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SHAREHOLDERVALUE, STAKEHOLDER
MANAGEMENT,AND SOCIALISSUES: WHAT'S
THE BOTTOMLINE?
AMY J. HILLMAN*and GERALDD. KEIM
Ivey School of Business, University of Western Ontario, London, Ontario, Canada
N
We test the relationship between shareholder value, stakeholder management, and social issue
participation. Building better relations with primary stakeholders like employees, customers,
suppliers, and communitiescould lead to increased shareholder wealth by helpingfirms develop
intangible, valuable assets which can be sources of competitive advantage. On the other hand,
using corporate resourcesfor social issues not related to primary stakeholders may not create
value for shareholders. We test these propositions with data from S&P 500 firms and find
evidence that stakeholder managementleads to improved shareholder value, while social issue
participation is negatively associated with shareholder value. Copyright ? 2001 John Wiley &
Sons, Ltd.
INTRODUCTION
126
127
outperformits rivals and create value for shareholders (Atkinson,Waterhouse,and Wells, 1997;
Barney, 1991; Teece, 1998). Resources that are
most likely to lead to competitiveadvantageare
those that meet four criteria: they should be
valuable, rare, inimitable, and the organization
must be organized to deploy these resources
effectively (Barney, 1991). Using these criteria,
resourcesthat may lead to competitiveadvantage
include socially complex and causally ambiguous
resources such as reputation,corporateculture,
long-term relationshipswith suppliers and customers, and knowledge assets (Barney, 1986;
Leonard,1995; Teece, 1998).
Some strategy researchershave explored the
firm as an institutionalsetting that can facilitate
learning and the creation and disseminationof
value-producingknowledge (Grant,1996; Moran
and Ghoshal, 1996; Nahapietand Ghoshal, 1998;
Spender, 1996). This institutional context can
include, for example, a historyof repeatdealings
with actors such as employees, customers, suppliers, and local communitiesthat generatereputational capital and trust (Barney and Hansen,
1994; Ring and Van de Ven, 1992, 1994).
By developing longer-termrelationshipswith
primary stakeholderslike customers, suppliers,
and communities,as well as present and future
employees,firmsexpandthe set of value-creating
exchanges with these groups beyond that which
would be possible with interactionslimited to
markettransactions.Our emphasishere is on the
value that can be createdby interactions,between
firms and primary stakeholders, which are
relational rather than transactional since trans-
128
sistent with long-term value creation through nancialperformanceare the relationshipsa comrelationshipswith key stakeholdersare coopera- pany develops with customersand the relationtive planning and design efforts that unite firms ships internal to the firm that shape customer
with suppliers and customers and rewarding relations and impact customer service. Legnickmanagers/employeeson the basis of customer Hall (1996) emphasizesthe importanceof loyaltysatisfactionmeasuresor other measuresof exter- producing relationships with customers that
nal reputation(Lado and Wilson, 1994; Martin, extend beyond traditionalfirm boundariesas a
Mitchell, and Swaminathan,1995; Mudambiand source of competitiveadvantage.Atkinson et al.
Helper, 1998; Nayyar, 1995; Oliver, 1988; Rao, (1997) argue that employees and communities
1994). Because of the relational aspects that shouldalso be includedin this list of relationships
underliethese activities, the time dimensionwill that drive financialperformance,such that effecconstitute an important,intangible, path depen- tive stakeholdermanagementwith primarystakedent quality of the relationshipwith that stake- holders is seen as driving financialperformance.
holder group. In turn, these relationshipswill be Bennett Stewart, creator of the financial mandifficult for other firms to duplicate at least in agementsystembased on EconomicValue Added
the short run.
