Building a business case on good stakeholder relations isn’t a straightforward exercise. Managers must recognize misalignment of perception with reality.
One of the key ways sustainability is expected to boost financial performance is through enhanced relationships with stakeholders. A recent survey by BCG and the MIT Sloan Management Review suggests the No. 1 perceived benefit from sustainability investments is the brand-building potential from a reputation for sustainability. Further demonstrating the importance of stakeholder relationships, several recent California Management Review articles have examined the potential for sustainability to deliver financial benefits to firms. Though researchers disagree about the certainty of the link between sustainability and profit, they seem to agree that if sustainability leads to profitability, enhanced relationships with one or more stakeholder groups are essential.
But is the average person – whether playing the role of customer, potential employee, or investor – paying attention to what companies are doing? Recent evidence suggests the message may not be getting through. Research comparing objective sustainability ratings (measured by surveys from a third-party rating agency) to stakeholder perceptions (prospective employees, investment managers, and supply chain professionals) finds a distinct gap between reality and perception.
The Perception-Performance Paradox
Companies like Google and Apple, for example, rate relatively poorly according to objective sustainability measures but are held in high esteem by stakeholders. Conversely, firms in the energy and financial services industries are often believed to have sub-par sustainability performance, despite scoring above-average on objective measures.
It is critical for researchers and managers to understand this misalignment between reality and perception. It suggests building a business case on enhanced stakeholder relationships may not be as straightforward as it appears. Identifying how stakeholders develop their perceptions of a firm’s sustainability performance may be important research that still needs to be done.
What This Means for Your Firm
NBS research on decision-making outlines a number of biases and limitations of decision-making concerning sustainability. For example, prospect theory shows that people are, irrationally, much more sensitive to losses than gains. And, it just may be that even when stakeholders are inclined to build sustainability into their behaviours, they may simply lack the motivation and ability to differentiate between “good” and “bad” firms.
It would seem that those of us in the “sustainability community” have strikingly different levels of sustainability knowledge and interest than the average person. It might be that others just don’t care like we do.
Does this mean firms should abandon their sustainability initiatives? No. But it does mean that we, as managers and researchers, might want to temper our expectations of the role that enhanced stakeholder relations will play in building a sustainability “business case.”