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Mandatory Assignment Resources/Responsible Leadership and Stakeholder Management.pdf
S Y M P O S I U M
RESPONSIBLE LEADERSHIP AND STAKEHOLDER MANAGEMENT: INFLUENCE PATHWAYS AND
ORGANIZATIONAL OUTCOMES
JONATHAN P. DOH NARDA R. QUIGLEY Villanova University
The construct of responsible leadership has gained considerable traction in contem- porary management scholarship. Yet defining and operationalizing how responsible leadership manifests in organizational outcomes has posed challenges. In this paper, we draw from stakeholder theory to offer a more fully formed view of how responsible leadership influences organizational processes and outcomes. We provide descriptions of two distinct pathways through which leaders and their organizations exhibit and project their responsible leadership behaviors and actions: psychological and knowl- edge-based. We suggest that these two pathways constitute process mechanisms that advance and disseminate specific signals and messages and, ultimately, actions and outcomes. We provide brief illustrations of three companies and their leaders to underscore the potential of our framework. We conclude with implications for re- search and practice.
The construct of responsible leadership has gained considerable traction in contemporary man- agement scholarship (e.g., Doh & Stumpf, 2005; Miska, Stahl, & Mendenhall, 2013; Pless, Maak, & Waldman, 2012; Stahl, Pless, & Maak, 2013; Voegt- lin, Patzer, & Scherer, 2012; Waldman & Siegel, 2008). Responsible leadership presents an attrac- tive and potentially useful integration of research on leadership and corporate social responsibility (CSR) and offers the opportunity to provide mean- ingful advances in the field of leadership. Yet de- fining and operationalizing how responsible lead- ership affects organizational outcomes has posed
challenges. For example, Siegel (in Waldman & Sie- gel, 2008) suggested that truly responsible leader- ship must include the strategic use of CSR, such that leaders leverage CSR instrumentally to benefit shareholders. Waldman (also in Waldman & Siegel, 2008) argued against such “rigid instrumentality,” suggesting instead that responsible leadership must involve multiple stakeholder groups in decision making because doing so supports the firm’s long- term sustainability. These two contrasting perspec- tives underscore the nascent condition of the re- sponsible leadership construct and the need to further elaborate the processes through which re- sponsible leadership manifests in organizational outcomes.
In this paper, we seek to partially reconcile these divergent perspectives (and others) by drawing from stakeholder theory (cf. Cragg, 2002; Donald- son & Preston, 1995) to contribute to a more fully developed theory of responsible leadership. Prior research suggests that a stakeholder approach to management is positively associated with long- term performance (e.g., Cragg, 2002; Rowley & Ber- man, 2000). Indeed, the ongoing viability and sur-
The authors thank symposium co-editors Günter Stahl and Mary Sully de Luque and AMP co-editor-in-chief Don Siegel for their advice and guidance on the devel- opment of this article, and David Waldman and an anon- ymous reviewer for their helpful feedback on earlier ver- sions of the manuscript. We also acknowledge ongoing financial support from the Villanova School of Business Center for Global Leadership, Rammrath Chair in Inter- national Business, and summer research support pro- gram. Both authors contributed equally to the develop- ment of this manuscript.
� The Academy of Management Perspectives 2014, Vol. 28, No. 3, 255–274. http://dx.doi.org/10.5465/amp.2014.0013
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vival of firms may hinge on the influence of diverse stakeholders (Hart & Sharma, 2004; Harting, Harmeling, & Venkataraman, 2006; Hillman & Klein, 2001). We extend research on stakeholder theory (Jones, 1995; Mitchell, Agle, & Wood, 1997) and responsible leadership (Ciulla, 2005; De Hoogh & Den Hartog, 2008; Doh & Stumpf, 2005; Maak, 2007; Maak & Pless, 2006; Miska et al., 2013; Pless et al., 2012; Voegtlin et al., 2012; Waldman & Gal- vin, 2008; Waldman & Siegel, 2008) to offer a more fully formed view of the pathways through which responsible leadership influences organizational processes and outcomes.
We consider multiple levels of analysis as we build our argument. In particular, we examine how responsible leaders can effectively leverage the stakeholder approach in influencing others through two specific pathways: a psychological pathway and a knowledge-based pathway. We look at these pathways at four distinct levels: micro/individual, team, organizational, and societal.
• At the micro/individual level, we note that re- sponsible leaders consider their followers to be important stakeholders, and as such may be able to leverage their unique perspectives to generate both motivation and creativity (e.g., Zhang & Bar- tol, 2010).
• At the team level, a responsible leader considers and encourages diverse perspectives in her or his approach to stakeholders, which may lead to team-level psychological safety and learning, both linked to team performance (e.g., Edmond- son, 1999) and improved decision options and accuracy (e.g., Stasser & Titus, 1985).
• At the organizational level, leaders with a stake- holder approach may help build an open, inclu- sive, and diverse internal culture by sharing and disseminating knowledge while fostering strong ties with external stakeholders, all of which could lead to firm growth, innovation, and per- formance (e.g., Thomas, 2004).
• At the societal level, leaders who are able to consistently apply a stakeholder approach might be better able to manage across cultural bound- aries (Miska et al., 2013) and identify and antic- ipate critical economic and societal problems and trends so that they can respond more appro- priately (Stahl et al., 2013).
As noted above, we provide descriptions of two distinct pathways through which responsible lead- ership behaviors and actions influence outcomes: psychological and knowledge-based. We suggest
that these two pathways constitute process mecha- nisms that direct and disseminate specific signals and messages and, ultimately, actions and out- comes. We provide brief illustrations of three com- panies and their leaders to underscore the potential of our framework. We conclude with implications for research and practice. This approach should be viewed as a complement that can augment the clas- sic “do no harm” and “do good” dimensions of the responsible leadership construct that have ap- peared in prior literature. Before addressing the two pathways, we first review recent research that has explored the relationship between responsible leadership and stakeholder management.
RESPONSIBLE LEADERSHIP AND STAKEHOLDER ORIENTATION
Stakeholder management has garnered substan- tial scholarly attention since the introduction of R. Edward Freeman’s book Strategic Management: A Stakeholder Approach, which sought to describe the potential advantages of viewing and formulat- ing strategic management from a stakeholder per- spective (Freeman, 1984). Since that time, there have been numerous attempts to advance stake- holder theory and to demonstrate its practical im- plications for business management and organiza- tions more broadly (Mitchell et al., 1997). Stakeholder management may be viewed as both broader than and also a component of CSR, which itself has taken on a range of meanings and appli- cations (Wood, 1991).
Stakeholder Theory and Leadership
An attractive feature of stakeholder management is its elemental simplicity. It also offers the poten- tial of a comprehensive and unifying framework for understanding the complex interactions between firms and their internal and external constituen- cies. A “stake” in an organization rests on “legal, moral, or presumed” claims or on the capacity to influence an organization’s “behavior, direction, process, or outcomes” (Mitchell et al., 1997, p. 858). Somewhat ironically, early management scholars had already recognized the fundamental interdependencies that firms and their stakehold- ers shared in the political and social arenas. For example, Barnard (1962) introduced the notion of business firms as “cooperative” organizations built on rational thinking, and incorporated a range of
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perspectives and influences in his understanding of the roles and responsibilities of business.
Schwartz and Carroll (2008) and Jones and Wicks (1999) maintained that stakeholder theory assumes a network of connections and linkages between corporations and their various constituencies, and stakeholder theorists have explored the nature of these relationships, focusing on antecedents, pro- cesses, and outcomes (Freeman, 1984). Importantly for our discussion, some variants of stakeholder theory include a strong normative element that pre- sumes that the interests of all (legitimate) stake- holders have intrinsic value, and no set of interests is assumed to dominate the others (Clarkson, 1995). At the same time, however, stakeholder scholars have consistently argued that the theory is— or should be—practical, and should have the ability to inform managerial decision making (Donaldson & Preston, 1995).
Although stakeholder theory has many attractive features, applying it in a practical setting poses a challenge: The list of potential stakeholders of most modern corporations is potentially limitless. Prior- itizing among these stakeholders—which may in- clude investors (shareowners and lenders), employ- ees, suppliers, governments, customers, unions, regulatory authorities, joint venture and other alli- ance partners, private organizations (NGOs and, occasionally, the media), local communities and citizens, and even future generations— can be daunting (Post, Preston, & Sachs, 2002). Further, in the global setting in which contemporary leaders operate, the stakeholder relationships may now ex- tend to second-, third-, and fourth-order suppliers and customers, creating obvious practical chal- lenges to managing relationships across geographic space and through dense and elaborate supply chains.
To address the increasingly challenging task of both identifying and managing the range of poten- tially relevant stakeholders, Post and colleagues (2002) suggested that leaders find a way to narrow the focus to those stakeholders whose relationships with the firm really matter. They presented a sim- ple depiction of stakeholders in three concentric circles around the company that correspond to the strategic settings of the firm, with progressive de- grees of importance from those closest to the firm to those more distant. Of more instrumental rele- vance, Mitchell and colleagues (1997) proposed a model of stakeholder salience based on the relative power, urgency, and legitimacy of stakeholder
claims, which can be used to better understand nonmarket stakeholders.
In considering stakeholder theory and its poten- tial implications for leadership, several relevant insights emerge. First, theories of “strategic” lead- ership have naturally acknowledged and encour- aged the consideration of stakeholders, reflecting the role of leaders in considering all contextual dimensions of their options and strategic priorities (Hitt, Ireland, & Rowe, 2005; McWilliams & Siegel, 2001). Second, other theories of leadership that have emphasized the leader as “servant” similarly acknowledge the obligations, commitments, and re- sponsibilities leaders have to their various constit- uencies (e.g., Greenleaf, 1970; Laub, 1999; Mittal & Dorfman, 2012). Finally, an emerging stream of lit- erature (the focus of this symposium) has sought to leverage and integrate perspectives from CSR and leadership studies to develop a vision of the re- sponsible leader. This stream has emanated from both scholarly advances and an acknowledgment of the realities of change in the global business envi- ronment and organizations themselves (e.g., Sch- neider, 2002).
Responsible Leadership Scholarship: A Stakeholder Perspective
An emerging stream of literature has attempted to integrate studies in ethics, leadership, and CSR to triangulate the relatively loosely defined concept of responsible leadership (e.g., Ciulla, 2005; De Hoogh & Den Hartog, 2008; Doh & Stumpf, 2005; Maak, 2007; Maak & Pless, 2006; Pless et al., 2012; Voegt- lin et al., 2012; Waldman & Galvin, 2008; Waldman & Siegel, 2008). An increasingly visible trend in this literature is to incorporate some kind of stake- holder consideration in the conceptualization of responsible leadership, perhaps in response to re- cent major world events (e.g., the global financial crisis, environmental catastrophes, ethical scan- dals, and globalization). As Miska and colleagues (2013) pointed out, these events have resulted in an increased focus on ethics across the business world, and expectations have risen with respect to the roles that corporations and business leaders take on as participating members of society.
In addition, the research stream on responsible leadership—in particular that which addresses the broader global context within which leaders oper- ate— has increasingly focused on understanding what the concept of “responsible” means with re- spect to outcomes. For example, work on the triple
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bottom line (economic, environmental, and social value) has indicated that leaders who are truly “re- sponsible” attempt to have a positive influence across all three types of impact (e.g., Elkington, 1997; Savitz & Weber, 2006), while other research has considered two separate sets of responsible be- haviors as outcomes of responsible leadership: “do good” and “do no harm” (e.g., Brown & Trevino, 2006; Crilly, Schneider, & Zollo, 2008; Waldman & Galvin, 2008). Some of this literature argues that responsible leaders must go beyond doing no harm to actually doing good (e.g., Waldman & Galvin, 2008). The approach we take below is in line with the latter perspective; our conceptual model and case illustrations underscore this emphasis on the value of adopting a broad, inclusive approach to stakeholder identification and consideration.
Relatedly, Stahl and colleagues (2013) described the need for responsible global leaders to consider, act in accordance with, and respond to the needs of both global and local stakeholders; they noted that four significant leadership challenges arise in the do- mains of diversity, ethics, sustainability, and citizen- ship. As another example, Miska and colleagues (2013) linked intercultural competencies from the Global Competencies Inventory (Bird, Mendenhall, Stevens, & Oddou, 2010) to three CSR approaches to decision making (globally standardized, locally adapted, and transnational), and found that only globally standardized approaches to decision mak- ing are not associated with intercultural competen- cies. Some intercultural competencies, however, are associated with effective stakeholder manage- ment when the locally adapted CSR approach to decision making is used, and more intercultural competencies are relevant when the transnational approach is used.
Consistent with Miska and colleagues (2013), other research has considered the responsible lead- er’s interaction with stakeholders to arrive at a more clear understanding of what constitutes lead- ership responsibility given the increasing complex- ity of conducting business in a global, intercon- nected world (e.g., Pless et al., 2012; Voegtlin et al., 2012). As Voegtlin and colleagues (2012, p. 2) asked, “[W]ho is responsible for what and toward whom in an interconnected business world?” Voegtlin and colleagues (2012) took a process-oriented, normative approach to these questions, incorporating Haber- mas’s theory of deliberative democracy (Habermas, 1999, 2001) as a philosophical foundation from which to shed light on responsible leadership. In line with this approach, they conceptualized re-
sponsible leadership as leadership that is open to a broader target group (the stakeholders) with the aim of ensuring the legitimacy of the organization and developing symbiotic relationships with stakeholders.
As Voegtlin and colleagues (2012) noted, how- ever, a leader who successfully undertakes the above steps would be considered “responsible,” but there is likely a continuum of responsibility, leaving a gray area between the responsible leader at one end of the spectrum and the self-interested, egotistical, instrumental leader at the other end of the spectrum. This conceptualization of responsi- ble leadership clearly accounts for the role and consideration of affected stakeholders, but it is less clear on exactly how leaders would manage the diverse, sometimes conflicting demands of the var- ious groups affected.
Voegtlin and colleagues (2012) also considered the outcomes of a responsible leadership approach across multiple levels of analysis. In particular, they considered responsible leadership’s positive influence on macro-, meso-, and micro-level out- comes, which they proposed all lead to the ability of the leader to tackle the challenges of globaliza- tion. At the micro level, they noted that responsible leaders play an important part in organizations as role models and involve employees in decision- making processes. As a result, followers of respon- sible leaders are likely to have higher levels of job satisfaction, motivation, commitment, and organi- zational citizenship. While Voegtlin and colleagues (2012) were clear that responsible leaders generate positive outcomes, they did not explicate in detail exactly how leaders understand and balance the diverse views of different stakeholders.
Pless and colleagues (2012) also considered in- teractions with stakeholders to be a critical part of their conceptualization of responsible leadership. They used a qualitative analysis of 25 business leaders and entrepreneurs to build a descriptive taxonomy of a concept they called “responsibility orientation.” In this framework, leaders can be cat- egorized along two dimensions: the extent to which they differ in terms of breadth of constituent group focus (narrow versus broad) and the extent to which they differ on the degree of accountability toward others (low versus high). With respect to the former, business leaders with a narrow focus hone in on a single specific constituent or stakeholder group (this could be shareholders/owners, for ex- ample), while leaders with a broad focus attend to
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the needs of multiple constituents or stakeholder groups.
With respect to the degree of accountability di- mension, Pless and colleagues (2012) defined the low-accountability end of the spectrum as leaders who direct accountability toward shareholders/ owners. As they noted, with this end of the dimen- sion, the assumption is that the business’s objective is to maximize profit in the short and/or long term; this accountability to shareholders is viewed as actually benefiting society (Pless et al., 2012). Lead- ers with a high degree of accountability, in contrast, perceive their accountability to go beyond the shareholders/owners. These leaders may be skepti- cal of the ability of the market and government to provide socially optimal outcomes, and therefore may believe that considering the needs of nonbusi- ness stakeholders is legitimate and morally rele- vant. Mapping these two dimensions together cre- ates a matrix of four orientations toward responsible leadership: (1) the traditional econo- mist (low accountability, narrow breadth of stake- holder focus); (2) the opportunity seeker (low ac- countability, broad breadth); (3) the integrator (high accountability, broad breadth); and (4) the idealist (high accountability, narrow breadth).
In further explicating each of the responsible lead- ership orientations, Pless and colleagues (2012) noted that each orientation is likely to have a different ap- proach to CSR. Because of the traditional economist’s emphasis on short-term value creation targeted to- ward shareholders, leaders with this orientation are likely to exhibit little commitment to CSR and would, at best, follow industry standards and norms regarding CSR activities (Pless et al., 2012). The opportunity seeker is likely to engage in CSR if there are instrumental reasons for doing so—for example, if the leader believes that social respon- sibility could be part of a strategy of longer-term value creation (e.g., Orlitzky, Schmidt, & Rynes, 2003). Both of these orientations focus clearly on the idea of accountability toward shareholders/ owners.
In contrast, the integrator proactively engages with a broader range of stakeholders and attempts to deliver results along multiple bottom lines by integrating objectives across these groups (Pless et al., 2012). This particular orientation toward re- sponsible leadership is also likely to be perceived by others as visionary or transformative (e.g., Sully de Luque, Washburn, Waldman, & House, 2008). Last, Pless, Maak, and Waldman (2012) noted that the idealist orientation toward responsible leader-
ship is most likely to occur among social entrepre- neurs—those individuals who believe that the pur- pose of their business is to create innovative solutions to societal problems (Mair & Marti, 2006; Nicholls & Cho, 2006) while maintaining some level of self-sustainability (rather than necessarily profits).
These leaders must balance their emotional con- cern for a targeted group of stakeholders who are in need with the rational demands associated with running the organization, which often proves to be difficult. In any case, the idealist’s approach tends to be very servant-based, in that he or she is serving the needs of a set of targeted stakeholders (e.g., Mittal & Dorfman, 2012; Sendjaya, Sarros, & San- tora, 2008; Van Dierendonck, 2011). Interestingly, Pless and colleagues (2012) did not explicitly tie the different orientations toward responsible lead- ership to leadership effectiveness, likely because there are few empirical studies to support this con- nection. Moreover, the literature to date has not fully specified the pathways through which re- sponsible leaders exert their unique abilities to in- fluence organizational processes and outcomes.
Beyond Shareholders: The Responsibilities of Responsible Leaders
In considering the emergent work on the connec- tion between responsible leadership and stake- holder management, the literature is converging on the idea that responsible leaders have a view of their personal accountability that goes beyond serv- ing the needs of shareholders/owners alone. Re- sponsible leadership also likely requires a proac- tive dialogue with other stakeholders who will be affected by the actions of the organization. This kind of an approach requires a particularly open, transparent, and confident leadership orientation, such that the leader is able to both interact with and prioritize stakeholders effectively and detect cues and emergent trends so that they can be incorporated into firm strategy and organizational processes. In the next section, we discuss how responsible leaders may influence organizational dynamics and, in so doing, shape organizational outcomes.
RESPONSIBLE LEADERSHIP, INFLUENCE PATHWAYS, AND ORGANIZATIONAL
OUTCOMES
Leaders clearly can influence multiple levels of analysis in and around organizations (e.g., Yukl,
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2012). While Voegtlin and colleagues (2012) con- sidered the positive outcomes associated with re- sponsible leadership at the macro, meso, and micro levels, here we explicate how leaders may influ- ence such outcomes through stakeholder engage- ment. We highlight two pathways through which responsible leaders using a stakeholder approach may engender positive outcomes: psychological and knowledge-based (see Figure 1).
Pathway 1: Psychological Benefits of Responsible Leadership
While research that explicitly examines how the stakeholder approach works at the individual level is scarce—for the simple reason that the literature on stakeholder theory has tended to be more macro in nature (e.g., Donaldson & Preston, 1995)—a re- sponsible leadership approach that is more inclu- sive of the needs of various stakeholder groups is likely to resonate psychologically at the individual level, resulting in higher levels of engagement with the organization. The broader leadership literature within organizational behavior has much to add to our understanding of why a stakeholder-oriented approach may be particularly effective in terms of psychologically motivating and influencing em- ployees. Sully de Luque and colleagues (2008), for example, using a cross-cultural sample of CEOs and their followers, provided convincing evidence that when leaders assign a greater level of importance to stakeholders, subordinates perceive them as more visionary (rather than autocratic). This, in turn,
motivates followers to exert extra effort, which then positively influences firm performance. In contrast, they noted that leaders who place more economic emphasis on values (more of a stockholder/owner prioritization approach) are more likely to be per- ceived by followers as autocratic, a leadership style that may have short-term benefits in terms of effi- ciency but likely erodes employee motivation and engagement over time (e.g., Appelbaum et al., 2004; Bass, 1990; Gastil, 1994).
The research stream on empowering leadership has also emphasized the motivational and individ- ual performance benefits of a leadership style that is inclusive of various employee perspectives, par- ticularly with respect to influencing individual cre- ativity. Zhang and Bartol (2010), for example, noted that empowering leadership creates conditions that enable employees to become more engaged with their work, perhaps through delineating the signif- icance of the job, providing autonomy in decision making, expressing confidence in the employee’s capabilities, and removing barriers to performance. Empowering leadership, by definition, is a leader- ship style that is inclusive and welcoming of dif- ferent employee perspectives— clearly related to the idea of a responsible leader trying to meaning- fully engage various stakeholders within the organ- ization. Logically, a leader who embodies this kind of open approach is likely to create a climate of psychological trust and respect, which in turn has many positive benefits for affected stakeholders. Indeed, Zhang and Bartol (2010) found that em- powering leadership was positively related to
FIGURE 1 Proposed Model: Responsible Leadership, Pathways, and Outcomes
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higher levels of employee creativity, operating in part through the mediating mechanisms of psycho- logical empowerment, engagement in the creative process, and intrinsic motivation.
The literature on servant leadership also suggests a link between the consideration of stakeholder needs and psychological benefits to followers. While there are many recent definitions and inter- pretations of servant leadership, as with the litera- ture on responsible leadership, scholars have yet to converge on a single consensus regarding its pre- cise definition and theoretical framework (Mittal & Dorfman, 2012). The first empirical study to mea- sure the servant leadership concept was Laub (1999); subsequent work has validated many of the dimensions found in that piece. Most pertinent to the discussion of responsible leadership is the ser- vant leadership dimension of “creating value for the community”—a natural point of integration. As Mittal and Dorfman (2012) noted, this involves building strong personal relationships both inside and outside the organization by working collabora- tively with others (and valuing their differences; Goffee & Jones, 2001). From a normative perspec- tive, this dimension of servant leadership also re- quires the leader to recognize that “organizations have a moral duty not only to consider the impact of organizational action on the larger communities in which they operate, but also to constructively improve those communities as well (Reed, Vidaver- Cohen, & Colwell, 2011)” (Mittal & Dorfman, 2012, p. 557).
Van Dierendonck’s (2011) review piece on ser- vant leadership noted that empirical (though cross- sectional) support exists for the positive relation- ships between servant leadership and employee satisfaction, commitment, and performance. The main theoretical mechanisms through which this process occurs are the development of a high-qual- ity leader–follower relationship and the develop- ment of a psychological climate of trust and fair- ness (Van Dierendonck, 2011). Although this literature is in its infancy, it lends some logical support for the idea that a stakeholder-oriented ap- proach in which a leader is cognizant of the broader community in which his or her organization oper- ates (and cognizant of the organization itself as a community) would lead to positive individual- level outcomes through psychological mechanisms such as trust and ownership. In this regard, Car- meli, Gilat, and Waldman (2007, p. 972) linked employee identification to actions on the part of the firm pertaining to CSR, finding that perceived so-
cial responsibility and development had a larger effect on organizational identification than per- ceived market and financial performance, which “in turn resulted in enhanced employees’ work out- comes—adjustment and job performance.”
