Managing Stakeholder Ambiguity

Stakeholder management — especially that of secondary stakeholders — is becoming increasingly important in many industries, although its effects may vary from sector to sector and company to company. Multinationals, particularly in natural resource-based industries such as oil and gas, agriculture, mining and forestry, are increasingly under pressure to manage conflicting or difficult to reconcile stakeholder demands. For example, the efforts of St. Louis, Missouri–based Monsanto Co. in agricultural biotechnology have been aggressively contested by secondary stakeholders such as Greenpeace and Friends of the Earth due to concerns over health, safety and environmental uncertainties (Chataway et al. 2004). In Brazil, concerns have extended to include the impact of biotechnology on farmers’ rights and competencies and the potential domination of an important industrial sector by foreign multinationals (Hall and Matos 2004). Houston-based Shell Oil Co.’s experiences doing business in Nigeria have forced the company to address stakeholder concerns about its relationship with a corrupt and exploitive government. Such thorny issues are now clearly on the minds of many senior managers.

In contrast to primary stakeholders, such as customers, suppliers and shareholders, secondary stakeholders are often difficult to identify beforehand, or they may not be willing or able to engage, negotiate, compromise or clearly articulate their positions — a phenomenon we have referred to asstakeholder ambiguity (Hall and Vredenburg 2003). Although much management literature represents secondary stakeholder engagement as a panacea for a variety of ills and a means of accessing untapped opportunity, this largely ignores the fact that stakeholder ambiguity is difficult to manage because it is idiosyncratic and context-specific. Managers are often ill-prepared to deal with stakeholder ambiguity and typically revert to formulaic decision-making frameworks such as discounted cash flow and cost-benefit analysis, which misrepresent the challenges.

For example, major multinationals, such as U.S.–based Conoco-Phillips and Texaco and France-based Perenco, encountered resistance from antidevelopment religious groups in the oil-producing region of the Ecuadorian Amazon (Hall and Vredenburg 2004). The companies’ difficulties stemmed in large part from their lack of understanding of the locals’ social and environmental sensitivities. Midsize producer Canada-based Pacalta Resources, on the other hand, moved its headquarters to the Ecuadorian capital of Quito and set up a quasi-independent nongovernmental organization composed of locals who understood these problems. Pacalta’s loose affiliation with the local communities allowed it to manage conflicting pressures from, for example, migrant workers and indigenous peoples who could not have been managed as well with traditional risk profiling techniques and cost-benefit analyses.

Trends in Stakeholder Management

Freeman’s seminal book on stakeholder management introduced the distinction between primary and secondary stakeholders (Freeman 1984). He argued that it is easy but extremely detrimental for managers to assume that stakeholders who oppose them are irrational and irrelevant. Clarkson (1995) reinforced this point by arguing that there is wide variation in stakeholder claims, interests and rights. More recently, much stakeholder management theory has focused on the question of which stakeholders really matter. According to Mitchell et al. (1997), the answer lies with those that possess power, legitimacy and urgency. Winn (2001) emphasized the ambiguity, noting that stakeholders include subgroups and individuals with multiple and changing interests and roles. She also recognized that stakeholder categorizations are situation- and issue-specific, and thus temporary. Similarly, Wicks and Berman (2004) emphasized the importance of context in determining companies’ ability to create trust among stakeholders.

A key area of research interest has been the question of whether stakeholder engagement can lead to competitive advantage. Sharma and Vredenburg’s (1998) qualitative and statistical survey-based studies of oil and gas companies found that proactive firms that engaged in stakeholder discourse accumulated valuable, difficult to imitate capabilities that could be exploited elsewhere. This draws parallels to analogical reasoning that, according to Gavetti et al. (2005), allows managers to transfer useful wisdom from previous experiences — particularly in novel and complex settings — which is a useful alternative to deduction and trial-and-error techniques. Because they are context-specific, dynamic and difficult to copy, these stakeholder management capabilities are a potential source of competitive advantage. Note, however, that it is difficult to conduct a precise cost-benefit analysis to determine, for example, how heavily to invest in stakeholder engagement. (See “Referenced Research.”)