(EVA), arguesthat 'to increaseshareholdervalue,
We are not alone in emphasizingthe impor- a company must addressthe needs of its staketance of improvingrelationswith primarystake- holders more efficiently and effectively than the
holders as competition increases. Chakravarthy companiesagainst which it competes' (Birchard,
(1986), Pfeffer (1998), and Prahalad (1997) 1995: 49). Therefore,we proposethe following:
express similar views and Jones (1995) in his
instrumental stakeholder theory contends that
Hypothesis 2: Stakeholder management leads
firmsthat contractwith theirprimarystakeholders to improved shareholder value creation.
on the basis of mutualtrust and cooperationwill
have a competitive advantage over firms that
Social issue participation
do not, all else equal. Therefore, we propose
If stakeholdermanagementis positively related
the following:
to shareholdervalue creation and the nature of
Hypothesis 1: Stakeholder management is posi- causality is such that effective stakeholdermantively associated with shareholder value cre- agementleads to improvedshareholdervalue creation.
ation,does this relationshipalso extendto another
component of corporate social performanceNext, we address the question of causality. If social issue participation?
We have suggested above that investing in
effective stakeholdermanagementis positively
associated with financial performance,in what relationshipswith primarystakeholderscan lead to
direction is the causality? The primary stake- valuable, intangible competencies that are
holder interdependenceperspective holds that importantin gaining and maintainingcompetitive
effective stakeholdermanagementleads to finan- advantage.Using corporateresources to pursue
cial performance.Firms can be more successful social issues that are not directly related to the
by developing (up to some margin)relationships relationshipwith primary stakeholdersmay not
with customers, employees, communities and create such advantages.Social issue participation
governments(Harrisonand St. John, 1994; Kotter refersto elementsof corporatesocial performance
that fall outside of the directrelationshipsto priand Heskett, 1992).
This sentiment is reflected by Robert Wood mary stakeholders.For example, common forms
Johnson(quotedin Prestonand Sapienza, 1990), of social issue participation
may include:avoiding
who led Sears in its postwar growth, when he nuclear energy, not engaging in 'sin' industries
listed 'four parties to any business in order of (alcohol, tobacco, and gambling),refrainingfrom
importance'as 'customers,employees, communi- doing business with countriesaccused of human
ties, and stockholders.'He contends that if the rights violations,refusing to sell to the military,
interestsof the firstthree groupsare looked after, etc. While each of these may be an important
then the stockholdersbenefit. Similarly, Kaplan issue for some membersof society, the fundamenand Norton (1996) argue that the drivers of fi- tal difference between social issue participation
Copyright? 2001 John Wiley & Sons, Ltd.
(2001)
129
130
A. J. Hillmanand G. D. Keim
(2001)
131
(2001)
132
F0
I,
a.
462.245
4913.883
0.055
0.170
18518.398
1049.636
14.914
0.371
1.948
2.005
MEAN
MBASS
39.402
2212.939
0.064
0.152
10124.786
523.056
37.397
1.068
-1.016
0.842
1.000
-0.033
-0.095
-0.066
-0.030
-0.037
0.052
-0.190**
0.090
-0.080
MVA
ROA
ROE
SALES
NET
SI
1.000
0.165**
1.000
0.161*
0.708**
1.000
0.404** -0.089
0.060
1.000
0.623** 0.268** 0.352** 0.779**
1.000
-0.101
-0.140*
-0.232** -0.028
-0.133*
1.0
0.044
0.048
-0.036
-0.090
-0.015
-0.00
-0.286**
0.086
-0.006
-0.319** -0.299**
0.0
0.244** 0.101
0.105
0.160*
0.189** -0.01
MBASS = Market-to-Book
Assets; MVA = MarketValue Added; ROA = Returnon Assets; ROE = Returnon Equity;SALES = N
Income(proxyfor size); SIC = Industry;BETA = Risk; SIP = Social Issue Participation;SM= StakeholderManagement
Cq
rl
t
5/
134
DISCUSSION
Table 3. Regression results for market value-added
(MVA 95-96): social issue participation independent
variable
Variables
SIP 94
Sales 94
Net income 94
Industry 94
Risk 94
Intercept
R2
Adjusted R2
F
-0.127* (132.538)
-0.215** (0.21)
0.762** (0.376)
-0.005 (16.589)
0.043 (661.510)
104.044 (994.786)
0.424
0.412
34.904**
corporate social performance and financial performance in the past have used more traditional
accounting-based measures. In order to frame this
study in the context of the existing literature
and to test for the sensitivity of our results to
performance measure, we also ran our analyses
using three additional variables often used to
measure financial performance: Return on Assets
(ROA), Return on Equity (ROE), and the ratio
of Market to Book Assets (often called the Q
ratio as it approximates Tobin's Q). Table 1 also
indicates the descriptive statistics and correlation
of these additional dependent variables to our
predictor variables. Regression analyses in all
Copyright ? 2001 John Wiley & Sons, Ltd.
