External Stakeholders

Contributed by Witold Henisz

The realization of the economic value from a transaction often depends critically upon the institutional environment in which it is embedded. The institutional environment may pose hazards to value generation in the form of a risk of expropriation by a political actor or by a private actor using political influence. Alternatively, changes in the current regulatory or policy environment may alter the returns to a transaction. Such changes may either enhance the value of a transaction with positive economic returns or transform a transaction with negative economic returns to one with positive returns. Any of these actions may be motivated by political actors seeking to use their discretionary power to generate private gains for themselves or their constituents, to sustain their power or that of their allies, or to maximize social welfare. The behavior of political actors, their allies and constituents is influenced by the provision of information, ideological beliefs or by the (in)direct transfer of goods, services or cash.

Actors are connected via myriad economic, political and social ties. Those ties alter their beliefs and behavior. Modeling the policymaking process requires the incorporation of these network ties among a diverse set of external stakeholders into the design and implementation of their influence strategies. The network of relevant stakeholders encompasses the entire political, economic and social value chain for a given issue: producers (including producers of substitutes and complements), suppliers (including providers of finance and labor), buyers (including consumers), voters as well as those directly impacted or having preferences over the distribution of economic returns or externalities including but not limited to the media and activists.

The theoretical modeling and empirical analysis of this strategic game of external stakeholder influence is among the most nascent domains in the field of strategy but also, arguably, among the domains with highest potential payoff. The institutional environment is too often modeled as an exogenous parameter or, in the non-market strategy literature (for more depth on this topic, see Public & Private Political Strategy), simplified down to a carefully delimited set of lobbying or informational interactions among actors in a particular context. Given the nascent status of the research domain, the reader focuses more on the necessary building blocks or foundation of a potentially successful research program rather than on the evolution of the domain to date. These building blocks are found in diverse social science disciplines including economic and financial history, law, international business, political economy, world polity, development, social movement theory, sociology, communications, psychology and corporate social responsibility.

The core questions and challenges for researchers are:

(1) What strategic actions by a focal firm can minimize the downside risk of expropriation posed by political actors or by private actors using political influence?
(2) How does one surmount the inherent data hurdles both in capturing an organization’s influence strategy and linking it to performance particularly in the international context?
(3) How should researchers balance the insight gained into particular mechanisms and tactics available through deep dives into a specific context against the loss of generalizability?

Practical Origins. Edward Bernays was among the earliest, most influential and most prolific scholars and practitioners of influence strategies. Bernays (1947) offers insights into his repertoire that he claimed allowed him and other practitioners to “engineer consent” among the public in the interests of his clients. Bernays shaped the perception of key external stakeholders transforming the apathetic or uninterested into powerful allies of his client. He tapped into not only economic interests but also, and more commonly, emotional levers of aspiration and fear to promote his preferred outcome often relying on supposedly independent experts and staged media events to raise awareness and alter opinion. While Bernays was an exemplary practitioner and author, the tactics he used were not original but rather drew upon the writings of his uncle Sigmund Freud and many other studies of human motivation and action. Any attempt to formalize or codify influence strategies should thus also draw insight the multiple domains in which it has long been and will continue to be deployed.

International Business. As international business is defined by the extension of an economic transaction across a political frontier, political risk has long been a central concern among scholars in the field. While the vast majority of the political risk management literature has emphasized the strategies of avoidance or adaptation as responses to political risk, a few classic pieces of scholarship and some more recent ones emphasize strategies that firms can take to influence the outcome of policymaking processes. Moran’s (1973) classic comparative case study of Kenecott and Anaconda Copper’s sensitivity to the expropriation risk posed by the Chilean government in the 1960s emphasizes the formation and deployment of a diverse network of external stakeholders including providers of capital to the project and to the government that guarantees it with whom Anaconda crafted an alignment of interests. As a result of this concerted effort to construct a strong network of advocates to whose concerns the Chilean government was sensitive, Anaconda better weathered the wave of nationalizations than its peers.

Political Economy. A deep understanding of the context and process of policymaking forms an important component of any effort to model external stakeholder influence. Putnam’s (1988) analysis of two sided negotiations highlights many of the key inputs from this literature into such a model including multi-party negotiations among principals who vary in their power and credibility representing agents who vary in the homogeneity of their preferences. As a result of these and other characteristics of the players in the game and the strategies that they employ, the range of possible bargaining outcomes varies widely.

Sociology. Models of political economy typically treat actors as rational autonomous utility maximizing actors. Yet, the connections among these actors clearly influence their beliefs and behavior. Furthermore, powerful ideas and frames or events can create cascade effects particularly under the right political opportunity structure which seem to invoke mechanisms beyond the realm of political economy. For deeper insights into these two necessary extensions, we turn to the discipline of sociology. Rowley (1997) applies network tools and metrics to extend extant stakeholder theory. The article both serves as a useful introduction into the stakeholder perspective and the implications and methods for the incorporation of networks of policymakers into a model of strategic influence. Rowley introduces and applies such constructs as network density and centrality to help predict the form of interaction between a focal firm and its external stakeholders. Another vein of sociology of relevance to external stakeholder influence strategy focuses not just on the power of structure that links political actors but rather the impact of mobilizing structures and cognitive frames within a political opportunity structure. McAdam (2009) offers a rich summary of the social movement literature specifically designed to inform the understanding of political and social resistance to large global investment projects.

Strategic Communications and Negotiations. While Political Economy and Sociology offer the theoretical tools to depict the policymaking process, they are less forceful or at least less rich in the depiction of strategic behavior than the reality suggested by the process oriented studies in international business or policy. For more insight into the strategies of persuasion, we turn to the literature on strategic communications and negotiation. Sebenius (1992) offers a summary of the key insights from the negotiations literature

Integration. Henisz (2009) seeks to incorporate the insights from the political economy, sociology and strategic communications and negotiations literatures into a strategic decisionmaking process for influence strategy that incorporates information on the preferences, power, issue salience and beliefs of individual actors as well as the strength of ties between them to identify the efficacy of various influence strategies at their disposal using simulation techniques.

Conclusion. The literature on external stakeholder influence introduced here is interdisciplinary and as of yet lacking in both rigorous formal theoretical development and empirical analysis. Yet, as we survey the drivers of organizational performance heterogeneity, particularly across international markets or in times of domestic political and economic upheaval such as the global crisis of 2009, the ability to strategically “change states of mind” or generate “a feeling of personal comfort in social relations that is sometimes called solidarity” (Barnard 1968: 148) is clearly among the key drivers of performance. We hope that the introduction offered to the literature here can motivate subsequent development by scholars in or entering the field of strategy.

Extended Version