Managing for Stakeholders Can Pay Off in the Long-Term

The authors apply a stakeholder management lens to the recurring question: why do some firms have higher financial performance than others?

The authors apply a stakeholder management lens to the recurring question: why do some firms have higher financial performance than others? Researchers examine how a company’s approach to stakeholder relationships can lead to competitive advantage. They focus on 1) how managing for stakeholders can give firms more knowledge about their stakeholders preferences, and 2) how this knowledge can translate into additional value.

Background

All firms have stakeholders—employees, managers, customers, suppliers, owners—but the amount of time, energy and money firms devote to them varies. While research suggests investing to keep stakeholders happy may help the bottom line, it is difficult to justify extra effort or resources without knowing the benefits. In this paper, the authors examine how and when investing in stakeholders can pay off in the long-term.

Findings

• A firm “managing for stakeholders” allocates more resources to them than would be necessary for normal operations, resulting in more stock options, better customer service, or shared cost savings. For example, a chain of coffee houses might provide health benefits to part-time employees.

• In return, stakeholders reveal information about what they want, allowing the firm to better meet their needs e.g. designing a new product or offer for customers.

• Trust is key. A firm could easily exploit knowledge they receive. Stakeholders expect reciprocity and fairness.

• Managing for stakeholders can pay off through 1) increased demand for products/services or better efficiency in providing them, 2) ideas for innovative ways to satisfy stakeholders, and 3) an improved ability to respond to surprises like changes in technology, regulation, or relative prices.

• Short-term thinking would discourage many firms from managing for stakeholders.

Implications for Managers

• Manage for stakeholders to mitigate uncertainty. This approach may help you respond to sudden changes (e.g. a new regulation), or even provide advance warning if the shock involves your stakeholders (e.g. a pending strike).

• Balance across stakeholders. Firms cannot satisfy all stakeholders at all times. When one stakeholder must compromise (e.g. employees taking a pay cut), they expect to be compensated in some way in the future. This requires balancing over time by the firm.

• Be consistent.Don’t pick and choose individual stakeholders or contexts. Managing for stakeholders is a long-term solution based on trust, justice, and reciprocity. It may take time for stakeholders to disclose information, and time for the firm to learn how to use it.

• Convert to capture value. Firms must translate the information into value – e.g. realize the value of the information, and how to apply it.

• Don’t ‘give away the store’. It’s possible to allocate too many resources to stakeholders. Also, you’re unlikely to take full advantage if you are forced to over-allocate to powerful stakeholders, e.g. a strong union forcing firms to pay higher wages than the market rates.

Implications for Researchers

This paper leaves testing of the reasons for the relationship between managing for stakeholders and competitive advantage to future work. Researchers should examine which factors make stakeholders reveal their preferences, and identify new methods for measuring the value created.

Methods

The authors explain how and why managing for stakeholders can create value by examining the literature on firm competitiveness and performance and stakeholder management. While the authors draw on a few empirical studies to help explain the relationship, their reasoning is not tested in this article, indicating a need for future research.

Harrison, Jeffrey S., Douglas A. Bosse and Robert A. Phillips. (2010) Managing for stakeholders, stakeholder utility functions, and competitive advantage. Strategic Management Journal, 31:58-74.