The Five Levels of Stakeholder Engagement

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By Tim Kelley and Nathan Havey

On this date last year, the Business Roundtable, a group of 180 CEO’s of America’s largest companies, made an announcement that would make  Gordon Gekko roll over in his fictional grave. “Maximizing value for shareholders,” they said, “is no longer the sole purpose of business.  The purpose of business is now to maximize value for all of a company’s stakeholders.”

While this might be a controversial statement at first blush, the controversy would be based on a view popularized by Milton Friedman and the Chicago School of Economics that maximizing shareholder value is the only purpose of business.  In his incredible work over the past quarter century, business professor Ed Freeman has all but proven that in fact, the best way to maximize benefit for any stakeholder in a company, including shareholders, is by rejecting trade-off thinking and aligning the interests of all key stakeholders.  In other words, focusing on the greatest win for all stakeholders is the best way to maximize value for shareholders. This concept was further supported mathematically by John Nash in his Nobel-winning game-theory proof, as popularized in the movie A Beautiful Mind.

Anyone who has read much in the field of Conscious Capitalism is familiar with this idea, but many may be unfamiliar with what this concept looks like when it is applied in the day-to-day operations of a company.     

We offer the five-stage continuum below as a guideline for operationalizing this concept and helping facilitate self-reflection for leadership teams to direct the evolution of a company’s work in this area.  As in any model, we have arbitrarily broken a continuum down into stages for clarity.  Where is your company in this journey?

The Five Levels of Stakeholder Engagement

1 – What’s a Stakeholder?

At this stage, a company has yet to realize that there are stakeholders in the business beyond the owners or shareholders of the company.  No attention is paid to stakeholder relationships because the company is functionally, or sometimes willfully, blind to them.

2 – Mind Reading

At this stage, the company is aware of at least some of its various stakeholders, and may even have a stakeholder map.  Yet its process for tending to stakeholder relationships all happens in the executive conference room and in the minds of executives.  These well-intentioned efforts to get into the shoes of various stakeholder groups occur without any sustained interactions with real-life stakeholders.  Meetings will often include comments like these:  “I’m sure the customers will love the new design.”  “What employee wouldn’t be excited about this new career path?”  “I doubt the developers will care about this policy change.”

3 – Surveys

The next stage is the company that regularly surveys their stakeholders and pores over the results in an earnest effort to create value and strengthen relationships.  This approach is better than the previous two, but the feedback it yields is two-dimensional by nature and totally subject to the insightfulness of the questions used in the survey, as well as the interpretations of those reviewing the results.

4 – Discussions and Feedback

At the next level, a company engages various stakeholders in robust discussions about their relationship to the company and runs proposals by them to gather feedback before they go into effect.  There may be several paths for stakeholders to provide feedback, e.g. meetings, a suggestion inbox, an open-door policy.  At this stage, feedback is usually solicited and welcomed, though it is interpreted and used (or not) by a small group when the time comes for decision-making.

5 – Co-creation

A highly conscious company transcends the previous levels to proactively extend real authority in decision-making to affected stakeholder groups.  In practice, this approach allows stakeholders to veto or modify a course of action. The degree of transparency and trust required to have this kind of system work is quite high, but the quality of decision-making and the ease of implementation create an enviable ROI for those who achieve this level.  Because the stakeholders have already had a chance to weigh in and exert influence before a decision was made, implementation of the decision enjoys broad support and active participation.

Though that last level may seem like pie-in-the-sky to those not practiced at ongoing stakeholder engagement, it isn’t.  In fact, there is a whole methodology called the “Collaborative Operating System” that explains in detail exactly how to operationalize this level with any stakeholder group, regardless of size.  And research shows that except in extreme circumstances, collaborative decisions made on an equal footing are faster, require less effort, and produce significantly more ROI than decisions made hierarchically (Edge, 1984 and Woolley, et al., 2010).

Different levels for different stakeholder types

Except for the most- and least-evolved organizations, a typical company will operate at different levels with different stakeholder groups.  For example, a manufacturing company might operate at level 3 with stockholders, level 4 with employees, and level 1 with the surrounding community.  When you rate your organization’s level of development in stakeholder engagement, you will probably need to rate its approach to each stakeholder group separately.

Conscious Capitalists consider at least six stakeholder groups that are core to every business: customers, employees, suppliers, the environment, the community where the company does business, and shareholders.  In addition to these six core stakeholder groups, your company may have others like regulators, the media or franchisees.

Different levels for different situations

Some problems and decisions require rapid action that precludes robust stakeholder engagement processes (unless your organization has been at level 5 for a while).  When a live-or-die situation comes along, you may find yourself needing to act immediately with little or no stakeholder consultation.  While it may be necessary, such an action can do lasting harm to stakeholder relations.  

Transparency is the watchword in these situations:  approach affected stakeholders after the fact, explain the situation and why an immediate decision was necessary, and ask what the stakeholders want or need in order to deal with the new post-decision reality.  Proper clean-up can repair or even strengthen frayed trust.  Stakeholders may have excellent recommendations about how things could be done differently in a similar, future situation.

One thing to watch out for:  if there is a crisis every ten minutes that requires immediate action, this can create an excuse for never engaging stakeholders.  “It would be nice to survey our suppliers, but we have to put out these fires first…”  Some leaders are able to maintain a command-in-control environment by creating or allowing constant crises, consciously or unconsciously.  

As we are writing, the COVID-19 crisis is in full swing and many companies find themselves in an unprecedented time of crisis. The manner with which companies engage their stakeholders will have a dramatic effect on how and whether they emerge from the storm, and how their stakeholders will view them once it has passed.