2.0 Introduction.

The aim of this chapter is to review the existing literature relevant to stakeholder management in a general sense and then to focus on publications which cover stakeholder issues related to large scale construction/development projects. By following this sequence I can give an outline in stakeholder management in general and then focus on the topics relative to my investigation.

To start with, I will define exactly what a stakeholder is and the evolution of stakeholder management from being an abstract business theory to the pivotal role it now plays in determining the success of a modern day project.

I will then cover the best practices in modern stakeholder management and its relationship to project management and how it is linked to value management.

Through the course of the literature review I hope to be well informed and well placed to conduct relevant research which will lead to useful and significant findings and recommendations.

2.1 Origin and Definition of Stakeholder

The origin of the word stakeholder can be traced back to the 1530s where stake was defined as “to risk, wager” or that which was placed at hazard. (CHAMBERS , 1999). This is used in a betting context but is derived from driving a stake into land and claiming it, as in to “stake a claim”. It first appeared in business parlance in the early 1960s by Stanford Research Institute, who proposed a definition of stakeholders as “groups without whose support the organization (sic) would cease to exist” (FREEMAN, Edward R Et Al, 1983).

Edward Freeman is credited with advancing the notion of stakeholder theory in his seminal work “Strategic Management: A Stakeholder Approach”. In this book he stated that current business strategy theories were inconsistent with the business environment of the 1980s. The established theory at the time was a stockholder approach which suggested that as business was owned by those who held shares in it, the managements was principally obligated to run the organisation so as to maximise value for the shareholders. The influential free-market economist Milton Friedman argued that a corporation had a responsibility to maximise value to shareholders and to comply with legislation of the country it operates in (FRIEDMAN, Milton, 1970). He goes on to state that a business entity cannot have social responsibilities, that only individuals can. One of his main arguments was that an unhindered free market environment would address most societal and social problems and the government would be responsible for the rest. It was not the place of business to be involved in social responsibilities. Friedman was a professor in the University the Chicago’s school of economics. His free market ideologues became a doctrine informing a series of right wing U.S government’s domestic and foreign policy throughout the 1970s and 1980s. He was a member of President Reagan’s Economic Policy Advisory Board in 1981 and his ideas were incorporated into the pro-business agenda of the 1980s in American where many regulations governing and regulation businesses activities and taxation were relaxed (NISKANEN, William A, 1988) .

Freeman’s book, when published in 1984, was the most important work to date in advancing the notion of stakeholder theory. He sets out the dynamics of the relationship between a firm and the different players in the firm’s external environment. His diagram, depicting the firm at the centre and the stakeholders connected to it has been reproduced and amended in countless textbooks and journals since then.

He also defined a stakeholder as “any group or individual who can affect or is affected by the achievements of organisations objectives”. He advocated the categorisation of stakeholders into direct and indirect stakeholders. He was a pragmatic business strategist who advocated the consideration of diverse stakeholders not for purely altruistic or ethical reasons. His advice to a firm was to know “what it stands for” when formulating strategy. This means aligning the firm’s business activities to the expectations of the principal stakeholders. As different stakeholders have different expectations and wants, a trade off has to be made. By advocating this type of analysis, Freeman embraces the concept of value in strategy formulation and stakeholder management.

The trade off between differing stakeholders is the difficult aspect of stakeholder management. It would be a perfect world if every stakeholder could be completely accommodated and no trade-off between the firm’s objectives and that of all the stakeholders were needed. The reality is that there is a significant trade-off required and Freeman suggested a methodology to inform an organisation of its particular stakeholder landscape.

He categorises the stakeholders based on the effect that they have on the firm and the effect the firm’s activities have on them. These are social, political, economic, managerial and technological. He quantifies the power each stakeholder yields as economic, socially influential, or equity. These terms and categories and their emphasis have evolved in later literature but Freeman was the pioneer who gave us most of the concepts of modern stakeholder management.

