Riku Ruokolahti: Positioning the Company in Relation to the Stakeholder System
“The general public isn’t really a key stakeholder for us.”
In the second chapter of this book, we examine the development of theoretical thinking regarding stakeholders from the perspective of corporate competitiveness. In this chapter, we focus on stakeholders from the perspective of reputation management. A company’s reputation can be understood as the interpretations of the company and its operations held by “someone else.” Collectively, these “someone else” constitute the company’s stakeholders. The stakeholders of any organization are the medium in which the company’s reputation resides.
How should an organization position itself in relation to its stakeholders?
Stakeholders often operate as organized, distinct groups in relation to companies and organizations. In practice, this means that each stakeholder group has its own public face or representative. Examples of such representatives could include a union representative at your workplace, a journalist specializing in your industry, an active politician, a representative of a non-governmental organization, an analyst at a fund specializing in your industry, or a buyer at one of your major clients.
Clearly defined stakeholders and their representatives make the world seem clear and straightforward. There is a huge temptation to view the world in such a way that we, as an organization, are at the center of everything and the world revolves around us. We listen to each stakeholder group separately, communicate with them centrally, and strive to gain their support for our activities.
However, the reality that shapes our lives is not nearly this straightforward. Let’s shift our perspective so that we no longer focus on our own relationship with our stakeholders, but rather on the environment that defines our stakeholders’ relationship with us. After a little thought, we may come to realize that each of our stakeholders has a whole host of their own stakeholders, and we are just one stakeholder among many to them.
Let’s expand on this idea a bit and focus for a moment on, say, the politicians who are important to our organization.
Every politician must balance their actions with their own stakeholders: their supporters, other politicians, their party, the media, and ultimately the entire democratic system. Yes, our organization may be part of the system, but only as one player among many. Our firm’s significance among a politician’s stakeholders may actually be quite limited.
This same pattern plays out in different ways for all of our stakeholders. The specific groups that influence different stakeholders may overlap to some extent, but they are, at the very least, weighted differently. However, all stakeholders are united by at least two factors: a representative of any stakeholder group is part of the general public, and the general public is one stakeholder group for any actor. All of this forms a networked system, a kind of ether or shared consciousness in which the organization operates. Let us call this ether the stakeholder system. I have attempted to illustrate this system in the Stakeholder System diagram.
The foundation of reputation is an organization’s overall reputation—the psychological consensus mentioned earlier—upon which its reputation in relation to other stakeholders is built. From a management perspective, the situation is quite complex, as all stakeholders are in dialogue with one another. The company itself is certainly able to participate in many of the ongoing dialogues, but only as part of this constantly evolving whole.
Let’s take a step back for a moment and consider how reputation functions as a psychological consensus. I’ll ask you this: “Does Nokia have a good reputation?” As you try to answer the question I’ve posed
, your train of thought might go something like this: You’re not really thinking about Nokia. At least not directly. Your own perception of the organization isn’t necessarily relevant when discussing reputation. You’re trying to figure out what other people might think of Nokia. At the heart of your assessment is your own gut feeling about other people’s thoughts regarding Nokia.
Let’s change the approach, and this time I’ll ask you: “Is Nokia a well-managed company?” Now it’s your turn to reflect on Nokia, its achievements, and its future prospects from your own perspective. Your assessment will be influenced by your personal history and your relationship with Nokia.
In your first reflection on Nokia, you sense a psychological consensus, and in your second reflection, you evaluate the company from your own perspective. This is precisely the point: every organization has its own unique reputation in relation to each individual, each stakeholder, and at the same time the entire stakeholder system.
All of this leads to something extremely interesting. A company’s reputation within the stakeholder system as a whole determines the degree of freedom each individual stakeholder—or even individual person—has in relation to the organization. This phenomenon is discussed quite freely in public discourse, even though it is not often linked to reputation. For example: “They ended up paying a heavy political price for a project that was, in itself, quite sensible and important.” Such a comment might arise in a situation where someone or some people do something that is, in itself, useful and important, but it does not look good in the eyes of others.
