Part 1: Purpose Leadership and Stakeholder Management Overview

This article kicks off a 10-part series detailing the principles and framework of purpose leadership and stakeholder management covering the theory, economics, and essential steps. It incapsulates the more detailed curriculum of the Enterprise Engagement Alliance Purpose Leadership and Stakeholder Management Academy.

A Focus on Harmonizing Interests Toward a Common Purpose, Goals, Objectives, and Values
Putting Principles Into Action
A Side-by-Side Comparison: Purpose Versus Shareholder Leadership

By Bruce Bolger

Employee engagement remains near long-term lows, according to Gallup, and American Customer Satisfaction Index surveys reveal little improvement since 1994. New research indicates why: the failure of most organizations to implemement a strategic, holistic, and systematic approach. to enterprise engagement. This article provides a roadmap for organizations seeking to address the new framework for value creation through people compared with the shareholder-focused model.

Why do many organizations fail to address the fundamental lack of engagement among their employees and customers? Perhaps because they cannot actually measure the impact on their bottom lines or balance sheets.

This research from Irrational Capital, independently validated by the quantitative analytics group of J.P. Morgan Securities, finds that organizations with a strategic, holistic, and systematic approach to people management across the enterprise can experience an alpha of 4% in terms of future equity value creation. It supports many other studies finding a connection between strategic people management and higher performance. More recently, research conducted by Alex Edmans, Professor of Finance for Great Places to Work in the UK, found that these companies outperformed the Financial Times Stock Index by 400% over 23 years.

If strategic management of people is the next bastion of value creation, what is the new paradigm for leadership in the 21^st century? What can address the fundamental failure of organizations to engage employees, customers, supply chain and distribution partners, and earn the trust of communities? We believe the model for our times is Purpose Leadership—a focus on enhancing returns for investors only by creating value for all stakeholders—customers, employees, supply chain and distribution partners, and communities.

The concept is gaining ground based on a growing body of research finding a clear connection between enhanced financial performance and having highly engaged customers, employees, supply chain and distribution partners.

To clear up the distinction between leadership based on shareholder primacy versus leadership based on harmonizing stakeholder interests, we have created this simple guide applicable not only to business but to government, not-for-profits, faith-based organizations--anyone whose success depends upon stakeholders.

We believe the basic principles and practices of Purpose Leadership are embodied in this recent Enterprise Engagement Alliance YouTube show with CSX CEO Joe Hinrichs and on other EEA shows with purpose leaders. Purpose leadership does not avoid the need for organizations to make tough trade-offs in a time of crisis or major change, but it provides a guidepost against which these tradeoffs can be avoided or at least better explained.

A Focus on Harmonizing Interests Toward a Common Purpose, Goals, Objectives, and Values

Purpose leadership starts by harmonizing the interests of shareholders and stakeholders toward the achievement of transparent purpose, goals, objectives,

and values, rather than pitting the interests of one stakeholder against the other. The premise is simple: organizations that successfully align the interests of their stakeholders toward a common purpose, goals, objectives, and other expectations, financial and otherwise, have a greater chance of sustainable success than those that don’t. While extensive research supports the logical conclusion that having highly engaged customers, employees, supply chain and distribution partners, communities, and shareholders all sharing a common expectation is a sensible practice, no business strategy is a panacea in a world with many threats, challenges, and unknowns.

That said, the current model obviously isn’t working. Based on Gallup and the American Customer Satisfaction Index, employee engagement and customer satisfaction, both factors have direct impact on productivity with neither getting better than a general score of C. Gallup estimates the waste due to low employee engagement at $1.7 billion in the US alone. ACSI data suggests a high correlation between customer satisfaction and profitability, and yet no company would consider a 77% customer satisfaction score particularly impressive. Where does this waste appear on balance sheets? To us, it can be found in the same place as the enormous waste caused by poor quality management practices in the US in the 1980s that enabled the Japanese to steal an enormous market share of automobiles and other products from which the US has never recovered: this calamity appeared nowhere on balance sheets but was buried in sales, profitability, and market share declines.

