Businesses as Stakeholder Ecosystems

Businesses as Stakeholder Ecosystems

There is a long tradition of likening different aspects of business to natural phenomena – notions of ‘evolution’, ‘natural selection’, ‘lifecycle’, or ‘ecosystem’ all offer interesting contexts for capturing different aspects of socioeconomic interactions that form the foundations of modern commerce. The earlier mentioned enterprise theory-promoted view of business interactions draws particularly close parallels to the concept of ecosystem. Defined, in its original scientific context, as the totality of living organisms and nonliving elements inhibiting a particular area and interacting with one another, individual ecosystems are generally assumed to exhibit a certain degree of distinctiveness, and their overriding purpose is typically framed in the dual context of survival and self-perpetuation, or using business vernacular, to remain a going concern.

Given the highly reductive but nonetheless widely used conception of business organization as a group of individuals joined together in pursuit of commercial goals, a question of how those individuals are ‘joined together’ needs to be addressed. While a broader overview of different legal organizational forms falls outside of the scope of this overview, let it suffice to say that corporation is the most common type of business organization, at least in the US. One of the distinguishing characteristics of that particular organizational form is that a corporate entity is considered a stand-alone legal body that is both distinct and independent from the individuals who make it up, which means that the very individuals who comprise a business corporation can be thought of as organizational constituents, rather than the organization itself. Furthermore, as hinted by the notion of stakeholder ecosystems, any external to the organization entity that interacts with the firm and contributes to the creation or to the consumption of its economic output can also be considered its constituent. All considered, a publicly owned (i.e., one whose shares are traded on a public stock exchange, such as the New York Stock Exchange or NASDAQ) corporation can have up to seven distinct sets of constituents: shareholders, employees, regulators, customers, creditors, suppliers, and competitors, all of whom have constituent interest in the corporation’s decisions.

Shareholders, defined as any person, company, or other entity that owns at least a single share in a company, are the first of the seven common stakeholder groups. Although it is rare for shareholders to have direct interactions with organizations in which they own stock, as owners they nonetheless have numerous rights, many of which translate into binding obligations – or liability – on the part of the management. (It should be noted that, in the US, the exact makeup of those rights depends on the state in which a company was incorporated, as laws governing corporations are derived from state rather than federal laws; that said, nearly half of all US public companies, and more than 60% of Fortune 500 corporations, are incorporated in the state of Delaware, in spite of the fact that most are domiciled elsewhere.)

The second key stakeholder group is employees, defined as persons who work for a business enterprise in return for financial or other compensation. Within the confines of stakeholder ecosystems, there are two distinct employment classes: executive and non-executive. The former shape and enforce organizational policies that the latter are expected to follow, which points to noticeably different interactions with the organization: From the standpoint of corporate governance, executive employees are effectively legal proxies of the organization they manage hence can be viewed as endogenous to the firm, whereas non-executive employees are exogenous to the firm, thus can be considered a distinct external stakeholder group.

Regulators are the next key stakeholder group. Although there are numerous federal (more than 500 in the US, according to official sources), not all have rulemaking powers and of those that do, not all have oversight over business conduct of organizations. Overall, regulatory agencies with rulemaking powers and business conduct oversight can be grouped into two broad categories: (1) business-general and (2) industry-specific. The former, exemplified by the Securities and Exchange Commission, the Federal Trade Commission or the Equal Employment Opportunity Commission regulate those aspects of business that apply to all companies, whereas the latter, exemplified by the Food and Drug Administration or the Nuclear Regulatory Commission, focus on matters that are specific to only certain industries. Hence, it follows that while all organizations that are involved in commercial activities within the US are subject to at least one US regulatory agency’s oversight, the number of applicable regulatory overseers will vary across industries and, to a lesser degree, across companies. Also, it should be noted that individual states (in the US) regulate some limited aspects of business, such as insurance, which may translate into additional regulatory demands, directly or indirectly impacting organizational decision-making.

Considering that no business organization can remain a going concern without earning income from the sale of its products and/or services, customers should be viewed as yet another distinct group with a constituent interest in business organizations. In many regards, interacting with customers can be seen as most information intensive, primarily because the customer-company linkage is highly tenuous. It is hard to think of a product or a service that is not competitive, in the sense of differently branded but functionally substitutable offerings, which translates into ongoing, information-intensive customer acquisition and retention efforts.

The next two stakeholder groups – creditors and suppliers – are similar, yet distinct. They are similar insofar as both supply product or service creation and delivery required inputs, which means both sets of relationships tend to be governed by contractual agreements centered on the truthfulness of all requisite disclosures as well as adherence to the agreed upon terms. They are distinct because interacting with each entails different decisions and calls for different types of information.

The last and probably the most unlikely organizational stakeholder groups are the firm’s competitors. It is important to note that when taken at its face value, the nature of competitor constituency is fundamentally different from those discussed above: While virtually all of the other organizational stakeholders have symbiotic relationships with business organizations in which they hold constituent interest, that is generally not the case with competitors. However, when looked at from a more macroeconomic point of view, firms that compete in a particular product or service category have a vested interest in making sure that others (i.e., competitors) adhere to the agreed upon rules of engagement, broadly known as trade practices. Thus following that line of reasoning, firms have constituent interest in governance-related decisions of their competitors, which places additional demands on firms’ decision-making related information creation and dissemination.