This review of transformational/visionary, em- powering, and servant leadership styles, while not exhaustive, lends some level of support to the idea that leadership that is more inclusive of various stakeholders within and outside the organization has important individual-level effects through var- ious psychological pathways. Stakeholders with higher levels of trust, psychological ownership in the organization, and commitment to the organiza- tion are likely to engage more with the organization at the individual/micro level, which is likely to have important long-term individual-level benefits for all involved.
At the team level, the literature on psychological safety in work teams (e.g., Edmondson, 1999) sug- gests that when team members share a belief that the team is safe for interpersonal risk taking, teams may be better able to learn and perform. Recent work by Nembhard and Edmondson (2006) sug- gests that the concept of leader inclusiveness is a key antecedent of psychological safety. Leader in- clusiveness is the extent to which a leader’s words and deeds indicate an invitation and appreciation for others’ contributions (Nembhard & Edmondson, 2006). It seems clear that leader inclusiveness is conceptually related to responsible leadership that emphasizes a stakeholder-based approach—leaders who are more sincerely interested and invite oth- ers’ contributions would be considered high on leader inclusiveness and likely to engage multiple categories of stakeholders in a given discussion.
It should be noted that we assume here that in- clusive leaders are aware of the existence of various stakeholder groups, to include them. Inclusiveness may actually have multiple dimensions, however, such as depth of inclusion and breadth of stake- holders included; future research should examine whether leader inclusiveness does, indeed, consist of multiple dimensions. In any case, based on the literature on psychological safety in work teams, there is a psychological benefit to leader inclusive- ness, which then results in greater levels of engage- ment and team learning (e.g., Nembhard & Edmond- son, 2006). This provides further support at the team level for the idea that responsible leadership using a stakeholder approach would result in psychological benefits that would then translate into positive out- comes at multiple levels of analysis.
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Another stream of research at the team level that points to the psychological benefits of a more stake- holder-oriented approach for responsible leaders is the literature on shared leadership in teams. Car- son, Tesluk, and Marrone (2007) defined shared leadership as an emergent, team-level property re- flecting the distribution of leadership influence across multiple team members. In a sample of 59 consulting teams, shared leadership predicted team performance, such that teams with higher levels of shared leadership were able to perform better (Car- son et al., 2007).
While we do not think it necessary for responsi- ble leaders to share leadership with stakeholders to be considered responsible, we do see a connection between leaders who are open to the idea of sharing leadership responsibilities and the qualities that have been attributed to responsible leadership. While this openness may have an important impact on the task outcome, there is also likely a psycho- logical process occurring that helps to solidify team members’ trust in the leader. A leader who can admit what he or she does and does not know and can confidently seek out those who are able to pro- vide the necessary knowledge and perspectives on the issue is likely to be perceived by followers as more honest, trustworthy, and effective (e.g., Ancona, Malone, Orlikowski, & Senge, 2007), resulting in a further psychological boost. The psychological bene- fits of an inclusive approach to leadership are also supported by the literature on participative leader- ship (cf. Bass, 2008).
At the organizational level, a responsible leader who values stakeholders beyond merely those in the stockholder/ownership category can have an important impact on the culture of the organization through psychological means. As noted above, Voegtlin and colleagues (2012) explicated the im- pact that responsible leaders can have on meso- level issues as they shape organizational culture and performance (e.g., through building an ethical culture, boosting the corporate social responsibility of the organization, creating opportunities for so- cial entrepreneurship for themselves, and possibly contributing directly and/or indirectly to the firm performance). Here, we suggest that the psycholog- ical benefits of a more stakeholder-oriented ap- proach create a virtuous cycle at the organizational level. As leaders are more inclusive of the perspec- tives of various important stakeholders, those stakeholders are more likely to trust the leader, feel committed to what the organization is trying to accomplish, feel more psychological ownership
over the tasks at hand, perhaps feel more of an emotional connection to the work and to the organ- ization, and be more motivated at the individual level as a result.
Organizational culture can be thought of as both a bottom-up emergent phenomenon and a top- down contextual phenomenon (e.g., Kozlowski & Klein, 2000). We argue that the responsible leader creates a cascade of positive influence from the top down by being inclusive with various stakeholder groups; this inclusive, open culture is then rein- forced from the bottom up as employees of the organization feel the impact of this leadership ap- proach. Over time, because the nature of the stake- holder approach is to build bridges and community with other groups outside the organization (i.e., not just employees), this culture will both be an exten- sion of and reinforce the connections that the re- sponsible leader has made with the broader com- munity of stakeholders (e.g., suppliers, customers, trade groups, etc.). The connection between organ- izational leadership and culture, of course, is both robust and complex (e.g., Cameron, Quinn, Degraff, & Thakor, 2006; Schein, 1992).
As the organization interfaces with a global, di- verse set of stakeholders, it is important to note the likely psychological benefits of the responsible leader’s stakeholder approach cross-culturally as well. Although to our knowledge no studies have directly examined the psychological benefits of a stakeholder approach in terms of cross-cultural leadership effectiveness, it would seem that re- sponsible leaders with an inclination to include stakeholders would be more effective in leading across cultures. Leaders who are focused solely on stockholders and short-term profit-oriented con- cerns may miss opportunities to create long-lasting connections with stakeholders across cultural boundaries. By contrast, responsible leaders who can navigate cross-cultural challenges with acumen likely understand the importance of an inclusive approach to successful cross-cultural leadership.
Mittal and Dorfman (2012), for example, offered strong support for the idea of servant leadership across cultures, suggesting that this may be an ef- fective leadership style to use in cross-cultural sit- uations. It is important to note that their results are somewhat nuanced, however, in that not all groups of cultures examined found the dimensions of ser- vant leadership to be similarly effective (for exam- ple, the humility dimension of servant leadership was not highly endorsed in Germany, Austria, and Switzerland; in contrast, this dimension was
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strongly accepted in many of the Asian countries included in the study). In any case, as leaders con- duct increasingly more business with a diverse group of stakeholders, one dimension of that diver- sity is likely to be culture, and the more practice the responsible leader has with respect to building bridges to various communities, the more skillful he or she will become, building other stakeholders’ trust and confidence in his or her leadership skills along the way.
Pathway 2: Knowledge-Based Benefits of Responsible Leadership
In addition to the psychological pathway, a sec- ond, equally important route that responsible lead- ers can take to influence outcomes is the knowl- edge-based pathway. Adopting the perspective that organizations are open systems (e.g., Allport, 1955; Giddens, 1993), we assert that responsible leaders with high consideration for stakeholders are likely well positioned both to navigate the context within which organizations operate and to encourage knowledge to flow in a functional manner within and across the boundaries of the organization among employees and external stakeholders.
Knowledge flow and management in organiza- tions has been a topic of great interest in the broader management literature over the past two decades (e.g., Hansen, Mors, & Lovas, 2005; Nonaka & Takeuchi, 1995; Spender & Grant, 1996; Tsai, 2001), in large part because knowledge is an invalu- able source of the firm’s ability to innovate and deliver value (cf. Grant, 1996; Nonaka & Takeuchi, 1995). We define the concept of knowledge sharing somewhat broadly, in keeping with Srivastava, Bar- tol, and Locke (2006), as any sharing of task-rele- vant ideas, information, and suggestions among the parties involved. Additionally, we adopt Nonaka’s (1994) theory that new knowledge is created when interaction occurs between two basic types of knowledge (tacit and explicit), giving rise to four types of knowledge creation (internalization, so- cialization, articulation, and combination). Thus, knowledge sharing between and among organiza- tional stakeholders is critical for knowledge cre- ation and, more broadly, innovation. Despite the need for integration between theories of responsi- ble leadership and the literature on knowledge sharing and creation, as Bird and Oddou (2013) noted, there is a surprising dearth of research ad- dressing the connection between these two topics. We assert that a knowledge-based pathway is the
second route through which responsible leaders with high consideration for stakeholders can func- tion effectively across levels of analysis; in the fol- lowing section, we briefly review existing research that supports this claim.
One central focus of the knowledge sharing and transfer literature at the individual and dyadic lev- els of analysis has been to better understand how to encourage individuals within organizations to share the knowledge they have with others to form the basis of innovative new ideas (e.g., Nonaka, 1994). Motivating factors such as incentives, goals, trust between knowledge provider and recipient, and norms regarding reciprocity of communication have been examined in the knowledge sharing lit- erature (e.g., Bartol & Srivastava, 2002; Davenport & Prusak, 1998; Hansen et al., 2005; Quigley, Tesluk, Locke, & Bartol, 2007), but as noted above, rela- tively few studies in the knowledge sharing litera- ture or in the leadership literature have examined the role of leadership as a motivating factor in the knowledge sharing process. We would expect that responsible leaders taking a CSR approach would, in fact, affect whether organizational stakeholders choose to share or not share knowledge.
This was indeed the case in a field study con- ducted by Srivastava and colleagues (2006), who found that empowering leadership was positively related to knowledge sharing and subsequent per- formance of management teams. In other words, knowledge sharing was a key mediating variable through which empowering leadership influenced performance. While responsible leaders taking a CSR approach would not necessarily adopt an em- powering leadership style, we expect that respon- sible leaders who communicate with and balance the needs of various stakeholders would likely model and (either intentionally or unintentionally) encourage knowledge sharing among organiza- tional stakeholders themselves. Recent research in the domain of leader-member exchange (LMX) sim- ilarly suggests that leaders who have high-quality relationships with followers encourage employee knowledge sharing (e.g., Carmeli, Atwater, & Levi, 2011). Therefore, we expect that responsible lead- ers who effectively involve multiple stakeholders will likely help to motivate those stakeholders, both within and outside the organization, to share knowledge with one another, thus improving indi- vidual-level outcomes at work.
The knowledge sharing pathway will also aid responsible leaders who take a more CSR-oriented approach in that we expect there to be a positive
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impact on processes and outcomes at the work group/team level. Some stakeholders are likely to be more or less formally organized in groups or teams, and the issues associated with knowledge sharing become more complex as responsible lead- ers consider interactions among team members. Stasser and Titus (1985), for example, developed the concept of “hidden profiles” to describe the problem of group decision making when some in- formation is shared among group members and other information remains unshared, creating shared information biases and leading to poor de- cisions. This literature has revealed that individu- als are more likely to exchange information they already share rather than information that is unique and could lead to better decisions (see Mesmer- Magnus & DeChurch, 2009, for a review).
One solution to this problem is the deliberate integration of the unique knowledge of individual group members to allow optimal decisions to be realized. Unshared information is more often novel, and thus incorporating it into decision mak- ing leads to more fully informed and innovative outcomes. Although no published studies to date address this, the hidden profile issue likely also exists between stakeholder groups. For responsible leaders to fully leverage the latent knowledge within and among stakeholder groups, they must first be aware of this issue, and consider ways in which different groups might communicate more effectively with the leader and among themselves to lead to the development of new knowledge and innovation.
Groupthink is another example of a classic “pro- cess loss” issue in the teams literature that might be effectively mitigated with a responsible leader’s CSR approach (Janis, 1972). Groupthink is caused, in part, by the conformity of thinking that arises from a lack of cognitive diversity among team mem- bers. We would expect a responsible leader taking a CSR approach to be better able to integrate diverse perspectives in decision-making processes, leading to knowledge sharing within and across various teams and ultimately circumventing the process loss issues caused by groupthink. Our discussion of the impact a responsible leader may have on team processes and outcomes because of the knowledge- oriented pathway is somewhat limited here, but we believe this could be an extremely fruitful avenue for future research.
At the organizational level, responsible leaders taking a CSR approach serve in a boundary-span- ning capacity—a sort of external liaison—to iden-
tify, calibrate, and process information and cues coming from the external environment generally and key stakeholders in particular. In their role as boundary spanners, responsible leaders leverage the knowledge-based pathway to improve organi- zational outcomes. Such a role is especially valu- able considering the increasing interaction between firms and nongovernmental stakeholders (NGOs). These interactions may be conflicting, with NGOs seeking to call attention to the shortcomings of corporate social and environmental performance. They might also cooperate with firms and NGOs, engaging in some form of partnership or collabora- tion (Yaziji & Doh, 2009). Closer relationships with NGOs may provide corporations with access to dif- ferent skills, competencies, and capabilities than those that are otherwise available within their or- ganization or that might result from alliances with for-profit organizations.
According to Rondinelli and London (2003), cross-sector alliances— collaborative relationships among NGOs and corporations—may offer oppor- tunities for corporations to achieve the legitimacy and develop the capabilities needed to respond to increasing pressure from stakeholders to address environmental and social issues (Waddock, 1988, 1991). For example, Doctors Without Borders pro- vides a reliable, efficient, and trustworthy partner for pharmaceutical companies in distributing medica- tions in developing countries and conveys poten- tial reputation benefits (or costs) that are idiosyn- cratic to its status as a nonfirm, nongovernmental stakeholder. Yet, to identify and recognize the po- tential value of these relationships, a responsible leader must be attuned to signals from the external environment and able to identify opportunities that emanate from those signals. The leader must also listen to and/or share leadership with other organ- izational members who might also be in tune with such signals.
Some scholars have even advocated for engage- ment with “fringe” stakeholders to develop more imaginative and creative approaches to tackling major challenges (Hart & Sharma, 2004), arguing that the knowledge required to engage in “compet- itive imagination” increasingly exists outside of the firm and even beyond traditional corporate com- munities. By reaching for these sometimes mar- ginal fringe stakeholders, firms can develop a dif- ferentiated perspective that is attuned to social movements and trends and position themselves on the leading edge of these transformations in ways that create economic and social value (Hart &
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Sharma, 2004). Hart and Sharma (2004) suggested that empathy with those on the margins is both good social policy and a potential contributor to long-term competitive advantage. Interestingly, they explicitly advocate moving beyond large, powerful salient stakeholders to those that are less visible, prominent, and explicitly influential. An- other way to describe these stakeholders is as “la- tent,” in that their immediate power and urgency is not apparent but rather is in an embryonic phase or form, poised to emerge at some subsequent pe- riod (e.g., Mitchell et al., 1997).
Responsible leaders who are oriented toward serving as a pathway through which knowledge and insight flow are clearly in a stronger position to capitalize on the engagement with external stake- holders who might otherwise go unnoticed (at least until they pose challenges or threats to the firm). These latent stakeholders may provide cues to help leaders and their firms increase awareness and ap- preciation of important trends. Through engage- ment with these peripheral stakeholders, firms and leaders may be less likely to be blindsided by un- foreseen developments that are outside the scope of their typical perspectives. As part of this “early warning system,” engagement with these stake- holders may provide partial insulation from social movement action and NGO advocacy (Doh, Law- ton, & Rajwani, 2012; Lawton, Doh, & Rajwani, 2014). Responsible leaders who see their role as brokering information and knowledge and creating more permeable firm borders have the capacity to acquire and distribute knowledge that can be help- ful and supportive of firm goals and of a culture of social responsibility and sustainability. Once that knowledge is assembled or aggregated, responsible leaders can also serve as an internal advocate and carrier for knowledge flow and distribution; shar- ing this macro-level knowledge internally within their organizations with the appropriate individu- als and teams will assist in the decision-making process at lower levels of analysis.
Hence, responsible leadership can create value and improve decision making at the organizational level through the process of boundary spanning with external actors and engaging with latent stake- holders, and then incorporating the perspectives and knowledge from those stakeholders into firm- level decision making. In addition, as discussed above, responsible leaders foster internal informa- tion sharing, including uncovering and disseminat- ing novel “hidden” knowledge, promoting multiple creative options, and creating a culture of overall
knowledge sharing. Therefore, the knowledge- based pathway clearly represents a set of mecha- nisms that responsible leaders taking a broad ap- proach to stakeholders can use to positively influence outcomes at multiple levels of analysis. We acknowledge that this perspective is somewhat idealized; in reality, it must be balanced with time management, resource constraints, and bounded rationality (Voegtlin et al., 2012).
Last, we note that the psychological and knowl- edge-based pathways are not entirely discrete or mutually exclusive, although we have discussed them separately here for the purposes of clarity. Rather, they can and do coexist, either in a tempo- rally concurrent or sequential fashion. That is, be- havior and action resulting from the psychological pathway may precede that which emanates from the knowledge-based pathway (e.g., the Walmart example we discuss below) or vice versa (the Coke and DuPont examples, also below). Moreover, as shown in Figure 1, these cases underscore the re- ality that these pathways are often mutually rein- forcing, dynamic, and recursive, such that move- ment on one begets action on the other and vice versa.
In the next section we provide three brief exam- ples from the world of corporate sustainability to illustrate our perspective and the explanatory power of the psychological and knowledge-based pathways.
RESPONSIBLE LEADERSHIP PATHWAYS: EXAMPLES FROM CORPORATE SUSTAINABILITY LEADERSHIP
Sustainability has emerged as an important soci- etal issue and one that corporations have begun to incorporate into their business strategy and their broader social engagement (Bansal, 2002; Orlitzky, Siegel, & Waldman, 2011). Organizational leaders are recognizing that addressing sustainability chal- lenges may improve their standing with their stake- holders and potentially translate into a stronger reputation (Flammer, 2013). Significant variance exists, however, in what firms and leaders believe are the potential benefits of committing to sustain- able management practices (Aguilera, Rupp, Wil- liams, & Ganapathi, 2007). Anecdotal evidence sug- gests that individual leaders can have a profound impact on a company’s decision to move affirma- tively toward a more sustainable business model.
Often, a crisis or personal epiphany is the cata- lyst that drives a leader—and the company—in the
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direction of a sustainable future. In both cases, the psychological and knowledge-based pathways are likely at work. A personal epiphany may occur because of new knowledge or insight the leader has acquired, perhaps from an external stakeholder. The psychological pathway is also involved, begin- ning with the CEO or top management team mem- ber(s) undergoing a change of perspective and then appealing to different levels of the organization to support that shift (e.g., Walmart). In the case of a crisis or watershed event, the knowledge-based pathway may prompt a leader to initiate or accel- erate actions (e.g., Coke and DuPont). As responsi- ble leaders attempt to galvanize support for their decisions, the psychological pathway becomes crit- ical. In most instances, these processes are initiated at the level of the organizational leader and “trickle down,” but in some instances they emanate both from senior levels and from the bottom up. As we noted above, the psychological and knowledge- based pathways are not mutually exclusive; in- deed, they likely coexist and may even be mutually reinforcing.
In this section, we briefly highlight three compa- nies and their leaders, each of whom demonstrates some of the mechanisms we described above regard- ing pathways of responsible leadership, through ei- ther knowledge sharing/dissemination or psycholog- ical enrichment— or both. Notably, these examples are somewhat stylized, as they are intended to pro- vide practical illustrations of the pathways de- scribed above. In addition, much of our discussion focuses on the knowledge-based pathway (or some combination of psychological and knowledge- based), because these cases are based on secondary data, and the knowledge pathway is more easily observable from that perspective.
Walmart, the Walton Family, and Lee Scott
The story of Walmart’s conversion to sustainabil- ity is legendary. Although Walmart introduced green product labeling beginning in the late 1990s, those steps backfired when consumers perceived Walmart’s commitment to be superficial and cur- sory (Plambeck & Denend, 2008).
According to lore, the real change happened when Rob Walton, son of founder Sam Walton, was confronted at the end of a scuba diving trip in Costa Rica by Peter Seligmann, co-founder and CEO of Conservation International, who said, “We need to change the way industry works. And you can have an influence” (Gunther, 2006, p. 43). As it turns
out, there was a strong conservationist streak in the family already: The family often took camping va- cations, younger brother John was a conservation- ist, and Rob’s son Sam, who worked as a Colorado River guide, sat on the board of the Environmental Defense Fund. A few years earlier, after a trip to Africa, Rob Walton had begun setting aside family resources for conservation causes, but Seligmann sug- gested that Walmart could do more by leveraging the power of its commercial influence (Gunther, 2006) to become a catalyst for environmental change across its industry peers and among its extensive supplier base, the largest in the world (Gunther, 2006). This interaction reflects the sometimes pow- erful role a key outside stakeholder and a personal relationship can play in transforming the way com- panies and their leaders gain knowledge and in- sight—and a resulting reorientation.
According to Plambeck (2007, p. 18), Walmart’s first outside CEO, Lee Scott, strongly supported this agenda. Some of this support reflected the deep Christian religious beliefs of the Waltons and Scott:
In October 2005, in an auditorium filled to capacity, Wal-Mart President and CEO Lee Scott made the company’s first speech to be broadcast to 1.6 million employees in all 6,000-plus stores worldwide—and shared with its 60,000-plus suppliers. Scott an- nounced that Wal-Mart was launching a sweeping business sustainability strategy to dramatically re- duce the company’s impact on the global environ- ment. . . . He argued that “being a good steward of the environment and being profitable are not mutu- ally exclusive. They are one and the same.” Scott also committed Wal-Mart to three aspirational goals: to be supplied 100% by renewable energy, to create zero waste, and to sell products that sustain our resources and the environment.
Walmart made its biggest sustainability impact by requiring its thousands of global suppliers to sign on to stringent environmental requirements. Devel- opment of these standards took place as part of broad cooperation with environmental NGOs, par- ticularly the Environmental Defense Fund. Tyler Elm, Walmart’s vice president and senior director of corporate strategy and business sustainability, remarked at the time, “We recognized early on that we had to look at the entire value chain. If we had focused on just our own operations, we would have limited ourselves to 10 percent of our effect on the environment and eliminated 90 percent of the op- portunity that’s out there” (Plambeck, 2007, p. 18).
Since that time, Walmart has embarked on what some consider to be a profound transformation of
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its operations and those of its suppliers, initiating a series of global environmental initiatives that have had broad and deep direct and secondary effects on its internal organization, customers, suppliers, and other stakeholders. According to Walmart’s (2012) Global Responsibility Report, company achieve- ments included reducing waste by 80%, expanding locally grown produce sold, expanding the Wom- en’s Economic Empowerment Initiative, using 1.1 billion kilowatt-hours of renewable energy (more than 38 U.S. states combined), developing an inte- grated sustainability index, expanding its global direct farm program, and increasing diversity and inclusion for women and minorities (Walmart, 2012). Walmart now ranks suppliers—large and small— on their sustainability efforts and has be- come an active participant in global efforts to sup- port sustainably sourced forest products, marine fish and aquatic species, and palm oil, reflecting a level of “responsibility” that goes beyond the com- pany’s own organizational boundaries. Most re- cently, Walmart has embarked on an effort to green the production and packaging of children’s toys.
Walmart’s leadership around sustainability dem- onstrates elements of the psychological and knowl- edge-based pathways of responsible leadership. The family founding of the company and its reli- gious motivations for conservation suggest strong psychological pathways through which the firm influenced its internal and external stakeholders at multiple levels. The initial process occurred at the most senior level of the organization and within the founding family and top executives. Subsequently, however, the move toward responsible leadership cascaded down and across the organization to in- clude even the retail stores and suppliers. While the psychological pathway remained strong and salient, Walmart and its leaders—the Walton fam- ily and Lee Scott—leveraged the knowledge-based pathway to engage external stakeholders such as the Environmental Defense Fund and transfer and disseminate the knowledge and insights of those stakeholders—and the powerful logic of moving to a more sustainable future—to both internal and external constituencies (e.g., employees, custom- ers, and suppliers).
