January 29th, 2012 The Clarkson Principles of Stakeholder Management

Origin and Purpose of Clarkson Principles of Stakeholder Management

The year after his retirement from the faculty of the University of Toronto in 1988, Max Clarkson (1922-1998) founded the Centre for Corporate Social Performance and Ethics in the Faculty of Management, now the Clarkson Centre for Business Ethics & Board Effectiveness, or CC(BE) 2 . Four conferences hosted by the Centre between 1993 and 1998 brought together management scholars to share ideas on stakeholder theory, an emerging field of study examining the relationships and responsibilities of a corporation to employees, customers, suppliers, society, and the environment. The Alfred P. Sloan Foundation funded the project, from which the Clarkson Principles emerged.

 

Critical Content of Clarkson Principles of Stakeholder Management

After an introduction to the stakeholder concept with comments on shareowners and the legal and moral duty of managers, seven (7) principles of Stakeholder Management are set forth, each with a paragraph or two expanding on its meaning. These principles represent an early stage general awareness of corporate governance concerns that have been widely discussed in connection with the business scandals of 2002.

 

Principle 1 : Managers should acknowledge and actively monitor the concerns of all legitimate stakeholders, and should take their interests appropriately into account in decision-making and operations.

 

Principle 2: Managers should listen to and openly communicate with stakeholders about their respective concerns and contributions, and about the risks that they assume because of their involvement with the corporation.

 

Principle 3: Managers should adopt processes and modes of behavior that are sensitive to the concerns and capabilities of each stakeholder constituency.

 

Principle 4: Managers should recognize the interdependence of efforts and rewards among stakeholders, and should attempt to achieve a fair distribution of the benefits and burdens of corporate activity among them, taking into account their respective risks and vulnerabilities.

 

Principle 5: Managers should work cooperatively with other entities, both public and private, to insure that risks and harms arising from corporate activities are minimized and, where they cannot be avoided, appropriately compensated.

 

Principle 6: Managers should avoid altogether activities that might jeopardize inalienable human rights (e.g., the right to life) or give rise to risks which, if clearly understood, would be patently unacceptable to relevant stakeholders.

 

Principle 7: Managers should acknowledge the potential conflicts between (a) their own role as corporate stakeholders, and (b) their legal and moral responsibilities for the interests of all stakeholders, and should address such conflicts through open communication, appropriate reporting and incentive systems and, where necessary, third party review.

 

Implementation of Clarkson Principles of Stakeholder Management

In many ways, the Clarkson Principles are meta-principles that encourage management to embrace specific stakeholder principles and then to implement them in accordance with the norms listed above. Their current use seems largely hortatory, unlike principles or codes that call for formal adoption by managers or corporations.

 

Principles of Stakeholder Management

The large, professionally managed corporation is the distinctive economic institution of the twentieth century. It has proved uniquely effective in mobilizing resources and knowledge; increasing productivity; and creating new technologies, products and services. Corporations have proliferated and grown because they meet the needs of various members of society: customers, workers and communities, as well as investors. The worldwide spread of corporate activity has produced an increasingly integrated and interdependent global economy.

 

The success of the corporation, however, inevitably gives rise to questions and criticisms. Corporations are spontaneous and voluntary associations in which diverse individuals and interests collaborate for the creation and distribution of wealth. Some critics question whether organizations with the vast scale and scope of contemporary multinationals can be effectively controlled and directed toward these purposes. Others are concerned about the limited range of interests directly represented in corporate governance, and the lack of openness in corporate decision-making. And, as multinational corporations expand their activities and linkages, both corporate managers and their critics search for principles for action that transcend national borders and cultural values, and modes of operation that will achieve the broad purposes of the corporation on a long-term and sustainable basis, without undue conflict with diverse human and social norms.

