Quality management is there to every activity of corporate governance and thus to the wide range of activities and interactions of the internal and external actors of an organization which determine, address, or influence its current and future results. These actors are the stakeholders of the organization and more precisely:
clients;
employees, managers, and shareholders;
competitors, suppliers, and partners;
institutions and local communities; and
organizations and national and international bodies involved in the governance of the company, markets, and economic systems in general.
The life and the strategic decisions of every business depend on them, on their interests, on their policies, and on the way the company interacts with them and follows their guidelines or instructions. Talking about quality management also means understanding who these stakeholders are and monitor how they move. In this chapter, we will attempt to portray them, exploring their interests and relational dynamics and investigating how company management takes them into consideration and satisfies them.
The prime goal of any business is to achieve individual objectives while generating added value in favor of a plurality of subjects (Conti & De Risi, 2001; Nassimbeni, Sartor, & Orzes, 2014). Each model of value creation requires the following:
to manage strategic choices to maximize the value of the invested capital;
to provide shareholders with adequate remuneration on such capital;
to drive management behavior toward meeting customer needs and shareholders’ expectations at the same time;
to analyze customer behavior, upon which the firm’s ability to create economic value depends;
to maintain collaborative relations with the socio-economic community the enterprise belongs to; and
to drive projects and business activities toward sustainability concepts.
Such model also requires the contribution of different categories of subjects who express multiple interests and find satisfaction in direct and indirect benefits generated through the value creation process itself.
A company therefore brings together many different, and sometimes conflicting, interests (Conti & De Risi, 2001; Freeman, 1984).
Initially, shareholders were the only stakeholders; over the years, the category has expanded to include employees, managers, consultants, suppliers, and socio-economic organizations with an influence on corporate life. Moving toward total quality has, therefore, placed customers and their satisfaction at the heart of the analysis, with product and service as instruments of communication with the market. Now more than ever, the achievement of corporate goals requires careful selection of applicable business models and adequate relationship with every stakeholder.
To grow, a company must exploit all its resources, human ones in particular (Del Pozzo, 1997). Businesses are in the first instance social entities and then technical-economic systems. Dedication and sense of belonging are essential requirements to achieve high-level objectives. There is a two-way relationship between the company and the people involved; in the same way as the organization sees people as the most important asset and invests in them to generate benefits, people invest in the organization if they see interesting features and prospects. Mutual investments tend to grow with the feeling of sharing important values and the sharing itself of such values strengthens the sense of belonging. Therefore, participation on the one hand allows receiving and on the other promotes the involvement and the creation of better working conditions and value distribution.
The analysis of the share received by the company and of the benefits achieved by the actors of the production system allows identifying the people involved and recognizing the conditions through which the company itself not only creates value for shareholders and customers, but also for suppliers, employees, sponsors, communities, and the economic system.
It is proven that various levels of participation by these subjects to the business activities improve the quality of the output reducing timescales and costs at the same time. If benefits and compensation perceived are adequate, improvement actions are generally undertaken by every subject involved. A physiological relationship between values offered by stakeholders and the social, economic, and cognitive benefits they receive is clear. It is thus worth identifying the indicators expressing the ability of a company to generate value for all these subjects and its ability to adequately satisfy all converging interests.
In economic terms, benefits are linked to employees’ remuneration, profits distributed to shareholders, prices paid to suppliers, goods sold to customers, and interests paid to lenders. On a cognitive and social level, they relate, instead, to learning new concepts and business models, to the professional development of those who actively participate in corporate governance, to the social benefits on the community as a result of the contributions paid by the enterprise and its participation in social and environmental projects. Besides being granted suitable prices, suppliers will be satisfied if they will have the opportunity to grow on a technological level. Employees actively contribute to the added value of the company if they find stimulating working environments. And capital investors do so too if they succeed in adequately remunerating their investments.
In business theory, it is highly significant to recognize the existence of many contributors to the success of an organization and to acknowledge that this success is subject to mutual satisfaction (Conti & De Risi, 2001; Del Pozzo, 1997).
