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.
When a firm performs well (above average for its industry), good stakeholder relations help sustain it for a longer period of time. Employees may work harder, or customers will buy more products or pay more for them.
When a firm performs poorly, good stakeholder relations help it bounce back faster. For example, textile producer Malden Mills experienced a financial crisis in 1995 following an industrial accident. It recovered in less that one year, an accomplishment the CEO credited to support from employees, suppliers, customers, and the community.
Stakeholder relations are unique in their ability to help firms bounce back. Other competencies such as technological expertise are context-specific and can lock firms into bad patterns as well as good ones. But, stakeholder relations are effective across contexts and versatile enough to support a variety of strategies.
Stakeholder relations don’t lead to persistently higher performance levels over time; for that, successful firms must rely on other competencies like technological expertise.
Implications for Managers
Develop good stakeholder relations now to benefit in the future. If you wait until you’re in a crisis to build bridges, you’re too late to reap the benefits.
Prioritize stakeholders when resources are tight. The authors found that human resources (employee relations and diversity) and marketing (product quality) were most important; community and environmental issues contributed less significantly to preserving high performance or improving poor performance.
Technological competencies are still fundamental in order to achieve long-term success that beats your industry averages. Expect they’ll help most when you’re already doing well.
Implications for Researchers
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.
Choi, Jaepil and Heli Wang. (2009) Stakeholder relations and the persistence of corporate financial performance. Strategic Management Journal, 30: 895-907.