PRD (Product)
ENV (Environment)
-0.074 (351.574)
-0.046 (293.524)
DIV (Diversity)
COM (Community)
Sales 94
Net Income 94
Industry 94
Risk 94
Intercept
R2
Adjusted R2
F
0.046 (305.401)
0.225** (378.267)
-0.196* (0.021)
0.689** (0.373)
0.012 (16.265)
0.056 (643.943)
-800.273 (1007.584)
0.474
0.454
23.359**
ER (Employeerelations)
0.019 (276.568)
Standardized
regressioncoefficientsare shown;standarderrors
are in parentheses
N = 308
*p < 0.05; **p < 0.01
Strat. Mgmt. J., 22: 125-139 (2001)
135
resultsalso indicatethat the directionof causality sample scored negatively for the dimension of
is from stakeholdermanagement/socialissue par- CommunityRelations,where firms with negative
ticipation to shareholder wealth creation/ scores capture 16.9 percent of Diversity Issues,
destruction. Additional analyses support this 20.9 percent of ProductIssues, 21.7 percent of
directionalcausality in that the reverse causality EmployeeRelationsand 29.1 percentof Environis not statisticallysupported.Thus, our findings mental Issues. This skewness may also have an
are consistentwith our theoreticallybased predic- effect on our results. Therefore,we have reason
tions that stakeholdermanagementcan lead to to believe that the findings in our additional
shareholderwealth creationand that participation disaggregationmay be a result of the data rather
in social issues does not lead to shareholder than an indication that only one dimension of
stakeholdermanagementis positively related to
wealth creation.
Our results, however, should be interpreted shareholderwealthcreation.These analyses,howwith caution.Additionalanalysesusing alternative ever, also indicatepromisefor furtherresearchin
measures of financial performance,ROA, ROE this area.
and Market-to-BookAssets, are not significant.
As discussedin the Methodssection, we strongly
believe that this is a result of the problems IMPLICATIONS AND CONCLUSION
associated with these operationalizations,rather
than an indicationof lack of robustnessof our Business firms face an increasinglycompetitive
findings.Conceptually,MVA is the closest oper- environment.The developmentof a world market
ationalization available to us to capture our for investmentcapital,in particular,increasesthe
dependentvariableof interest:shareholderwealth importanceof competing for investmentcapital.
creation. However, this is an area for future Such increasedcompetition,we believe, encourresearch.
ages firms to searchfor sourcesof organizational
Finally,while our fundamentalargumentis that advantagethat cannotbe easily or quickly dupliCSP is multidimensionaland that disaggregation cated in order to continue to attractinvestment
is necessaryto betterunderstandthe relationships capital.Sustainableorganizationaladvantagemay
studied herein, our additionalanalysis also indi- be built with tacit assets that derive from
cates promisein disaggregatingstakeholderman- developing relationshipswith key stakeholders:
agementeven furtherinto individualcomponents. customers,employees, suppliersand communities
Unfortunately,while the KLD data are the best where businesses operate.
availableto researchersstudyingcorporatesocial
Implicationsof our researchare that investing
performance,these data have unique issues in in stakeholdermanagementmay be complementheir constructionand aggregationthat cannotbe taryto shareholdervalue creationand may indeed
disentangledhere. For example,while community provide a basis for competitive advantage as
relationsis the only positive and significanteffect importantresourcesand capabilitiesmay be crefound in our regression analyses, employee ated that differentiatea firm from competitors.
relationsand diversityissues are also significantly On the other hand, participatingin social issues
correlatedwith MVA. Interestingly,product is- may be seen at best as a transactionalinvestment
sues and environmentalissues have an insignifi- easily copied by competitors.
