationships were challenging but at least they were defined and recognized. Today business is expected to engage with a vast crowd of poorly defined newcomers – its so-called stakeholders. And in the UK, for the first time, these newcomers are set to acquire formal rights over businesses if the Company Law Reform Bill becomes law. It will oblige directors not only to safeguard the financial interests of the companies they serve but also to have regard to their employees, customers and suppliers – and to nurture communities and the environment – in every decision they make.

It is a curious term – stakeholder – which has come to mean almost totally the opposite to its original sense. A stakeholder was someone who held money on behalf of two or more other people pending the resolution of an issue between them – usually the outcome of a wager. He was bound to hand over the money to the successful party. In other words, the stakeholder had a formal responsibility towards his principals. Even in jurisdictions where wagering contracts are unenforceable (including England to this day) the stakeholder still had to pay up. In the American Wild West, if the stakeholder ran off with the stakes the aggrieved parties could hunt him down and shoot him. A system with attractions today when I think of some of our stakeholders.

Almost anyone can be a stakeholder: it is as easy as posting an entry on the Internet. I did a Google search recently on GM Foods and it produced 6.4 million hits. The entries ranged from governments and scientific bodies to NGOs, pressure groups and individuals. 6.4 million self-appointed stakeholders, and, through Google democracy, each gets the same weight. Even interests which cannot use the Internet – like endangered species – can become stakeholders if the media and pressure groups appoint themselves on their behalf. Through environmental pressure groups, the planet itself has been turned into a stakeholder.

Essentially, these new stakeholders are claimants, who take no account of how their demands on business will be met. They are mostly unelected and unaccountable and think only of their own constituency. Some years ago natterjack toads – previously an unpopular species associated with poison and witchcraft – acquired a British pressure group dedicated to their preservation. As a result, British business now grinds to a halt – often literally in the case of traffic – the moment it threatens a natterjack toad. The cost of preserving that toad falls on business and in turn on its employees and shareholders and all the other beneficiaries of its activities. None falls on the toad-lovers.

Management of new stakeholders has added costs to business whether it chooses to do this itself or outsources it to specialists. If the proposed UK Company Law Reform Bill is enacted, British businesses could face substantial new costs in routine administration and record-keeping to defend themselves from the prospect of litigation. It opens up new possibilities for directors to be sued for decisions which adversely affect stakeholders. Directors will have to prove that they acted in good faith towards those stakeholders and to demonstrate that they took their interests into account.

These still remain the prime stakeholders in our business. Let’s examine each of them in more detail. They still have great power to signal their discontent if their demands are not met by withdrawing their custom or their capital. But even consumers and owners have become highly disparate groups of people with conflicting interests which modern business is often hard to put to identify, let alone reconcile.

The complexities of consumer relationships are matched by those of investor relationships. One is the sheer number of investors in any public company and the disparity in their power, status and interests. Every shareholder, across the world, is entitled to reports and communication – in itself a significant cost to business. Investors range in size from individuals with a few shares to massive institutions. Some of these investors want income, some are in it for capital growth. Some are active, some are passive. In short, there is no community of interest among investors. The only thing they all have in common is that there are thousands of alternative places where they can invest their money.

Adding to the complexity, we now have the twin phenomena of the ethical consumer and the ethical investor. These people select from the myriad of available goods and services and investments those which give them the greatest moral satisfaction. Some get professional advice, from ethical investment funds but many more take their information from pressure groups, through the Internet and from each other. The Company Law Reform Bill would give such investors new power without giving them any additional responsibility towards other investors or towards other stakeholders in business. There is nothing to stop such investors taking instructions from pressure groups even those who actually want to undermine the company in which they have bought shares.

Increasingly, companies survive or prosper because of the talent they command in their workforces, their accumulated knowledge and experience allied to their capacity to create new ideas and with them to conquer new markets. Increasingly, talented people of all kinds are becoming scarcer for business – partly for demographic reasons, partly because of persistent failure at all levels of the education system and partly because talented people have more and more career and lifestyle options open to them. Joining ethical consumers and ethical investors are ethical employees – people able to choose an employer who gives them a sense of worth. In Cadbury Schweppes we survey employee opinions annually and achieve a 90%+ rating as “a company I am proud to work for”. This is not just satisfying, but extremely important as a measure of how well we are using our most important asset – our human capital.

Consumers, shareholders, employees, suppliers: all of these present challenges as stakeholders even though they have formal and defined links with business. But how much more complex is it to manage stakeholders without formal links who define their relationship with business in their own terms?

