Most entrepreneurs have a healthy appetite for profit. But keeping that appetite at bay can prove challenging. The trouble with an appetite for profit is that it’s never satisfied. Too often, hungry entrepreneurs trade long-term vision for quarterly earnings, laying the groundwork for future disaster. There’s more to running a business than increasing the numbers.
Businesses thrive within an ecosystem; if the system falls out of balance, the ripple effect may throw a business into upheaval, or worse. Successful entrepreneurs know how to balance earnings with the values of their stakeholders. Stakeholders are more than investors and shareholders — stakeholders are anyone with skin in the game. This includes all the people and organizations involved with or affected by your business.
Defining The Stakeholders
A stakeholder is a person with something at stake through the operation, growth or existence of a business. A stakeholder’s role within an organization may be obvious or otherwise. Stakeholders include:
• Managers and employees
• C-level executives
• Local community members
• Customers and clients
• Suppliers and service providers
• City, state and federal government
• Activist organizations
Whether through direct involvement or separated by several degrees, business owners may be surprised at ow many stakeholders they’re responsible for.
Explaining Stakeholder Theory
Entrepreneurial mindfulness isn’t a new concept. While its origins remain disputed, this viewpoint was popularized in 1983 by R. Edward Freeman. Named “stakeholder theory,” this approach stands in stark contrast to shareholder theory — a mindset placing quarterly profits above all else.
Stakeholder theory operates on three approaches that could each be discussed at length. At the general level, these are:
The normative approach: Businesses have a moral compass all their own. The normative approach helps identify and clarify the philosophical goals of the business and leadership, helping establish an appropriate operational and management structure.
The descriptive approach: Boards, managers and C-level executives have their own supervisory styles, viewpoints and goals for the organization. The descriptive approach illuminates how company leadership thinks about managing, how they execute managerial responsibilities and how they feel about the impacts of their decisions.
The instrumental approach: The instrumental approach explores profitability, growth, efficiency and other data. This helps determine the success of stakeholder management and may highlight areas for improvement in balancing groups.
With a clear picture of the company, its leadership and its impact on the stakeholders involved, entrepreneurs can make decisions with access to more information.
Practicing Stakeholder Theory
Business owners are, to some degree, beholden to profit. Some entrepreneurs must satisfy shareholder demands while others just need to keep the lights on. Making money is an important part of running a business — it’s just not the only part. Balancing needs, wants and desires of stakeholders can lead to more than a positive earnings statement. Successful entrepreneurs can increase efficiency, reduce turnover, boost profits and help secure long-term success by addressing their stakeholders.
Today’s social media companies provide an excellent example. Driven for years on near-guaranteed growth, these firms are now beginning to experience a decline in new users. Unable to rely on shareholder theory any longer, these companies are reaching out to their stakeholders to remain in the marketplace long term. To remain relevant, companies may try developing new services, offering better privacy terms or testifying before government entities.
Exercising effective stakeholder theory is more about balance than perfection. It is difficult to make everyone happy, but mitigating their disappointment may still be achieved. Bring more balance by practicing better:
Communication: Today’s business environment can feel a little cold. Between both peers and subordinates, many professionals have erected walls that limit communication. Encouraging an open environment can boost efficiency, safety, morale and more. Leaders have a lot on their minds and may miss potential hazards or opportunities for success.
Transparency: The walls again. Secrecy does not guarantee job security. Keeping information from your subordinates can often backfire. Compartmentalization can lead to reduced morale and efficiency and increased employee turnover. Transparency can help all those included in your business environment maintain the same course for success.
Compassion: Attitude is everything. To observe stakeholder theory, those involved genuinely need to care. Those driven solely by profit may deliver solid returns, for a while. But alienation from their peers and subordinates can lead to trouble over time. Shaping corporate culture to align stakeholder needs with the company’s chartered course is a conscious decision. The more harmonious the balance, the better.
Practice Makes Perfect
Change is rarely easy. Developing an entirely new mindset, creating new processes and expanding company vision are changes that may take a while to implement. Caring for your stakeholders requires conscious awareness of all those impacted by your business. Identify these groups, learn what makes them tick, and develop a stronger company.
Stakeholders can be frustrating. You might not always agree, but abandoning a group of stakeholders can have ripple effects throughout your organization. Attain better harmony in your organization by tending to your stakeholders and becoming a great business owner in the process.