Monday, January 27, 2020

Managing for Stakeholders: One Professor’s Primer

What an exciting time to be a CEO! On top of all the ordinary challenges associated with leading an organization, last August the Business Roundtable made a public announcement that kicked off a groundswell of debate about the purpose of a firm. The Business Roundtable membership is a bit like VACEOs, but with larger organizations. Its announcement broadened the Roundtable’s stated purpose of a firm from maximizing shareholder value to creating value for all stakeholders. This was news because for more than 20 years the Roundtable had explicitly embraced the idea that “corporations exist principally to serve shareholders.”

STAKEHOLDERS: DEFINITION AND THEORY

The term ‘stakeholders’ refers to actors who affect or are affected by the firm, including employees, customers, suppliers, communities, and shareholders. While the popular business press has dedicated gallons of ink to this debate in the last few months, the arguments for prioritizing stakeholders (not just shareholders) are already well established. Some of the foundational research in this area originated at UVA’s Darden School, and some of the more recent developments are coming out of University of Richmond’s Robins School.

Because academic writing can often be boring and overly technical for casual reading, this article translates a very brief sampling of recent stakeholder-related research topics and findings from the strategic management journals.

Stakeholder theory is broadly focused on understanding and explaining how organizations form and nurture relationships with a collection of stakeholders. This perspective is unique among strategy theories in that it explicitly acknowledges businesspeople do not and cannot make decisions independent of moral norms and values.

Said another way, business is not a distinct and separable domain from ethics. Every organization has behavioral norms that emerge and evolve in its relationships with stakeholders. This makes stakeholder theory more appropriate for focusing on relationships as the unit of analysis, whereas the dominant economic approaches to strategy research are primarily focused on transactions as the unit of analysis. This distinction adds realism to explanations of strategy in practice because the vast majority of businesspeople describe their most important interactions in the context of relationships rather than transactions.

“DIFFERENT STAKEHOLDERS EXPECT DIFFERENT THINGS”

Why do you think employees choose your firm over others? Why do customers? What do you provide your stakeholders that they cannot get from other firms? All stakeholders have alternatives to participating in your organization, and when they do pick yours, they expect to benefit more in this association than with their next best alternative.

In a free society with open competition for stakeholders of all types (e.g., customers, employees, members, suppliers, communities, etc.), there are no fixed rules that always work for attracting, enrolling, and retaining the stakeholders your organization needs to execute its plan. Instead, the best course of action in practical situations is always conditional. My own research seeks to specify those conditions in a variety of situations.

The first thing to acknowledge is that different stakeholders expect different things. In the marketing domain, we recognize this in the concept of customer segments. Customer segments are subgroups of customers that share some common expectations. Your other stakeholder groups can be segmented this way, too.

It is common to think stakeholders primarily value financial metrics such as prices, wages, discounts, premiums, taxes, and dividends. But in many contexts, research shows stakeholders enter and leave relationships with firms based on other considerations.

POWERFUL EXPECTATIONS

One of the most powerful considerations, for example, is the extent to which they are included in the process of making decisions that affect them. They want you to ask for their opinions and to seriously consider their opinions. They want decision-making processes at your firm to be based on accurate information, to be consistent, and to be revised if they are later found to need correcting. The expectations about your decision-making processes are so critical they are referred to collectively in the research as expectations of procedural justice.

Another set of powerful expectations, collectively called interactional justice, are all about the manner in which your firm treats the stakeholder. Specifically, most people place a high value on being treated with courtesy, dignity, and respect. Stakeholders who do not believe they are getting enough of these things (enough ‘interactional justice’) from you may sever the relationship even if the material financial benefits of working with you are strictly better than their next best alternative.

THE SIMPLE TRUTH: THE GOLDEN RULE APPLIES

These expectations for different forms of value (material, procedural, and interactional justice) play a big role in the stakeholder behaviors that create or(?) destroy value at your firm. Not only does a stakeholder decide to enter, remain, or sever her relationship with your firm based on the comparative amounts of value she gets from you, but if she remains in the relationship, these things also affect how the stakeholder behaves towards your firm. These behaviors can be more beneficial – or more costly – than many executives realize.