Case studies conducted by Sharma et al. (1994) in West Africa and Garcia and Vredenburg (2003) in Latin America supported the competitive advantage argument as it applies to midsize multinationals. Interestingly, however, stakeholder ambiguity may actually erode the competitive advantage of large multinationals such as Shell Oil, BP and Exxon-Mobil. Although such companies possess significant competencies, technological capabilities and economies of scale, those traditional sources of competitive advantage may not necessarily translate into stakeholder skills. Indeed, because of their high profiles, they may be at a disadvantage when trying to determine and align the interests of environmental and social activists, local communities, indigenous groups and others. This provides opportunities for lower-profile, smaller firms that lack scale economies but have built nuanced capabilities for managing stakeholder ambiguity. For example, midsize Calgary, Canada–based oil and gas company Nexen Inc., a former subsidiary of Los Angeles–based Occidental Petroleum Corp., has been successful in Yemen, where other major multinationals failed, due in large part to a variety of education programs for its staff, suppliers and local communities and an entrenched corporate culture that has always valued engagement with local communities.

Stakeholder Management and Shareholder Wealth

Stakeholder management approaches have often been criticized for diverting managers’ attention from what has been argued to be their sole duty — creating shareholder wealth (Jensen 2001). However, such purely economic approaches are based on the notion that market forces will, over time, optimize societal benefits (Friedman 1970). This may be the case from a long run, macroeconomic perspective, but in the short run, managers who ignore or poorly handle stakeholder ambiguities will see their companies’ share prices drop precipitously. For example, Monsanto CEO Robert Shapiro stepped down in 2000, in part due to the inability of his company to cope with opposition from secondary stakeholders and the subsequent deleterious effect of that opposition on the value of Monsanto stock.

Talisman Energy Inc. of Calgary, Canada, once a division of London-based oil giant BP plc, encountered major shareholder friction and reduced shareholder value due to stakeholder ambiguity problems in civil war–torn Sudan. For example, in 1999, Talisman became the focus of international criticism for its role in helping the Sudanese government develop oil reserves. Critics claimed that the revenues were helping the military regime commit human rights abuses against the largely Christian southern population. International condemnation arose from human rights and labor groups, religious organizations, left-and right-wing political parties and from the Canadian and U.S. governments. Although Talisman belatedly engaged in various community development projects and cooperative discussions with activist groups, it was routinely linked to the troubles in Sudan, which was reflected in its stock price, and it eventually sold its Sudanese investment in 2003 to the National Oil Company of India.

Reach Out and Touch Everyone

A recent stream of applied management literature has emphasized the “reach out and touch everyone” approach. For example, Waddock et al. (2002) argued that companies should engage “all stakeholders in continuing dialogue to ensure that the company’s values and actions are in accord with society’s and stakeholders’ expectations.” Hart and Sharma (2004) emphasized the business opportunities that lie in recognizing and integrating the views of “fringe” stakeholders, defined as those that are disconnected or invisible to the firm because they are remote, weak, poor, disinterested, isolated, nonlegitimate or nonhuman. Yaziji (2004) argued that collaborative affiliations with nongovernmental organizations and not-for-profits can help a company head off trouble, accelerate innovation, foresee shifts in demand, shape legislation and set industry standards. He claimed that compared to business entities, nongovernmental organizations have a greater awareness of social forces, networking, specialized technical expertise and legitimacy.

Although identifying and reaching out to a broader range of stakeholders may resolve some issues, new problems may result. First, there is the added challenge of complexity and the associated problems of imperfect information. Second, additional stakeholders often have disparate goals, demands and opinions, and they frequently interpret the same situation differently (Hall and Vredenburg 2004). Although the complexity issue has been discussed in the management literature, the challenges are, as the examples above indicate, often underestimated in practice. As the research suggests, managing secondary stakeholders is becoming increasingly important, but managers are still largely behind the curve in recognizing, justifying and developing the capabilities to do so.