In the past, the relationship between the company and its stakeholders was largely one of “us” versus “them.” Companies were selective about how they communicated with stakeholders, and stakeholders were skeptical of the information they received.

By CB Bhattacharya, Professor at the European School of Management and Technology, Berlin

But this is changing. As demands for increased transparency from a wide variety of external stakeholder groups increase, companies recognize that this relationship must evolve into one that is more aligned and cooperative.

The new “stakeholder centricity”

Companies now see their stakeholders as part of the same team. Rather than always prioritizing short-term profit maximization, companies are incorporating multiple stakeholder views into their decision-making.

My research reveals that this stakeholder engagement, when aligned and at the heart of a company’s strategy, can:

• Enhance social value
• Enhance business value
• Protect, and indeed, enhance a company’s reputation which is an essential asset in today’s competitive marketplace.

The first principle that companies need to take on board is that stakeholders matter

This requires them to go from an inside-out view of the world – where the company is at the center and dictates strategy to the various stakeholders – to an outside-in perspective.

In this latter approach, companies actively engage their stakeholders. They listen to them, seek feedback and suggestions and, to the extent that is possible, incorporate those views into their decision-making.

This broader stakeholder view requires companies to rethink what is meant by compliance. Stakeholders are no longer satisfied with companies that do the bare minimum and simply meet their obligations in a strictly defined legal sense.

Increasingly, they expect companies to consider compliance more broadly and do what is right, not just what is required. According to this view, compliance is not just a box-ticking exercise but the bedrock of corporate responsibility initiatives.

And it is not just tax authorities and regulators scrutinizing compliance; investors also want companies to show that they are good citizens and prepared to set standards within their industry.

Relationships with all stakeholders need to move from being purely transactional to become more embedded and engaged

In the tax arena, for example, enhanced relationships with tax administrations, which are based on transparency and trust, can be considered a good example of this process.

These relationships need integrity and goodwill from both sides to succeed, and will take time to develop. But they enable a far more efficient and effective way of engaging with stakeholders than a purely transactional approach.

Placing stakeholders at the center of the business takes determination from executives to make it happen. It also has significant cost implications:

• Employees must be trained
• New systems and processes need to be implemented

The benefits will not be immediate – in some respects, these are initiatives that are at loggerheads with short-term profit maximization and beating analysts’ forecasts.

Stakeholder engagement inherently requires a longer-term perspective that does not pander to these more immediate pressures.

This highlights the importance of leadership. Senior executives need to be able to bring staff on the journey with them, as none of this can happen without engaging the internal stakeholder group to embrace this new approach.

They also need to put in place metrics to determine whether the stakeholder engagement is working or not. There are dozens of metrics that companies could use on an ongoing basis to assess the effectiveness of their strategy.

For example, companies may want to measure stakeholder identification with the company or the perceived reputation of the organization.

Finally, companies need to respond to the feedback from their stakeholders

This cannot be approached in a half-hearted way. If you tell stakeholders that you are going to take action and then you don’t, this gives them the message that they are wasting their time.

Leaders have to commit to respond and, if they can’t take action on the basis of stakeholder feedback, they need to explain why.

Stakeholder engagement is a powerful philosophy, but it can only be effective if both sides play their role.

Biography

CB Bhattacharya is the E.ON Chair Professor in Corporate Responsibility at ESMT European School of Management and Technology in Berlin, Germany, and Dean of International Relations. Previously he was Professor of Marketing at the School of Management at Boston University. CB Bhattacharya is the co-author of Leveraging Corporate Responsibility: The Stakeholder Route to Maximizing Business and Social Value (CUP, 2011).

This article was first published in Issue 06 of Ernst & Young´s T Magazine publication which can be accessed using the links below:

• Read all web articles from T Magazine issue 06
• Download full pdf version of T Magazine issue 06 (pdf, 7.40 MB)