Stakeholder Relations Sustain Positive Financial Performance
How can companies extend periods of exceptional financial performance and end those of substandard performance? This study found that good stakeholder relations were a key factor in sustaining above-average financial performance. Perhaps more importantly, it was the only factor examined that shortened periods of poor performance, allowing firms to get back to "normal" levels more quickly following problems.
Past research has shown that a firm’s resources can contribute to sustainable competitive advantage. Some research suggests stakeholder relationships are one of these resources. This research examines whether stakeholder relations can impact the duration of good or bad financial performance. The authors focused on the firms’ relations with stakeholders who didn’t directly benefit the firm’s financial returns – that is, employees, customers, suppliers, and the local community.
Future research could explore conceptually the role of different stakeholder groups. Scholars could also examine separately the effects of strengths and weaknesses in stakeholder relations, rather than using a measure that combines both.
The authors used data on 518 firms from the S&P 500 or DSI 400 for the period 1991-2001. KLD Research and Analytics Inc.
yielded data on stakeholder relations and COMPUSTAT data provided firm financial performance and control variables. Quality of stakeholder relations was computed by netting ‘strengths’ and ‘weaknesses’ across several areas. Performance was measured using ROA and Tobin’s q. Authors controlled for technological knowledge, firm risk, firm size, and firm age. They used a series of first-order autoregressive models to test hypotheses.