 

The Principles of Stakeholder Management presented in this document (Table 1) have been developed in response to these concerns and needs. They are addressed to managers: those individuals at any level who are responsible for the performance and impact of the corporation. They are consistent with the basic organizational structure and purpose of the modern business enterprise; they do not suggest that the corporation be turned into a polity (i.e., a unit of political government), nor into an agency of the state. In sum, these guidelines are intended to make managers more aware of the diverse constituencies that they are obligated to serve and increase the openness of management processes. There are many reasons to believe that adoption of a stakeholder approach to management will contribute to the long-term survival and success of a firm. Positive and mutually supportive stakeholder relationships encourage trust, and stimulate collaborative efforts that lead to relational wealth," i.e., organizational assets arising from familiarity and teamwork. By contrast, conflict and suspicion stimulate formal bargaining and limit efforts and rewards to stipulated terms, which result in time delays and increased costs. In addition, more and more executives are recognizing that a reputation for ethical and socially responsible behavior can be the basis for a competitive edge in both market and public policy relationships. Finally, in spite of the specification and measurement difficulties involved, many research studies have found evidence of positive associations (and few have found negative associations) between various socially and ethically responsible practices and conventional economic and financial indicators of corporate performance (profitability, growth, etc.) Thus, there is no reason to think that the conscientious and continuing practice of stakeholder management will conflict with conventional financial performance goals.

 

The Stakeholder Concept

The constituencies that are affected (favorably or adversely) by the operation of the corporation are referred to here as its stakeholders. The implication of the term is that such parties have a stake in the corporation: something at risk, and therefore something to gain or lose, as a result of corporate activity. Many stakeholders (e.g., investors, employees) are linked to the corporation through explicit contracts. With many others (e.g., customers), contractual relations may be largely implicit, and subject to specific interpretation only in problematic circumstances. Still other interests (third parties outside the network of explicit and implicit contracts) are non-contractual and often involuntary, and the parties involved may even be unaware of their relationship to the corporation until some specific event, favorable or unfavorable, draws it to their attention. Impacts on third parties are often referred to as "externalities," because they occur outside the range of the firm�s internal and market relationships. Examples of third party impacts are economic benefits or environmental harms that may be experienced by communities as a result of corporate operations. Such impacts, although clearly external to the firm as an organization, are nonetheless real, and perhaps significant: they are, therefore, within the normal purview of responsible management. The notion that important aspects of corporate performance can be ignored by managers because they are external (perhaps as a result of being deliberately externalized) is incorrect.

 

The Status of Shareowners

Shareowners have a special status among stakeholders in that their potential gain or loss from their involvement with the corporation is determined as a residual: it depends upon what is left over after all other stakeholder claimants have received their specified distributions. If a firm is, or is expected to be, profitable, its shareowners may receive dividends or appreciation in the value of their shares; if a firm incurs, or is expected to incur, losses, its shareowners will correspondingly lose. (Of course, other contractual stakeholders may be included in profit-sharing arrangements, and even non-contractual third parties (e.g., philanthropies) may benefit or suffer because of variations in corporate profitability.)

 

The distinctive position of shareowners among stakeholders is not due to their fractional ownership interest in the corporate entity, which is essentially a legal artifact; and owning stock is not riskier than other forms of association with the corporation. Indeed, the possibility of job loss (to employees), product failure (to customers), etc., may be much more significant to the parties involved than the impact of any single corporate bankruptcy on a well-diversified shareowner. But employee and customer risks (like the risks of lenders) arise because the corporation may fail to fulfill its contractual obligations. By contrast, shareowner risks are an inherent feature of their ownership contract. They have agreed to take whatever is left over, or the current market value of whatever is expected to be left over in the future.

 

The Legal and Moral Duty of Managers

Managers occupy a special place within the corporate structure. They are responsible for negotiating contracts with the firm's voluntary constituents and for accommodating the firm's involuntary stakeholders, in order to turn these disparate individuals and groups into a cooperative, wealth-enhancing network (or, at least, to minimize the number and severity of unavoidable conflicts). They attempt to accomplish this task by distributing among stakeholders the rewards and burdens that arise from corporate activity in ways that encourage (or at least do not discourage) their participation and by developing organizational processes and cultures that enhance stakeholder satisfaction.

 

The responsibilities of managers require and presume discretionary authority, and, as a condition of this authority, managers owe the corporation a duty of loyalty. This duty is, to some extent, a matter of law. But the moral responsibility of managers exceeds the normal market standard of indifference (i.e., not knowingly doing harm) and embraces all of the stakeholders of the firm, not merely the shareowners. Managers have an obligation to deal openly and honestly with the firm's various stakeholders and to avoid purely self-serving actions which their privileged access to information and discretionary authority may make possible. Managerial policies and processes should emphasize the interdependence among all stakeholders and should demonstrably reflect the application of a common standard of fairness.