The term “stakeholder” literally means carrier (“holder”) of interest (“stake”). It therefore includes in its meaning a group of people who have, to a varying degree, “an interest in the performance or success of the organisation” (see ISO 9000).
Identification, analysis, and study of the contributions of the various types of stakeholders have been the focus of interest of many authors; to give an idea of the attention devoted to the subject, we provide some of the main definitions of “stakeholders” in Table 2.1.
Table 2.1: Definitions of Stakeholders.
Source |
Definition |
“Those groups of people without the support of which a company would stop existing” |
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“They depend on the firm for the achievement of their personal goals and the firm depend on them for its existence” |
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“Driven by their own interests and goals they participate in a firm, and thus depending on it and the health of the firm depends on them” |
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“They can affect the achievement of an organization’s objectives or are influenced by the achievement of such objectives”; “on which the organization is dependent for its continued survival” |
|
“Claimants” who have expectations or “contracts” |
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“Stakeholders have a stake in or claim on the firm”; “benefit from or damages are harmed by, and whose rights are violated or respected by corporate actions” |
|
Alkhafji (1989) |
“Groups to whom the corporation is accountable” |
Those who are in “relationship with an organization” |
|
“Those who have an interest in the actions of an organisation and the ability to influence it” |
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“Constituents who have a legitimate expectation on the firm established through the existence of an exchange relationship”; those who provide “the firm with critical resources (contributions) and in return expects their interests to be satisfied“ |
|
Participants in “the human process of joint value creation” |
|
“The firm is significantly responsible for their well-being, or they hold a moral or legal claim on the firm” |
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“Those who are or might be influenced by, or are or could be able to influence the organisation” |
|
“They run a certain risk for having invested some form of capital, human or financial, something of value, in a firm” or “they run a risk for the company’s activities” |
The most common and shared definition is that of Freeman: “A stakeholder is any group or individual who can affect or is affected by the achievement of the organization’s objectives.”
According to this definition, the mutual impact is not required, as instead is in definitions referring to transactions or contracts. Not falling under the definition of stakeholders are only those with no influence on businesses (as they have no power) and who are not affected by it (as they do not have any expectations or relationship). The identification and characterization of the stakeholders of a company allow its management to know who can influence its management or who may be affected by it; this in turn allows them to plan actions for a fair balance of expectations and interests within the wider production system. Further to these basic considerations, it is useful to focus and characterize some of the main stakeholder types.
Shareholders have an essential role. In addition to their capital share, they may contribute, more or less critically, to both strategic management and business tactics. Among the strategic aspects, their contribution to the definition of a company corporate and financial structure (Del Pozzo, 1997) is becoming increasingly relevant.
Employees are one of the primary assets, if not the most important one, of a company. Their involvement in business processes and their sharing of the most relevant choices are at the heart of the business success. Thanks to the gradual dissemination of total quality concepts, their participation in corporate governance, as well as that of any other supplier input, is considered crucial.
Companies try to increase the potential of human capital by increasing its stock of knowledge and supporting skills and professionalism. All these lead to higher efficiency levels, stirred, for example, by forms of additional remuneration, which may be proportional to the contribution offered by each individual to the growth and development of the company.
Suppliers represent another primary asset of the production system. They supplement or complement the basic know-how of the company, providing factors of production, knowledge, and innovation, all directly or indirectly integrated into the products entering the market.
Parts, components, systems, and equipment from various supply chains all end up in fact on the assembly line to be coupled with parts made by the client itself. Among the indirect goods provided by suppliers, it is worth to mention engineering services, consulting and supporting activities, capital goods and technologies; a basket of tangible and intangible assets playing an important role in the management of production processes, albeit not actually visible in the finished product.
Suppliers and partners often contribute to the competitiveness and success of the client; the extent of their contribution depends on the quality of the relations established with the company itself. Collaborative and lasting relationships based on trust positively influence the achievable levels of success and profitability. A direct correlation is therefore apparent between type of relationship, the quality of the output provided and the value creation for the end customer and the whole production system.