Coca-Cola and Neville Isdell
In the mid-2000s, Coca-Cola was accused of us- ing water that contained pesticides in its bottling plants in Kerala, India, and of illegal water dis- charges and diversion. An environmental group,
the Center for Science and Environment (CSE), found that 57 bottles of Coke and Pepsi products from 12 Indian states contained unsafe levels of pesticides (Mather, Johnson, & Kumar, 2003). Kera- la’s minister of health, Karnataka R. Ashok, im- posed a ban on the manufacture and sale of Coca- Cola products in the region. Although subsequent tests suggested that the amount of pesticides found in Pepsi and Coca-Cola drinks was harmless to the body, Coca-Cola’s reputation had been tarnished. In May of 2007, a team of investigators led by the India Resource Center released a report on viola- tions by a Coca-Cola bottling plant in Sinhachawar, Uttar Pradesh, documenting wastewater discharges into surrounding agricultural fields and a canal that feeds into the Ganges River as well as illegal dump- ing of sludge on the plant’s property. As such, Coke’s move toward responsible leadership began at the societal and organizational levels, with broad political, economic, and cultural forces exerting specific pressures for change.
These developments also had a profound impact on Coke’s then CEO, Neville Isdell. Although Isdell had a strong personal commitment to environmen- tal sustainability, the company had not launched any major initiatives until this crisis. While Isdell had not operationalized his personal psychological commitment to sustainability, this crisis— channel- ing new knowledge and insight from external par- ties— helped activate the dormant psychological pathway.
One early move was to establish an in-house team of sustainability advocates, operating almost as an in-house NGO. According to Kert Davies, then research director at Greenpeace, this initiative was genuine and authentic: “The inspiration and the perspiration are real” (Gunther, 2008, p. 68). Such a step was a somewhat radical acknowledgment of the need to broaden the knowledge-based pathways available to the organization and widen the scope of knowledge and expertise available to the firm as it tackled this crisis.
Isdell underscored the need to include multi- ple stakeholders to address challenges of this type to leverage the knowledge these parties could bring to the table. Shortly after the India debacle, he remarked:
No single company or organization has all the an- swers or holds ultimate responsibility, but we all can do our part to conserve and protect water re- sources. . . . Our company will need time and coop- eration from our bottlers, our suppliers and our con- servation partners to accomplish the goal of
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replacing the water we use. We will be open about our progress and engage others to better understand what it takes. (World Wildlife Fund, 2007)
During the remaining years of his tenure at Coke, Isdell undertook a series of sustainability initia- tives that engaged internal and external stakehold- ers and, according to former critic Greenpeace, had a measurable impact on the world’s environment. These included providing financial support to bot- tlers to finance new wastewater equipment, engag- ing with NGOs such as Greenpeace, World Wildlife Fund (WWF), and others, and moving toward water neutrality in its global operations. The company also undertook a global risk assessment to persuade its bottlers to join the initiatives and forestall an- other crisis such as the one in India. Muhtar Kent, Isdell’s successor as the CEO of Coke, has contin- ued this legacy of environmental sustainability and has tried to instill an ongoing culture of sustain- ability at the organization, suggesting some activity through the psychological pathway we describe.
Kent built on Isdell’s initiatives by deepening Coke’s partnerships with bottlers and suppliers, engaging employees in sustainability efforts, and integrating sustainability with Coke’s other CSR initiatives. In the meantime, Isdell became chair- man of the board of the World Wildlife Fund and has devoted his retirement to advancing the sus- tainability cause; Kent and Isdell continue to work together, as Coke and WWF have now forged a comprehensive partnership around climate change, called the “Climate Savers” campaign. Interest- ingly, Kent frequently remarks that he is Coke’s chief sustainability officer: “I say that the chief sustainability officer of the Coca-Cola Company is me. . . . That’s my responsibility. It starts at the top, and it is driven and permeates through the entire organization from the top” (Shapiro, 2010).
Coca-Cola’s leadership around sustainability demonstrates both the knowledge-based and psy- chological pathways as mechanisms through which responsible leaders effect change. Although the cat- alyst was primarily knowledge-based, the ensuing organizational changes employed both pathways. Both Isdell and Kent assumed responsibilities for harnessing external cues and interests in addition to marshaling internal information and knowledge exchanges to leverage and influence employees and other stakeholders. Moreover, Coke’s relationship with bottlers, on which it was and is mutually dependent, also reflected this important knowl- edge-sharing and influencing process. In terms of
the psychological pathway, the personal experi- ences and dedication of Coke’s leaders offered the potential to spill over to the organization’s culture, although it is difficult to discern the depth and breadth of that effect from secondary sources alone. It is clear, however, that both Isdell and Kent em- bodied a deep personal commitment to sustainabil- ity, and that those psychological commitments were increasingly used to galvanize Coca-Cola’s employees. Ultimately, the knowledge-based and psychological pathways appear to have converged in these two leaders’ ability to mobilize Coca- Cola—and many other individuals and organiza- tions—to this mission of responsible environmen- tal leadership.
DuPont and Chad Holliday
DuPont was one of the codevelopers of ozone- depleting chlorofluorocarbons (CFCs) used in re- frigerants and aerosol spray cans, and in the 1980s the company was one of the largest producers of CFCs in the world, with a 25% market share. It was also the target of aggressive criticism from NGOs such as Greenpeace, whose members scaled one of its plants facing a highway (on which thousands of drivers passed each day) to hang a banner that read, “Number 1 in contributing to destruction of the ozone layer.” Like Coca-Cola, DuPont faced a seri- ous crisis, and leaders sought to change the context and process for decision making. Again, both the knowledge-based and psychological pathways pro- vided mechanisms to facilitate change.
DuPont has made a great deal of progress toward sustainability in the ensuing years, first under the leadership of Chad Holliday and then under Ellen Kullman. The company’s recent strong commit- ment to environmental sustainability has included phasing out the production of CFCs, dramatically improving energy efficiency at its plants around the world, substantially reducing water use and waste, and developing new energy-saving products and services such as Tyvek building insulation. DuPont has since received a number of awards for its sus- tainability accomplishments. For his part, Holliday has served on numerous NGO boards and govern- ment committees, including the ClimateWorks Foundation, and acted as co-chair of the UN Secre- tary-General’s High-Level Group on Sustainable Energy for All.
From 2000 to 2010, when he retired, Holliday frequently commented on his philosophy and ra- tionale for moving DuPont toward a more sustain-
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able future. His approach reflected elements of the information pathway we describe above. After his retirement from DuPont in 2010, Holliday gave an interview in which he discussed his commitment to sustainability, how he engaged the entire DuPont organization, and how he looked outside of tradi- tional organizational boundaries for new ideas (Rogers, 2012).
Regarding the overall sustainability challenge, he remarked, “In the United States . . . we have to do something different. Somewhere along the line, people will wake up to the reality that the world has changed and that they need to adapt” (Rogers, 2012, p. 4). Regarding the need to infuse the organ- ization with new and diverse information, he suggested:
Once ideas reach a certain point of development, you have to find ways to disseminate them, because you limit their growth if you keep them protected. DuPont handled this by moving people around its organization. . . . It’s critical to start with concrete examples. If you do that, people will be more likely to listen to your theoretical approach. All my expe- rience at DuPont suggests that it’s the stories that really capture people’s imagination. . . . At DuPont, we recognized great achievements and really high- lighted good ideas so people would understand what the company valued. We gave out sustainable- growth awards every year. We had hundreds of sub- missions, and we established an external board to evaluate a short list of about 12 ideas. (Rogers, 2012, p. 6)
As a responsible leader, Holliday used the knowl- edge-based pathway to increase the psychological commitment of DuPont’s employees to his sustain- ability initiatives. Like Coke, DuPont also recog- nized the need to open up its organizational bound- aries and engage with nontraditional stakeholders, such as NGOs. Holliday noted:
Twice a year, DuPont invited about 10 NGOs to a meeting with about 10 of the company’s business leaders. . . . The first meeting we had was tough, but it was amazing how the experience opened us up. It helped us understand the sensitivities in a variety of areas, as well as how NGOs thought, and we went about accomplishing our strategy differently as a result. Sometimes we actually identified market opportunities because of the dialogues. . . . These experiences also enabled us to avoid a lot of con- flicts because we learned where the “hot spots” were. And we developed such good relationships with NGOs that they were willing to help us. When DuPont did face a situation and the press called these NGOs, they were able to explain our views
because they knew us. But you have to put some chips in the bank with NGOs. It’s a multiyear pro- cess: they need time to really get to know the com- pany, and companies need to know NGOs as well. (Rogers, 2012, p. 8)
Holliday indicated that he was committed to gain- ing diverse outside perspectives:
Leaders should spend quality time with people out- side their industries—people who think differ- ently. . . . At DuPont, we looked for opportunities to send senior businesspeople into communities where there were conflicts between commercial in- terests, civil society, and government. The idea was to help our people develop leadership skills by helping communities reach solutions. DuPont had no stake in these conflicts; we just wanted our staff to get experience dealing with complicated issues where multiple stakeholders had differing interests. (Rogers, 2012, p. 8)
This passage underscores a fairly substantial reori- entation in the process through which DuPont as an organization acquired, processed, and dissemi- nated knowledge from and to its stakeholders. Based on Holliday’s comments, it seems that Du- Pont was actually engaging in an organization-wide responsible leadership development initiative with the explicit purpose of training leaders to be able to incorporate the views of multiple stakeholders in their decision-making processes.
Ellen Kullman, who succeeded Holliday as chair and CEO of DuPont, has maintained DuPont’s com- mitment to sustainable enterprise. In a recent inter- view with Leaders magazine (2012, p. 20), she remarked:
When I joined DuPont in the 1980s, sustainability was very important to the then CEO. He called him- self a chief environmental officer— he was a real pioneer. Chad Holliday also championed sustain- able development, so it’s embedded now in what we do. We not only think about footprint reduction when we think about sustainability; we think about it from a numerator standpoint, how we create prod- ucts that keep the environment or the world safe.
DuPont’s experience with sustainability leadership exhibits mostly elements of the knowledge-based pathway, although the psychological pathway played an important role as well. As a science- based organization where knowledge and informa- tion are paramount, and in the face of a change in broad, external conditions and expectations, DuPont demonstrated an openness to outside infor- mation and influences— even when these external
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ideas presented as potentially threatening and crit- ical. This willingness to engage with critical exter- nal stakeholders was a hallmark of DuPont’s sus- tainability experience. Indeed, DuPont appeared to sometimes engage with “fringe” stakeholders to gain important knowledge (Hart & Sharma, 2004). In addition, DuPont pursued several innovative mechanisms for sharing knowledge and encourag- ing participatory development of the sustainability program. The personal commitment and interest of DuPont’s leaders also suggest activity along the psychological pathway, although that influence, again, is not as clear or evident as the knowledge- based pathway.
It is important to reiterate that the examples above reflect only the positive attributes of respon- sible leadership exhibited by these leaders. Each has also been faulted for several mistakes, errors, and even transgressions. We have deliberately and intentionally included only those leadership attri- butes that help to reveal the pathways of influence of responsible leadership that we outlined above.
Table 1 provides a summary of these cases, not- ing the leaders involved, the primary impetus that resulted in an increase in responsible leadership, the main pathways through which responsible leadership had an impact, and the levels of affected outcomes.
CONCLUSIONS AND FUTURE RESEARCH
It is clear that our understanding of the concept of responsible leadership is evolving and becoming more defined as more scholarship appears on the subject. We have tried here to further link the re- sponsible leadership (and the broader leadership) literature to stakeholder theory by explicating the pathways through which responsible leaders influ- ence outcomes at multiple levels of analysis within organizations. Further, we have attempted to show how responsible leaders who take an open and inclusive approach to understanding and incorpo-
rating the views of a diverse set of stakeholders into executive decision making may have a positive im- pact. We have built on prior recent work in this area (e.g., Miska et al., 2013; Pless et al., 2012; Stahl et al., 2013; Voegtlin et al., 2012) by proposing the pathways (psychological and knowledge-based) through which this process occurs. We reviewed literature from related fields (e.g., leadership, deci- sion making, etc.) to help support our arguments. Last, we used three recent examples of leaders at Walmart, Coca-Cola, and DuPont to further illus- trate the theoretical pathways we proposed.
It should be noted that several scholars have proposed that CSR is most effective when it ties closely to the business capabilities of the company and complements the firm’s business and corpo- rate-level strategies (Siegel, in Waldman & Siegel, 2008). As noted by Porter and Kramer (2006, p. 89 – 90), the “most strategic CSR occurs when a com- pany adds a social dimension to its value proposi- tion, making social impact integral to the overall strategy.” Further, Pearce and Doh (2005) suggested that collaborative social initiatives work best when they leverage the core business competencies of the firm. The pathways approach we have described provides one specific set of mechanisms that may be used to advance this approach.
Much work remains to be done as we continue to grapple with understanding the essence of respon- sible leadership. We encourage future scholarship in this area to focus on process issues: If responsi- ble leaders are, indeed, more effective, how do they manage these processes? As we noted in our dis- cussion of Voegtlin and colleagues’s (2012) work, the discursive decision process to reach consensus that responsible leaders use seems somewhat ten- uous and inconsistent with some leadership the- ory. In our ever-changing, fast-paced, global world, leaders are increasingly asked to make real-time decisions without the luxury of consultation. Given these kinds of demands on their time (and other resources), how can responsible leaders effectively
TABLE 1 Corporate Sustainability and Responsible Leadership Pathways at Walmart, Coca-Cola, and DuPont
Company Leaders Initial prompt Pathway Relevant levels of action
Walmart Rob Walton Lee Scott
Personal and individual Primarily psychological Meso and individual
Coca-Cola Neville Isdell Muhtar Kent
Event-driven but subsequently embedded Psychological and knowledge- based
Macro, meso, and individual
DuPont Chad Holliday Ellen Kullman
Event-driven but subsequently embedded Primarily knowledge-based Macro and meso
270 AugustThe Academy of Management Perspectives
communicate with the stakeholders who are criti- cal to their ability to make good decisions?
Finally, future work should examine empirically whether the pathways we have proposed here are as important as theory would suggest— critically, the linkages and interactions among these path- ways, leadership characteristics, and outcomes need attention. In particular, we have suggested that our model portrays a reflexive and dynamic process, but we have provided only anecdotal evi- dence of that. We also make some inferences about succession and the influence of prior leaders on their successors (e.g., Holliday and Kullman, Isdell and Kent, and Walton and Scott), although this very im- portant process deserves more comprehensive analy- sis and scrutiny.
Future research should also examine whether there are best practices or preferred methods by which leaders can manage the flow of knowledge with critical stakeholders. Even more broadly, we still need to know more about how responsible leaders prioritize stakeholder groups such that they can manage communication and knowledge-shar- ing in a logical fashion. It is clear that much work remains to be done on the practical side of respon- sible leadership—which leads one to ask, what can we do, on the academic/research side, to provide advice and/or assistance to those leaders who wish to be considered as “responsible” as part of their legacy? These and other questions must continue to be examined in future research on responsible lead- ership. We hope to have provided a start in this direction.
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Jonathan P. Doh ([email protected]) is Ramm- rath Professor in International Business, faculty director of the Center for Global Leadership, and professor of management at the Villanova School of Business. His research interests include strategies for emerging mar- kets, corporate-NGO interactions, and global corporate responsibility. His most recent book, Aligning for Advan- tage: Competitive Strategies for the Political and Social Arenas (with Thomas Lawton and Tazeeb Rajwani), was published by Oxford in April. He is 2014 program chair for the Academy of Management Organizations and Natural Environment Division and incoming editor in chief of Journal of World Business. He received his PhD in strategic and international management from the George Washington University.
Narda R. Quigley ([email protected]) is an associate professor and chair of the Management and Operations Department at the Villanova School of Busi- ness. She earned her PhD in organizational behavior from the Robert H. Smith School of Business at the University of Maryland, College Park. Her research interests include emergent and cross-cultural leadership, multilevel is- sues, knowledge sharing, and groups and teams in organizations.
274 AugustThe Academy of Management Perspectives
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Mandatory Assignment Resources/Stakeholder Mapping.pdf
BSR | Stakeholder Mapping 1
Introduction
Stakeholder mapping is Step 2 in the BSR Five-Step Approach to Stakeholder Engagement. Mapping is an important step to understanding who your key stakeholders are, where they come from, and what they are looking for in relationship to your business. To be most effective, this process should be driven by an engagement strategy developed in Step 1: Engagement Strategy. What Is Stakeholder Mapping?
Stakeholder mapping is a collaborative process of research, debate, and discussion that draws from multiple perspectives to determine a key list of stakeholders across the entire stakeholder spectrum. Mapping can be broken down into four phases:
1. Identifying: listing relevant groups, organizations, and people 2. Analyzing: understanding stakeholder perspectives and interests 3. Mapping: visualizing relationships to objectives and other stakeholders 4. Prioritizing: ranking stakeholder relevance and identifying issues
The process of stakeholder mapping is as important as the result, and the quality of the process depends heavily on the knowledge of the people participating. Action: Gather a cross-functional group of internal participants to engage in this process. Identify sources external to the company who may have important knowledge about or perspective on the issues, and reach out to these sources for input and participation. Finally, identify a resource who can facilitate your work through the following activities. Capture all your work in writing to help with future steps. 1.1 IDENTIFYING The first step in the mapping process is to understand that there is no magic list of stakeholders. The final list will depend on your business, its impacts, and your current engagement objectives—as a result it should not remain static. This list will change as the environment around you evolves and as stakeholders themselves make decisions or change their opinions. Action: Brainstorm a list of stakeholders without screening, including everyone who has an interest in your objectives today and who may have one tomorrow. Where possible, identify individuals. Use the following list to help you brainstorm: Owners (e.g. investors, shareholders, agents, analysts, and ratings agencies) Customers (e.g. direct customers, indirect customers, and advocates) Employees (e.g. current employees, potential employees, retirees, representatives,
and dependents) Industry (e.g. suppliers, competitors, industry associations, industry opinion leaders,
and media)
Stakeholder Mapping November 2011
Fe ed
ba ck
L oo
p
BSR’s Five-Step Approach to Stakeholder Engagement
Who Is This Approach For? This executive introduction to stakeholder mapping: • Reinforces the importance
of stakeholder mapping as a process
• Helps businesses organize an internal mapping team and begin brainstorming
• Produces a prioritized list of stakeholders with relevant issues
BSR | Stakeholder Mapping 2
Community (e.g. residents near company facilities, chambers of commerce, resident associations, schools, community organizations, and special interest groups)
Environment (e.g. nature, nonhuman species, future generations, scientists, ecologists, spiritual communities, advocates, and NGOs)
Government (e.g. public authorities, and local policymakers; regulators; and opinion leaders)
Civil society organizations (e.g. NGOs, faith-based organizations, and labor unions) Here are some additional considerations to help you brainstorm: Learn from past and ongoing engagement: Look at your organization’s
existing engagement activities. What are the objectives of these activities? What stakeholders communicate regularly with your company? What groups do they cover well? Where can you reach beyond this existing comfort zone to engage with lesser-known stakeholders?
Be forward thinking: Consider potential stakeholders from new markets, new technologies, new customers, and new impending regulations. Depending on your objectives, the relevant stakeholders you need to engage with may not play the usual sustainability roles but may instead serve other functions relevant to your business.
Be diverse: Make sure to include a rich diversity of stakeholder expertise, geography, and tactics from across the spectrum. This is an opportunity to reach out and mix the old with the new, including individuals from each of the following stakeholder categories: influencers, collaborators, advocators, and implementation partners.
Be social: Social media provides an unparalleled opportunity to identify and reach lesser-known stakeholder groups. Canvas blogs, forums, networking, reviews, and news sites to discover stakeholders relevant to your business and to learn about their interest in your activities.
Be aware: People have a tendency to focus on formal authorities in the mapping process, but the loudest voices or heaviest campaigners are not necessarily your key stakeholders. Step back and add silent members to your list because they may have a hidden wealth of expertise.
1.2 ANALYZING Once you have identified a list of stakeholders, it is useful to do further analysis to better understand their relevance and the perspective they offer, to understand their relationship to the issue(s) and each other, and to prioritize based on their relative usefulness for this engagement. BSR has developed a list of criteria to help you analyze each identified stakeholder: • Contribution (value): Does the stakeholder have information, counsel, or
expertise on the issue that could be helpful to the company? • Legitimacy: How legitimate is the stakeholder’s claim for engagement? • Willingness to engage: How willing is the stakeholder to engage? • Influence: How much influence does the stakeholder have? (You will need
to clarify “who” they influence, e.g., other companies, NGOs, consumers, investors, etc.)
• Necessity of involvement: Is this someone who could derail or delegitimize the process if they were not included in the engagement?
Action: Use these five criteria to create and populate a chart with short descriptions of how stakeholders fulfill them. Assign values (low, medium, or high) to these stakeholders. This first data set will help you decide which stakeholders to engage. See example that follows.
About BSR A leader in corporate responsibility since 1992, BSR works with its global network of more than 250 member companies to develop sustainable business strategies and solutions through consulting, research, and cross-sector collab- oration. With offices in Asia, Europe, and North America, BSR uses its expertise in the environment, human rights, economic development, and governance and account- ability to guide global companies toward creating a just and sustainable world. Visit www.bsr.org for more information.
BSR | Stakeholder Mapping 3
Stakeholder Contribution Legitimacy Willingness to Engage Influence Necessity of Involvement
SH1 High: Knowledge in X issue is of value to the company
High: Directly affected by our company’s activity
High: Proactive group that is already engaging
Low: Relatively unknown group
Low: Not an outspoken stakeholder
SH2 Medium Medium High Medium Medium SH3 Low Low Medium Low Medium SH4 Low Medium Low Medium Medium SH5 High Medium Low High High
1.3 MAPPING Mapping stakeholders is a visual exercise and analysis tool that you can use to further determine which stakeholders are most useful to engage with. Mapping allows you to see where stakeholders stand when evaluated by the same key criteria and compared to each other and helps you visualize the often complex interplay of issues and relationships created in the criteria chart above. Action: Draw a mapping as follows to identify key stakeholders. 1. Draw a quadrant using two axes labeled “Low” to “High.” 2. Add “Expertise,” “Willingness,” and “Value” to the criteria chart, as above. 3. Assign “Expertise” to the Y-axis and “Willingness” to the X-axis 4. Discuss and debate where each stakeholder falls. 5. Plot the stakeholders on the grid. 6. Use small, medium, and large circle sizes to denote their “Value.” 7. To illustrate relationships, use arrows to depict “Influence.” Consider quadrants, circle size, and influence arrows when prioritizing. Sample Mapping
Expertise Value Willingness
Quadrant Tactics
(Tactics discussed further in Step 3: Preparation)
BSR | Stakeholder Mapping 4
Note: This is just an illustrative mapping example, and your approach may vary depending on your needs: You may need to use more or less criteria in Analysis depending on the mix of your stakeholder list; more ambitious objectives may require a more strategic, detailed Mapping; and your process may be influenced by outside variables such as tools and frameworks already in place at your company. Look closely at your needs and decide whether this example will work for you as is. 1.4 PRIORITIZING STAKEHOLDERS AND IDENTIFYING ISSUES It is not practical and usually not necessary to engage with all stakeholder groups with the same level of intensity all of the time. Being strategic and clear about whom you are engaging with and why, before jumping in, can help save both time and money. Action: Look closely at stakeholder issues and decide whether they are material to your engagement objectives, asking yourself the following questions:
Combined with your criteria chart and mapping, use issue materiality to rank your stakeholders into a prioritized engagement list. You should now have captured the most relevant issues and the most relevant stakeholders. Have You Developed the “Right” List?
The key is not to agonize over whether your stakeholder list is “right.” By working through the four steps in the mapping process you will have created a robust, relevant, prioritized stakeholder list—but it will change over time. Instead, focus on whether your list will help you further prepare for your engagement activities.
Action: Answer the following questions to see if you are ready to move on:
Is our list focused on relevant stakeholders who are important to our current and future efforts?
