Prioritizing Stakeholder Interests in the Triple Bottom Line Era
| By 3P INSIGHTS |
Sustainable value creation requires a multi-stakeholder model that creates dialogue and aligns interests with strategic goals.
The current triple bottom line era of management in the U.S. relies on the multi-stakeholder model, which requires organizations consider their impact on shareholders, investors, customers, employees, suppliers, and the broader community when making decisions (see Archie Carroll and Ann K. Buchholtz’s book, Business and Society: Ethics, Sustainability, and Stakeholder Management). Stakeholders are individuals and groups whose achievement of personal goals depends on the organization and likewise, on whom the organization’s existence depends. Organizations have internal (i.e. organizational stakeholders) as well as external stakeholders (i.e. economic and societal stakeholders), which often have conflicting or competing interests.
In his 2017 book, Strategic Corporate Social Responsibility, David Chandler develops a framework that can help managers prioritize stakeholders with different interests. The multi-stakeholders model suggests that managers must first consider issues that are strategically relevant to the organization and its operations. Managers should also consider how institutionalized the issue is, or how regularly it is adopted as a common management practice. Once the importance, relevance, and evolution of an issue is established, managers must identify stakeholders who are most affected by the issue and then prioritize them.
The Multi-Stakeholder Model
Managers should also consider which stakeholders are central to the organization’s interests. Thomas Wheelen and J. David Hunger, authors of Strategic Management and Business Policy: Toward Global Sustainability, suggest prioritizing stakeholders as primary or secondary stakeholders. Primary stakeholders are those who have direct connections and significant bargaining power with organizations. These may include buyers, suppliers, and employees. Secondary stakeholders are those who have only indirect relations with the organization, yet are still affected by (and can affect) its operations. For example, community or government organizations that have an indirect economic connection with the organization. Although it is often the case that primary stakeholders should be prioritized, Chandler cautions that organizations cannot afford to consistently ignore stakeholders considered lower priority, such as the government regarding an issue with broad societal support.
Chandler further challenges the traditional idea that directors and managers have a responsibility to prioritize shareholder interests over those of other stakeholders in public corporations. In fact, he argues that corporate leaders are not necessarily legally obligated to maximize shareholder profits and that U.S. courts have stated clearly: “directors are not agents of the shareholders but fiduciaries of the corporation.” As such, directors may execute actions that they believe are in the best long-term interests of the company even if this does not maximize shareholder value. Indeed, the core concept behind the business judgement rule (the corporate law of deference) suggests that operational decisions made by directors are acting as a separate entity from shareholders.
Firms should therefore seek to create long-term value for other relevant stakeholders and meet society’s needs more broadly. Although, as Bernard Sharfman points out in an article published in the New York University Journal of Law and Business, stockholder wealth maximization (SWM) is still a legal obligation of a corporation’s Board and the Business Judgement Rule serves to support that purpose. However, Chandler underscores that shareholders have a right to a firm’s profits only if a firm is willing to issue them. For example, a firm may choose to allocate its resources to higher pay for employees rather than pay out dividends. Likewise, a firm may choose to donate a portion of its profits to charities or invest in employee development training rather than issue payments to shareholders.
The primary value of the multi-stakeholder framework is that it allows organizations to analyze the interests of all its stakeholders, as well as how one stakeholder’s interests may vary across issues. As long as managers keep in mind the organization’s strategic goals, the stakeholder prioritization model can be successfully implemented to improve the triple bottom line.
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3P INSIGHTS is a consulting firm that offers training, speaking and support services to help organizations attract and retain diverse talent, create inclusive workplaces, become better environmental stewards, and improve their overall social, environmental, and economic impact.
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