Putting Principles Into Action

It is not enough for CEOs to be human. It takes a system to mobilize multiple stakeholders with different perspectives on the value created by the organization and how they can benefit. There is no need to recreate the wheel, because the world of total quality management in the US and especially in Japan has repeatedly proven that a focus on a clear purpose, goals, objectives and values that actively involves all stakeholders with transparent metrics and gainsharing have a measurable impact on quality, productivity, and customer satisfaction. Despite emulating the total quality management practices actively shared by the Japanese with US automakers, the Japanese still hold most of the top 10 position in the Consumer Reports list of quality cars in the US, with no domestic automakers even on the most recent list as of this reporting.

Below are the characteristics of purpose leaders based on a similar approach employed in total quality management that puts a premium on the value of people—an element the Japanese continue to focus on and about which the US automotive companies continue to struggle based on the lengthy, costly strike. (The Japanese auto industry almost never has strikes; in the US, they are much more common.)

A Side By Side Comparison: Stakeholder Versus Shareholder Leadership

While the framework for purpose leadership and stakeholder management is taught at a few universities, such as the Darden Business School at the University of Virgina (See ESM: Seeking an MBA in Stakeholder Capitalism? most people have never heard of the concept of stakeholder capitalism or even of related frameworks such as Conscious Capitalism, Economics of Mutuality, B-Corp, or the Shared Value Initiative. So, the many CEOs and other leaders who embrace these principles do so based on both principles and instincts. Here is an outline of the general difference between stakeholder versus shareholder leadership based on how they address key organizational principles and stakeholders, recognizing organizations might fall somewhere in between in many areas either intentionally or through lack of knowledge.

To gauge your organization's progress toward purpose leadership and stakeholder management, take this free, confidential 10-minute self-assessement from the Maturity Institute and the Enterpise Engagement Alliance.