cant but negative relationship.This may be a
We think these findingshelp shed light on the
resultof the actualcompositionof the dimensions dilemmafaced by managerswhen called upon to
trackedby KLD. The Appendix shows that the serve an expandedrole in society. Our findings
dimensionsof communityrelationsand diversity suggest that if the activity is directly tied to
issues track more 'areas of strength'than 'areas primarystakeholders,then investmentsmay beneof concern.' The other three dimensionshave a fit not only stakeholders but also result in
more equal balancebetween strengthsand weak- increased shareholder wealth. Participating in
nesses. How the individual items within each social issues beyondthe directstakeholders,howcategory are summed to form a score for each ever, may adversely affect a firm's ability to
category is undisclosedby KLD. In addition,a create shareholderwealth.
We are not making the normative assertion
frequency analysis of the individualdimensions
indicatesthat only 1.2 percentof the firmsin our that firms should not engage in such activities.
Copyright ? 2001 John Wiley & Sons, Ltd.
136
Indeed, many firms have multidimensional performance goals that may include social issue
activism. However, the conflict between these
goals and shareholder wealth creation should be
recognized. The use of a firm's resources always
has an opportunity cost. Implementing a social
issue participation strategy appears to come at
the cost of forgone opportunities to increase
shareholder value.
Moran and Ghoshal argue for a reorientation
of business strategy 'to reflect the fact that what
is good for society does not necessarily have to
be bad for the firm, and what is good for the
firm does not necessarily have to come at a
cost to society' (Moran and Ghoshal, 1996: 45).
Consistent with this view, the emphasis on shareholder value creation today should not be construed as coming at the expense of the interests
of other primary stakeholders. Participation by
firms in all the social issues that beckon, on the
other hand, may not lead to the same competitive
value creation prospects as stakeholder management.
In addition, our findings may provide insight
into the pattern of relationship between social
performance and financial performance in past
literature. Evidence here suggests the two dimensions of corporate social performance-stakeholder management and social issue participation-have opposing relationships to financial
performance. This may partially explain why
aggregating the two together into a measure of
corporate social performance may lead to ambiguous results. Furthermore, as noted in our Methods
section, our operationalization of financial performance using market value added may be an
improvement over accounting measures of return
in understanding the effect of intangible assets
such as stakeholder relationships. This suggests
that future research may extend the decoupling
of social performance and further explore the
differences between the dimensions as well as
reconsidering measures of financial performance.
These findings create other opportunities for
further research. First and foremost are the
methodological issues discussed in our Discussion
section. Further research focusing on alternative
measures of performance and further disaggregation of our constructs is promising. In addition,
the processes by which stakeholder relations are
managed and the balancing of diverse demands
of stakeholder groups is a ripe area for further
Copyright ? 2001 John Wiley & Sons, Ltd.
(2001)
137
138
with the
community.
Areas of strength. The company in recent years
has consistently given over 1.5 percent of pretax
earnings to charity or otherwise demonstrated
generous giving; the company is known for innovative giving, such as support of nonprofit agencies promoting self-sufficiency among the economically disadvantaged; the company supports
education through a long-term commitment to
improve programs at the primary or secondary
level, or the company is a prominent recent supporter of job training programs; prominent participation in public/private initiatives that support
housing initiatives for the economically disadvantaged.
139
offers its employees strongretirementbenefits,or emissionsof toxic chemicalsin the United States;
other innovative benefits, relative to others in the company is among the top producers of
its industry.
ozone-depletingchemicals; the company's legal
Diversity issues. Areas of concern. The com- emissions of toxic chemicals into the air and
pany has paid substantialfines or penalties or water are among the highest of the companies
been involved in major controversiesrelated to followed by KLD; the company is one of the
its affirmativeaction record.
largest producersof agriculturalchemicals.
Areas of strength. The company's CEO is a
pany faces major recent product safety controversies; the company faces a major marketing
controversyor has paid fines or penaltiesrelated
to advertising practices, consumer fraud, or
governmentcontractingpractices.
Areas of strength. The company has a long-
(2001)