Do we have a good understanding of where stakeholders are coming from, what they may want, whether they would be interested in engaging with our organization, and why?
How can we further understand and qualify these stakeholders? Through discussions with internal colleagues? Reading reference reports? Finding specific blogs or Twitter accounts to follow?
Based on our prioritized stakeholders, can we define a granular level of engagement? Will this list inform tactics, formats, and investment considerations?
Have we given thought to what type of resources (expertise, people, and budget) we need to support our engagement strategy and follow-up activities?
What are the issues for these priority stakeholders? Which issues do all stakeholders most frequently express? Are the real issues apparent and relevant to our engagement objectives?
Interested in Learning More? Learn more about BSR Stakeholder Engagement Consulting Services.
Explore case studies covering our range of consulting services, including stakeholder engagement.
BSR | Stakeholder Mapping 5
Next Step: Think Tactics
You are ready to move on to preparing engagement goals, tactics, and format. In Steps 3 and 4: Preparation and Engagement you will better prepare for the engagement by more deeply examining your stakeholders to understand their interests, concerns, and positions. With this knowledge you can frame and lead the process of engagement to anticipate their needs. Step 3 and 4 will also show you how to match the method of engagement to the issue and to the specific stakeholder, considering the level of formality, ease, and risk associated with certain engagement formats. Contact
For more information, contact BSR at: Americas: Eric Olson [email protected]
Asia: Jeremy Prepscius [email protected] Europe: Farid Baddache [email protected]
- Introduction
- What Is Stakeholder Mapping?
- 1.1 Identifying
- 1.2 Analyzing
- 1.3 Mapping
- Have You Developed the “Right” List?
- Next Step: Think Tactics
- Contact
Mandatory Assignment Resources/Stakeholder Theory, Value, and Firm Performance.pdf
Stakeholder Theory, Value, and Firm Performance
Jeffrey S. Harrison University of Richmond
Andrew C. Wicks University of Virginia
ABSTRACT: This paper argues that the notion of value has been overly simpli- fied and narrowed to focus on economic retums. Stakeholder theory provides an appropriate lens for considering a more complex perspective of the value that stakeholders seek as well as new ways to measure it. We develop a four-factor perspective for defining value that includes, but extends beyond, the economic value stakeholders seek. To highlight its distinctiveness, we compare this perspective to three other popular performance perspectives. Recommendations are made regard- ing performance measurement for both academic researchers and practitioners. The stakeholder perspective on value offered in this paper draws attention to those factors that are most closely associated with building more value for stakeholders, and in so doing, allows academics to better measure it and enhances managerial ability to create it.
KEY WORDS: value, performance measurement, corporate performance, stake- holder theory, happiness
Q TAKEHOLDER THEORY HAS INFILTRATED the academic dialogue in O management and a wide array of disciplines such as health care, law, and public policy (Freeman, Harrison, Wicks, Parmar & de Colle, 2010). Much attention has been paid to some basic themes that are now familiar in the literature—that firms have stakeholders and should proactively pay attention to them (i.e.. Freeman, 1984), that stakeholder theory exists in tension (at least) with shareholder theory (i.e., Friedman, 1970), that stakeholder theory provides a vehicle for connecting ethics and strategy (i.e., Phillips, 2003), and that firms that diligently seek to serve the interests of a broad group of stakeholders will create more value over time (i.e., Campbell, 1997; Freeman, 1984; Freeman, Harrison & Wicks, 2009). Nevertheless, there are so many different interpretations of basic stakeholder ideas that theory development has been difficult (Scherer & Patzer, 2011).
In spite of its importance to stakeholder theory, little attention has been devoted to questions regarding what it means to create value for stakeholders and how we can measure it. Part of the reason for the relative absence of discussion may be that researchers assume they know what value means. For example, much heat and
©2013 Business Ethics Quarterly 23:1 (January 2013); ISSN 1052-150X pp. 97-124 DOI: 10.5840/beq20132314
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debate in the stakeholder literature regards the issue of who has legitimacy and to whom managers have responsibilities (e.g., Donaldson & Preston, 1995; Freeman, 1994; Goodpaster & O'Halloran, 1994; Mitchell, Agle & Wood, 1997). At their core, these studies are about who should have claim to the spoils of the firm. For instance, legitimate stakeholders presumably should get a larger share. An inherent assump- tion in this literature is that the concept of value is already understood as economic value (i.e., Agle, Mitchell & Sonnenfeld, 1999). If the only relevant value created by a firm is economic then the legitimacy arguments may actually feed animosity among stakeholders—that they are all vying for a piece of the economic pie, and each wants a larger share. This type of animosity is contrary to the underlying phi- losophy that has characterized stakeholder theory emphasizing the "joint-ness" of stakeholder interests and the need for all stakeholders to benefit over time through their cooperation (Freeman, 1984; Freeman, Harrison & Wicks, 2007).
Another major stream of literature addresses the size-of-pie issue by attempting to link good (i.e., generous, fair) stakeholder treatment with the creation of value (i.e., Berman, Wicks, Kotha & Jones, 1999; Choi & Wang, 2009; Hillman & Keim, 2001 ; Preston & Sapienza, 1990). The underlying assumption of most studies of this type is that economic measures capture the value created through good treatment of stakeholders, thus sidestepping the notion that much of the value stakeholders get from working with stakeholder-friendly firms may not be captured in economic measures. While economic returns are fundamental to a firm's core stakeholders, most stakeholders want other things as well (Bosse, Phillips & Harrison, 2009). Attention to these other factors may prove critical to understanding why firms suc- ceed over time, why stakeholders are drawn to (and remain with) some firms, and which firms do the most for their stakeholders.
These two important streams in the stakeholder literature demonstrate the need for a more thorough evaluation of the concept of value. A stakeholder-based perspec- tive of value is important from a managerial perspective because managers tend to focus attention on things that lead to higher performance based on what actually gets measured (Kaplan & Norton, 1992; Sachs & Riihli, 2011). Rather than focusing primarily on economic measures of performance, a stakeholder-based performance measure challenges managers to examine more broadly the value their firms are creating from the perspective of the stakeholders who are involved in creating it. Thus, it gives managers the information they need to engage stakeholders where they are and enhance managerial ability to use such insights to create more value. At its core, this perspective is about creating a higher level of well-being for the stakeholders involved in a system of value creation led by the firm.
From an academic researcher's perspective, most empirical studies based on stakeholder theory have used a measure of stakeholder performance as the inde- pendent variable, with some measure of economic performance as the dependent variable (i.e., Berman et al., 1999; Choi & Wang, 2009; Hillman & Keim, 2001). If a broad-based measure of stakeholder performance instead becomes the depen- dent variable, with an organizational action or phenomenon as the independent variable, then there is much greater potential to understand how that phenomenon is infiuencing the overall value the firm creates. Further, this perspective suggests
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that while recommendations made by business scholars on how managers can cre- ate economic value may have merit, they could also lead managers to take actions that create economic value while reducing other types of stakeholder value. This, in turn, not only diminishes the value of the insights, it also raises questions about the ability of the firm to sustain its economic performance over time—especially if efforts to focus on financial returns ignore or erode bases of support from some of the firm's stakeholders.
In this paper we begin by discussing the concept of value, noting some of the ways it has been understood and using this understanding as a platform to argue for why we need a more complex view that is grounded in stakeholders. We then develop a four-factor model of stakeholder value and turn to operationalizing it using the existing literature on happiness as one way of demonstrating the practicality of our model. We conclude by noting implications and directions for future research.
ECONOMIC FOUNDATIONS FOR UNDERSTANDING VALUE
Revisiting some foundational texts and thinkers in economics provides useful insights for this project. Adam Smith (1776) provides at least two important perspectives on "value." First, a central premise of The Wealth of Nations is that individuals know what is best for them—that value is something that individuals should define for themselves and not allow governments or others to choose in their stead (Smith, 1776). Although Milton Friedman (1970) is often criticized as providing an amoral vision of business, a careful reading of his work also highlights the importance of moral ideals, particularly individual freedom—to decide how to hve, where to work, what to buy (i.e., what is of "value") and under what terms (i.e., what "value" they are willing to pay to receive the value they seek). The push to emphasize individual freedom and reject allowing others (e.g., government, one's peers) to make choices for oneself is precisely the impetus that drives our inquiry—that individual differ- ences in defining value are fundamental.
Second, Smith (1776) emphasizes that healthy markets allow customers to choose—what they will buy, from whom (i.e., among a number of potential vendors for any given item), and under what terms. Such a market also operates for other stakeholder roles, including for employment (e.g., for whom will I work, under what terms, for what compensation). We know from the basics of markets that people will tend to make choices that provide them the most value for what value they give up. When they can find a better deal—i.e., more value for what they give up for it—people will tend to shift from their previous choice to this better deal over time. As such, if firms want to be successful, they need to find ways to improve what they do to better appeal to their customers.
If we shift to other thinkers who were key in the evolution of economic thought and current understandings of "value," two figures stand out: Jeremy Bentham and J. S. Mill. Jeremy Bentham, widely credited as the "father" of utilitarianism, began the focus on value as measured by specific aggregate measurements of pleasure and pain. For him morality and good public policy were best understood in terms of decisions that maximized pleasure and minimized pain—irrespective of whether
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such choices went against tradition, authority, or rule-based notions of morality (e.g., Kant). In Bentham's view pleasure and pain were sensory-based phenomena that could be measured and systematized across all persons (Bentham, 1970). Other than attending to factors like duration and intensity that related to the total utility of an experience, Bentham viewed all pleasures and pain of equal standing (i.e., no qualitative differences).
While utility remained the core foundation for morality (and what should drive public policy). Mill believed there were critical differences across types of pleasure and pain, suggesting qualitative differences that had to be taken into account in any approach to defining or measuring utility. Mill was particularly enamored with the life of the mind and the higher pleasures it offered. Such innovations complicated the notion of "value" within utility, suggesting that value was more than simple pain and pleasure. Mill's shift in focus in thinking about utility is captured in the language of the "greatest happiness" principle. That is, utility is not simply a collec- tion of raw sensory experiences, but a way of understanding how certain experiences enabled one to live a better life. Mill's innovation, forcing scholars to appreciate the qualitative differences in utility, has had wide influence (e.g., Sidgwick, 1981 ; 441, defines utility as "happiness"; Shaw, 1999, defines utility as "well-being"), includ- ing the emergent research on "happiness" in management (e.g., Haidt, 2006; Judge and Kammeyer-Mueller, 2011). Later in this paper we will return to the concept of happiness as a potentially useful way to think about measuring how stakeholders feel about the value they receive through their interactions with a firm.
Modem economic thought emerged from this intellectual backdrop, particularly as it relates to utility and the measurement of outcomes. Questions about utility and its relevance for modem economics have been explored in a wide array of literatures, particularly under the headings of "welfare economics" and "social choice theory," and relevant research has been developed by philosophers, economists, political scientists, game theorists, and others (Hausmann & McPherson, 2006; Sen, 1987). Value has been tied to a variety of factors: value as determined by price; value as determined by labor; value as determined by exchange; and value as determined by production (see Table 1). Sen (1987; 1998) argues for an array of factors, be- yond aggregate utility, as important dimensions of value to both the individual and society, such as the creation of capabilities essential to development and living a good or happy life.'
Our position in this paper is consistent with many scholars who have criticized the trend in economic thought, influential in an array of literatures (including manage- ment), that has brought a narrowing in conceptions of value (Hausman & McPherson, 2006:133; Satz, 2010:60; Sen, 1998). While simplification of the construct of value enables certain research capabilities (e.g., complex mathematical modeling), it also tends to obscure other critical aspects of utility relevant to a discussion of value— particularly dimensions that extend beyond profitability and economic retums. This paper draws upon some of the theory already crafted on utility and value while using a stakeholder perspective to address a context and set of concems that have not been highlighted in existing research on value. For the purposes of this paper, we will define "value" broadly as anything that has the potential to be of worth to
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Table 1: A Sampling of Relevant Notions of "Value"
Value in Exchange: the idea that value is based on how much a given item is within in a marketplace exchange (e.g., Adam Smith; Neoclassical Economics). Value here is negotiated and inter-subjective.
Value of Use: value here is based on a subjective evaluation of how much an item is worth to a particular individual; may not be visible to others and may vary from zero to nearly infinite value.
Value of Labor: value is based on how much labor was required to create an item (e.g., David Ricardo; Karl Marx; classical economics). Value here is determined independent of individual preferences and set by a quality inherent to the object (i.e., by labor).
Value of Production: value is based on the total costs involved to produce an item (e.g., like Value of Labor, but adding in other related costs to produce an item). As with Value of Labor, value is set independent of individual preferences.
Intrinsic v. Extrinsic Value: one way to think about value is whether it is intrinsic, or an inherent feature, of an item—or whether it is simply a vehicle or means to some other good (i.e., extrinsic). Most goods in the marketplace are "extrinsic." A sandwich is good for satisfying my hunger; money helps me feel important or secure—both are "extrinsic" goods. However, some things are good in and of themselves. Kant calls a good will an inherent good; virtues also would qualify as inherent goods.
Subjective v. Objective Value: related to the distinction between intrinsic and extrinsic good is the contrast between subjective and objective notions of value. While there are numerous ways of defining both lerms, subjective typi- cally refers to the assessment of an individual and what they happen to like, while objective typically refers to a norm that operates across individuals or at a higher level of analysis (e.g., a universal moral norm; a social value; a human right).
Sources; Hausman & McPherson, 2006; Sen, 1987.
Stakeholders. The term "utiUty" will be understood to refiect value a stakeholder receives that actually has merit in the eyes of the stakeholder—it is a function of the stakeholder's utility function, which expresses the stakeholder's preferences for particular types of value.
STAKEHOLDER THEORY AND VALUE CREATION
Smith's (1776) argument that healthy markets allow individuals to choose is similar to Freeman's (1984) perspective that all stakeholders are "customers"—they all have decisions to make in terms of whether the utility a firm provides them is greater than what they give up from other opportunities. By this logic, firms that tend to make their stakeholders better off will be ones that are able to retain their support and participation and thrive over time. Stakeholders themselves determine their own utility functions based on individual preferences, consistent with Smith (1776) and Friedman (1970). Their preferences come from perceptions regarding how transac- tions, relationships and interactions with the firm inñuence the utility they receive. As mentioned previously, we will suggest in a later section that one possible way to measure those perceptions is in terms of the happiness stakeholders feel with regard to the utihty they obtain pertaining to both tangible and intangible factors.
A central premise of much of the literature on stakeholder theory is that focusing on stakeholders, specifically treating them well and managing for their interests, helps a firm create value along a number of dimensions and is therefore good for firm performance (e.g., Donaldson & Preston, 1995; Freeman, 1984; 1994; Freeman, Harrison and Wicks, 2007; Harrison, Bosse & Phillips, 2010; Jones, 1995; Jones & Wicks, 1999). The existing empirical literature, reviewed by Freeman, Harrison, Wicks, Parmar, and de Colle (2010), is generally supportive of a positive relationship between stakeholder-oriented management and firm performance, which is almost always measured in terms of financial returns (i.e., Berman et al., 1999; Choi &
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Wang, 2009; Hillman & Keim, 2001). Thus, as we mentioned previously, in most stakeholder-oriented empirical studies stakeholder performance is the independent variable rather than the dependent variable. Consequently, the empirical stakeholder literature itself reinforces the idea that financial retums are the most relevant measure of the value created by a firm.
Financial performance is important to many of a firm's stakeholders, but it is not the only aspect of value that is important to stakeholders. Consistent with Freeman's (1984) fundamental idea that a firm should serve multiple stakeholders, firm perfor- mance might be defined as the total value created by the firm through its activities, which is the sum of the utility created for each of a firm's legitimate stakeholders. Phillips (2003) identifies a firm's legitimate (or normative) stakeholders as those groups to whom the firm owes an obligation based on their participation in the cooperative scheme that constitutes the organization and makes it a going concem. They include customers, communities in which the firm operates, suppliers of capi- tal, equipment, materials, and labor. Firms may have other legitimate stakeholders specific to their own situations.
Confiict or Cooperation
Much of the existing business literature posits that the interests of stakeholders are in confiict. This is understandable. A simple identification of stakeholders and their interests tends to generate lists that point even the casual observer in differ- ent directions as we move from one group to the next. Particularly if we start with the view that the firm has a fixed pie of resources, each group will be vying for as many of those resources as they can—and the success of any one group in getting resources diminishes the amount left for the others. Folding in assumptions from agency theory about the motivation and disposition of stakeholders, particularly that they are self-interested and with guile (Williamson, 1985), the picture of deep- seated conflict among stakeholder interests is vividly drawn. In contrast, one of the underlying arguments, found repeatedly in the stakeholder literature as well as the inter-firm networks literature, is that firms tend to perform better when they see stakeholder interests as joined, or at least largely overlapping, than firms that see them as primarily conflicting (i.e.. Dyer & Singh, 1998; Freeman, 1984; Freeman, Harrison & Wicks, 2007; Freeman, Wicks & Parmar, 2004).
Fortunately, we know from the experience of real firms that organizations are able to operate in ways that draw in stakeholders and create enough overlap in their interests for them to function. Conflicts of interest and tensions among stakeholders still exist, particularly in cases that highlight those potential tensions (e.g., where the focus is on the allocation of a fixed pie of resources at a given point in time). However, stakeholder theory highlights the underlying overlap of stakeholder in- terests in generating value and describes the operations of a firm as a mechanism for all stakeholders to become better off over time (Freeman, Harrison & Wicks, 2007). This argument is supported by the idea that stakeholders depend on the firm and its other stakeholders to satisfy their own interests. Stakeholder interests are inseparably connected in a system of value creation in which each stakeholder
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provides resources or influence in exchange for some combination of tangible and/ or intangible goods (Sachs & Rühli, 2011). The quality of contributions of each stakeholder to the system influences the total value created in the system (Susniene & Vanagas, 2006).
Part of what holds stakeholder cooperation together and generates utility for stakeholders is the presence of shared norms that go beyond strict self-interest. Researchers from a variety of disciplines have demonstrated that most people operate within norms of fairness and reciprocation (Becker, 1986; Cialdini, 1984; Cropanzano & Mitchell, 2005; Fehr & Gachter, 2000; Rabin, 1998; Rawls, 1971), while other scholars have gone so far as to suggest that love is a motivating agent in organizations (i.e., Argandoña, 2011)—all of which may provide both direct and indirect (e.g., enabling behaviors like trust that lead to increased value creation) forms of value for stakeholders. The fact that they voluntarily come together to participate as stakeholders of the firm is powerful evidence that their interests are overlapping and reinforcing to a substantial degree.
A STAKEHOLDER-BASED PERSPECTIVE ON VALUE
We now present a stakeholder-based perspective on firm performance that is derived from the value a firm creates through its activities. It is based on the core ideas that all of the firm's legitimate stakeholders have customer-like power to engage or not to engage with a firm and that the utihty that is created for one stakeholder is dependent, in part, on the behavior of the firm's other stakeholders. Furthermore, stakeholders determine their own utihty functions. The amount of utility they receive from the firm influences whether they choose to engage with the firm and how they act when engaged in transactions with the firm.
Our perspective focuses on four factors that emerge from a focus on stakeholders and the value they seek from relations with a firm. The factors incorporate not only the tangible value stakeholders seek, but also consider the process and distribution of value (Harrison, Bosse & Phillips, 2010). The four factors are defined in terms of the perceived utility stakeholders receive from the firm, consistent with the idea that perception influences utility (Barney, 2011). They are: 1) stakeholder utihty associated with actual goods and services, 2) stakeholder utility associated with organizational justice, 3) stakeholder utihty from affiliation, and 4) stakeholder utility associated with perceived opportunity costs.
These factors were selected among the many that could have been included spe- cifically because they have been identified in previous research to be important to stakeholders (Ashforth & Mael, 1989; Bosse et al., 2009; Spiller, 2011; Susniene & Vanagas, 2006) and they are broad enough to incorporate much of what stakeholders seek through their interactions with a firm. Consequently, they are closely associated with the motivation of stakeholders to cooperate in the value creating activities of the firm. That is, each category is important at the individual level, yet it simulta- neously relates to the value that is sought by the group of stakeholders associated with the firm and therefore helps establish how and why they cooperate successfully over time (e.g., they seek these particular goods and services; they value the sense
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of faimess and shared norms the firm provides; they believe they get the best deal from their association). While there are a wide array of other specific things one might cite as important to individual stakeholders, there is a need for parsimony in any model: to offer a model that is both specific enough to capture core features and broad enough to capture the range of the phenomenon in question.
Physical Goods and Services
Perhaps the most obvious source of utility for stakeholders is found in the physical goods and services provided by the firm, where physical goods also include financial remuneration in a variety of forms. Economists have studied exchanges of goods and services for centuries. The field of marketing also has developed elaborate theories regarding how customers determine the amount of value they are willing to part with in exchange for something they want. Some of the value given up includes time and effort, as well as uncertainty regarding the extent to which whatever is purchased will really provide the expected level of utility. A reasonable goal for the firm with regard to its customers is to create goods and services that are perceived as providing a highly positive ratio between the utility received and the value given up (Barney, 2011).
Similar thinking is applicable to all of a firm's legitimate stakeholders (Freeman, 1984). Suppliers give up goods and services as well as time and other resources, and are subject also to transaction uncertainties, in exchange for financial (and other forms of) payment. Financiers provide capital and face uncertainty as they hope for retums from the firms in which they invest. Employees give of their time, efforts, and other resources in exchange for wages and other firm-specific tangible benefits. Communities provide locations and infrastructure and frequently also provide a large part of the work force in exchange for tangible benefits such as employment of its citizens, tax revenues, and economic growth (through local purchases). Other stakeholders may also be included in this list depending on the situation of the firm. As with customers, the goal for a firm is to create the best value possible as perceived by stakeholders such that the utility they receive is sufficient to warrant continued, cooperative engagement with the firm.
Organizational Justice
Researchers from a variety of disciplines have demonstrated that most people operate within norms of faimess and reciprocation (Becker, 1986; Cialdini, 1984; Cropanzano & Mitchell, 2005; Fehr & Gachter, 2000; Rabin, 1998; Rawls, 1971). The organizational justice literature examines several types of faimess. Distribu- tional justice means that actors believe that material outcomes received as a result of transactions with another party are perceived as fair in comparison with the ma- terial outcomes received by other parties (Adams, 1965; Rabin, 1993). Procedural justice pertains to the faimess of the mies and procedures used to assist in making decisions that have an impact on another party (Colquitt, Conlon, Wesson & Porter, 2001). Interactional justice describes the ways people treat each other in regular
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interactions (Cropanzano, Bowen & Giulliland, 2007). A flrm that tieats stakehold- ers respectfully would be considered interactionally just.
Organizational justice is important to value creation because people reciprocate and they value being treated fairly (Blau, 1964; Simon, 1966). For instance, a worker who is paid more than their opportunity cost of staying with a particular employer is likely to reciprocate by providing more than their minimal effort at work (Akerlof, 1982). From a purely economic perspective a flrm that pays more than an employee's opportunity cost is wasting resources. We acknowledge this, but would argue that the reciprocation argument does not apply only to financial remuneration. Distributive justice, most closely associated with economic factors, is supplemented by perceptions of procedural and interactional justice as stakeholders assess how much utility they are receiving from a firm. For example, a firm might provide a wage and benefits that satisfy, but do not exceed, employee expectations based on distributive justice. However, employees might still receive utihty from the firm that is worthy of positive reciprocity due to the way they are treated from the perspectives of both procedural and interactional justice. Similar logic applies to all of a firm's stakeholders. The key is to determine what matters to stakeholders and to provide for them an amount of utility that they perceive as favorable (Harrison, Bosse & Phillips, 2010). Negative reciprocity can likewise have a negative impact on human behavior (Bewley, 1998).