 

Table 1: Principles of Stakeholder Management

Principle 1	Managers should acknowledge and actively monitor the concerns of all legitimate stakeholders, and should take their interests ppropriately into account in decision-making and operations.
Principle 2	Managers should listen to and openly communicate with stakeholders about their respective concerns and contributions, and about the risks that they assume because of their involvement with the corporation.
Principle 3	Managers should adopt processes and modes of behavior that are sensitive to the concerns and capabilities of each stakeholder onstituency.
Principle 4	Managers should recognize the interdependence of efforts and rewards among stakeholders, and should attempt to achieve a fair distribution of the benefits and burdens of corporate activity among them, taking into account their respective risks and vulnerabilities.
Principle 5	Managers should work cooperatively with other entities, both public and private, to insure that risks and harms arising from corporate activities are minimized and, where they cannot be avoided, appropriately compensated.
Principle 6	Managers should avoid altogether activities that might jeopardize inalienable human rights (e.g., the right to life) or give rise to risks which, if clearly understood, would be patently unacceptable to relevant stakeholders.
Principle 7	Managers should acknowledge the potential conflicts between (a) their own role as corporate stakeholders, and (b) their legal and moral responsibilities for the interests of stakeholders, and should address such conflicts through open communication, appropriate reporting and incentive systems and, where necessary, third party review.

Commentary on Principles of Stakeholder Management (Table 1)

 

 

Principle 1: Managers should acknowledge and actively monitor the concerns of all legitimate stakeholders, and should take their interests appropriately into account in decision-making and operations.

 

The first requirement of stakeholder management is an awareness of the existence of multiple and diverse stakeholders, and an understanding of their involvement and interest in the corporation. Many stakeholders (investors, employees, customers) are readily identified because of their express or implied contractual relationship to the firm. Others may identify themselves because of the impact, positive or negative, of the firm's activities on their own well-being. And, of course, some third parties may claim a stake in the firm when no such relationship, in fact, exists. Managers are not obligated to respond favorably to every request or criticism; they are, however, obligated to examine all such claims carefully before passing judgment on their validity.

 

The salience of specific stakeholder concerns varies among different areas of managerial decision-making, and according to the time horizon involved. Current working conditions are of greatest concern to employees; the cost and quality of products are of greatest concern to customers. Long-term survival and growth may be of greatest concern to investors and to the communities within which the firm operates. In taking particular decisions and actions, managers should give primary consideration to the interests of those stakeholders who are most intimately and critically involved.

 

Principle 2: Managers should listen to and openly communicate with stakeholders about their respective concerns and contributions, and about the risks that they assume because of their involvement with the corporation.

 

Communication, both internal and external, is a critical function of management, and effective communication involves receiving, as well as sending, messages. Hence, to understand stakeholder interests and to integrate various stakeholder groups into an effective wealth-producing team, managers must engage in dialogue. A commitment to engage in dialogue, however, does not constitute a commitment to collective decision-making: there are obvious limits as to the amount and content of information (particularly information about strategic options under consideration) that can be appropriately shared with particular stakeholder groups. Nevertheless, the more open managers can be about critical decisions and their consequences, and the more clearly managers understand and appreciate the perspectives and concerns of affected parties, the more likely it is that problematic situations can be satisfactorily resolved. Open communication and dialogue are, in themselves, stakeholder benefits, quite apart from their content or the conclusions reached.

 

Principle 3: Managers should adopt processes and modes of behavior that are sensitive to the concerns and capabilities of each stakeholder constituency.

 

Stakeholder groups differ not only in their primary interests and concerns, but also in their size, complexity, and level of involvement with the corporation. Some groups are dealt with through formal, and even legally prescribed, mechanisms, such as collective bargaining agreements and shareowner meetings. Others are reached through advertising, public relations, or press releases; still others (e.g., government officials) are reached largely through official proceedings and personal contacts. Both the mode of contact and the type of information presented, or the opportunity for dialogue, can appropriately vary among different stakeholder groups, although the descriptions of situations and explanations of actions offered by managers should be consistent among all stakeholders. Extreme caution is required when managers deal with stakeholder groups that have limited capacity to assimilate and evaluate complex situations and options.