The state, intended as a set of local and national government bodies, is not directly involved in business activities, but defines conditions and areas under which the production processes may take place. The state is responsible for the construction of logistics infrastructure and services, and for the implementing of rules on the safeguard of the individual and the community, all factors representing fundamental prerequisites for conducting any production and commercial activity. The state thus performs a crucial regulatory function on sectors and markets where companies operate.
The theory of stakeholders identifies the correlations between stakeholder management processes and corporate performance. The theory shows that companies paying the due attention to the stakeholders, are, under the same conditions, more successful in terms of profitability, stability, and growth (Donaldson & Preston, 1995; Friedman & Miles, 2006; Freeman, Rusconi, & Dorigatti, 2007).
For this reason, the theory invites us to acknowledge the existing stakeholders together with their interests, factors that vary over time, and with individual situations. Managers have the responsibility to govern the enterprise so as to provide the stakeholders with the expected benefits, proportionally to their specific relevance.
The relevance theory suggests a classification of the stakeholders based on the following parameters:
(1) the power of stakeholders to influence the company;
(2) the legitimacy of the relationship between stakeholders and company; and
(3) the urgency of the expectations of stakeholders.
Power: Pfeffer and Weber argue that it is often easier to recognize it than to define it. It generally represents “the ability to get things done the way one wants them to be done” (Salancik & Pfeffer, 1974).
Etzioni (1964) categorizes power in relation to the type of resources used to exercise it and distinguishes it in coercive power (based on the physical resources of force, violence, or pressure), utilitarian power (based on material or financial resources), and normative power (based on symbolic resources, such as authority, knowledge, leadership, and operating procedures).
A party therefore holds power if it has (or may have) access to coercive, utilitarian, or normative means. Since the degree of access to these factors is variable, power is necessarily transitory and dynamic: it can be gained and lost (Freeman et al., 2007; Mitchell, Agle, & Wood, 1997).
Legitimacy: Legitimacy and power are separate attributes, which combined can create authority; however, authority can exist irrespectively and is called, in this case, charismatic authority (Weber, 1947).
To be considered by management, besides legitimacy, the stakeholders must have the power to express their will and, where appropriate, to make their expectation perceived as urgent.
Suchman (1995) argues that legitimacy is “a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions.”
Urgency: Urgency is when the relationships or the expectations are important and critical for one or more stakeholders. It is based on the following factors:
Time sensitivity: parameter according to which the delay in satisfying the expectations is not acceptable by a stakeholder.
Criticality: importance of the event in question, related to the positive or negative consequences associated to its implementation.
Urgency can be defined as the degree to which stakeholder claims call for immediate attention (Freeman et al., 2007; Mitchell et al., 1997).
The theory of stakeholder highlights that, to achieve certain objectives, managers need to diversify the rate of attention paid to each category, considering the parameters mentioned above (Freeman et al., 2007; Mitchell et al., 1997).
Since the relevance of the stakeholders is defined by the managers’ perceptions, it is possible to define the following classes of stakeholders based on the actual or perceived possession of one or more of the attributes described above:
latent stakeholders are those who only own one;
“expectant” stakeholders are those who own two; and
definitive stakeholders are those who possess all three attributes.
Those with no power, legitimacy and urgency are nonstakeholders and may be felt by management as entities without relevance (Freeman et al., 2007; Friedman & Miles, 2006; Mitchell et al., 1997).
The principles of stakeholder management relate to managers and business leaders, or people primarily responsible for the management of a company and the impacts the company itself generates on the social and economic context. These principles identify the management duties toward different groups of stakeholders and emphasize the need to increase their involvement in the decision-making process.
1st Principle: “Managers should acknowledge and actively monitor the concerns of all legitimate stakeholders, and should take their interests appropriately into account in decision-making and operations”.