Thus far our discussion has focused on dyadic relationships between a firm and each of its individual stakeholders, and the resulting reciprocity. However, stake- holder theory also provides a lens for understanding how the way a firm treats one stakeholder can influence relationships with other stakeholders (Freeman, Harrison & Wicks, 2007; Rowley, 1997). In other words, the influence of the whole group of stakeholder relationships on the value created is greater than the sum of the influence of each relationship taken separately. This form of interdependence is associated with a phenomenon called generalized exchange (Ekeh, 1974).
Generalized exchanged involves multiple actors who are part of an integrated set of transactions in which reciprocations are indirect in the sense that there is not a one-to-one correspondence between what actors take from and give to another actor (Ekeh, 1974; Bearman, 1997). Because people have memories, it is even possible for much time to elapse between events that are signiflcant to the actors (Wade-Benzoni, 2002). The actors put events in the context of other events that have happened over time. Generahzed exchange explains why stakeholders are sometimes willing to sacriflce some of the value they receive if they believe it is in the best interests of other stakeholders or the flrm over time. For instance, employees may be willing to take a pay cut or suppliers may be willing to re-write a contract if they believe it will be good for the flrm's entire network of stakeholders (Harrison et al., 2010). Other examples of generalized exchange are found in the kinship structures of primitive peoples, bam raisings, or sharing software on the Internet (Molm, Collett & Shaefer, 2007). Bosse et al. (2009: 449) explain that "third-party observers of an exchange will systematically reward or punish those they perceive as fair or unfair, respectively." Generahzed exchange, then, provides a partial answer to the question
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of why the whole of stakeholder relationships can be greater than the sum of its parts. That is, the way a firm treats one stakeholder influences relationships with others.
Trust, understood as a willingness of one party to be vulnerable to another with the expectation of non-opportunistic behavior, is important to both reciprocity and generalized exchange and is fostered by the presence of faimess in relationships among parties (Mayer, Davis and Schoorman, 1995). Assuming bounded rationality (Cyert and March, 1963), a stakeholder is probably unlikely to exhibit behaviors such as incremental effort, generosity, and loyalty unless there is some expectation that the firm can be trusted to reciprocate by distributing some of the additional value created back to the stakeholder. This additional value might come in the form of more or better tangible goods and services, which may include financial remuneration (distributional), greater consideration of the needs of the stakeholder in organizational decision processes (procedural) or simply better treatment during transactions (interactional). Trust is also important to the transfer of sensitive yet valuable information between stakeholders and the firm (Harrison et al., 2010), which is essential to the rapid and efficient development of new technology that is a hallmark of value creation in the modem global economy.
Organizational Affiliation
Stakeholders also receive utility from affiliating with organizations that exhibit be- haviors that are consistent with things they value. They identify with the firm. Social identity theory explains that people tend to classify themselves into social categories associated with organizations and other types of groups in an effort to understand who they are (Ashforth & Mael, 1989). If the firm embodies characteristics that are considered valuable by, for example, its employees, organizational affiliation can provide feelings of connectedness, esteem, and empowerment (Ashforth & Mael, 1989; Hogg & Tumer, 1985). As employees invest energy, effort, time and attention in the firm they develop feelings of "ownership," which provides a sense of respon- sibility, shared interest, and motivation to work at high levels (Pierce, Rubenfeld & Morgan, 1991; Vandewalle, Van Dyne & Kostova, 1995).
Utility through affiliation occurs, in part, through the ability of actors to obtain benefits from their membership in social networks (Lee, Lee & Pennings, 2001; Nahapiet & Ghoshal, 1998; Portes, 1998). From a stakeholder perspective, group affiliation can motivate stakeholders to care about one another's interests and the success of the firm (Hartman, 2011; Putnam, 2000). In fact, Hartman (2011: 96) suggests a similar notion about affiliation—that it can support collective action that benefits all stakeholders involved and serves the larger good they seek through their cooperation. Stakeholder desire for affiliation encourages stakeholders to contribute to creating more value and discourages them from behavior that destroys it.
Utility through affiliation may also provide esteem and satisfaction. By esteem, we mean that people feel as though they are supporting an organization whose be- havior they see as virtuous or desirable. Satisfaction in this context refers to actual feelings of happiness as stakeholders interact with an organization that exceeds what they might feel when interacting with some other firm in the same way. For
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example, a customer may feel happier about buying a product from a flrm simply because their own value system is in some way consistent with the expressed and actualized values of that flrm.
Esteem and satisfaction can work in both positive and negative directions. A stakeholder can feel bad about identifying with a flrm that has engaged in activities that are inconsistent with their own values, such as damaging the environment or contracting with supphers who use child labor in third-world countries. This does not mean that stakeholders will necessarily cease to conduct business with the offend- ing flrm. Our perspective suggests that the utility stakeholders gain from affiliation with a firm is only one part of the package, which is then combined with the other factors: tangible utility, justice and fairness, and opportunity cost. For example, a stakeholder may continue to do business with a flrm if the purely economic value of doing so outweighs the negative effects of affiliation. But it does mean that there is less motivation to do so than there would be if the flrm was perceived by the stakeholder as a virtuous organization.
Opportunity Costs and the Interconnectedness of Factors
Thus far we have deflned utility in terms of 1) the tangible beneflts created for stakeholders associated with the products and services of the flrm, 2) the intangible beneflts stakeholders enjoy based on just and fair treatment, and 3) the beneflts of affihating with particular organizations. Embedded within each of these factors is the notion of opportunity costs (Kerins, Smith & Smith, 2004; Spiller, 2011). As mentioned previously, utility is based on perception (Barney, 2011), and perception is influenced to a great degree by whether stakeholders believe they are getting a good deal from the organization compared with what they might expect to receive through interactions with other flrms that serve similar purposes. For instance, members of a flrm's community are likely to compare the amount of value they receive in terms of tax revenues or employment opportunities to other flrms in the community of similar size and scope or even firms in other communities. Suppliers, customers, financiers, and employees make similar comparisons.
In addition to the interconnectedness of the concept of opportunity costs with the three other factors, each of those factors overlaps the others to some degree. For example, the way a firm treats a stakeholder with regard to justice and fairness influences their perceptions of the virtuousness of the organization (and thus utility from affiliation) and also the way the stakeholder feels about the tangible goods and services obtained from the relationship. Similarly, tangible utility from goods and services influences perceptions of justice (especially distributive justice) as well as utility from affiliation. Of course, utihty from affiliation also influences stake- holder perceptions about the other two factors. What emerges from this discussion is a picture of a firm at the center of a network of stakeholders whose behavior is influenced, in part, by the treatment the flrm gives to other stakeholders (Susniene & Vanagas, 2006). It is a value creation cycle, consistent with the systems perspec- tive that what happens at one part of a system influences other parts of the system
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directly, and that eventually the influence returns to the initial part of the system to reinforce the original occurrence.
For example, consider a case in which employees believe that they have received a good deal in terms of the total value they receive from a firm, compared with their opportunity cost. Those employees, according to the principle of reciproc- ity, are likely to give effort and loyalty above that which would otherwise be the case (Vandewalle, Van Dyne & Kostova, 1995). Their behavior can result in better products or products that are produced more cheaply, which allows the firm to increase its value proposition to customers. As value to the customer increases, so does demand. Demand leads to growth in sales and profits, which provides more value to investors and surplus profits that managers can reinvest, with part of that reinvestment going back to employees as value in the form of higher compensation. An assumption important to this cycle is that the firm will continue to incorporate distributional justice such that a portion of the incremental value will be distributed back to employees to reinforce their behavior.
The value creation cycle also supports negative reciprocity. For this example, we will begin with the customer. Assume that managers, in an effort to spike short term profits to enhance their own welfare with respect to compensation, reduce the value proposition to customers either through unjustified price increases or reduction in the quality of the product. In essence, they are then transferring value from custom- ers to the firm, and ultimately to themselves (through bonuses or other forms of compensation). Customers recognize the reduced value and demand drops. Without continuing through the rest of the cycle, it is easy to understand how eventually the total value created in the system will be reduced. If managers persist in their behavior they might reduce the value proposition to customers again, resulting in a loss of customer demand for products, which in turn erodes future prospects for the firm.
COMPARISON OF STAKEHOLDER-BASED WITH OTHER PERSPECTIVES ON FIRM PERFORMANCE
Thus far in this papfer we have examined and adopted concepts from some of the fundamental economics and stakeholder literatures pertaining to the construct of val- ue. We have built on this foundation a stakeholder-based perspective of performance defined as the sum of the utility created by a firm for its legitimate stakeholders. We will now briefly compare this stakeholder-based performance perspective to three other popular performance measurement perspectives, not for the sake of a detailed comparison, but to highlight ways in which our approach differs from: a shareholder perspective, the Balanced Scorecard and the Triple Bottom Line.
Shareholder-Based Financial Performance
Firm performance for much of the business and economics literature is focused on providing financial returns, variously referred to as profits, return on investment (ROI), economic rents, or shareholder returns (for a review, see Barney, 2011, chapter 1). Many scholars believe that shareholders should be the highest priority firm stakeholder (i.e., Berle & Means, 1932; Rappaport, 1986; Jensen, 2001; Wai-
STAKEHOLDER THEORY, VALUE, AND FIRM PERFORMANCE 109
lace, 2003), in part because shareholders do not have a specifiable contract with the organization, which makes them residual claimants (Fama and Jensen, 1983). The logic continues that providing the maximum possible return to shareholders is the primary duty of firm managers. However, even if one resource provider or another does have the residual claim, why should a firm be obligated to maximize that residual at the expense of other resource providers? It might also be argued that stakeholders that provide more or better resources to a firm than their contracts require are also entitled to some of the surplus value created (Barney, 2011).
Jensen (2001) argued for a single corporate objective function, "I argue that since it is logically impossible to maximize in more than one dimension, purpose- ful behavior requires a single valued objective function" (297). However, much has happened in the financial markets to expose well-entrenched economic theories upon which such arguments have been made. The Nobel laureate economist Paul Krugman (2009) wrote, "As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth Economists will have to learn to live with messiness. That is, they will have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic 'theory of everything' is a long way off." Similarly, Barney (2011) admits that tackling issues associated with measuring performance from the perspective of multiple stakeholders is important even if it makes the process more complex.
From a stakeholder perspective, financial performance metrics are important because they are important to all of the firm's core stakeholders, but they are incom- plete and oversimplify the roles of, and utility received by, the various stakeholders involved in firm success (Barney, 2011). Financial measures offer an important but limited perspective on value creation, particularly when they are tied to efforts to quantify events in terms of specific and measurable financial outcomes in the short or medium term—and thus reduce the ability and/or desire of managers to think more broadly about what a firm might do to increase total value across stakeholders. We should remember that what is tracked tends to be what gets managerial atten- tion in an organization (Kaplan & Norton, 1992; Sachs & Riihli, 2011). Measuring performance through tangible and intangible factors that are important to core stakeholders, as proposed herein, allows organizations to better understand what stakeholders want and need—both as a retrospective measure of how well firms have done and to help form new ideas about how firms will perform in the future. If the ability to create utility for stakeholders matters, and is a central predictor of future firm performance, then it is important to find ways of capturing more complex notions of value in a systematic and comprehensible fashion.
Furthermore, most financial performance measures are so aggregated that they are not particularly useful in pinpointing problems within the organization (Johnson & Kaplan, 1987). In contrast, if an organization is using performance metrics that track utility created across multiple stakeholders, it is in a much better position to pinpoint potential sources of problems within the system that are reducing the amount of total value created.
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The Balanced Scorecard and Triple Bottom Line
Some progress has been made with regard to measuring (and controlling) perfor- mance across multiple perspectives. The two most prominent examples are the Balanced Scorecard (Kaplan & Norton, 1992) and the Triple Bottom Line (Elk- ington, 1999). A multiple-perspective approach has also been advocated by other authors (i.e., Atkinson, Waterhouse & Wells, 1997; Cameron, 1980; Chakravarthy, 1986; Connolly, Conlon & Deutsch, 1980); however, we will focus on the Balanced Scorecard and Triple Bottom Line because they have received considerable attention and have been influential with practitioners.
The Balanced Scorecard examines firm performance from the perspective of finances, customers, innovation and learning, and internal efficiency. In advocating for the Scorecard, Kaplan and Norton (1992) argue: "Senior executives understand that their organization's measurement system strongly affects the behavior of manag- ers and employees. Executives also understand that traditional financial accounting measures like return on investment and earnings per share can give misleading signals for continuous improvement and innovation. . . . The traditional financial performance measures worked well for the industrial era, but they are out of step with the skills and competencies companies are trying to master today" (172).
Some of the arguments made by Kaplan and Norton (1992) apply equally well to a stakeholder-based performance construct. For instance, they argue that their four performance areas are connected. This is also an important feature of our stakeholder-based perspective. Furthermore, their model is multi-stakeholder in that they recommend measuring customer perceptions directly and employee is- sues indirectly through their internal efficiency construct. However, they leave out some important stakeholders, such as suppliers and communities, who also supply essential resources. And although the Scorecard measures four areas, the primary dependent variable is still financial returns (Kaplan and Norton, 1992). The other three areas are present to facilitate maximizing profits—thus, instead of creating a richer conception of value, this sort of measure attempts to oversimplify and monetize it, creating the appearance of measurability and commensurability across categories. In essence, this perspective on value simply adds additional factors to consider and measure while retaining the conception of value provided by the shareholder view.
The Triple Bottom Line, on the other hand, includes the broad interests of society directly (Elkington, 1999). It is based on the idea that firms should measure perfor- mance from the perspective of economic, environmental, and social value added. It is strong in its ability to raise the awareness of the firm's broader performance in the eyes of its managers, and helps to increase the accountability of firms. Along similar lines. Porter and Kramer (2011) recently argued that organizations should adopt a "shared value" approach that encourages the generation of profits that also create social benefits. The Triple Bottom Line and Porter and Kramer's arguments are part of a rich stream of discussions in the management literature by business and society scholars under the label of corporate social responsibility (CSR). For these scholars, business has to think about not just economic value but the ways in which it creates value in social, environmental, and moral terms. CSR has become
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a vehicle for a wide array of scholars, critics and activists to criticize what they perceive as excessive self-concem by business elites and to encourage firms to bring more attention and resources to address issues (i.e., create "value") across a range of topics such as the natural environment, sexual harassment, worker job security, outsourcing of jobs, education, regulation, corporate govemance, and the like.
Perhaps because of its moral foundation, stakeholder theory is often used to support CSR propositions (Phillips & Freeman, 2008; Phillips, Freeman & Wicks, 2003). However, stakeholder theory was not developed to advocate for societal in- terests nor was it about building value within entire economies—except to the extent that as firms create more value for themselves and their stakeholders they are, in essence, advancing the interests of society (Freeman, 1984; Walsh, 2005). Phillips and Freeman (2008), noted experts on the topic, "claim that stakeholder theory does not apply to entire economies" (103). According to Phillips, Freeman, and Wicks (2003), "'Stakeholder' is not synonymous with 'citizen' or 'moral agent' as some wish to interpret it. Rather, a particular and much closer relationship between an organization and a constituency group is required for stakeholder status. The theory is delimited and non-stakeholder should remain a meaningful category" (491).
It is precisely the way in which the TBL and CSR try to incorporate concems for factors that extend beyond profits that differentiates them from a stakeholder approach. First, both approaches distinguish "economic" from "social" and "envi- ronmental" categories, reinforcing the idea that these are extra responsibilities for a traditional business. Such a conceptualization has been criticized for reinforcing the separation thesis—the notion that business and ethics (or society or the environment) are categorically and conceptually separate spheres of activity (see Freeman, 1994; Wicks, 1996). The language and conceptual tools used by TBL and CSR advocates makes the separation thesis an inevitable problem and feeds into the criticism of shareholder advocates like Friedman that "social responsibilities" are not only op- tional, but that they cut against the moral duties of managers.
Second, the categories added for consideration (i.e., society and environment) are not clearly or directly tied to value creation for stakeholders and the utility they seek in the firm. Extemal (rather than intemal) firm forces draw attention to these factors. While stakeholders through their cooperation in firms will tend to want to improve society and not harm the environment, it isn't clear the extent to which they will do so in their capacity as stakeholders. Thus, TBL and CSR differ from the perspective offered in this paper in that our factors are not shaped by society (e.g., public policy analysts) or environmental activists, but by what stakeholders seek as utility through their interactions with the firm. To that extent, one criticism of our stakeholder-based perspective may be that it lacks concem for society, the environment and minority interests, although stakeholders may bring these concems with them as they judge the value of their affiliation with a firm. Firms that ignore the concems of their stakeholders with regard to societal dimensions risk reducing the utility those stakeholders perceive they are getting from the firm. Rather than a weakness, this is simply a practical manifestation of the stakeholder approach as we have applied it. It is essential to have social and environmental concems raised by
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other groups (e.g., governments, non-profits) to either encourage or require firms to improve their performance in areas that are of interest to society as a whole.
Finally, it is not clear how the various factors in either the CSR approach or the Triple Bottom Line relate to each other and thus provide direction for managers beyond the hope that concern with non-economic factors may enhance the bottom line. In contrast, our model highlights the inter-connection of factors, how each relates to stakeholder utility, and why all are important to firm success.
MEASURING THE VALUE CREATED THROUGH A FIRM'S ACTIVITIES
An ongoing theme of this paper is that stakeholders receive value that extends beyond economic benefits. Consequently, measures of the utility created for stake- holders should consider both economic and other benefits stakeholders seek. Both practitioner and academic researcher aspects of measuring utility are relevant to this discussion. Our discussion of the measurement implications for academic research is positivist in the sense that we are assuming a process based on technical analysis in which researchers use large samples of data and statistical methods to explain observable phenomena (Scherer & Patzer, 2011). Thus, the measures described in that section will be fairly objective in nature but not as rich as what might be obtained through personal involvement.
On the other hand, we acknowledge that researchers may also become involved in case research in which they communicate directly with the focal actors to as- certain what they value and how the firm has infiuenced their well being. Scherer and Patzer (2011) refer to this approach as post-positivist, and explain that it is necessary when normative issues need to be addressed. The post-positivist or inter- pretive approach allows the researcher to determine whether observations are more a function of unchangeable laws or volatile situations that are subject to change. Participating with the focal actors in the information collection process allows an observer to gain a clearer picture of their interests, values, and the way they interpret the world (Habermas, 1990). The practitioner approach, discussed first, is almost entirely post-positivist. Consequently, it allows for collection of rich information that is useful in understanding what the firm can do to serve its stakeholders and thus create more value.
Practitioner Measures of Value Creation Through the Construct of Happiness
There are a variety of ways one might specify and operationalize our four-factor model (and the broader notion of stakeholder utility). The essential ingredients include 1) recognition that the purpose of a firm, and thus its performance, is based on the amount of value the firm provides to its stakeholders, 2) inclusion of both economic and non-economic factors that provide utility to stakeholders, 3) inclusion of measures for all of a firm's primary stakeholders, 4) recognition that different stakeholders are likely to value different things (i.e., their utility functions are dif- ferent) and 5) measures should have the capacity to recognize a level of utility to stakeholders that exceeds mere satisfaction with the firm.
STAKEHOLDER THEORY, VALUE, AND FIRM PERFORMANCE 113
The fifth requirement is essential because reciprocity and generalized exchange, which provide a foundation for the creation of additional value, require more than just a base level of stakeholder satisfaction (Bosse et al., 2009; Harrison et al., 2010). For example, a stakeholder that is merely satisfied with their affiliation with a firm or with the level of distributional (including economic), procedural, or interactional fairness may not have an incentive to cease relations with the firm but likewise is not particularly motivated to give additional effort, exhibit a high level of loyalty, engage in more value creating activities with, or provide more potentially valuable information to the firm. To tap into this additional value creating behavior the firm needs to provide a level of utility that is above the base level. We believe that one way to get at this higher level of utility is through the construct of happiness. That is, a stakeholder is not merely satisfied, but is happy (or potentially very happy) about the amount of utility received from one of more aspects of engaging with the firm. Happiness as a way of understanding utility received and thus the value provided to stakeholders builds from the ideas of Mill (1961) and connects to more recent writings (i.e., Gilbert, 2005; Haidt, 2006; Sidgwick, 1981; Shaw, 1999).
Haidt's (2006) work, in particular, is interesting in light of the utility-creating no- tions of organizational justice we have examined herein, as he advocates for respect, empathy, and a balance between internal and external factors as the keys to happiness. Our work runs in parallel with Haidt's ideas on happiness in that external factors can be interpreted in terms of the tangible utility gained from goods and services and internal factors that come from the perceived utility that arises from just and fair treatment, from social capital, and from the intangible benefits of esteem and satisfaction associated with affiliating with an organization that exhibits behavior that is considered virtuous.
As Judge and Kammeyer-Mueller (2011) point out, most of the organizational research on happiness has been conducted in the context of work. However, happiness research is increasing in both volume and breadth (Blanchflower & Oswald, 2011; Judge & Kammeyer-Mueller, 2011), and from a stakeholder perspective happiness is just as important to a suppher or customer as it is to an employee. We will define happiness in terms of the way stakeholders feel about the intangible and tangible utility they receive through their association and interactions with the firm. The idea of going directly to stakeholders to measure happiness is consistent with Gilbert's (2005) observation that experience is only observable to the people who have it. As mentioned previously, it is a post-positivist or interpretative approach in which the investigator is involved directly with the subject (Scherer & Patzer, 2011). We are making this final connection because we believe it is more practical to measure stakeholder happiness than it is to try to measure the actual utility received, especially since each stakeholder has a different utility function, even within groups such as employees, customers or suppliers.
Does heterogeneity within stakeholder groups make any attempt to measure happiness (and thus utility) meaningless? We believe it does not for two reasons. First, it is nearly impossible for a firm to make all of its stakeholders happy all of the time. Second, for reasons already elaborated upon in this manuscript, we would expect a meaningful correlation between the amount of value a firm creates and the
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proportion of stakeholders within a group who consider themselves happy with the firm. Thus, if a high proportion of stakeholders within a group are unhappy it is a good indication that the firm has a problem in that area. According to the theory presented herein, such a problem can hinder creation of incremental value within the system. We should also mention one of the risks of collecting this sort of infor- mation is that the process can raise the expectations of stakeholders and thus make it more likely that the firm will disappoint them.
Happiness, which psychologists often refer to as subjective well-being (Diener, Lucas & Oishi, 2002; Kahneman & Krueger, 2006), can be measured in a number of ways. Perhaps the most common is self-report questionnaires (Pavot & Diener, 1993). Because of potential problems associated with self-report measures such as situational priming and cognitive biases, researchers have also used a technique called Experience Sampling Method that has participants stop what they are doing and make notes on their experiences (Stone, Shiffman & DeVries, 1999). Other techniques include informant reports from people who are close to the respondent (Sandvik, Deiner & Seidlitz, 1993), coding of observational data (Frey & Stutzer, 2002) and memory recall of positive versus negative events (Siedlitz, Wyer & Diener, 1997). Information about stakeholder happiness may also be obtained from consultants and outside sources, such as rating agencies or reviews found in periodicals (i.e.. Fortune's "100 Best Companies to Work For").
If a relationship of trust has been established stakeholders are more likely to be honest about how happy they are, especially if distributional justice has been exhibited in the past and a stakeholder therefore believes that any additional value created in the firm as a result of the information they share is likely to improve their own situation. Overall happiness with the utility a stakeholder receives from a firm is important and is likely to influence stakeholder behavior; however, it may not be particularly helpful in terms of diagnosing problems or finding new ways to create value for stakeholders. Consequently, happiness should be measured for multiple dimensions for each primary stakeholder. Table 2 (left column) contains examples of the types of dimensions that might be measured. The list is not intended to be definitive, especially since stakeholders themselves determine their own utility func- tions. It is, however, a good starting point for those things firms might consider as they examine the value they are providing to their stakeholders.