 

Principle 4: Managers should recognize the interdependence of efforts and rewards among stakeholders, and should attempt to achieve a fair distribution of the benefits and burdens of corporate activity among them, taking into account their respective risks and vulnerabilities.

 

A business firm's a purposive organization in which all voluntary stakeholders collaborate for mutual benefit. Involuntary or consequential stakeholders (e.g., communities or third parties) may also be affected by the operation of the enterprise. And both voluntary and involuntary stakeholders are vulnerable, and differently vulnerable, to the effects of uncertainty and change over time. Successful managers will see that all stakeholders receive sufficient benefits to assure their continued collaboration in the enterprise, and that their burdens and risks are no greater than they are willing to bear. Again, the openness and demonstrable fairness of the distribution of benefits and burdens among stakeholders are, in themselves, stakeholder benefits. Managers may need to make special efforts to demonstrate stakeholder interdependence and the collaborative nature of the enterprise to non-contractual and involuntary stakeholders.

 

Principle 5: Managers should work cooperatively with other entities, both public and private, to insure that risks and harms arising from corporate activities are minimized and, where they cannot be avoided, appropriately compensated.

 

Corporate wealth creation necessarily gives rise to consequences that may not be fully mediated through the marketplace. Some of these may be beneficial and welcome; others may be harmful. Monitoring and ameliorating undesirable consequences (i.e., negative externalities) often requires cooperation with other firms, private sector organizations, public agencies and units of government. Managers should be proactive in developing contacts with relevant groups and in forging coalitions aimed at reducing harmful impacts and compensating affected parties. The often true observation that one firm cannot solve this problem alone should be a stimulus to multi-party cooperation, not an excuse for neglect and inaction.

 

Principle 6: Managers should avoid altogether activities that might jeopardize inalienable human rights (e.g., the right to life) or give rise to risks which, if clearly understood, would be patently unacceptable to relevant stakeholders.

 

The ultimate consequences of most human endeavors (particularly endeavors involving large expenditures, diverse interests and long time periods) can never be fully anticipated in advance. Hence, managerial decisions and corporate operations necessarily give rise to multiple and diverse risks. Managers should communicate openly with stakeholders concerning the risks involved with their specific roles in the corporate enterprise, and should negotiate appropriate risk-sharing (and benefit-sharing) contracts wherever possible. When stakeholders knowingly agree to accept a particular combination of risks and rewards, then the arrangement is usually considered satisfactory. However, some projects may have consequences for which no conceivable compensation would be adequate, or risks that cannot be fully understood or appreciated by critical stakeholders. In these circumstances, managers have a responsibility to restructure projects to eliminate the possibility of unacceptable consequences, or to abandon them entirely if necessary.

 

Principle 7: Managers should acknowledge the potential conflicts between (a) their own role as corporate stakeholders, and (b) their legal and moral responsibilities for the interests of all stakeholders, and should address such conflicts through open communication, appropriate reporting and incentive systems and, where necessary, third party review.

 

Up to this point, we have spoken of managers as if they were disinterested coordinators of stakeholder interactions. However, managers also form a distinct stakeholder group, with privileged access to information and unique influence on corporate decisions. As stakeholders, managers are naturally interested in the security of their jobs, the level of their rewards, and the scope of their discretion in the use of corporate resources. Other stakeholder groups (shareowners and boards of directors, in particular) have devised a variety of arrangements intended to align the interests of managers with those of the corporation as a whole, and to prevent opportunistic abuse of managerial positions.

 

However, the tension between the interests of managers as stakeholders, on one hand, and those of other stakeholder groups and of the corporation itself as an on-going entity, on the other, is unavoidable. Responsible managers will recognize this, and will therefore accept and encourage organizational practices intended to control this source of intra-organizational conflict. Managers gain credibility when they establish procedures to monitor their own performance and, when appropriate, to facilitate third party review. Credibility matters when managers ask other stakeholders to align their interests with those of the corporation, and to act responsibly rather than opportunistically. Without mutual credibility, stakeholder trust diminishes and the collaborative character of the organization may be jeopardized.

 

References

http://www.cauxroundtable.org/TheClarksonPrinciplesofStakeholderManagement.html

http://www.mgmt.utoronto.ca/%7Estake/Principles.htm