The first is government. People still talk about “the government” – but government is not singular but multi-layered. If you do business in London you deal with no fewer than five layers: your local council, the Mayor and Assembly, the shadowy Government Office for London, central government, and the EU. None of these bodies have the same agenda and they are elected or appointed by different methods and on different timetables. And as well there is the plethora of quangos and other publicly-funded busybodies who have relationships with business.

The law, especially in the United States, has become an independent stakeholder as a direct beneficiary of any stakeholder activity which results in legislation or litigation. Moreover, lawyers can now define their own relationship with business and other stakeholders. They can choose to defend business from the claims of other stakeholders or to offer them a means of pursuing those claims through the courts – a phenomenon vastly expanded by the arrival of contingency fees.

The media, particularly the new flourishing Internet media, are more ready to circulate hostile stories about business – many originated by pressure groups and NGOs – if they make news and play on popular fears and they take no responsibility for the consequences. The almost invariable response of the media to any bad story about business is to demand government action to prevent it happening again. (Needless to say, the media take no responsibility for scandals which they helped to create: no financial journalist ever got sacked for tipping Enron).

Through their relationships with government, media and the law pressure groups and NGOs have become powerful in their own right. Their claims to represent local communities and other interests are often unverified: all that matters is that government (or media or the law) accept them. From that moment on, the pressure group becomes automatically a stakeholder. To give one example, Transport for London, a publicly-funded body, has included the Tamil Action Group and the University of the Third Age in consultations on London transport policy – effectively giving a free platform for their demands.

Pressure groups and NGOs also benefit from an asymmetry between their reputations and that of business. If a pressure group plants an inaccurate story or launches a frivolous lawsuit the worst that can happen to it is to be thought misguided or misinformed. (It may even enjoy the halo of martyrdom if it goes down in court). For business, the inaccurate story or the frivolous lawsuit can damage a company or brand reputation which may have taken decades of investment and effort to establish.



Business should always believe that its core activities are worthwhile and represent a contribution to society. It is easy to mock mission statements (in our case “working better together to create brands people love”) but they help businesses define the ground on which they expect to be judged by other stakeholders. Any business that feels guilty about its activities should either diversify or quit altogether. Otherwise it will be just a pushover for other stakeholders with no doubts about their mission.

Even at their most interfering and self-righteous other stakeholders can have a genuine interest in the decisions it makes and very often genuine new insights. I mentioned earlier that talent is vital for business survival and it would be foolish of business to ostracize the talent and ideas on offer from other stakeholders. Moreover, business needs to be pro-active – not waiting for stakeholders to hit them with demands but putting forward its own agenda for advancing common goals. (That will not prevent other stakeholders, especially government, from doing foolish things but at least it will force them to consider better choices).

Indeed, I believe that business itself should behave like a responsible stakeholder – a legitimate and necessary interest group in all the societies in which it operates. Business should display the same persistence and clarity in expressing its views – if not the same self-righteousness – as the pressure groups and NGOs with whom it has to contend. Indeed I believe that business is the natural defender of values which are deeply cherished in world society including the rule of law, protection against arbitrary power, freedom of thought and expression and social mobility. Let us act as stakeholders for those values wherever we operate.

I will paraphrase Abraham Lincoln: you cannot be loved by all of the people all of the time and business needs to recognize this. One effect of the proliferation of stakeholders and their demands is a constant search for win-win solutions which produce benefits for everybody concerned. A corollary of this search is the idea that such solutions are always possible and that “responsible” behaviour by companies towards other stakeholders will always bring its own reward. Unfortunately, this does not always happen. Some rational and indeed essential decisions by business produce pain for stakeholders – and not just temporary but permanent.

If a company is in trouble it may have to shed jobs and devastate local economies. When that happens the business concerned should avoid any false hopes or promises and explain its decision clearly and honestly …… and without fatuous euphemisms which generate cynicism of the (“we have decided to refocus our business”) kind. Above all, it should ensure that the decision was taken without favouritism – that the same motives for the decision are being applied, with the same force and logic, to other parts of the company, and indeed at all levels within it.

Business must keep uppermost the vital importance of its and its brands reputation. There is so much value locked up in these assets, and so much to lose by a false move that they should be factored into every decision where stakeholder interests are involved. Thinking about reputation will not always produce the right decision but it should block off a number of stupid ones – such as passing off tap water as a new mineral water in a savvy consumer and media market such as the UK.

Finally, we have to recognize that stakeholder proliferation and its management paradox is a permanent reality.

There is no point grumbling about it.

As a business grows its markets and activities, it inevitably engages with more interests in local, national and global society. The complexities this causes should be counted as part of the price of our success.

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