Measures for Academic Research
Academic researchers may use a case-based method to gather rich information about the happiness of firm stakeholders. A case method is superior to large sample statistical studies based on objective measures if the goal is to sort out normative issues or to distinguish between constant influences and situational factors that are subject to change (Scherer & Patzer, 2011). However, frequently it is difficult to make generalizations based on case research that apply to a broader group of companies. For these situations, we believe that effective (albeit not perfect) measures can be selected from archival sources or obtained through primary sources such as surveys.
STAKEHOLDER THEORY, VALUE, AND FIRM PERFORMANCE 115
Table 2: Examples of Performance Measures from Multiple Stakeholder Perspectives
Employees
Customers
Suppliers
Shareholders
Community
Potential Categories for Measuring HappinessAVell-heing
Various components of employment contract (i.e., pay, benefits, perquisites)
Perceived fairness of decision making processes
Perceived treatment (i.e., respect, inclusive- ness)
Perceived authenticity (i.e., what firm says, it does)
Consistency between stated vs. realized firm values (i.e., honesty)
Promotion policies/upward mobility
Firm's environmental performance
Firm's position/performance on other soci- etal issues
Also, objective measures such as turnover, legal actions
Product/service features
Perceived treatment during transactions (i.e., respect, fairness)
Perceived authenticity (i.e., what firm says, it does)
Firm's environmental performance
Firm's position/performance on other soci- etal issues
Also, objective measures such as repeat busi- ness, legal actions
Perceived treatment during transactions (i.e., respect, fairness)
Firm's environmental performance
Firm's position/performance on other soci- etal issues
Nature of payments (i.e., size, speed)
Also, objective measures such as longevity, availability of supplies
Financial returns
Perceived riskiness of investment
Governance structure and policies
Disclosure of pertinent information/transpar- ency
Firm's environmental performance
Firm's position/performance on other soci- etal issues
Also, objective data on returns and risk
Perceived impact on community/environ- ment (per community leaders or general perceptions)
Perception of integrity of firm
Also, objective data on number of positive/ negative encounters, community service, charitable and infrastructure contributions
Potential Proxies for Researchers
Compensation and benefits
Workplace benefits (i.e., fitness center, child care)
Legal actions or, if unionized, grievances Productivity measures
Inclusion on list of best companies to work for
Internal promotions to top management
IXimover
KLD Health and Safety Concern or Strength
KLD Workforce Reductions
KLD Pension/Benefits Concern or Strength
KLD Cash Profit Sharing
Growth in sales
Consumer reports on products/services
Reputation rankings
KLD Product Safety Concern
KLD Marketing or Contracting Controversy
KLD Quality Ranking of Products
KLD R&D/Innovation Ranking
Days payable (from accounting statements)
Longevity of supplier relationships (available in 10-K for some firms)
Legal actions
Shareholder returns
Price-to-eamings ratio (P/E)
Risk associated with returns (i.e., variance and beta)
Number of shareholder proposals
Compensation levels of top managers (KLD Compensation High or Low)
KLD Ownership Concern
Tax breaks or other advantages provided to the firm
New local regulations that affect firm
Legal actions
KLD Tax Disputes or Investment Contro- versies
KLD Negative Economic Impact
KLD Generous Giving
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Consistent with stakeholder theory, academic measures of organizational perfor- mance should be measured from the perspective of multiple stakeholders so as to capture as much value as possible. For example, in order to gain a more complete picture of the value created or destroyed in a large scale organizational change such as moving a headquarters or engaging in an acquisition, studies of these sorts of phenomena should include measures from the perspective of several stakeholder groups such as customers, employees, shareholders, suppliers and local communities, rather than focusing on just one. These measures should also address the idea that more value is created when the firm provides a level of utility to a stakeholder that goes above the norm (happiness). Consequently, the best measures allow firms to be compared to other firms in general or to firms in their industries. Multiple sources of information about a particular stakeholder, where available, are better than relying on one source of information. This provides triangulation. Finally, proxies should be allowed. A researcher may not be able to ask a stakeholder directly how happy they are with a firm, but might be able to determine what the firm is doing for the stakeholder that can realistically make that stakeholder happy. For instance, although it is especially difficult to assess supplier happiness, there is one thing a firm can do that arguably makes a difference to the supplier—pay bills quickly. Consequently, a measure like cost of goods sold divided by accounts payable might serve as one possible proxy for the happiness of suppliers.
The right column of Table 2 contains examples of a variety of possible measures of (and proxies for) value created for stakeholders. It is not intended to be exhaustive but rather representative of what is available or can be obtained through primary research. Several KLD variables are included in the table.^ Although the KLD data are oriented towards social responsibility (Sharman, 1996), a lot of it applies also to how a firm treats its stakeholders (see Berman et al., 1999; Hillman & Keim, 2001). Frequently researchers combine the scores from five KLD areas to form a composite measure of performance: community, employees, diversity, the environment, and products. These measures consolidate values from over 50 KLD variables. We rec- ommend instead that researchers examine each of the individual variables closely and include only those that best fit their theory (Chatterji & Levine, 2006) rather than relying on the five-factor measure simply because is has been used previously. Table 2 includes a number of KLD shareholder variables that have been left out of most of the empirical research using KLD data. Also included in the table are suggestions for proxies to measure value created for suppliers. We are not aware of any studies in the stakeholder literature that account for this important stakeholder.
DISCUSSION AND IMPLICATIONS
This paper argues that the utility stakeholders seek is complex and pertains to more than just economic value. Firms that provide more utility to their stakeholders are better able to retain their participation and support. Furthermore, stakeholders de- pend on both the firm and its other stakeholders to satisfy their own interests. We develop a four-factor perspective on the utility stakeholders receive from a firm as a more complete construct of firm performance than popular financial performance
STAKEHOLDER THEORY, VALUE, AND FIRM PERFORMANCE 117
measures. The stakeholder-based perspective of performance can help managers determine where their attention is needed in order facilitate the creation of more value. Collecting non-financial information on firm performance has also been found to enhance communication, learning and coordination within firms (Dossi & Patelh, 2010).
Similarly, a stakeholder-based perspective on performance may lead researchers to consider the influence of organizational activities and phenomena on a much wider range of stakeholders. Indeed, our argument begins as an affirmation of Freeman's (1984) original claim that attending to stakeholders and their interests is a critical starting point for managers and provides a foundation that drives their ongoing success. At present, there are very few studies that examine the influence of firm activities on a broad group of stakeholders (a notable exception is Waddock and Graves, 2006). For major advances to be made in the empirical stakeholder literature, stakeholder-based performance should be the dependent rather than the independent variable. We would also argue for further conceptual and empirical work examining our model (and rival perspectives on value for stakeholders).
One issue for future research relates to the question of cooperation and conflict regarding stakeholders (and their interests). The argument made in this paper is that stakeholder theory suggests that cooperation, rather than conflict, should be the pri- mary managerial mindset (e.g.. Freeman, 1994; Freeman, Harrison & Wicks, 2007). Stakeholders do not always cooperate, and their interests can conflict, particularly when one operates from a theoretical lens that highlights such potential conflict (e.g., agency theory). Thus, future work might explore an array of questions about cooperation and conflict among stakeholder interests raised by a focus on value creation. For example, there is need to further investigate the creation of processes and vahd norms among stakeholders (e.g., Habermas, 1990) as a means of resolving (potential) conflicts in ways that are both normatively sound and instrumentaUy viable (e.g., Jones and Wicks, 1999). Similarly, there are potential conflicts between the utility that stakeholders and firms seek versus what society may value; research is needed both to document consis- tent kinds of gaps between the two potential means to close the gap (e.g., regulation, incentives, education, pubhc policy). Future research might also explore whether the resources an organization expends in creating utility for its stakeholders is more than compensated for by the additional value created within the firm's system.
From a practical perspective, much of management research has focused on fi- nancial performance as the exclusive criterion of interest; thus, it tends to provide prescriptions that optimize financial performance rather than the total value created. For example, the merger and acquisitions Uterature has been dominated by research focusing on shareholder returns. Consequently, researchers and practitioners who use this hterature to derive firm recommendations are biased in terms of maximizing the financial success of an acquisition rather than creating value in broad stakeholder terms. We understand by now that there are human costs associated with mergers and acquisitions, but what strategies can a firm making an acquisition use to reduce those costs and possibly even enhance value created for employees, communities, supphers and so forth. If the total value is considered, how are management decisions likely to change? The same might be said for restructurings, joint ventures, new product devel-
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opment, various types of training programs, management succession, or plant location decisions. This shift in perspective opens up the ability to create more value (and a broader array of value) for stakeholders. Also, the perspective may lead managers to utilize moral imagination (Werhane, 1999), seek creative solutions, and make choices that might otherwise seem counter-intuitive from a shareholder-dominated approach.
Some scholars argue that there is a risk that too many performance measures will reduce the infiuence of any one measure in terms of what managers focus on (Chat- terji & Levine, 2006; Jensen, 2001). However, unlike Jensen's single performance objective, our perspective is about joint value maximization and the processes through which it is achieved (Zajac & Olsen, 1993). As managers focus on creating utility for their stakeholders, across both tangible and intangible factors, more value is created. Neglect of any one stakeholder could set off a downward spiral in the system as the firm's other stakeholders respond to what they observe. Consequently, our position is that the real risk, from a managerial position, is that managers will become focused on too few objectives representing too few stakeholder interests, rather than too many.
We would like to say in closing that it is not our intention to suggest that the four factors we have identified are the only important factors. We selected factors that are highly relevant to stakeholder theory (because our stated purpose was to provide a stakeholder-based model). Our factors are also closely associated with the amount of value a firm creates and is able to create in the future. They are broad based and include both economic and noneconomic factors, consistent with our argument that both types of factors are important to the amount of utility stakeholders receive from interactions with a firm. However, other factors may be found to be as or more important as this stream of research continues.
Similarly, we use the happiness construct as an example of the way some of our ideas might be specified in research. Of course, happiness was also a part of some of the original writings on value and utility, and is regaining popularity as a vari- able of interest. One evidence of this fact is that the National People's Congress in China recently declared that increasing happiness is more important than increasing GDP (Economist, 2011). Nonetheless, it would be a mistake to focus exclusively on stakeholder happiness in future research. One of the major themes of this paper is that multiple measures of firm performance are superior to just one (i.e., financial retums). A singular emphasis on happiness would be subject to the same criticisms.
Value, what it means, how it is created and how we measure it cuts to the core of our understanding of organizations. It also speaks to the fiindamentals of what it means to live well, something that has been a perennial concem of ethicists (e.g., Solomon, 1992). This work highlights the need for actually doing the hard work of developing new measures of firm performance based on the value a firm creates for its stakeholders, and going out and gathering data—both for academics and for firms. From a managerial perspective, collecting this data can be a powerful signal to stakeholders about their commitment to them, can lead to innovation and enhanced efficiency because of the new information that is obtained during the process, and may provide more than mere intuition to guide the underlying logic of how a firm creates outstanding performance. Creating processes for engaging stakeholders and understanding value creation from their perspective is critical to firm success and the ability to remain a vibrant business in the future.
STAKEHOLDER THEORY, VALUE, AND FIRM PERFORMANCE 119
NOTES
We gratefully acknowledge the helpful comments and guidance received from Ed Freeman, Adrian Keevil, Robert Phillips, the associate editor, and three anonymous reviewers on earlier drafts of this manuscript.
1. There are also contributors within economics and political theory who have argued for objective constraints or limitations on pursuits of utility maximization, whether by individuals or across society, based on normative principles. For example, Rawls (1971) and Nozick (1974) both argue for the critical and fundamental role of individual freedoms that limit efforts to maximize utility.
2. In 2010 MSCI acquired RiskMetrics, who had previously acquired KLD (Kinder, Lydenberg & Domini) Research and Analytics. The KLD data are now called the ESG (environmental, social and gover- nance) indexes, but to avoid confusion we are keeping the traditional name most often found in the research literature.
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Mandatory Assignment Resources/The Future of Stakeholder Management Theory - A Temporal Perspective.pdf
The Future of Stakeholder Management Theory: A Temporal Perspective
Alain Verbeke • Vincent Tung
Received: 10 April 2011 / Accepted: 6 March 2012 / Published online: 23 March 2012
� Springer Science+Business Media B.V. 2012
Abstract We propose adding a temporal dimension to
stakeholder management theory, and assess the implications
thereof for firm-level competitive advantage. We argue that
a firm’s competitive advantage fundamentally depends on
its capacity for stakeholder management related, transfor-
mational adaptation over time. Our new temporal stake-
holder management approach builds upon insights from
both the resource-based view (RBV) in strategic manage-
ment and institutional theory. Stakeholder agendas and their
relative salience to the firm evolve over time, a phenome-
non well understood in the literature, and requiring what we
call level 1 adaptation. However, the dominant direction of
stakeholder pressures can also change, namely, from sup-
porting resource heterogeneity at the firm level to fostering
industry homogeneity, and vice versa. When dominant
stakeholder pressures shift from supporting heterogeneity
towards stimulating homogeneity in industry, the firm must
engage in level 2 or transformational adaptation. Stake-
holders typically provide valuable resources to the firm in
an early stage. Without these resources, which foster het-
erogeneity (in line with RBV thinking), the firm would not
exist. At a later stage, stakeholders also contribute to inter-
firm homogeneity via isomorphism pressures (in line with
institutional theory thinking). Adding a temporal dimension
to stakeholder management theory has far reaching impli-
cations for this theory’s practical relevance to senior level
management in business.
Keywords Competitive advantage � Institutional theory � Resource-based view � Stakeholder management theory � Temporal perspective
Introduction
The analytical stakeholder approach to strategic management
examines the firm within a myriad of relationships, and argues
that devoting appropriate attention to all legitimate stake-
holders is important to achieve superior performance (Ar-
gandona 1998; Donaldson and Preston 1995; Freeman 1984;
Gibson 2000; Laplume et al. 2008; Ruf et al. 2001). The firm
responds to multiple stakeholders for different reasons and in
various ways (Berrone et al. 2007). Here, systematic attention
to stakeholders can be viewed as a means for the firm to rise
above the conventionally assumed objective of shareholder
profit maximization. According to Kaler (2006), those with a
moral claim on the actions of the firm are its stakeholders,
namely consumers, employees, competitors, suppliers, gov-
ernment, as well as other actors in society. These actors forge
enduring and ongoing ties of strategic importance with the
firm that can contribute to its competitive advantage in the
long term. However, if stakeholder involvement negatively
affects the firm’s operations, this can be detrimental to the
firm’s bottom line (O’Higgins 2010).
Alain Verbeke and Vincent Tung contributed equally to this
manuscript.
A. Verbeke (&) McCaig Chair in Management, Haskayne School of Business,
University of Calgary, 2500 University Drive NW, Calgary,
AB T2N 1N4, Canada
e-mail: [email protected]
A. Verbeke
Solvay Business School, University of Brussels (VUB),
Pleinlaan 2, 1050 Brussels, Belgium
V. Tung
Haskayne School of Business, University of Calgary, 2500
University Drive NW, Calgary, AB T2N 1N4, Canada
e-mail: [email protected]
123
J Bus Ethics (2013) 112:529–543
DOI 10.1007/s10551-012-1276-8
The extant research on stakeholder management consists
of three distinct streams: descriptive, instrumental, and
normative (Donaldson and Preston 1995). Descriptive
research mainly explores corporate characteristics driving
firm behavior vis-à-vis stakeholders, as well as management
perceptions of obligations to stakeholders. Research in the
instrumentalism sphere examines the organizational out-
comes of stakeholder management in terms of financial and
social performance, organizational learning, and innovation.
Concurrent with the development of the descriptive and
instrumentalist views is the ongoing scholarly debate on the
need for a normative basis of stakeholder management
theory as a prescriptive tool for management.
Despite the important insights gained from past
research, the significance of a stakeholder management
approach to understand the transition over time from firm
heterogeneity to more homogeneity in industry (and vice
versa) has not yet been fully explored. Such fundamental
moves in the primary direction of stakeholder pressures
deserve managerial attention, as they can profoundly affect
the firm’s ability to maintain competitive advantage. The
move towards more homogeneity in industry typically
entails stakeholders pushing (large) incumbents with a
resource base considered unique to become more similar to
other firms. Opposite moves are also possible, and occur in
cases of industry disruptions, whether as the result of
breakthrough innovations, new entrants from other indus-
tries, sudden changes in customer needs, etc. In such cases,
the dominant pressure from stakeholders is to support the
innovating or newly entering firm in gaining competitive
advantage based on resource heterogeneity, and to move
away from the status quo in industry.
As Friedman and Miles (2002, p. 1) argued, ‘‘previous
literature has led to a lack of appreciation of: the range of
organization/stakeholder relations that can occur; the
extent to which such relations change over time; as well as
how and why such changes occur.’’ While there has been
growing attention devoted to the integration of the stake-
holder management approach with other significant con-
ceptual frameworks in strategic management such as the
resource-based view (RBV), further research should also
examine how adding a temporal dimension to stakeholder
management might explain fundamental shifts in stake-
holder management when stakeholders shift from sup-
porting resource heterogeneity toward seeking more
homogeneity in industry, and vice versa.
The purpose of the present paper is to introduce a
temporal model of stakeholder management theory that
incorporates insights from both the RBV ànd institutional
theory (DiMaggio and Powell 1983; Scott 1987), but
infused with insight from transaction cost economics
(TCE) and innovation theory. Drawing on the RBV, this
paper argues that the critical processes of accessing
valuable resources and achieving sustainable competitive
advantage can be usefully described by a stakeholder
approach to management at the early stage, i.e., the stage
immediately following the firm’s birth (or the stage
immediately following a significant innovation), whereby
resource heterogeneity is critical. The RBV suggests that
inter-firm differences arise because of the unequal distri-
bution of resources, itself the result of market imperfec-
tions. The RBV is thus particularly well positioned to
describe and explain the firm’s growth process in the early
stage by focusing on the processes of resources accumu-
lation and exploitation (Barney 1986). The stakeholder
approach emphasizes achieving the most effective and
efficient access to—and usage of—these resources through
stakeholder management, which should aim at reinforcing
resource heterogeneity. Here, what matters is not just the
technical processes of accumulating and combining
resources that have value-creating features, but the social
construction of a network of stakeholders as resource
providers, who help the firm achieving heterogeneity, i.e., a
unique position in industry (Gulati et al. 2000).
However, over time stakeholder preferences evolve and
their stakes change based upon the strategic issues con-
sidered relevant at a particular point in time (Freeman
1984). A unique type of change is that of stakeholders
shifting away from supporting resource heterogeneity
towards seeking more homogeneity in industry. Homoge-
neity seeking is the domain of institutional theory, which
seeks to answer the question of what forces make organi-
zations more similar (DiMaggio and Powell 1983). For
instance, suppliers may apply pressures at the inter-firm
level on their buyers, and compel the latter towards con-
formity with particular standards or preferences. The con-
verse can occur as well, namely when buyers build up
market power over time and gain significant bargaining
power over their suppliers. Other actors (i.e., other than
suppliers) can exert similar pressures. At the industry-level,
the institutional context typically triggers public and reg-
ulatory pressures and industry-wide norms, rules and
beliefs that define or enforce socially acceptable economic
behavior. In this late stage of firm-level (and industry-
level) development, wherein firms have reached maturity
and established businesses generate relatively stable cash
flows, institutional forces seeking homogeneity among
firms become stronger. Modern institutional theory is par-
ticularly well equipped to address the stronger forces
towards homogeneity, as it emphasizes social justification
and the adoption of common practices (Oliver 1997).
By combining and contrasting elements from the RBV,
with its focus on managerial processes to achieve hetero-
geneity among firms, and institutional theory, with its focus
on the processes driving homogeneity in industry, this
paper effectively introduces a temporal stakeholder
530 A. Verbeke, V. Tung
123
management model. As noted above, the dominant
requirements for effective stakeholder management in the
early stage of any firm’s existence are related to the social
construction of resource heterogeneity, in line with the
RBV. In a later stage of the firm’s life, institutional forces
seeking more homogeneity among firms will typically play
a more dominant role in stakeholder management, with the
firm engaged in a network of actors seeking mainly con-
formity and social acceptability.
Since competitive advantages erode in the longer run
(Jacobsen 1988), ‘‘due to the instability of bargaining
power profiles over time and the responses of external
markets to rents’’ (Coff 1999, p. 128), it is important to
identify the key stakeholders potentially involved in this
erosion process, as well as their strategic preferences. In
this particular case, the value of a sole stakeholder man-
agement focus on resource heterogeneity declines over
time as compared to a stakeholder management approach
focus that accommodates homogeneity, i.e., common
practices among firms. More specifically, once the relevant
stakeholders are identified, it is critical to understand the
role they play in the processes pushing towards more inter-
firm homogeneity, and to reflect on the stakeholder man-
agement strategies that can be pursued to benefit from the
push towards greater homogeneity, while maintaining
requisite heterogeneity of resource access and utilization.
We distinguish among five stakeholder groups (beyond
shareholders) conventionally recognized in stakeholder
management theory (e.g., Argandona 1998; Donaldson and
Preston 1995; Friedman and Miles 2002). These include
the firm’s suppliers, consumers, employees, competitors,
and government/regulatory agencies. In other words, in
addition to recognizing industry rivals and government as
stakeholders, we follow Freeman et al. (2004, p. 365), who
suggest that ‘‘business is about putting together a deal so
that suppliers, customers, managers and shareholders all
win continuously over time.’’
For each of these stakeholders, this paper discusses in a
stylized fashion how they can provide firms with initial
competitive advantage by making resources accessible
(consistent with the RBV perspective), but later pressure
firms towards homogeneity (consistent with institutional
theory thinking). Here, we need to take into account that
the purpose of stakeholder management is precisely to use
these forces towards homogeneity in ways that support
competitive advantage. Indeed, Oliver (1997) suggests that
firms need not necessarily ‘acquiesce’ when faced with
external institutional pressures, but may pursue idiosyn-
cratic strategies that include ‘‘compromise’’, ‘‘avoidance’’,
‘‘defiance,’’ and ‘‘manipulation’’ to gain competitive
advantage. The main point made here, however, is that the
substance of effective stakeholder management processes,
conducted in a context of stakeholders predominantly
supporting resources heterogeneity (as in the firm’s early
stage) will be different from what is required in a context
with stronger stakeholder pressures towards inter-firm
homogeneity (as in the later stage of the firm’s life).
Obviously, access to resources also remains important in
the later stage of the firm’s life, and some common stan-
dards or behavioral patterns in an industry (or broader
organizational field) may be important in the early stage as
well, but the point is that the firm would simply not come
into existence without privileged access to—and the idio-
syncratic combination of—at least some resources from
stakeholders, and would not survive through later stages
without showing an appropriate level of conformity with
what other economic actors in industry are doing so as to
gain legitimacy as perceived by a broad set of stakeholders.
From a managerial perspective, this paper describes the
need for the firm to transition from early stage—idiosyn-
cratic capitalization on the resources provided by stake-
holders—toward later stage—equally idiosyncratic
response to institutional pressures towards inter-firm
homogeneity—so as to gain and sustain competitive
advantage over time.