As seen above, many stakeholders, such as investors, employees, and customers, are easily identifiable because of their implicit or explicit relationships with the company. Others, instead, can be identified on the basis of the positive or negative impact company activities have on their welfare. Managers are not required to respond favorably to every request or criticism, but they have to carefully examine the relative expectations, defining relevance and legitimacy case by case. They must also consider the interests of those stakeholders who are largely and more critically involved (Clarkson Centre for Business Ethics, 1999; Freeman et al., 2007).
2nd Principle: “Managers should listen to and openly communicate with stakeholders about their respective concerns and contributions, and about the risks that they assume because of their involvement with the corporation.”
The effectiveness of communication, both internal and external, is a critical aspect when managing stakeholders. The more manager will be open to any kind of issue, the greater the understanding of the various perspectives and stakes and the opportunity to satisfactorily resolve the same issues (Clarkson Centre for Business Ethics, 1999; Freeman et al., 2007).
3rd Principle: “Managers should adopt processes and modes of behavior that are sensitive to the concerns and capabilities of each group of stakeholders.”
Such groups are characterized by diversity of interests, basic needs, relevance, and type of involvement in the company. Relationships are managed with some groups through formal procedures or legal agreements; this is the case for collective agreements, purchase and sale agreements, decision-making procedures of the board of directors, etc.; relationships with other groups call for constant dialectical interactions, public relations or press releases instead (Clarkson Centre for Business Ethics, 1999; Freeman et al., 2007).
4th Principle: “Managers should recognize the interdependence of efforts and rewards among stakeholders, and should attempt to achieve a fair distribution of the benefits and burdens of corporate activity among them, taking into account their respective risks and vulnerabilities.”
Although in different ways, each stakeholder category is subject to risk, uncertainty, and constant change. Successful managers know how to mitigate these factors by ensuring, where possible, continuity of collaboration as well as charges and risks commensurate to the power and ability of stakeholders to face and overcome them (Clarkson Centre for Business Ethics, 1999; Freeman et al., 2007).
5th Principle: “Managers should work cooperatively with other entities, both public and private, to insure that the risks and harms arising from the corporate activities are minimized and, where they cannot be avoided, appropriately compensated.”
Company management sometimes has negative impacts on the environment and society in broad terms. It is a management task to monitor and reduce these undesirable effects and to collaborate, where appropriate, with other companies and public and private organizations (Clarkson Centre for Business Ethics, 1999; Freeman et al., 2007).
6th Principle: “Managers should avoid altogether activities that might jeopardize inalienable human rights (e.g., the right to life) or give rise to risks which, if clearly understood, would be patently unacceptable to the relevant stakeholders.” In particular, they must then:
contribute to the professional development of those operating in the enterprise system;
ensure that all stakeholders respect ethics and human rights;
ensure health and safety at work;
support the communities where the company operates;
ensure diversity of workforce and supplier base;
incorporate environmental sustainability projects in the master business plan; and
promote international sustainability standards.
Since decisions and business activities involve risks, every manager must implement risk management models in order to remove or reduce them to a tolerable size, covering consequences with adequate insurance policies. In the event that certain decisions involve excessively high risks, and it is not possible to contain them, management must refrain from taking them (Clarkson Centre for Business Ethics, 1999; Freeman et al., 2007).
7th Principle: “Managers should be able to recognize the potential conflicts between (a) their own role as corporate stakeholders, and (b) their legal and moral responsibilities for the interests of all stakeholders, and should address such conflicts through open communication, appropriate reporting and incentive systems and, where necessary, third-party review.”
Managers form a distinct group of stakeholders with privileged access to information and they can significantly influence company decisions. They must make the best use of the available resources, protect safety at work, and ensure an appropriate level of remuneration. It is inevitable, however, that tensions and misunderstandings may arise among the various stakeholders. Aware of this, managers must encourage practices aimed at dialogue and understanding of expectations and reciprocal obligations. Their credibility and authority are of paramount importance, especially when they have to ask other stakeholders to align their interests with those of the company in the common interest. Trust, respect, and mutual credibility are the foundations of a business organization (Clarkson Centre for Business Ethics, 1999; Freeman et al., 2007).
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