What is a ‘Good’ Organisation? Profitability, The Stakeholder Approach, and Employee Engagement

Posted on August 30th, 2018

Is there such a thing as a ‘good’ organisation in today’s marketplace? And what does it mean to be one?

It depends of course on the criteria we use to judge whether an organisation is ‘good’ or ‘bad’.

Elon Musk
It doesn’t matter if your organisation is not profitable if enough people believe it is going to change the world. Elon Musk, image via Wikimedia Commons.

Profitability is perhaps the most obvious criteria – an organisation is not going to last very long if it is not making any money (unless of course it is owned by Elon Musk or… Donald Trump) – and in years gone by, many businesses would be content to understand how ‘good’ they were on the basis of their bottom-line results.

But more recently, organisations have recognised that the exclusive focus on the maximisation of profit can compromise or undermine what makes it possible – such as morale and cooperation – and that other factors, related to profitability but not reducible to it, may also be important and even effect an organisation’s very survival.

A Greenpeace enthusiast for example might argue that an organisation will not be profitable for very long if that profitability comes at the cost of damaging the natural environment upon which the organisation and other human systems ultimately depend – and the campaigns of environmental activists against such organisations can easily turn into long-term PR nightmares (think BP).

The Stakeholder Approach

It is indeed likely that companies in the twenty-first century will come under increased regulatory and public pressure to broaden their criteria of performance and effectiveness: to include for example concerns related to ethics and social responsibility, or to the desire of staff to grow and realise their potential.

One way of thinking about why it is important for organisations to broaden their criteria of performance is provided by the so-called ‘stakeholder approach’ to organisational success.

Rather than the narrow focus of the ‘shareholder approach’ on maximising particular performance metrics, the stakeholder approach emphasises the importance of considering the different interests held by different groups of people within and outside the organisation who each play a part in the organisation’s continued success.

The emphasis here is not so much on profitability, as on the factors that underpin profitability and make it sustainable over the long-term.

Every organisation on this view is part of a system which is larger than the organisation itself, and which is indeed made up of a number of different groups – including customers and suppliers as well as managers and employees from different departmental functions. And according to the stakeholder model, achieving effectiveness is rarely a simple matter because different people want different things.

While customers for example may be concerned primarily with purchasing high quality products and services at a fair price, employees are more likely to be concerned with their work conditions, opportunities for development and levels of pay.

Stakeholder model
The traditional stakeholder model, via Research Gate.
Profitability and the Stakeholder Approach

What this means is that the ‘good’ organisation looks slightly different for different organisational stakeholders, and that the ‘stakeholder approach’ involves attempting to balance the preferences of different groups so as to achieve organisational effectiveness and sustainable profitability.

It is essential to emphasise that this approach is not just a nice, ‘socially responsible’ way of evaluating performance, with only tenuous links to the bottom-line. Because in fact, according to the stakeholder model, the satisfaction level of each stakeholder group can be taken as an indication of an organisation’s performance, and organisations that consider the interests of different stakeholders tend to perform better. Indeed a wealth of research has shown that the assessment of multiple stakeholder groups is a strong indicator of organisational effectiveness, especially with respect to organisational adaptability.

Considering organisational effectiveness from the perspective of the stakeholder approach not only therefore gives a more robust understanding of profitability – including the factors that underpin profitability in the first place – than a focus on the bottom-line alone, but also gives a way of thinking about how to further improve performance and profitability by exploring and taking seriously the interests of different stakeholder groups.

To show how valuable it is to take such an approach we are going to turn to a key organisational stakeholder: an organisation’s employees, and to the literature on employee engagement, to show how powerfully organisational profitability and performance are linked to measures of employee engagement.

An Organisation’s Key Stakeholder – Its Employees

There has been a wealth of research in recent years exploring the link between ‘employee engagement’ and organisational performance, and the results are quite extraordinary. Indeed there is now a substantial body of evidence showing a strong correlation between higher engagement – roughly speaking, the degree to which employees feel personally committed to the organisation and its goals – and higher performance.

One stand-out example of this research has been provided by the Gallup Organisation. Through rigorous research, involving the study of survey results from more than 25 million employees around the world, Gallup identified twelve questions which measure the most important elements of employee engagement (copyrighted sadly, but available online here).

What is so stunning about the Gallup research however is not only that the so-called ‘Q12’ survey results provide a good indication of employee engagement. Because in fact, the survey results – and hence the level of employee engagement in a given organisation – also show a strong relationship to key business performance outcomes.

Indeed according to Gallup, engaged organisations have 3.9 times the earning per share growth rate compared to organisations with lower engagement in the same industry. The message is clear: look after your key stakeholder, focus that is on the engagement of your employees, and higher levels of business performance are likely to follow.

Developing Performance with the Stakeholder Approach

The strength of the stakeholder approach depends not just on how it encourages organisations to consider the interests of diverse stakeholder groups, but also on how interrelated the interests of those different groups are. For employees for example, the ‘good’ organisation is more or less equivalent to the ‘engaged’ organisation. But for shareholders too, the engaged organisation is likely to be the more profitable organisation, and so judged ‘good’ according to their criteria as well.

Some tough-guy bosses might object that it is not their job to ‘make people happy’ or even to make people feel better about what they do. But the research on employee engagement suggests otherwise: that it is the responsibility of every boss and business owner to do what they can to improve the engagement of staff, and that the interests of boss, business owner and employee are all quite powerfully interlinked.

The wonderful thing about the Gallup Q12 survey is that it provides twelve questions, and hence twelve ways, to start thinking about how to improve engagement within an organisation. Run through the questions for yourself and see which measures your organisation is strong on, and which might be worth a little reflection.

A similar task could be completed in relation to other organisational stakeholders – in relation to customers or suppliers for example. Once you have a rounded picture of different organisational stakeholders, including their different interests and areas for potential improvement, you may be able to start working out a balanced plan for moving forward.

LDL Training

As a training consultancy, we at LDL are of course delighted to assist organisations that are attempting to increase employee engagement and to develop and grow their staff.

In fact, as far as we are concerned, many of Gallup’s Q12 questions are related to basic management skills that can be identified and developed with training. These are skills related to setting clear goals and objectives, providing appropriate recognition and praise, offering opportunities to learn and grow, sharing the company mission and values, and showing genuine empathy and concern for an employee’s life and career.

If you would like to find out more about LDL Management Training, which is available in the form of open programmes, in-company tailored solutions and a new online course, please get in touch with us. We would be delighted to arrange a conversation with one of our Senior Consultants.

Learn more about LDL Management Training.

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