The list of stakeholder groups considered here, for
illustrative purposes, as being the most relevant is by no
means exhaustive: in any given case, the actual set of
stakeholders relevant to the firm results from a dynamic
process, whereby stakeholders may even move from one
category to another (Carroll and Buchholtz 2009). Never-
theless, our stakeholder set does include the actors viewed
relevant in most of the mainstream stakeholder manage-
ment research, having been shown in that research as
exerting major influence on firm management. In addition,
this approach highlights the areas in strategy research with
substantial potential for applying a temporal view of
stakeholder theory. The temporal model proposed here
does more than merely providing additional explanatory
power to existing stakeholder theory models, which in and
of itself, would also constitute a worthwhile academic
endeavor. As Post et al. (2002, p. 25) argued: ‘‘successful
stakeholder management also involves learning, because
stakeholder characteristics and interests change over time.’’
The present paper demonstrates that adding a temporal
view to stakeholder theory to explain firm-level competi-
tive advantage, moves our understanding of stakeholder
preferences, and their impact on the firm, from a static to a
dynamic conceptualization. Indeed, our temporal view
does not simply entail managing a stakeholder network
wherein the goals and stakes of the actors change and thus
require adaptation. Our temporal view addresses the
quantum-leap type, transformational change in stakeholder
management that is required when the ‘switch’ occurs from
stakeholders primarily supporting resource heterogeneity
towards seeking mainly inter-firm homogeneity.
The Future of Stakeholder Management Theory 531
123
Literature Review
RBV
The RBV of the firm, which has had a major impact on the
field of strategy, is based on conceptualizations of resource
selection, access, accumulation, and (re)combination. This
perspective suggests that resources management is largely
a function of intra-firm choices guided by motives of
efficiency, effectiveness and profitability (Conner 1991),
additional strategic elements such as buyer and supplier
power, and industry structure. Hence, resources manage-
ment depends at least partly on market imperfections pre-
venting rivals to pursue the same strategy as the firm under
study. These market imperfections include barriers to
acquisition, imitation, and substitution of key resources
(Barney 1986; Penrose 1959; Schoemaker and Amit 1994).
Inter-firm differences precisely arise when there is an
unequal distribution of resources as a result of imperfect
markets (Barney 1986; Dierickx and Cool 1989). Barriers
to resource mobility benefiting one particular leading firm
can generate long-term constraints on other firms’ abilities
to generate rents, to the extent that these other firms are
hampered in gaining access to—or somehow duplicating or
substituting—critical resources held by the leading firm.
The rent potential of a resource depends fundamentally on
the characteristics of the resource itself, i.e., whether it is
valuable, rare, inimitable, non-substitutable, etc. (Amit and
Schoemaker 1993; Barney 1991; Mahoney and Pandian
1992; Peteraf 1993). Furthermore, the accumulation of
resources and combinations thereof into assets with high
levels of specificity (e.g., specialized skills and valuable
physical location) can also has a profound influence on rent
generation and on what constitutes optimal governance
(Barney 1991; Williamson 1985). Here, the RBV touches
TCE thinking, since TCE always focuses on the choice of
resources that should be utilized within the firm (as with
employees and equity capital), rather than merely accessed
through external market contracts (as with outside suppli-
ers and debt capital). TCE also pays attention to optimal
internal governance and the optimal management of the
interface with external stakeholders, in the sense that the
idiosyncratic attention to be devoted to their claims should
be commensurate with the uniqueness of the resources they
bring to the firm. As a complement to the RBV, TCE
thinking thus also addresses the essence of stakeholder
theory, but with the latter focused more on the overarching
web of relationships between the firm and its stakeholders,
rather than on economizing in the context of individual
transactions or classes of transactions.
Apart from TCE, the modern theory of innovation
management also complements insight from the RBV on
how to manage the innovation process in its entirety, by
focusing on the role of the various resource providers in
ultimately making it possible for an innovation value chain
to be commercially successful, e.g., by minimizing dis-
ruptions in the functioning of these resource providers
(Afuah 1998). From a stakeholder management perspec-
tive, what matters here is not only the artful orchestration
of the resources committed to the innovation process, but
also the skillful social re-engineering of the network of
stakeholders who provide resources and ultimately share
(or evolve so they ‘grow to share’) the same goals and
interests as the innovating firm. As mentioned by Hall and
Martin (2005), social re-engineering may prove difficult to
achieve when secondary stakeholders (not studied in the
present paper), who were excluded from the innovation
value chain, try to become involved. Their attempts at
influencing the innovation process can often be interpreted
as a defense of the status quo, i.e., homogeneity in industry
and prevailing practices threatened by the innovation pro-
cess, but successful disruptive innovation precisely
requires the firm to focus on resource heterogeneity in its
stakeholder management, rather than paying attention to
stakeholders whose main interest is to maintain the status
quo.
From an RBV perspective, firms are motivated to
achieve economic optimization, which drives resources
management, and thereby the firm’s conduct and perfor-
mance. Variations across firms in resource strategies are a
result of market imperfections that inhibit access to—or
replication/substitution of—valuable resources. Thus, a
firm’s competitive advantage is the outcome of deliberate
resources selection, access, accumulation, and recombina-
tion, based on systematic assessment and value-optimizing,
managerial decisions in a context of resource mobility
barriers (Ginsberg 1994; McGee and Thomas 1986; Zajac
and Bazerman 1991).
Institutional Theory Perspective
The institutional theory perspective proposes that individ-
uals tend to be approval-seeking, susceptible to social
influence, and habituated to tradition and societal expec-
tations. The institutional theory view applies to firms
because, in essence, firms are social constructions, created
and managed by individuals. As such, firms also operate
within socially constructed limits and within a framework
of norms, values, and assumptions of acceptable (i.e.,
legitimate) economic behavior (Oliver 1997).
In contrast to the RBV, which emphasizes economic
optimization, normative rationality in institutional theory
encompasses social justification and social obligations
(Zukin and DiMaggio 1990). Institutional theorists suggest
that social conformity contributes to organizational success
due to increased legitimacy, resources, and survival
532 A. Verbeke, V. Tung
123
capabilities (Baum and Oliver 1991; DiMaggio and Powell
1983; Scott 1987). Activities within the firm that are
institutionally embedded are those taken for granted or so
strongly endorsed by corporate culture and the related
power structure that management no longer questions the
adequacy of—or rationale for—those behaviors. These
activities are enduring, socially accepted, resistant to
change and not wholly reliant on rewards for their persis-
tence (Oliver 1992).
Institutionalization, in the sense of viewing as legitimate
and adopting common practices, is not limited to the
individual and organizational levels. While managers’
habits and norms, as well as corporate culture and shared
beliefs, shape commonly performed activities at the indi-
vidual and organizational levels, respectively, pressures
from government, strategic networks and general societal
expectations, for example, influence what is considered
socially acceptable behavior across firms. These social
pressures—often common amongst firms in the same sec-
tor—trigger inter-firm homogeneity as companies begin to
adopt similar structures and processes (DiMaggio and
Powell 1983). As was the case with the earlier discussion
of the RBV, TCE can also be viewed as a complementary
lens to institutional theory thinking. Transaction cost
economizing implies ‘‘regulating’’ the institutional pres-
sures that will be taken on board by firms. For example,
suppliers with short-term contracts are unlikely to influence
the firm to purchase long-term, highly specific assets sup-
porting these short-term contracts, as this would amount to
poor governance, see Nordberg and Verbeke (1999). In
other words, TCE provides ‘‘governance guidelines’’ to the
firm for managing each stakeholder, driven largely by the
symmetry (or the lack thereof) between the nature of the
contracts (and claims) held by each stakeholder and the
corresponding demand (institutional pressure) emanating
from this stakeholder. Modern innovation theory also
provides useful insight here. When stakeholders plead for
conformity to behavior and practices they consider legiti-
mate, a piecemeal social engineering approach may again
be required from the firm, to prevent stakeholders from
harming the innovative value chain, especially in cases of
high performance ambiguity, in the sense of how the
expected or realized performance of the innovative prod-
uct, practice or even entire value chain is interpreted by the
firm’s management vis-à-vis the various stakeholders (Hall
and Martin 2005).
Temporal Model of Stakeholder Theory
Figure 1 outlines a temporal model of stakeholder theory,
whereby we distinguish between two stages, namely an
early stage and a later stage in stakeholder management.
Adopting this simple, two-stage model benefits parsimony
and clarity of exposition, but also implies foregoing some
detail and complexity in the evolving relationships between
the firm and its stakeholders. However, what really matters
in this context are the processes of moving in an idiosyn-
cratic fashion from a stakeholder strategy built primarily
upon the concept of stakeholders providing resources that
Resource - based view effects
Firm
Institutional theory effects
Inter-firm
Stakeholder Management Theory
Competitive advantage (Level 1 stakeholder management adaptation)
Isomorphism pressures (Level 1 stakeholder management adaptation)
Level 2 stakeholder management transformational adaptation
Early stage
Acceptance
Gratification
Contractual safeguards
Status quo
Later stage
Expectations
Desensitization
Emulation
reliability
New policies
Stakeholders
Consumers:
Employees:
Competitors:
Suppliers:
Government:
Segmentation
Standards-based
Fig. 1 Adding a temporal dimension to stakeholder
management theory: Two levels
of adaptation
The Future of Stakeholder Management Theory 533
123
support firm-level heterogeneity, to a strategy focused more
on managing institutional pressures towards conformity.
The latter strategy needs to address these isomorphic pulls
in ways that defy the tendency towards competence
commodification.
Our model does contribute to a better understanding of
these processes. As shown in the model, stakeholder theory
suggests that, at the outset, various stakeholders provide
sources of competitive advantage to the firm in the form of
resources and higher-order resource combinations, i.e.,
capabilities, valued for their potential to generate rent.
Examples of capabilities include technological capabilities,
marketing knowledge, various forms of tacit knowledge,
etc. (Barney 1991; Mahoney and Pandian 1992; Rao 1994;
Schoemaker and Amit 1994). Initial differences in select-
ing resources, and in accessing, accumulating and com-
bining these, imply firm heterogeneity, which is defined as
‘‘relatively durable differences in strategy and structure
across firms in the same industry that tend to produce
economic rents and a sustainable competitive advantage’’
(Oliver 1997, p. 701).
During this early stage, a firm’s competitive advantage is
sustainable, to the extent that competitors cannot imitate its
value-creating strategy, i.e., its unique way of combining
resources (Barney 1991). The firm’s idiosyncratic stake-
holder management strategy consists of more than uniquely
combining amorphous resources vis-à-vis rival companies.
Each resource instrumental to the value creation process is
provided by a stakeholder, which means that a ‘complete’
strategy consists of orchestrating both resources and the
network of resource-providing stakeholders.
During the transition from this early stage to a later
stage, the preferences of the various stakeholders (con-
sumers, employees, competitors, suppliers, and govern-
ment) evolve in a fundamental way, and so do the
stakeholder relations (Phillips 2003). In the early stage,
consumers may reward firms that augment their products
with even minor socially responsible attributes (e.g., use of
organic fertilizers in the food industry), with increased
consumption and loyalty. As time progresses, expectations
gradually form and many consumers begin to view those
socially responsible attributes as a requirement, and may
expect additional product features, or in general terms
‘‘more value for money.’’ This change in stakeholder
demands requires what could be called a level 1 stake-
holder management adaptation strategy, meaning that
sustainable competitive advantage needs to take into
account the evolving nature of existing and new stake-
holder demands, but there is little complexity or ambiguity
here (Hall and Martin 2005; Mitchell et al. 1997).
However, at the later stage, from an institutional theory
perspective, the blend of social and economic relations
among firms, common dependencies, as well as competitive-
advantage benchmarking, pressures firms towards confor-
mity that gives rise to inter-firm homogeneity. Market iso-
morphism pressures from the same stakeholders will
determine what constitutes acceptable economic behavior.
Activities subject to such pressures will lead firms to adopt
more homogenous strategies, structures, and systems
(DiMaggio and Powell 1983) though taking into account
that firms that cannot achieve differentiation in the eyes of
stakeholders exhibit relatively poor financial performance
(Brammer and Millington 2008). In other words, what is
required at this stage is a level 2 stakeholder management
adaptation strategy. Here, the key to success is not the cre-
ative management of stakeholders to achieve heterogeneous,
value-creating resource combinations, but rather establishing
a perception of legitimacy in the sense of behavior and
practices acceptable to stakeholders. Neither the resources
used, nor resource combinations crafted, must be seen as
geared solely towards achieving heterogeneity, but on the
contrary must serve achieving similarity. Responding to
stakeholder pressures to conform can obviously not consti-
tute the sole basis of stakeholder management, meaning that
any level 2 adaptation strategy, accommodating demands for
conformity, must always build on an earlier level 1 foun-
dational approach that focuses on heterogeneity in resource
use and combination. The same is true for the opposite
move, from a situation of substantial inter-firm homogeneity
and level 1 adaptation to evolving stakeholder goals and
preferences, to industry disruption via new, unique resource
combinations, each requiring a completely different stake-
holder management approach and level 2 learning.
Competitive Advantage: Combining Stakeholder
Theory and the RBV
Within the mainstream strategic management literature, the
RBV provides a comprehensive explanation as to the
driving forces underlying firm-level competitive advan-
tage, whereas stakeholder management theory is regarded
as a somewhat secondary set of frameworks associated
primarily with research in business ethics and corporate
social responsibility (CSR). However, it is more appro-
priate to view the two perspectives as complementary,
rather than competing, theories (Freeman et al. 2010). The
RBV considers firm-level competitiveness as an outcome
of resources management. In this regard, effective stake-
holder management is crucial, as a firm is highly dependent
on its stakeholder network for resource selection, access,
accumulation, and combination.
Stakeholder theory also supports the relationship between
the RBV and firm performance, meaning the development of
competitive advantage to fuel the creation of economic rents.
In other words, stakeholder management capacity represents
itself a higher-order capability in firms. For instance, one
534 A. Verbeke, V. Tung
123
source of firm-level competitive advantage lies in accessing
and further combining resources that are, inter alia, valuable,
rare, inimitable, and non-substitutable (Barney 1991).
Effective stakeholder management with suppliers and cus-
tomers provides firms with intangible assets such as a good
reputation and high-quality relationships. These intangible
assets are difficult to imitate by competing firms as no two
reputations or relationships are identical. As a result, firms
that have a greater capacity to access valuable resources
thanks to their reputation and relationships can be expected to
command a stronger competitive advantage, which yields
higher financial performance and increased economic value
(Fischer and Reuber 2007).
Inside the firm, the RBV perspective suggests that
valuable resources may be combined into unique strategic
human resources management systems or organizational
processes. Internal stakeholders (e.g., employees) routinely
make firm-specific investments via organizational learning
that are essential to the firm’s competitiveness. This effect
is particularly pronounced in industries that rely on high
human asset specificity in research and development, such
as the information technology and pharmaceutical sectors.
A firm can enhance its competitive position to the extent
that it can motivate its internal stakeholders to invest more
effort into the firm (Oliver 1997).
Overall, stakeholder theory addresses some of the limi-
tations of the RBV. First, the RBV has been criticized for its
lack of prescriptive capacity—it does not explain how firms
should manage resources to maintain their competitive
advantage (Priem and Butler 2001). In contrast, stakeholder
theory not only provides insight into how firms should
manage their stakeholders to access resources, and further
develop competitive advantage, but also recognizes that a
firm’s stakeholder network is in itself a source of compet-
itive advantage (Harrison et al. 2010). Second, the RBV
does not provide guidance on how economic rents should be
distributed after they have been created (Barney and Arikan
2001). Stakeholder theory suggests that compensation
should be given to stakeholders to encourage their contin-
ued support. Furthermore, compensation is not limited
simply to the issue on how to create and capture economic
rents in a mechanistic fashion, but also prescribes behavior
viewed as desirable from the perspective of the firm’s
stakeholders (e.g., customers may regard a firm’s charitable
donations to the local community as highly favorable). As
Freeman et al. (2010, p. 116) have asserted, ‘‘the RBV
needs stakeholder theory to be complete.’’
Temporal Perspective of Stakeholder Theory: Evolving
Preferences
Whereas the types of preferences at play in the RBV and
institutional theory are relatively static in nature (Oliver
1997), the preferences of the main stakeholders in stake-
holder management theory are constantly evolving. RBV
theorists assume that economic rationality, motivated by
efficiency and profitability, is bounded mainly by uncer-
tainty, limited information, and heuristics biases when
managers make resource decisions. Decisions on resources
are vulnerable to managerial biases, and value-maximizing
choices are imperfect due to partial information and
uncertainty about future outcomes (Amit and Schoemaker
1993). Within this context, the relevant stakeholders and
their demands on the firm may change over time, thus
requiring stakeholder management adaptation, but this
remains largely what we denote as level 1 adaptation.
Institutional theorists contend that managers make
decisions based on normative rationality, which is bounded
by historical precedents and trajectories, social justifica-
tion, norms, and habits. At the organizational level, com-
panies react to institutional pressures, which may also be
evolving over time. Here again, what matters is effective
level 1 adaptation, in this case adaptation to keep con-
forming to pressures for homogeneity.
The above, level 1 adaptation processes, are relatively
well understood in contemporary scholarly work on
stakeholder management. However, our temporal view
goes beyond level 1 adaptation processes and suggests that
stakeholder preferences may undergo a fundamental
change in direction, namely from supporting heterogeneity
towards seeking homogeneity in industry, thereby also
requiring level 2 or transformational, stakeholder man-
agement adaptation. Below, we focus in greater detail on
the reasons for the fundamental redirection of stakeholder
preferences from supporting heterogeneity to seeking
homogeneity, that trigger the need for level 2 adaptation by
the firm.
Role of the Consumer
First and foremost, this discussion begins with a consid-
eration of the role of current consumers. As Eesley and
Lenox (2006, p. 769) described it, a stakeholder targeting
‘‘a firm’s current revenue stream is likely to be more salient
than one that is targeting a potential revenue stream.’’ At
the early stage, consumers themselves are open to different
choices and inducements. They have a systematic and
reflective decision-making process for ‘search goods’, i.e.,
those products whose attributes and qualities can easily be
determined before purchase (Nelson 1970). Consumers
consciously and actively search for goods that provide
them with the rewards or experiences they seek. They
reward firms that fulfill their needs with loyalty, purchase
intent, positive attitude and also minimized scepticism if
they feel that a firm has considered a number of moral and
ethical consequences of its actions (Pirsch et al. 2007).
The Future of Stakeholder Management Theory 535
123
However, as consumers become more knowledgeable in
terms of product research and selection, certain product
characteristics previously considered as exceptional (e.g.,
socially responsible attributes) and heterogeneously pro-
vided by a single firm, come to be expected. As one
example, an evolved sense of expectations is particularly
apparent with regard to ecotourism. Today, consumer
perceptions have changed so dramatically that travelers
now have ‘‘ceaseless expectations for unique and culturally
authentic travel experiences that protect and preserve the
ecological and cultural environment’’ (Dodds and Joppe
2005, p. 13). Consumers will no longer make purchase
decisions based solely on the presence of differentiated
product characteristics, but rather, may even regret their
past purchase decisions based on the absence of such
attributes. Support for the ‘‘single firm’’ providing hetero-
geneous ‘‘ecotourism value’’ is being replaced by seeking
offerings in industry from a multitude of companies that
provide common ecotourism services, and whereby extra
value can come, e.g., from the firm working with local
partners or providing cost efficiencies to customers. It
could be argued that these last two sources of competitive
advantage are still based on heterogeneous resources uti-
lized by the firm, but our key point is simply that the nature
of the relationship with its customers on ecotourism mat-
ters has changed fundamentally: what used to be a source
of uniqueness and made the firm’s reputation, must now be
replaced by efforts to convince the customer that the
standard norms in industry are being respected, as a pre-
condition for this stakeholder considering the firm’s
offering.
Role of the Employee
While existing employees have typically adopted the cul-
ture, norms, and traditions of their current firm, prospective
employees more readily contemplate opportunities from
competitor firms that can better provide them with the
types of compensation to improve their overall wellbeing.
Both existing and prospective employees, however, play an
integral role in shaping work practices in firms.
Employees look for signals that management has heard
their concerns. As Russo and Perrini (2010, p. 218) sug-
gest: ‘‘the cultivation of close relationships with workers
and the social or business environment makes it possible to
establish expectations in social relationships.’’ According
to Hosmer and Kiewitz (2005), firms should go beyond
immediate fairness considerations to those of derivative
obligations; for example, they should provide ethically
appropriate benefit packages for employees (e.g., based on
‘living wage’ considerations) even if they operate in a
country where such responsibilities are not legally
required. In turn, if they can satisfy employee demands,
they will be rewarded with increased worker loyalty,
morale, and productivity (Moskowitz 1972; Parket and
Eibert 1975). Evidence also suggests that firms have used
responsiveness to ethical demands, particularly in indus-
tries with skilled labor shortages, as a means to recruit
prospective workers (Siegel 1999).
As Hill and Jones (1992, p. 136) have explained,
‘‘change at one point in time may favor managers; change in
a subsequent period may shift the balance of power towards
other stakeholder groups.’’ At the later stage, many work-
place incentives become institutionally embedded due to
employee desensitization to these programs. Desensitiza-
tion is defined as a reduction in emotion-related physio-
logical reactivity to stimuli (Carnagey et al. 2007). It can be
adaptive and unintentional, and is not limited to undesirable
stimuli. By definition, stimuli can be positive, negative, or
neutral. Repeated exposure to a stimulus may lead to the
desensitization in terms of emotional reactions to that
stimulus which instigates changes in cognitive and affective
responses such as decreased attention to, sympathy for, and
positive attitudes towards, the stimulus (Anderson and
Bushman 2002). Evidence suggests that these cognitive and
affective determinants influence subsequent behavioral
outcomes such as lower and delayed likelihood of action
(Bartholow et al. 2006). Over time, employees may become
desensitized to certain worker-focused programs and thus,
they no longer attribute to the firm the same level of concern
for employee well-being associated with those programs as
compared to the past. Again, what was perceived as a het-
erogeneous resource deployed by the firm, and in this case
made it an attractive employer, now becomes viewed as a
minimum quality threshold to be respected, for employee
retention, thereby changing the nature of the relationship
firm and employees.
Role of the Competitor
According to the RBV, the primary sources of rents are
derived from scarce natural resources (e.g., land, raw
materials, commodity-type inputs), human resources and
expertise (e.g., managerial talent), technological resources
(e.g., process technology), financial resources and intan-
gible resources (e.g., reputation) (Dyer and Singh 1998).
Individual firms erect barriers to imitation to preserve
profits and in a first stage an industry may be strongly
segmented, in the sense of a high, perceived resource
heterogeneity among companies. However, over time
competitors will move towards benchmarking and will
attempt emulating the key success factors characteristic of
market leaders. Effectively imitating competitors in terms
of resources management (from resource selection and
access to resource recombination) does not occur instan-
taneously, and may take substantial time, especially in the
536 A. Verbeke, V. Tung
123
presence of strong market imperfections (McWilliams and
Siegel 2001). For example, initial core competencies may
become core rigidities and prevent adopting new manage-
rial practices (Leonard-Barton 1992). Some stakeholders
may even become obstacles to achieving corporate objec-
tives (Goodpaster 1991), in this case through preventing
the firm from adopting proven practices utilized by other
companies. ‘‘A firm’s learning domain is defined in part by
where it has been’’ and thus, it will experience difficulty
when trying to alter its competencies (Teece 1988, p. 265).
However, despite the incumbents’ difficulties in embracing
change, from a microeconomics supply perspective, a
large, diversified firm can take advantage of economies of
scale and scope, and spread the costs of new (incremental)
initiatives over many products and services (McWilliams
and Siegel 2001). This lowers the cost per unit of devel-
oping new products or incorporating new processes into the
firm’s organizational systems. Smaller firms, without
equivalent prowess to engage in scaling up, will have to
adopt a wait-and-see approach until demand (e.g., from
consumers, employees, etc.) promises a return that will
compensate for the costs of implementing new programs.
