By Jolene Lampton, CPA, CFE, CGMA, and Curtis C. Verschoor, CMA, CPA

Ethics affects every individual, from business owners, executives, and employees to suppliers, customers, and competitors. The study and practice of ethics helps us develop skills to articulate our own values and gives us tools to evaluate the values and behaviours of others—all of which impacts how we as individuals develop relationships and interact with others.

The same applies to a company. A stronger ethical environment leads to better interactions with those inside and outside the organisation. And better interactions lead to better results. As such, ethics has a close connection to stakeholder theory.

Managing Stakeholders

As articulated by R. Edward Freeman in his book Strategic Management: A Stakeholder Approach, stakeholder theory involves measuring a business’s overall performance as it relates to a variety of stakeholder relationships. It requires that managers develop a stakeholder mind-set. This means reconfiguring value-creation efforts to consider and address everyone who is impacted by an organisation.

Organisations have direct relationships with a variety of individuals and groups (see Table 1). Each of these groups plays a vital role in the success of the enterprise. This business environment is too diverse and complex to manage in narrow silos—hence, the need to manage stakeholders. Navigating the relationships with these diverse constituencies is the essence of strategic management of stakeholders. The turbulence of the business world requires managers to be vigilant about current conditions and to continuously adjust to changes in the environment.

Who is a Stakeholder?

Any group or individual that can affect or is affected by the achievement of an organisation’s objectives is a stakeholder. Examples include:

Under stakeholder theory, executives manage actual behaviour and create mechanisms for policies that encourage people to make the world a better place. Managers striving to create value within an organisation must understand that business is fully situated in the realm of humanity. Freeman states that ethics is the natural conversation that we have about how we live and work together with stakeholders. He suggests that managers should be open to approaching ethics through the lens of a more complex psychology that acknowledges that work involves different kinds of people. The two bodies of knowledge—ethics and stakeholder theory—work in concert and complement each other.

Supporting External Relationships

The external environment necessitates changes in the way executives think about their organisations and their jobs. The essence of the stakeholder approach is that executives must gain a commitment to ethics throughout the organisation and from the board of directors. Yet while the internal environment is very important, CEOs spend as much as 90% of their time addressing a host of stakeholder concerns, including out-of-town meetings, talks with union leaders, exchanges with both partners and competitors, negotiations with prospective affiliates, and so on. Such leadership involves coordinating the interests that coincide with those of the organisation as well as resolving the conflicts among interests that don’t. CEOs serve as spokespersons for their corporations, participants in social and political processes, and builders of coalitions. The name of the game today is how to deal effectively with external groups.

Executives in organisations with a stakeholder approach to strategic management find they have an expanded sense of leadership. The boundaries are broadened to deal with different objectives and to emphasize the human side. The CEO’s job is to manage and protect the organisation’s resources, the most valuable asset of any company. Additionally, CEOs will encounter pressure to become involved with the changing external environment. Understanding “what the organisation stands for” can cause a great deal of pain when the process tackles tough issues.

In leading the establishment of corporate values, the CEO survives and thrives with the help of a team of trustworthy players. Accountants and finance professionals should aspire to be a part of this team and adopt a stakeholder mind-set. The IMA Statement of Ethical Professional Practice states that members should contribute to a positive ethical culture and practice integrity. Begin by applying the IMA Statement’s principles of responsibility, honesty, fairness, and objectivity in all your interactions with company stakeholders. This can put you ahead of your peers and lead to your own sense of expanded leadership.

SOURCE: This story originally appeared in the February 2019 issue of Strategic Finance.

About Strategic Finance

Strategic Finance® (SF) is the award-winning flagship publication of IMA® (Institute of Management Accountants). Every month, SF’s thought-provoking articles offer advice that helps financial professionals perform their jobs more effectively, advance their careers, grow personally and professionally, and make their organisations more profitable. SF is consistently rated by the IMA members as one of the most accessed and valued benefits of membership.

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