We said previously that a 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. In a previous article we identified the primary stakeholders as financial and non-financial. Financial stakeholders are shareholders and debt holders. Non-financial stakeholders are employees, customers, regulators, rating agencies, suppliers, community, and media.

Once you understand your stakeholders and their needs, determining your governing philosophy - how you will interact and deal with your constituents - is the critical next step. Realize that each stakeholder group can, at times, present conflicting objectives. Your philosophy on governance will dictate how you allocate resources to meet their desires.  As a leader, your ability to reconcile these competing demands will be reflected in shareholder value.

Consider the “old school” philosophy on governance best laid out in a Fortune magazine article in May 1962 on pages 129 - 130.  The article, entitled “The Chief Shows them How at Indian Head,” contains excerpts of the Indian Head Mills Company Manual where the CEO states:

“The objective of our company is to increase the intrinsic value of our common stock. We are not in the business to grow bigger for the sake of size, nor to become more diversified, nor to make the most or best of anything, nor to provide jobs, have the most modern plants, the happiest customers, lead in new product development, or to achieve any other status which has no relation to the economic use of capital. Any or all of these may be, from time to time, a means to our objective, but means and ends or never be confused. We are in the business solely to improve the inherent value of the common stockholders’ equity in the company.”

Of course we have Enron as a prime example of complete disregard for many of their stakeholders. They illustrate an obvious failure in dealing with employees and other stakeholders fairly and ethically.

At the other end of the spectrum are groups who espouse a governance philosophy which dictates the shareholders’ interests are last behind all others. Needless to say, each stakeholder group feels their interests are generally the most important. Notwithstanding the legal perspective, which group is the most important? It is obvious that without a profit employees will not have a job.  It is equally evident that without satisfied employees and customers a company will not provide the best possible return to the shareholders over the long term. Which group should dictate your management decisions from a strategic and operational perspective?

Have you considered how your stakeholders interrelate and where they specifically impact your company? Let’s start with the big picture. Mark Carey, CEO of DelCreo, Inc. summed it up this way in his eZine article entitled “Stakeholder Value.” Shareholder value is frequently defined as the sum of discounted future cash flows. At the basic level, there are only three ways to increase value: increase cash flow in, decrease cash flow out, or decrease the riskiness of future cash flows.  Management is constantly trying to find the optimal balance between revenue, cost, and risk.

Every stakeholder can impact each of these three key ingredients - they can contribute to increased cash flow, reduced expenses, or minimization of risk. It is clear that balance is the key ingredient to finding success in managing your stakeholders.  The goal of the business owner is to find balance in meeting the needs of stakeholders realizing it is impossible to please everyone 100% of the time.  A good manager gathers information to understand his stakeholders, develops a plan to meet their needs, communicates with all stakeholders on a regular basis, and consistently monitors progress.

The information age has dramatically changed the way your stakeholders discover and evaluate your organization. Employees now have web sites and blogs dedicated to sharing information on their employers. Customers have internet forums where they share the good and bad about their vendors. Groups can be quickly coordinated to bring action against or share their concerns with a company. Some states are considering Sarbanes-Oxley type legislation for private companies. The corporate governance environment is changing rapidly.