How Stuff Works: Stakeholders

I’ve mentioned the Stakeholder concept a few times before in this space, but it’s one of those evergreen topics that always seems to come up in the news – and occasionally in movies, novels, or real life – and I thought it might be a good idea to review the concept. Everyone knows that a corporation is governed by three groups – the shareholders, who actually own the company, the Board of Directors, who are elected by the shareholders and hire the senior management team, and the senior managers themselves, who in turn hire and manage everyone else who works for the company. But have you ever considered who else might have an interest (or stake) in how well the company performs, and whether or not it prospers?

Clearly, the employees who work for the company do. Although most of them probably don’t fall into any of those three groups (unless the company has an employee stock-purchase scheme as part of its compensation package), in many cases the employees will literally live and die right along with the company. But what about the other businesses from which our company purchases goods, services, or raw materials? If our company is their major customer, purchasing the bulk of their products, their survival may be just as dependent on the success of our company as our employees or shareholders are. And since those other companies have their own employees, stockholders and suppliers, they also have an interest in our success. But it doesn’t stop there…

Suppose there is a company whose business depends on some product that we make in order to stay in operation. Unless they can find another source for that product, the failure of our company will take them down, too, and throw all of their employees out of work (and potentially bankrupt their shareholders). Even if there isn’t, all of the companies that sell things to our employees will be negatively impacted by the loss of our revenue, and this could set up another chain reaction of companies failing and jobs being lost. But just within our own community, the local government depends on the tax revenue paid by our company and all of its employees to fund community services like police and fire protection, education, health, social services, and a host of other financial needs. If we go under, we could easily drag the entire community down with us, as well…

Now, it’s probably worth pointing out that even if our company is a publicly-held corporation, we have no fiduciary responsibility to any of these groups except our shareholders. In theory, the owners of our company could decide to take any number of actions that would benefit their financial interests in the short term at the expense of everyone else; one of the primary reasons the Board of Directors exists is to prevent that from happening (because no one would be willing to work for the company if that was going to be a regular event). But just because we aren’t financially responsible for the community in which we operate or the larger political unit (state or country) in which it is located, that doesn’t mean that our actions will not have consequences far beyond the scope of our annual report…

The truth is that even before the Industrial Revolution, the success or failure of one citizen would have a wider effect on his or her community than just that one person’s fortunes. As time has gone on, all of us have become increasingly interconnected, until today, when the failure of a company on the other side of the world (and of which you have never heard) could cost you your job, or even destroy your entire community. I’ve often said that it doesn’t really matter if you believe in the global economy; the global economy believes in you. The stakeholder effect is one of the more concrete examples of how that works…