2.2 Stakeholder vs. Stockholder

The view that stockholders had preference over all other stakeholders was enshrined and test in U.S law from the early 20th Century. In 1919 the Michigan Supreme Court issued a ruling in the Ford Motor Company V Dodge case which articulated the legal position in relation to stockholder supremacy. Henry Ford, majority shareholder and founder of the Ford Motor Company had built up significant profits ($60m) in the company and wanted to invest them in back into the business in areas of employment rates and improvements in quality and design. The Dodge brothers, who were minority shareholders at the time, successfully argued that this was at the detriment of stockholders and therefore against corporate law. In the adjudication speech the judge stated that “the business corporation is organised and carried on primarily for the profit of stockholders, the powers of the directors are to be employed for that end” (ANANT K SUNDARAM, Andrew C. Inkpen, 2004)

Milton Friedman’s statement that the corporate social responsibility of an organisation was the pervasive ideology up to and including the Reagan/ Thatcher era. However there were some dissenting voices in the academic community most notably in the aftermath of the great depression. Some scholars attempted to re evaluate the nature of an organisation and its constituent parts. Dodd argued that if a corporation can be given its own identity and rights then it should also have citizenship responsibilities similar to individuals. He went on to argue that if this was the case then the role of management and directors could not just be to serve the stockholders and increase profits. The citizenship responsibilities of an organisation obliged the management of a firm to consider other stakeholders such as consumers, employees and the environment (DODD, M.E, 1932).

There is an alternative view which is not formed from the right wing neo-liberal school of thought and is worth considering in this review. In the corporate world the value that shareholders derive from their investment is in the form of a residual claim. By this I mean that the shareholder is entitled to the profits from a firm’s activity only after all other claimants have been addressed and should be the ultimate controllers of an organisation (A.A ALCHAIAN, H Demsetz, 1972). Other stakeholders have a claim to these profits before the shareholder gets a dividend. These stakeholder claims include wages to employees, government and local authority taxes, costs of complying with legislation directors salaries and cash re-invested into the business to benefit customers in order to gain market share. It is only after all these activities that the shareholder comes into view. This means that only shareholders have the incentive to maximise the value of the firm. Other stakeholder groups only have the incentive to maximise value from the organisations activities to the extent that they themselves will benefit. They have no in-built concern for the other stakeholders who make subsequent claims on firm’s profits.

This argument is further advanced by Macy where he separates stakeholder claimants into fixed and variable claimants. Most stakeholders have a fixed claim to a business’s revenue and this does not necessarily change if a firm does reasonably well and holds its market position or does exceptionally well and eats into the market share of a competitor. In order to maximise value a firm may have to take risks, it is in the interests of the stockholders to control the direction of the company and take these risks. Taking controlled and calculated risks has lead to an advancement of civilisation in terms of technology and in a social sphere Stockholders have the most to gain from entrepreneurial risk taking and should therefore have the controlling influence of an organisation in preference to other stakeholders (MACY, J.R, 1991). In a slight contradiction he further argued that this would lead to maximising the value of an organisation for the eventual benefit of other stakeholders.

There is a long running debate with advocates of stakeholders on one side and stockholders on the other. It is my belief that this is incorrectly framed. Stockholders are stakeholders as well and their interests should not be mutually exclusive. Freeman argued that if a firm applies stakeholder theory to the process of devising a high level business strategy then the argument of maximising value for shareholders or stakeholders becomes an irrelevant argument.

Freemans work which linked stakeholders to strategic management is credited with bringing about an alternative view in the stockholder theory that dominated the business world up until the end of the 20th Century. There was a move away from an obsession with shareholder value and its dilution to appease other stakeholders. Stakeholder theory in relation to strategic management meant that stakeholders objectives must be integrated into the firm’s objectives and vice versa (R.E FREEMAN, J McVey, 2001). This meant that firm’s activities must be to develop relationships, create communities and facilitate a culture where all stakeholders strive to maximise value for the firm which will then be shared among the stakeholders in a reciprocal arrangement. The shareholders are important stakeholders as they provide in initial funding for the firm to achieve its objectives and are the ultimate monetary owners of the firm. Freeman argues that if all stakeholders worked together to achieve the firms objectives then shareholder value would be increased although this was not the motivating reason of his theory.

The main proponents of the pro stockholder group in this debate are Inkpen and Sundaram. They now accept the influence stakeholders have on the continued success of an organisation. “Our position is by no means that firms should ignore other stakeholders or that there are no boundary conditions to the manner in which shareholder value creation logic has been applied in practice.” (ANANT K SUNDARAM, Andrew C. Inkpen, 2004).

There is significant evidence that a stakeholder theory informed business strategy is decidedly pro stock holder also. Many firms now seriously engage with customers allowing large numbers of them to participate in design briefings and focus groups in the course of developing new products. This creates customer loyalty and brand identification which not only benefits the non –equity holding stakeholders but the shareholders as well. A good example of this is the Apple Corporation. It entered into a period of exponential growth which started in the late 1990s. This is the result of a new strategy which was extremely customer focused. This constant feedback from customers and user groups informed the design of new products including the IPod and Iphone which have been huge successes. Each new version of their products is an almost guaranteed success as it has alread