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Every business, regardless of size, has a management structure. Even sole proprietors subcontract out work and may find themselves managing the subcontractors. Whether a person is an owner, manager or employee, (s)he plays a role in the success or failure of the enterprise. Sometimes, making employees or managers stakeholders in the business can have dramatic effects that benefit the company. Let me give an example to illustrate a key small business strategy and the importance of stakeholders.
Two retail stores operate down the street from each other. Both are small businesses with an owner, manager and several employees. Business is hectic, and the owner of Business A assigns the manager the task of putting out the work schedule each week and allocating hours amongst the part-time staff. Over the course of several weeks, the manager receives complaints from the staff that they are not getting enough hours. So, she tweaks the schedule and adds a few more hours here and there. Some of the shifts now overlap, but everyone seems happier. The owner notices that the payroll seems to have gone up and wonders why.
In contrast, the owner of Business B, down the street, also assigns the manager the task of putting out the weekly work schedule. For the increased responsibility, the owner also gives the manager a small allocation of the net profit each month should the business beat certain net profit targets. As the weeks go by, the staff complain that they are not getting enough hours in their shifts. The manager could allocate everyone a few more hours. However, the manager knows that if she allocates unnecessary hours to keep the employees happy, the net profit target at the end of the month might be jeopardized due to the extra payroll expense. The manager chooses to keep the schedule intact and instead explains to the staff that the business does not require more shifts.
The difference is striking. In Business B, the owner made the manager a “stakeholder” in the business and, in effect, changed her decision-making process.
What is a Stakeholder?
A stakeholder is defined as “a person with an interest or concern in something, especially a business.” By having a financial interest in the success of an entity, stakeholders will intuitively begin to consider the profitability of decisions, even if subconsciously. It is why profit sharing, end-of-year bonuses and stock awards in lieu of cash are often used in the for-profit environment. On a smaller scale, I have seen small businesses distribute a little bit of each month’s profit to their key managers should the business achieve key targets. The managers embrace the business and work to make it better every single day. They start to think about the business’ reputation and how to get clients to become repeat customers.
When The Resourceful Business is asked to advise clients on their current strategy, one of the first things we evaluate is who in the company has the role of stakeholder. It can drive the day-to-day decisions being made in the business.
How Being a Stakeholder Will Change Behavior
In Business A, the owner would eventually sit down with the manager and explain that the work schedule should not be compromised to benefit the staff. Rather, the manager should create a work schedule to benefit the business, although a strong incentive to do so is not really in place. As the staff complain, the manager could still be motivated to add a few extra hours here or there, perhaps just not as many as before.
In Business B, the owner has incentivized the manager to create an efficient work schedule by making the manager a stakeholder. I outline this contrast as a reminder that it is very important for a small business to constantly evaluate who has the role of stakeholder. It may seem counter-intuitive to widen the base of stakeholders in a small, growing business. However, if a business exceeds expectations at the end of a given month, even a small distribution of profits to key staff members is incredibly motivating. Cost-cutting suggestions will start to trickle in and some fabulous new ideas will too.
A small business can thrive by considering how it designates and incentivizes its stakeholders. Need a strategic perspective on the structure of your business? Contact us.