Principles	Stakeholder Leadership	Shareholder Leadership
Purpose	The No. 1 priority is to protect and fulfill the purpose, financial and other goals, objectives of the organization, consistent with its stated values. Customers, talent, and other stakeholders and the environment are viewed as assets to be nurtured. The focus is on creating value for all stakeholders, rather than looking for ways to subtly shortchange customers, employees, supply chain and distribution partners, communities, and the environment. The organization makes a commitment to not offload its costs on to society as many do by underpaying employees, shortchanging customers, polluting or damaging the community. The organization has a purpose statement, goals, objectives, and values upon which all business leaders and employees are measured at least annually, with infractions related to values dealt with seriously and transparently as appropriate to privacy. Senior management is compensated based on fulfillment of the purpose, goals, objectives consistent with stated values. Every effort is made to align the purpose of the organization with those of its key stakeholders--customers, employees, supply chain and distribution partners and communities, and shareholders.	The No. 1 priority is to make investors happy, with a focus on maximizing profits often in the short term by “efficiently” managing costs related to customers, employees, supply chain and distribution partners, without serious measurement of long-term or often even short-term consequences on satisfaction. Customers, talent, and other stakeholders and the environment are viewed as resources to be tapped, especially when financially necessary or desirable. The organization looks for ways it can offload costs by paying people as little as possible, providing few benefits, deceiving or poorly serving customers, shortchanging supply chain and distribution partners, polluting, or damaging infrastructure. The organization has a purpose statement but very few people in the organization know what it is or follow it. Senior management is compensated based on short-term or other financial goals. Little regard if any is given to the purpose of any stakeholders other than as expedient.
Values	In addition to having a clear purpose statement, the organization’s values are clearly articulated and used as a guidepost when making tough decisions and trade-offs. The values are regularly communicated to all stakeholders and appropriate appreciation is transparently expressed by leadership to stakeholders whose actions embody these values. When trade-offs require compromises, key stakeholders understand why.	There are no stated values, or they are simply words on a wall. Decisions and trade-offs are finalized based on short-term or other financial considerations or to protect insiders. Little to no appreciation is expressed for people demonstrating the organization’s values.
Financial Goals	The No. 1 priority is to generate a return on assets over time rather than focusing on a return on capital invested or whatever the stated financial goal of the enterprise. Decisions are not based on hitting short-term goals that could jeopardize long-term performance unless necessary for survival or regulatory compliance. Financial goals are continually weighed against the purpose, goals, objectives, and values of the organization.	The No. 1 priority is to meet quarterly or other short-term financial goals as promised to investors. There is little concern given for making cuts that could affect customer or employee loyalty or other stakeholders over time because there are no clear metrics being measured.
Business Operating Systems	The organization has a business operating system to achieve its purpose, goals, objectives, and values. There is a clear operating plan for each stakeholder group and regular meetings with all leadership to ensure alignment and to address challenges and opportunities. Customers, talent, and other stakeholders and the environment are viewed as assets to be nurtured and whose voice must always be proactively heard and acted upon. Every effort is made by the CEO to break down siloes and to foster ongoing collaboration between all organizational units, sales, marketing, customer service, human resources, finance, operations, administration, legal, IT, etc.	There is either no clear business operating system with clear roles and responsibilities, or it is ad hoc. Or the business operating system and metrics are considered so important they often overlook the role of talent or other human factors that can affect outcomes. Little effort is made by the CEO to break down siloes between all organizational units, sales, marketing, customer service, human resources, finance, operations, administration, legal, IT, etc., leading to ongoing tensions, struggles for resources, and blame games.
Shareholders	The organization clearly discloses to shareholders its purpose, goals, and objectives, financial, and otherwise; the financial and other metrics it uses to measure progress and the basis upon which it makes tradeoffs, and seeks investors who buy into its vision.	The organization makes commitments to shareholders based generally on short-term or large-scale long-term pay-offs, with no explicit commitment to a purpose, goals, objectives and values to which it commits itself to in a measurable way.
Employees	All employees are considered a critical source of value creation and are nurtured as a crucial partner in achieving the purpose, goals, and objectives of the organization. Great care is taken to hire full-time people so as to avoid the need for layoffs, in part by dedicating a certain percentage of work to contract employees. The organization has a strategic and systematic process for listening to employees, encouraging innovation, acting rapidly to input, and systematically expressing appreciation for those whose actions contribute to the purpose, goals, and objectives or embody its values. Employees who create value are not laid off to meet short-term financial goals if those cuts could do damage to long-term return on assets or stakeholder experiences. Employees are only terminated for performance or values issues, or when economic, market, or structural financial challenges and risks force the organization to reduce fixed costs. Employees receive training and professional development based on a mutual career laddering strategy. The company invests in job design to ensure an enriching win-win employee experience. The organization uses metrics relevant to its purpose, goals, and objectives to track the impact of its investments in employees as well as effectiveness of management. DEI is viewed as a source of value creation—having more diverse employees and distribution partners opens new markets for customers supply chain partners and more welcoming communities. Unions aren’t feared because all stakeholders are actively heard. Employees have opportunities for profit-sharing and gainsharing.	