The point of all the above is simply that in the longer
run, and in spite of barriers to imitation, any firm’s com-
petitive position based on resource heterogeneity becomes
contestable. This is especially true for high-velocity mar-
kets, where competitive advantage is particularly short-
lived (Eisenhardt and Martin 2000). In other words,
homogeneity will creep in, consistent with the predictions
of institutional theory, even if adopting common practices
in industry may sometimes be more ceremonial than sub-
stantive. As a result of the fundamental erosion of the
firm’s heterogeneous resource bundles and capabilities,
stakeholder management vis-à-vis rivals also needs to
change. For example, industry-wide common responses to
triple bottom line pressures as seen in glossy CSR reports
are now commonly adopted by competing firms irrespec-
tive of their underlying motives and social values (Bartkus
and Glassman 2008).
Role of the Supplier
Firms and suppliers are almost by definition part of a social
network. According to TCE theory, the goal of the firm in the
context of relationships with suppliers is to reduce transac-
tion costs associated with ‘‘buy’’ decisions. The aim is to
minimize contractual hazards and opportunistic behavior
from suppliers, through using contractual safeguards (Wil-
liamson 1985). At the early stage, high asset specificity will
normally lead to bilateral dependency between buyer and
supplier and therefore trigger complex formal contracting,
whereby the buying firm is focused solely on the technical
aspects of the supplier contract, and the need to secure access
to the supplier’s heterogeneous resources. However, as the
buyer–supplier relationship develops and contractual safe-
guards mature, there is an enhanced sense of mutual reli-
ability and grounded confidence (i.e., grounded in shared,
past experiences, and mutual hostages) between the firms
that one party will not exploit—with guile—the vulnerabil-
ities of the other party (Barney and Hansen 1994). This
evolving relationship lowers contracting costs and increases
the returns that both partners can obtain from their rela-
tionship. Overall, close relationships create a sense of
security with suppliers (Murillo and Lozano 2006), and firms
may find it appropriate to jointly prepare for future chal-
lenges in their supply chains and to integrate more sophis-
ticated mutual adjustment mechanisms in their daily
operations, at least if complex contracts are warranted, given
the nature of the underlying supply transactions (Maloni and
Brown 2006). Relational contracting elements grow in
importance, reflecting level 1 stakeholder management
adaptation by both parties.
However, at the later stage, what was highly asset
specific, i.e., a heterogeneous resource, typically becomes
more of a commodity-type input, and the supplier (or
buyer) may wish to diversify its client (or supplier) base.
Substantial past contracting experience where performance
ambiguity has been eliminated may lead to a change in
focus from complex contracting clauses to simple contracts
and deterrence-based reliability, meaning that the credible
threat of losing future business in case the contract is not
properly executed may be a sufficient safeguard. In other
words, each party become more interested in making sure
that the contract meets ‘‘industry standards’’, in terms of
what constitutes fair pricing, quality features, renegotiation
and exception clauses, etc. Again, a move towards pursuing
what is legitimate and common in industry replaces the
initial focus of each party supporting and reinforcing the
other’s resource heterogeneity.
Role of the Government
The role of government is to co-create a society that will
improve its citizens’ wellbeing and to lay the foundations
(inter alia through laws and the enforcement thereof) of a
fair marketplace for businesses to compete and prosper.
Stable government regulations and policies provide firms
with the consistency they need for strategic planning,
whereas frequent power changes in government lead to an
uncertain and undesirable business environment. To the
extent that governments attach importance to business
preferences, they will often be motivated to maintain the
status quo so as to reduce uncertainty, and will only make
incremental adjustments to their policies affecting busi-
ness, thus triggering level 1, stakeholder management
adaptation processes in these firms.
The Future of Stakeholder Management Theory 537
123
As Harrison and St. John (1996, p. 49) explained,
‘‘political power influences environmental uncertainty.
Stakeholders with political power have the ability to
influence events and outcomes that have an impact on the
organization, whether or not they have a financial stake in
the organization.’’ Research has shown that managers
responsible for environmental matters perceive the greatest
salience from regulatory and government-related stake-
holders (Murillo-Luna et al. 2008).
Because governments most often are motivated pri-
marily to maintain the status quo, fundamental change does
only occur sporadically, e.g., in a crisis situation, when the
build-up of fiscal pressures or constituencies’ demands for
change can no longer be overlooked. For instance, gov-
ernments have implemented stricter environmental proto-
cols due to concerns for climate change voiced by
constituencies. In many countries with growing immigrant
populations, governments have recommended—and courts
have upheld—the need for more minority representation
(e.g., immigrant employees) in firms. Ultimately, govern-
ments will depart from their preferred decision-making
process of minute, incremental change when the policy of
‘action through inaction’ is no longer legitimate from the
perspective of their voters. In that case, firm-level stake-
holder management vis-à-vis government typically needs
to engage in level 2 adaptation, and shift towards more
cooperation and coordination with other firms in industry
to create a legitimate conduit for voicing industry concerns,
and avoiding new industry-wide policies from government
that would negatively affect all firms in industry.
Inter-firm Homogeneity: Influence of Stakeholder
Management Theory on the Institutional Theory
Perspective
From an RBV perspective, firm heterogeneity is the result
of market imperfections and resource mobility barriers.
From an institutional theory perspective, inter-firm homo-
geneity is a function of social and economic interrelations
among firms. Firms in the same industry conform to many
influences, common knowledge and understandings
achieved over time, and are thus propelled towards simi-
larity (DiMaggio and Powell 1983; Scott 1987).
The main sources of market isomorphism pressures—
that is, the influences favoring conformity by actors in an
organizational field that define or prescribe socially
acceptable economic behavior (Scott 1995)—can be
determined by analyzing evolving stakeholder preferences.
The five main sources of inter-firm homogeneity are:
market demand characteristics, human asset specificity,
competitor imitation, market networks, and the regulatory
environment (Oliver 1997). These sources of homogeneity
expose firms to common social influences, define what
resources firms are permitted to deploy, and affect the
mobility of resources across firms.
Market Demand Characteristics
Consumers contribute extensively to inter-firm homoge-
neity when their expectations towards acceptable product
characteristics or firm behaviors have become ‘‘normal-
ized.’’ Through their collective decision-making and pur-
chasing power, they begin to define what is acceptable
social behavior in the marketplace (e.g., environmentally
friendly materials, organic food ingredients, etc.). Firms in
the industry that do not meet consumer expectations will
risk rents reductions (e.g., from boycotts) and the effects of
a damaged reputation (e.g., negative word-of-mouth from
social media). As a result, firms are pressured into mir-
roring the industry leaders, e.g., in terms of socially
responsible actions, and must invest heavily in assets and
capabilities that allow them to meet or exceed the expec-
tations imposed on them by consumers.
Human Asset Specificity
Large groups of employees may demand further work-
related benefits when they become desensitized to early
workplace incentive programs and no longer view the firm
with the same level of reverence for those initiatives as in
the past. The cost of personnel turnover is substantial as it
provides a direct channel of proprietary information flow
from one firm to another. This cost is further exacerbated
with the risk of large-scale employee turnover, in cases
whereby the firm’s operations and knowledge-base reside
within the collective skills sets of many employees rather
than being wholly vested in a single individual (Nelson and
Winter 1982).
Individuals who work in an industry often develop
capabilities in the form of tacit knowledge and skills that
are transferable between firms in that industry. When the
above turnover process occurs, human capital transfers,
especially the transfer of individuals with specialized
knowledge such as technical expertise, reduce the asym-
metrical distribution of capabilities across firms, and con-
tribute to inter-firm homogeneity (Oliver 1997).
Competitor Imitation
Firms often directly imitate successful competitors (e.g.,
through adopting similar technologies) or indirectly use
them as role models (e.g., through benchmarking) via
competency blueprints or the hiring of outside consultants
when the pressure for change is greater than institutional
hindrances (Oliver 1997). A reduction in firm heterogene-
ity results when firms copy each other in areas such as
538 A. Verbeke, V. Tung
123
organizational structuring, product development, process
control, and sales and marketing.
Inter-firm homogeneity further increases when inter-firm
structural and strategic diversity is reduced. This is often a
result of high research and development costs. Imitations in
research and development reduce uncertainty for firms
when the risks and costs of pioneering technology are high,
particularly for smaller firms that hold a follower-type
market position. As Oliver (1997, p. 708) argued, ‘‘effec-
tive competency blueprints reduce firm heterogeneity by
increasing the availability and competitors’ level of
understanding of firm capabilities.’’
Market Networks
From a network perspective, suppliers are embedded
within a network of relationships with many other buyers
and suppliers (Gulati et al. 2000). The sharing of resources
and tacit capabilities, such as a network reputation, spe-
cialized technical expertise, and product development
capabilities, reduces resource mobility barriers and con-
tributes to inter-firm homogeneity (Reed and DeFillippi
1990). Inter-firm homogeneity will broaden when the net-
work expands to include more relationships with potential
suppliers. This will typically occur when an initial focus on
special contracts to absorb asset specificity, as a particular
form of resource heterogeneity, is replaced by standard
contracts for the supply of the input that has become more
commodity-like over time.
Regulatory Environment
When constituencies viewed relevant by government per-
ceive the default policy of ‘‘business as usual’’ as being no
longer acceptable, government will introduce regulatory
measures that firms must now abide by as part of the cost of
conducting business. A new or revised regulatory regime
typically limits inter-firm diversity by constraining firms’
range of permitted resource options, and by imposing
constraints on resource inputs and production deployment
based on societal expectations. Other resource standards
may include affirmative action requirements such as
acceptable human capital inputs (e.g., minority represen-
tation in a firm) and pollution control standards (DiMaggio
and Powell 1983; Meyer and Rowan 1977).
Application of the Model: Maintaining Competitive
Advantage
We have shown above, using a stakeholder management
theory lens, that stakeholders provide firms with
heterogeneity and competitive advantages in an early
stage, but then at a later stage contribute to inter-firm
homogeneity through pressures favoring shared practices.
Both in the early and later stages, firms must engage in
level 1 stakeholder management adaptation processes.
However, the most unique feature of a firm’s stakeholder
management system may be its ability to make quantum
leaps from responding to—and using—stakeholders sup-
porting resource heterogeneity to stakeholders seeking
more inter-firm homogeneity.
The extant literature has stressed the importance of
protecting both resource capital and institutional capital
(Oliver 1997). Resource capital refers to the value-
enhancing, rare and inimitable assets and capabilities of the
firm. Examples include patented technology, brand names,
employee talent, and customer loyalty. Resources must be
protected from competitor imitation, and constantly
enhanced through industry benchmarking and adding
quality features to ensure optimal value. In this context,
institutional capital refers to firm-specific resource utili-
zation strategies that facilitate the optimal use of resource
capital. Examples include training programs for employees
to accelerate the effective adoption of new technology,
management leadership programs to develop the firm’s
human capital base, and decision support systems to
encourage resource innovations. Institutional capital itself
can be enhanced through, e.g., the internal monitoring of
incentive programs and the use of cross-functional teams to
encourage innovations. Overall, resource capital and
institutional capital are complementary sources of com-
petitive advantage (Oliver 1997).
In addition to the mainstream view described above, this
paper provides a somewhat different perspective on how to
achieve competitive advantage: firms should adopt both
level 1 and level 2 approaches to manage their relationships
with stakeholders and diffuse appropriate resource capital
strategically through their institutional channels by lever-
aging the evolved, later-stage stakeholder preferences to
their advantage. For instance, while employee training
programs and even new technology may be rare, inimita-
ble, and valuable in the early stage, these will inevitably be
observed and imitated by competitors. Evolving stake-
holder preferences, which contribute to isomorphism
pressures, will further facilitate the diffusion of resource
capital leading to inter-firm homogeneity. Consequently,
rather than fighting this change process, firms should learn
to appreciate and take on board the later-stage preferences
of their stakeholders and strategically craft new resource
capital bundles, adapted to new stakeholder preferences, so
that their competitive advantage is maintained. Alterna-
tively, the firm can try to craft new legitimacy for its extant
resource capital by interacting with—and trying to influ-
ence—key stakeholders.
The Future of Stakeholder Management Theory 539
123
To illustrate the last point above, consider the nature of
CSR that varies from one time period to the next (Svendsen
1998). A firm with proprietary resource capital such as a
new oil extraction technology, the exploitation of which is
both profitable and socially responsible, may affect the
later-stage preferences of government bodies by influenc-
ing public policymakers to introduce regulations that
would require all firms in an industry to adopt the new
technology so as to benefit society (e.g., in the environ-
mental sphere) beyond the prevailing industry standards. If
successful, the technology will become the benchmark and
all firms must invest heavily (e.g., by obtaining a license to
use the technology) to continue operations. Undoubtedly,
the innovating firm could have taken a traditional approach
to competitive advantage by simply protecting its tech-
nology and guarding against imitation, but by opting to
anticipate evolving stakeholder preferences, it has now
secured its position as the industry leader displacing firms
that (initially) chose not to invest in more socially
responsible technology. Although ‘‘industries vary in their
perceptions of—and response to—stakeholder pressures’’
(Buysse and Verbeke 2003, p. 463), this strategy would
allow the firm to maintain its competitive advantage,
amidst the transformation towards inter-firm homogeneity.
Conclusion
Our central thesis in this article is that a firm’s relationships
with its stakeholders evolve over time, and are subject to
level 1 and level 2 adaptation processes, critical to sus-
taining competitive advantage. In line with earlier work by
Brammer and Millington (2008) in the context of CSR, we
do not suggest that more adaptation is always better. In
other words, our article does not imply that firm-level
actions to cater to stakeholder demands, including actions
related to CSR, should necessarily have a high intensity
during the firm’s entire life cycle. Stakeholder engagement
should always serve value-creating purposes and compet-
itive advantage, and its opportunity cost should be carefully
assessed. As was made clear by Brammer and Millington
(2008), the firm’s life cycle does matter in managerial
decisions on resource allocation towards satisfying specific
stakeholders’ demands. These scholars also found salient
stakeholders typically attaching more importance to the
firm’s ‘‘social sensitivity’’ when it has matured, rather than
earlier in its life cycle.
We have made two contributions to the extant literature.
The first contribution involves formally adding a temporal
dimension to mainstream stakeholder management think-
ing. The temporal approach suggests in a stylized (and
obviously simplified) fashion that at least two distinct
‘‘stages’’ in a firm’s life should always be considered. Each
stage is associated with its own level 1 adaptation process,
but the actual transition from one stage to another requires
level 2 adaptation. What we call level 1 adaptation is
consistent with the extant literature: the content and sal-
iency of stakeholder claims may change over time, and
effective stakeholder management should purposefully
adapt to such changes, taking into account the costs and
benefits of such adaptation. In contrast, level 2 or trans-
formational adaptation reflects the wholesale change in
direction of several stakeholder pressures from supporting
firm-level heterogeneity towards seeking more inter-firm
homogeneity (or the opposite move from homogeneity
seeking towards more heterogeneity, e.g., in case the firm
starts pursuing breakthrough innovations), thereby also
requiring a fundamental transformation in stakeholder
management processes.
The stylized nature of our model becomes apparent
when considering that an innovating firm’s birth and cor-
responding features of heterogeneity in the early stage of
its life, fostered by an idiosyncratic resource base, typically
upsets the ‘status quo’ in industry. In other words, a suc-
cessful entry by an innovator typically disrupts the pre-
vailing stakeholder forces in industry that favor
homogeneity. What we call the early stage, from the firm’s
view, may thus actually represent a disruption of long
established industry practices, including how firms manage
their stakeholder relationships in the face of dominant
pressures towards homogeneity.
The main reason for an innovator’s success, when given
a stakeholder management interpretation, is precisely that
its unique stakeholder network at the outset provides
resources that are somehow different from what prevails in
industry. The innovator also introduces a different set of
practices to manage its stakeholder network (or at least
parts of this network) as compared to prevailing practices
in industry, thereby creating economic value.
Inside the firm, these two stages can also be considered
at the level of newly established subunits, and even new
product introductions. In the early stage, stakeholders
contribute resources to the firm in an idiosyncratic fashion,
thereby increasing heterogeneity as the precondition for
successful value creation. However, subsequently, in a
later stage, these same stakeholder groups also contribute
to inter-firm homogeneity via isomorphism seeking,
thereby ultimately requiring level 2 adaptation by the firm.
Our paper’s second contribution is that we have made
explicit the linkages between stakeholder management
theory and the RBV in strategy. Stakeholder management
theory supports the proposed relationship between a stron-
ger resource base provided by stakeholders and firm per-
formance, as successful firms typically draw heavily in the
early stage on their idiosyncratic stakeholder networks for
resources selection, access, combination, and accumulation.
540 A. Verbeke, V. Tung
123
Here, stakeholder management theory and the RBV are
clearly complementary, but with TCE providing guidance
on how to manage ‘contracts’ with each stakeholder, and
innovation theory suggesting to look at the innovation value
chain in its entirety.
However, at the later stage, the RBV needs additional
insight from institutional theory to explain how the
evolving agendas of five major stakeholder groups, namely
consumers, employees, competitors, suppliers, and gov-
ernment all affect stakeholder management adaptation.
More specifically, the concept of dominant stakeholder
pressures switching direction from promoting heterogene-
ity towards fostering homogeneity in industry has not been
discussed previously in generic terms in the extant litera-
ture, but is—in our view—a critical cornerstone of a gen-
eral stakeholder management theory.
Building upon RBV thinking and institutional theory,
again infused with elements from TCE and innovation
theory, we have argued that the five main sources of iso-
morphism pressures, each related to a particular stake-
holder contributing to inter-firm homogeneity, are: market
demand characteristics, human asset specificity, competitor
imitation, market networks, and the regulatory environ-
ment. Although the traditional RBV focus on protecting
resources from competitor imitation remains important, we
arrive at a somewhat different suggestion to maintain
competitive advantage vis-à-vis rivals. The view offered
here suggests that firms should leverage the later-stage
stakeholder agendas to their advantage, by anchoring ele-
ments of their resource base to the various pillars (i.e., the
main stakeholder groups) active in their institutional
environment. Here, level 2 or transformational adaptation
to satisfy stakeholders promoting homogeneity in industry
must be added to the firm’s prior sole focus on maintaining
resources heterogeneity. This may imply, inter alia, that
conventional ‘‘lone wolf’’ behavior vis-à-vis industry rivals
and other stakeholders is being complemented or even
supplanted by initiatives fostering cooperative behavior,
e.g., in the sphere of joint standard setting.
Our temporal perspective with two generic levels of
stakeholder management adaptation will hopefully become
the foundation of an entirely new stream of scholarly work
on dynamic adaptation to changes in salient stakeholder
demands. One key question to be answered is how and
when firms actually start level 2 adaptation, taking into
account that more homogeneity (at least as perceived by
some stakeholders) may serve sustaining competitive
advantage, but may also bring significant costs. Does
management wait until several stakeholders have changed
direction from supporting heterogeneity to seeking homo-
geneity, or does the firm play the role of first mover, per-
haps even taking the lead in industry-wide initiatives
towards more homogeneous practices. The mirror image of
this situation is the timing of decisions by established firms
or new entrants to break away from prevailing stakeholder
management practices in industry, and to give (renewed)
priority to seeking heterogeneity of their resources base via
their stakeholder management.
Another important question revolves around the co-
existence and co-evolution of those stakeholder manage-
ment practices that seek to maintain requisite heterogeneity
of the firm’s resource base, and the practices serving the
opposite purpose, namely to accommodate stakeholder
demands for common practices across firms. Perhaps it is
ultimately the capacity to select, govern, and adjust
appropriately the mix of practices that serve respectively
heterogeneity-supporting stakeholder forces and homoge-
neity seeking ones that is the key to competitive advantage
in the long run.
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- c.10551_2012_Article_1276.pdf
- The Future of Stakeholder Management Theory: A Temporal Perspective
- Abstract
- Introduction
- Literature Review
- RBV
- Institutional Theory Perspective
- Temporal Model of Stakeholder Theory
- Competitive Advantage: Combining Stakeholder Theory and the RBV
- Temporal Perspective of Stakeholder Theory: Evolving Preferences
- Role of the Consumer
- Role of the Employee
- Role of the Competitor
- Role of the Supplier
- Role of the Government
- Inter-firm Homogeneity: Influence of Stakeholder Management Theory on the Institutional Theory Perspective
- Market Demand Characteristics
- Human Asset Specificity
- Competitor Imitation
- Market Networks
- Regulatory Environment
- Application of the Model: Maintaining Competitive Advantage
- Conclusion
- References
Mandatory Assignment Resources/understanding and engaging key stakeholders.pdf
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understanding and engaging key stakeholders
Enhancing the satisfaction of key stakeholders, including customers, employees, shareholders, suppliers and other strategic partners
In the Adapting to the changing business environment, it was determined that the majority of stakeholders of an organisation operate in its micro-environment. In order to be able to engage the key stakeholder groups as diverse as a part-time employee and a major investment bank, it is important to determine on which level of the hierarchy these stakeholders are engaged with the organisation.
Definition of an organisational stakeholder – an individual or group which can influence, or be affected by the outcomes achieved by an organisation, and have enforceable claims on an organisation’s performance.
The three primary stakeholder groups can be broadly divided into groups that are predominantly involved in its capital (debt & equity) structure, are involved with the product as either a consumer, supplier or host community and the final group consists of the organisational stakeholders, usually the employees.
The benefits of engagement have been introduced in the Adapting to the changing business environment and Strategic planning in changing times sections, and are discussed in greater detail in the Using experiences to differentiate your organisation. Memorable experiences such as positive engagement have consistently been found to be very strong sources of differentiation, and because creating such positive experiences reliable is very difficult, ultimately this may form the basis of a powerful competitive advantage.
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Understanding the different objectives of all organisational stakeholders is essential in ensuring management can address any competing interests effectively and in the greater interests of the organisation.
Engaging capital market stakeholders Shareholders and banks are the main sources of capital for business organisations, the common distinguishing
feature however is that shareholders typically hold equity in the organisation, and banks generally hold debt, although some banks, particularly investment banks will hold some equity, generally in larger publicly listed companies.
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Activated Logic is experienced in the corporate communications space with significant experience in the full suite of communication requirements ranging from preparing short-form prospectuses for equity raisings, detailed prospectuses intended for IPO, through to preparing investor newsletters, research reports, website and promotional material.
Engaging organisational stakeholders It is important to accurately and efficiently convey the organisations beliefs and objectives to all of an organisations
direct stakeholders including not only employees and middle-management, but also contractors and other key stakeholders which are pivotal to the success of the organisation.
An organisation can only grow as fast as its people can grow, therefore it is in an organisations ultimate interest to provide a stimulating place of work that is productive and in doing so meeting the objectives of the organisation through its workforce.
Engaging product market stakeholders At first it may not be immediately obvious how the engagement requirements for host governments, suppliers and
product end-users are related, however upon closer examination it is clear that all of these stakeholders meeting their own objectives is dependent on the satisfaction of the end-user, the customer.
Just as customer engagement is dependent on delivering value and satisfaction to the consumer, suppliers expect the maximum sustainable price for their goods and services, and a successful business provides jobs and taxes for host communities and their governments. This process is discussed further in The consumer-centric marketing process.
It is important to continue to exceed the expectations of the customer base, as it is the purchasing process which is the reason the organisation is in business in the first place. It is ultimately in the best interests of both the organisational and capital market stakeholders to continue to put the interests of the customer first.
“For us, our most important stakeholder is not our shareholders, it is our customers. We’re in business to serve the needs and desires of our core customer base”.
John Mackey Whole Foods CEO
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