A hypothetical example of this could be a socially significant development project involving a company with a poor reputation for providing care services. All the so-called rational arguments might support the collaboration, but the project never gets off the ground because others wouldn’t view it favorably, and we might lose the support of our stakeholders. Both people and organizations are eager to do things that make them look good and strive to avoid projects that would appear contradictory in the eyes of others.
Through these examples, I aim to highlight the mechanisms by which a company’s so-called overall reputation influences how other stakeholders view your organization. The actual situations faced by companies and organizations are often not this clear-cut, nor are the effects black and white. But even though the nuances of these effects are more subtle, their mode of operation is the same, and they are constantly affecting everyone.
So what exactly is a company’s or organization’s overall reputation? And can reputation even be broken down into stakeholder-specific components? Yes, it can—and it’s worth doing—but we’ll come back to that later.
Where does a company's overall reputation lie?
“The general public isn’t really an important stakeholder for us.” I often hear this said when a company’s customers are not direct consumer customers. From a reputation perspective, this is a rather peculiar idea. In this chapter, I’ll explain why.
A company can only have a reputation among those individuals who are familiar with it. Of course, one can be familiar with a company based solely on its reputation, but that is precisely the point. If an individual is unaware of the company’s existence, the company cannot have a reputation in that individual’s mind.
This brings us to the fact that different companies have very different levels of recognition among the general public. For example, Fazer has a very different level of recognition than Yara. Fazer is known for its products, which are part of the daily lives of many Finns, while Yara produces about a quarter of the fertilizers used in Europe. The latter company is not very well known, and even among those who are aware of it, their impressions may be limited to indirect messages received through the media.
For Fazer, the matter is quite simple. The general public is, in practice, the same as the company’s consumer customers. Nearly all Finns are familiar with Fazer. In Yara’s case, the matter is not nearly as simple. The company certainly has a general reputation, just like Fazer, but its audience is smaller. The individuals who know the company form a whole that consists of a collection of the company’s other stakeholders. A company’s customer or employee is also a representative of the general public, just as is a journalist who criticizes the company, and so on. All those who know Yara, either directly or through its reputation, together form the collective consciousness in which Yara’s overall reputation resides.
If Yara were to measure its reputation among the general public, the respondents would be drawn precisely from this group. Others, after all, cannot evaluate the company at all, since it is completely unfamiliar to them. This collective perception is, in principle, exactly the same in Fazer’s case. The audience in which the company’s reputation resides is simply significantly larger. Every company has a reputation, regardless. Whether the company measures it or not. Not measuring it simply means that this rather large variable is unknown to the organization in question.
The general public is a stakeholder group that is different for every company and relevant in different ways. Generally speaking, one could say that the general public and measuring its perception is one way to address or consider a company’s overall reputation. This is because the general public is rarely a single stakeholder group from the company’s perspective, but rather a collection of people representing various stakeholder groups. We are all part of the general public and its collective consciousness. If I wanted to exaggerate a bit—and I do—I could argue that, in terms of reputation, there is no such thing as a secondary entity called the general public from a company’s perspective. There is only a group of people in whom the organization’s overall reputation resides, and, on the other hand, those people who are unaware of the matter.
The link between reputation and stakeholder support
By “stakeholder support,” we mean the actions or willingness of a specific group relevant to our organization to support our activities. The exact nature of this support naturally varies from one stakeholder group to another. As a company and an organization, we want and expect different things from different stakeholders. From our customers, we hope for at least purchases and recommendations. We hope that politicians will listen to and support our proposals. And so on. However, there is one thing we want from all our stakeholders: trust.
But let’s continue to explore what the general public is wondering about. We expect the general public to be quite diverse in their expectations. The most common of these are trust, trust in times of crisis, investing, buying, job hunting, and word-of-mouth recommendations. These alone will take you a long way—don’t you think?
But so we don't get too philosophical, let's dive into the nitty-gritty for a moment and examine things in light of quantitatively measured data.