The simple truth here is a bit like the ‘golden rule’: when stakeholders believe they are getting more of these forms of value from your firm than they expect in this type of relationship, they are very likely to reciprocate in positive ways back towards your firm. That is, you did something extra-nice for them so they feel compelled to do something extra-nice for you. Positive reciprocity from employees, for example, can show up in doing more or better quality work than you expected. Positive reciprocity from customers might show up as recommending your firm to more prospective buyers.

On the other hand, negative reciprocity from your stakeholders who think you have delivered noticeably less value than they expected can be costly. Employees, for example, might steal from you and believe their behavior is justified if you are treating them poorly. This behavioral perspective on stakeholder relationships integrates philosophy and ethics into economic reasoning to show that when leaders in many settings allocate more benefits to their stakeholders, they initiate cycles of positive reciprocity that benefit the collective network of stakeholders, including the firm itself.

SIX ADDITIONAL INSIGHTS TO CONSIDER

If this work piques your interest, consider these other insights from our research along similar lines:

  1. Because stakeholders reciprocate positively and negatively towards the firm, firms can (paradoxically) increase their overall financial performance by distributing more value to stakeholders. In this sense, value distribution occurs, in part, before value creation occurs.
  2. When firms generously allocate value to stakeholders, the stakeholders may reveal more nuanced, detailed information about their private interests and capabilities. This, in turn, enhances the firm’s ability to coordinate value-creating activities among many stakeholders because it can form clusters of complementary value propositions for them.
  3. Firms that allocate more to stakeholders than the amount (just noticeable) required to stimulate positive reciprocity can experience lower overall firm performance. That is, there are practical economic limits to generous treatment of stakeholders.
  4. Whereas managers are taught to protect the firm from devious stakeholders by writing careful contracts to govern their interactions, this advice can become a self-fulfilling prophesy. The more you strive to protect yourself, the more protection you will need. An alternative lesson that is associated with better value creation overall is to invest time and energy in learning what each stakeholder expects in the focal context and provide material, procedural, and interactional value to stimulate a cycle of positive reciprocity.
  5. Business relationships are more than just a series of transactions. Stakeholders perceive varying types of psychological bonds with organizations and subsequently decide the level of effort they will provide to help those organizations reach their goals.
  6. Firms create or destroy incremental value in mergers and acquisitions based on how they treat the stakeholders of both the acquiring and acquired firms during the post-deal integration period.

This body of research helps explain what we see in the natural world: most successful firms are not exclusively focused on maximizing their quarterly shareholder performance or, alternatively, on ignoring their shareholders. Instead, we see firms serving the interests of many stakeholders.

Glance at the list of recent examples below, and prepare to share how you are serving your various stakeholders at your next CEO roundtable.

  • BlackRock recently launched a $50 million Emergency Savings Initiative to help millions of low-to-moderate income people increase their financial security.
  • AEP increased its budget for diverse, locally based suppliers by $95 million so that 49% of its total spend is going toward local suppliers.
  • Apple committed $2.5 billion to combat the affordable housing crisis in California.
  • Bank of America is increasing its minimum wage to $20 per hour.
  • Kimberly-Clark is collaborating with diaper bank networks to ensure families in need have access to diapers and wipes.
  • UPS will buy more than 6,000 natural gas-powered trucks in order to reduce fleet pollution.

About Doug Bosee
Doug Bosse is The David Meade White Jr. Professor of Business and Chair of the Management Department in the Robins School of Business at University of Richmond. In addition to teaching undergraduate and graduate classes, Doug often facilitates strategic planning and leadership alignment activities for executive teams and boards, and he teaches the Strategic Planning session in the CEO Essentials program, the partnership program of VACEOs and the Robins School of Business Executive Education. He can be reached at dbosse@richmond.edu.

 

Editors note: Content provided by the Robins School of Business at University of Richmond, a Sponsor of Virginia Council of CEOs.

Posted by Staff at 4:21 pm

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