Strategic Stakeholder Management

The instrumental approach for stakeholder management. Explanation of Strategic Stakeholder Management of Berman, Wicks, Kotha, Jones ('99) after Freeman. ('84)

The view regarding Strategic Stakeholder Management, described by Berman, Wicks, Kotha, Jones using earlier work of Edward Freeman is an Instrumental Approach. (Academy of Management Journal; Oct99, Vol. 42 Issue 5).

Instrumental approaches towards stakeholder theory hold that:

To maximize shareholder value over an uncertain time frame, managers ought to pay attention to key stakeholder relationships.

Firms have a stake in the behavior of their stakeholders. Prudent management of firms' operating environments, including relationships with their stakeholders, is a part of proper management in general. Therefore good stakeholder management has clear instrumental value for the firms.

A fundamental assumption of this type of model is that the ultimate objective of corporate decisions is marketplace success. Firms view their stakeholders as part of an environment that must be managed in order to assure revenues, profits, and ultimately, to provide returns to shareholders. Attention to stakeholder issues may help a firm avoid decisions that might prompt stakeholders to undercut or thwart its objectives. This possibility arises because stakeholders can control resources that can facilitate or enhance the implementation of corporate decisions (Pfeifer & Salancik, 1978); in short, Stakeholder Management is a means to reach an end; something what you have to do so that you can achieve something else. The end, or the ultimate result, is generally not the welfare of stakeholders. Instead, the firm's goal is the advancement of the interests of only one stakeholder group: its shareholders. Employing the terminology used by Donaldson and Preston (1995) and Quinn and Jones (1995), we see the concern of the firm for stakeholder relationships as instrumental and contingent on the value of those relationships to corporate financial success. Quinn and Jones stated: "Instrumental [strategic] ethics enters the picture as an addendum to the rule of wealth maximization for the manager-agent to follow" (1995: 25).

In this formulation, stakeholder management is part of a company's strategy but in no way drives that strategy. Implicit in this perspective is the assumption that modes of dealing with stakeholders that prove upon adoption to be unproductive will be discontinued, as will those that involve resources that are no longer needed. The concerns of stakeholders only enter a firm's decision-making processes if they have strategic value for the firm.

Two variants of the Strategic Stakeholder Management approach are the direct effects model and the moderation model. In the direct effects model, the attitudes and the actions of managers toward stakeholders (their stakeholder orientation) are perceived as having a direct effect on firm financial performance, independent of the corporate strategy. In the moderation model, the managerial orientation toward stakeholders does impact the corporate strategy by moderating the relationship between strategy and financial performance.