The graph below is a meta-analysis of the relationship between reputation and stakeholder support. By meta-analysis, I mean that the graph is based on 444 separate studies, all of which were conducted using a consistent methodology. This method is called Reputation&Trust. T-Media Oy creates statistical models of corporate reputation based on the measurement of eight different components of reputation (finance, management, innovation, interaction, products and services, workplace, responsibility, and governance). In this chart, each point represents a company’s modeled reputation and stakeholder support among the general public. The further to the right a single point (company) is, the stronger its reputation. The vertical axis, meanwhile, shows the level of stakeholder support. The higher a company is on the scale, the more people trust it, invest in it, buy from it, apply for jobs there, and recommend it. The statistical precision of each individual study ranges from 0.04 to 0.06 units on the 1–5 scale shown in the figure. The statistical accuracy of a single point depends on the standard deviation of the responses for that company. In this context, it can be concluded that the surveys are sufficiently accurate for quite a few conclusions.
To avoid getting bogged down in the data, let’s move on to the conclusions. You’ve probably already noticed that there’s no such thing as a “left upper corner” in this game: a bad reputation and excellent stakeholder support. Nor is there a true bottom-left quadrant: good reputation and weak stakeholder support. The “left upper quadrant” would essentially mean that a company in that position would have a very poor reputation but excellent stakeholder support. Everyone would want to buy from, trust, invest in, and apply for a job at a company in crisis. Of course, this isn’t how it works in practice; instead, the companies measured line up like pigs at a poor man’s house. The stronger the reputation, the better the stakeholder support.
Now, backed by empirical evidence, we can address the points I raised earlier: reputation is never simply binary—either weak or strong—and it can be measured and understood with a high degree of precision. In this context, even the smallest nuances matter greatly. In the figure, the term “slope” indicates how much stakeholder support changes in relation to reputation.
In practice, this means that if reputation shifts by one unit in one direction or another, stakeholder support changes by a greater amount on average. It changes by 1.15 units. Thus, even small shifts in a company’s reputation have a significant impact on stakeholder support and, consequently, on the company’s business operations.
Based on this substantial body of research, one can conclude that reputation and its impact on business can be measured and assessed with a fair degree of accuracy. The mere fact that a company’s reputation gains and losses can be measured and evaluated makes this intangible capital a manageable resource. Admittedly, this information is not yet sufficient for management at the level of an individual company, but we will return to this issue later.
Stakeholders, Reputation, and Competitiveness
Let’s revisit what we wrote earlier. In the second chapter of the book, we touched on the history of thinking regarding stakeholders and their significance from a business perspective. The idea that stakeholders are autonomous actors who make their own decisions regarding their affairs and actions in relation to the company is one of the philosophical cornerstones of reputation management. This is true for two reasons.
First of all, these factors are absolutely crucial to the fate of our business. No customers—no business. No capital—no business. No operating license—no business. No employees—no business. Do you still remember? Second, reputation directly determines the actions of these stakeholders. People want to work for reputable companies; they invest in them, buy from them, and societies are happy to support their operations.
From a bird’s-eye view, four key stakeholder groups and their actions determine the fate of a company: employees, investors, customers, and the communities in which the company operates. Practical reputation management should also be grounded in this way of thinking.
As noted earlier, a company’s reputation among the general public serves as an excellent indicator of its overall reputation and helps establish a broader context. However, I do not mean to suggest that simply measuring and analyzing the general public is sufficient. A company’s reputation should also be measured and analyzed among other key stakeholders from the organization’s perspective as distinct entities in their own right. But what exactly are these entities?
I suggest that you organize and review your stakeholders in line with the competitiveness model presented here. For example, the key stakeholder group “employees” should include your current and future employees. To put it simply: surveys measuring the company’s own employees and employer brand can be viewed as a single entity from a reputation management perspective. A company’s reputation in relation to society can be viewed as a separate entity by including, for example, political decision-makers, journalists, and, once again, reputation among the general public. For many companies, capital may be represented by relevant analysts, the retail investor community, and, for example, potential major investors. And, of course, customers and potential customers should be treated as a separate entity.
Of course, there is no single, ready-made formula for stakeholder positioning that would work as-is in every possible business context, but by adapting the thinking presented above to your stakeholder mapping, you can manage and address reputation in a way that is consistent with the theory of competitiveness. This creates a strong and clear foundation for reputation management.
Riku Ruokolahti has written a handbook on corporate reputation and its management. The excerpt published here, “Positioning the Company in Relation to the Stakeholder System,” can be found in the second section of the handbook: “Systematic Reputation Management.”
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