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Stakeholder expectations

Author

Shel

In 2014, Professor R. Edward Freeman, an American philosopher, gave a captivating Ted Talk titled ‘Business is about purpose’.


In his talk, he emphasized the need to tell a new story about business. Historically, business was about making money and profits, and people doing whatever they could get away with. He argued that even when a business’s focus is making money, money should not be the main purpose. To run a good business:

  1. Companies should create great products and services for customers,

  2. Employees should show up and want to be there,

  3. Suppliers should strive to make the business better, and

  4. Business owners should be good citizens in the community.

In simple terms, businesses should strive to create value for stakeholders, not just shareholders. In other words, businesses should focus on stakeholder capitalism.

A stakeholder is anyone (or any entity) who is affected by or can affect the business. There are two types of stakeholders:

  • Internal stakeholders: These are individuals or groups within an organization with a vested interest in the success of a business. They include:

    1. Owners
    2. Employees

  • External stakeholders: These are people or organizations that are not directly involved in a company’s day-to-day operations, but are still affected by or have an interest in the company’s decisions, outcomes, or operations. They include:

    1. Customers

    2. Suppliers

    3. Investors

    4. Creditors

    5. Media

    6. Communities

    7. Trade unions

    8. Government agencies

The quality of the relationship between a business and its stakeholders can dictate the company’s ability to anticipate and manage risks and opportunities. Effective stakeholder management also supports crisis response & business continuity planning.

The interconnection between stakeholder welfare and corporate profitability demonstrates that ESG makes good business sense. The most important stakeholder expectations include:

1) Investors

Large institutional investors publicly declared that ESG criteria will guide their decision-making on investment decisions, especially when there is climate-related risk. Investors are now holding companies accountable for progress on ESG issues, enhanced disclosure and reporting and ESG integration into their corporate strategy. Investors are expecting greater clarity and accountability measures for their ESG efforts.

2) Customers and supply chain partners

Research shows that supply chains account for an estimated 80%-90% of a company’s negative impacts. For example, scope 3 emissions which are all greenhouse gases emitted as supplies arrive at the company. Companies are now considered accountable for negative impacts along supply chains and 3rd party contracts. Businesses that are B2B are expected to contribute to their customers’ ESG goals. Supply chains are considered a part of a company’s footprint and respective impacts. Supply chain partner ESG maturity is key to both customer acquisition (for the supplier) & corporate risk management.

For customers, apart from stable customer decision-making drivers like price and convenience, other evolving factors like company transparency, labor relations, product safety and impacts of corporate behavior are becoming equally important.

3) Employees

Employee engagement has a positive correlation with a company’s ESG maturity, especially in today’s labor market where companies serve a higher purpose than generating profit and retaining talent. Millenials have been responsible for influencing social norms around key ESG issues in the current market while Gen Z have been engaged in these types of issues through out their childhood. They expect employers to share these values.

4) Community and civil society

Historically, companies engaged in Corporate Social Responsibility (CSR) activities with a goal of being socially accountable to themselves, their stakeholders, and the public. A key criticism of this model was that companies were throwing money at problems while continuing to create them.

With the rise of ESG, companies are expected to engage on local issues that impact the community. Examples of these engagements include:

  1. Local workforce development and employment

  2. Community partnerships on reducing CO2 emissions

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