All except the C-suite and top sales performers are viewed as fungible resources and a cost to be minimized as much as possible. The organization has no strategic process for listening or fostering innovation. If it conducts employee surveys, it does little with the results. Short-term financial goals are more important than work-life balance or ensuring all employees earn a living wage. Talent is not considered a measurable differentiator; therefore, management appointments and recruitment are often based on personal connections. Rewards and recognition are largely given to senior management and sales performance, and more perfunctorily to other employees. Employees receive training and professional development only as needed. Unions are viewed as a public enemy. DEI (diversity, equity, and inclusion) are viewed as compliance issues. There are little more than pro-forma opportunities for employees to participate in profits or gainsharing.
Customers	Customers are considered a critical source of value creation and are nurtured from start to finish. Every effort is made to nurture a relationship once it has begun, even at the cost of losing money on a given transaction. The organization has a strategic approach to expressing appreciation to customers. DEI is viewed as a business opportunity, not a compliance issue. The organization has very clear metrics for measuring effectiveness of customer engagement consistent with its purpose, goals, and objectives, and management is measured by and rewarded based on those results.	The focus is on attracting customers but not as much on keeping them: far more is spent in marketing than in fundamentally delivering the promises. Customers are seen as a source of short-term value extraction, shrinking packaging, reducing ingredients quality, increasing prices when possible, making dubious product and service claims, etc. all are considered as ways to optimize short-term profits. DEI is considered a compliance issue. The only clear metrics for measuring customer relationships are financial; little analysis is given to post-sale satisfaction and social media impact.
Distribution Partners	Every effort is made to form a partnership mentality with anyone who helps bring the organization’s products and services to market, starting with a built-in listening process to continually identify the best ways to help these channel partners succeed bringing the organization’s product to market. Distribution partners are actively appreciated for their contributions and are rewarded for their commitment. Distribution partners can count on the organization to look after their interests in making tough trade-off decisions.	Resellers are considered a necessary evil or a cost of doing business and therefore are treated at arms-length except as necessary in case the organization wishes to change direction. Distribution partners are never 100% certain they can trust the organization to not change its mind and go directly into competition.
Supply Chains	Vendors are considered a valued partner and are paid in recognition of service and value added, rather than squeezed. They receive the same basic information about purpose, goals, and objectives as other stakeholders so that they can identify new ways to create value. Appreciation is authentically expressed for contributions to success. Vendors know when they will be paid and are notified if there are any delays. The selection process is as objective and transparent as possible.	The supply chain is a cost to be reduced as much as possible. The goal is to squeeze suppliers as much as possible on price and payment terms. Suppliers never know when the business will be put out to bid and on what basis. Friends and family get preference.
Communities	The organization seeks to create value for the physical or business community in which it operates consistent with its purpose, goals, objectives, and values—such as investing in local education or other activities that can help develop new employees, distribution or supply chain partners, or customers. The organization makes a point of staying out of politics unless the issues are directly related to its purpose, goals, objectives, and stated values.	The organization makes donations to causes that it hopes will counteract its neglect or worse related to its impact on the community. Donations are made either to politicians or parties considered generally favorable or split across different parties to make sure the organization has a voice when necessary.
Environment	Consistent with it’s commitment to offloading no costs on to society, the organization pursues a policy of minimizing its impact on the environment in terms of emissions and waste and provides incentives for stakeholder groups that achieve specific annual goals.	Environmental and waste issues are considered compliance or public relations issues. Public pronouncements are made, and some steps taken, but otherwise every effort is made to minimize short-term costs.
Transparency	Because the organization considers its strategy provides a competitive benefit, and already keeps track of critical practices, metrics, and performance improvement processes, it publishes an annual corporate sustainability report that provides meaningful information on how it creates opportunities and risks for all stakeholders.	Any effort to reveal information is resisted on the basis that it is an administrative burden and a violation of free enterprise.

Enterprise Engagement Alliance Services

Celebrating our 15^th year, the Enterprise Engagement Alliance helps organizations enhance performance through:

1. Information and marketing opportunities on stakeholder management and total rewards:

ESM Weekly on stakeholder management since 2009. Click here to subscribe; click here for media kit.
RRN Weekly on total rewards since 1996. Click here to subscribe; click here for media kit.
EEA YouTube channel on enterprise engagement, human capital, and total rewards since 2020

2. Learning: Purpose Leadership and Stakeholder

Management Academy to enhance future equity value for your organization.

3. Books on implementation: Enterprise Engagement for CEOs and Enterprise Engagement: The Roadmap.

4. Advisory services and research: Strategic guidance, learning and certification on stakeholder management, measurement, metrics, and corporate sustainability reporting.

5. Permission-based targeted business development to identify and build relationships with the people most likely to buy.

Contact: Bruce Bolger at TheICEE.org; 914-591-7600, ext. 230.