The word stakeholder can be defined as: one who has a share or an interest, as in an enterprise or any party that has an interest in an organization. Stated another way, a stakeholder is any entity that can impact the attention or resources of your company. In short, stakeholders, also referred to as constituents, comprise those parties who have an interest in your company. When was the last time you considered who has a stake in your business? Can you identify each stakeholder? What are you doing to insure that each of your constituents receives the “return” they are looking for? To answer these and other critical stakeholder questions, it is important to identify your stakeholders, understand their needs, determine your governing philosophy, and implement a plan to provide them the return they desire. This article addresses identification of your stakeholders and enables you to begin the process of understanding their needs.

When surveying business owners regarding the identity of their core constituency or stakeholders, their typical responses are employees, shareholders, and customers. Needless to say, your stakeholder group is much more extensive - let’s unpack the group further. On a broad level, your core stakeholders are identified as two groups: financial and non-financial. While a case can be made for the non-financial stakeholders having a financial interest, for our purposes financial refers to those groups who have capital at risk. Financial stakeholders are shareholders (in a private company there may be only one) and debt holders. Non-financial stakeholders are employees, customers, regulators, rating agencies (generally for public companies only), suppliers, community, and media. Remember stakeholder returns are measured in many ways other than financial return including reputation and societal impact.

Shareholders have traditionally been thought of as the most important stakeholder. Since shareholders are a source of capital, it is vital they receive a “fair” return on their investment. Absent a return, their capital will go elsewhere leaving the other stakeholders out in the cold. What is a fair return? When was the last time you took a hard look at the return your shareholders’ are receiving?

Shareholders receive their return in one or both of the following – increase in share price or dividends. Wages are not considered a return - rather they are compensation for services provided.  Consider the following when assessing “fair” return. What are your shareholders’ alternative investments? The risk free rate is typically determined by current Treasury yields. Let’s assume for discussion purposes the risk free rate is 4.5%. A shareholder certainly needs to receive a return higher than 4.5% - otherwise they could invest in a Treasury with little risk. Let’s assume the average S&P company returns 12%. A private company shareholder would need a return greater than 12% to have enough incentive to invest in a smaller, riskier private company.

Debt holders are often thought of as the most feared stakeholder group. They are first in line to get paid. Their required return is the easiest to determine – the agreed upon interest rate. In addition to their return, debt holders typically require more extensive management reporting.

Employees have two basic needs as a stakeholder group – remuneration and a safe work place. In addition, they have numerous intangible needs such as confidence in job security, opportunities for advancement, and positive corporate culture. As a non-financial stakeholder, employees introduce a new element to your corporate governance plan. In order to meet your employees intangible needs, oftentimes the return to your financial stakeholders must be “sacrificed.”

Case In Point

By way of illustration, one of our clients recently had an employee who had a family member with cancer. Understandably, the employee was totally unproductive for a period of two years – minimal sales activity.  This small private company was continuing to pay him during this time. This act of goodwill by the company had a negative impact to the financial stakeholders – their needs were not getting met. Why make this decision? Principally speaking, they thought it was the right thing to do. From a financial perspective, how do you measure the impact on corporate culture when employees see their company stand behind their employees?

Customers desire the promised product or service for a reasonable price at the appropriate quality and safety level. The inherent conflict is obvious: these desires must be met while at the same time providing the return the financial stakeholders demand. Theoretically a higher price, lower service, and lower quality mean higher returns for the financial stakeholders (assuming of course no loss in customers). Consider the technical support you receive for many software products – most people would call it poor at best.  Long waits and many communication barriers typify a standard technical support call.  Yet we continue to buy the products.  Why? They have found an acceptable balance within their customer base. What is your acceptable balance?

Regulators are an often overlooked but important constituency. Consider all of the state and federal regulations you must comply with as a business owner. How many of them enhance the return to your financial stakeholders? Probably none. Regardless, the reality is this stakeholder group has needs, and they must be met. Their needs range from employment issues, ERISA guidelines, and competitive practices, not to mention a plethora of licensing requirements that generate revenue for their regulatory body. Consider the impact to your financial stakeholders if you are not in compliance with the appropriate regulations.

Rating agencies are generally a stakeholder for public companies only. They need information to rate debt and the overall viability of a company. Ignore them and your financial stakeholders suffer. Manage them properly and your financials stakeholders win.

Suppliers represent another non-financial stakeholder group. Companies frequently underestimate the importance of their supplier relationships. Oftentimes suppliers are viewed as easily replaceable. In fact, many suppliers are able to provide unique value add to the equation by developing an in depth understanding of your business over time. How well do you understand their business?

Case In Point

Consider the story of a company we will call Computer Media. Computer Media had an excellent supplier of storage media we will call Media Supplier. They had a long term relationship with Media Supplier. Computer Media decided to negotiate better terms with Media Supplier. Media Supplier was unable to meet their terms, so Computer Media took their business to another supplier. It became apparent after twelve months the new supplier provided an inferior product. In the interim Media Supplier went out of business, as they were unable to recover from the loss of their largest customer. It took Computer Media two years before they were able to find another satisfactory supplier.

Have you taken the time to fully understand the needs of your suppliers? Of course, you are the customer, and it is their responsibility to serve you. At the same time their needs must get met, or they may not be around for long.

The community and media are two non financial stakeholders that typically do not receive a lot of attention from private companies. Your community is impacted by your business in many ways including reputation, image, and additional tax revenue. They can be a champion for your business by promoting your company and fostering a community which is pleasant for working and living. What are you doing for your community? What is your community doing for you?

Large public companies deal with the media on a regular basis and fully understand the importance of the media’s role as a constituent. Smaller privately owned companies rarely contemplate the media as a stakeholder. The media has an interest in your company, because they are interested in information. What information do you have that the media may find useful? The media can provide a significant benefit to your company through exposure – free exposure. How much exposure are you currently receiving through the media?