Measuring The

Business Value
Of Stakeholder
Relationships
PART ONE

Ann C. Svendsen, M.A.

Robert G. Boutilier, Ph.D

Robert M. Abbott, M.A.

David Wheeler, Ph.D

This research project is a joint initiative between the Centre for Innovation in Management
at Simon Fraser University and the Haub Program in Business and Sustainability, Schulich
School of Business at York University. It has been sponsored by the Canadian Performance
Reporting Initiative (CPRI) of the Canadian Institute of Chartered Accountants.
The Centre for Innovation in Management (CIM), located in Simon Fraser University's
Faculty of Business, is a partnership of faculty, researchers, business leaders and social
entrepreneurs dedicated to helping business create social as well as shareholder value. CIM
conducts research, facilitates collaborative learning and disseminates new ideas in the areas of
non-financial performance measurement and stakeholder relations.
The Schulich School of Business is Canada's largest school of management and a
recognized leader in the field of sustainability research and education. Within the School, the
Haub Program draws upon an interdisciplinary faculty to conduct fundamental and applied
research in sustainability with an emphasis on sustainability performance measurement and its
correlation with competitiveness.
The Canadian Institute of Chartered Accountants (CICA) represents over 66,000
professional accountants and 8,500 students in Canada and Bermuda. Its CPRI collaborates
with disciplines and business leaders to provide innovative performance measurement tools
that address information and reporting needs in areas such as intellectual capital and
knowledge management, environmental performance, social and ethical responsibilities,
customer satisfaction and shareholder value creation.

RESEARCH DIRECTORS STEERING COMMITTEE

Ann Svendsen, Executive Director Beverly Brennan, FCA

Centre for Innovation in Management Philom Bios Inc.
Simon Fraser University
Len Brooks, FCA
7200-515 West Hastings Street
Vancouver, British Columbia Canada University of Toronto
V6B 5K3 Mathew Kiernan
Email: cim@sfu.ca Innovest Strategic Value Advisors Inc.
Website: cim.sfu.ca
David Moore, CA
David Wheeler, Chair and Director Canadian Institute of Chartered Accountants
Erivan K. Haub Program in Business and
Lynn Morley, CIA, CGA
Sustainability
Suncor Energy Inc.
York University, 4700 Keele Street
Toronto, Ontario, Canada M3J 1P3 Walter Ross, FCA
Email:sea@schulich.yorku.ca Laidlaw Foundation
Website: schulich.yorku.ca
David Selley, FCA
Canadian Centre for Ethics & Public Policy

Alan Willis, CA
Alan Willis & Associates

ADVISOR:

John Waterhouse, Ph.D

Simon Fraser University

MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE

 Table of Contents

Introduction 1

Context 2

A Stakeholder View of the Corporation 3

Evidence of the Link Between Quality of

Stakeholder Relationships and Business Success 7

How Do Stakeholder Relationships

Create Competitive Advantage? 9

A Conceptual Model of the Business

Value of Stakeholder Relationships 13

Measuring the Business Value of

Stakeholder Relationships 19

Defining Pathways 26

Next Steps 29

Endnotes 30

References 31

MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE

 Introduction

“It doesn't matter how good the market research is, how bright the management
team is, it is the quality of relationships among all people in the organization that
has an enormous bearing on the quality of decisions and their execution.”

Jeff Mooney, Chairman & CEO, A&W Food Services

In a rapidly globalizing, knowledge-based economy, sources of value creation in business are

shifting from tangible assets such as land and equipment, to intangibles such as intellectual,
human and social capital. While the relative importance of various assets is open to debate, we
believe that relationships between a firm, its employees and other stakeholders constitute an
important and yet undervalued business asset.

This report presents the conclusions of the As a first step toward answering these
first phase of a CICA sponsored research questions, this report includes a review and
project on the business value of stakeholder critique of academic research on the
relationships. The research addresses the business value of stakeholder relationships.
following questions: We also propose a model of the contribution
of stakeholder relationships to business
Under what conditions, and through which value and suggest a provisional set of
pathways, do stakeholder relationships measures for assessing the quality of
create business value? stakeholder relationships drawing on the
concept of social capital.
What are the essential attributes of an
organization that facilitate the creation of This report outlines a research framework for
positive stakeholder relationships? examining the various ‘pathways’ that link
stakeholder relationships to competitive
What measures are most useful in assessing advantage. During the next phase of the
the quality of stakeholder relationships? project, case studies will be conducted in
collaboration with approximately six
Canadian companies who strive to create
competitive advantage, and ultimately
business value, from their stakeholder
relationships.

PAGE 1 MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE

 Context

Shifting Paradigms and the

Criticality of Stakeholder
Relationships

Manual Castells, in The Rise of the Network Society (2000), argues that technology and
globalization are making networks of relationships a decisive business asset. In much the same
way that the Ford Motor Company's assembly line was the icon of the industrial age, Castells
argues that the globally networked business model is at the vanguard of the information age.
Kevin Kelly, in New Rules for the New Economy (1999), reinforces this view with his observation
that “the network economy is founded on technology, but it can only be built on relationships.
It starts with chips and ends with trust.”

Contemporary organizations are flatter and Although we do not seek to address the
characterized by more diffuse decision corporate governance implications of this
making, accelerated information flows and analysis, we have little doubt that
an emphasis on learning than are their fundamental changes occurring around and
predecessors. With this in mind, the within businesses are leading to a
creation and nurturing of relationships may redefinition of how companies must
rival the primacy of human and financial function in order to optimize the creation of
resources. As Charles Leadbeater noted economic value.
recently in Living on Thin Air (1999),
corporate-stakeholder relationships matter
because they “foster[s] the co-operation and
risk-sharing that promote innovation and
flexible responses to change in a global
economy.” (p. 152)

MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE PAGE 2

 A Stakeholder View of the Corporation

Defining Stakeholders

The term 'stakeholder' has been defined as any group or individual who can affect or is affected
by the achievement of a firm's objectives (Freeman, 1984). Primary stakeholders have interests
that are directly linked to the fortunes of a company including shareholders and investors,
employees, customers, suppliers, and residents of the communities where the company
operates. Some theorists have also added individuals and groups that speak for the natural
environment, non-human species, and future generations to this list (Wheeler and
Sillanpää, 1997)

Secondary stakeholders, on the other hand, Sustainability and the Business

have indirect influences on an organization
Value of Stakeholder Relationships
or are less directly affected by its activities.
They include the media and pressure
Increasingly, large companies, including
groups, and others that inhabit the business
members of the World Business Council on
and social networks of the organization.
Sustainable Development are using the term
‘sustainability' to reconcile how value is
A typology of stakeholders reveals the
created for firms, as well as for their
variety of interests or “stakes” that groups of
stakeholders, in economic, social and
people hold in organizations or causes. The
environmental terms. This more inclusive
stakes of investors, for example, are based on
approach is based on the premise that
equity. Other direct stakeholders, including
corporate performance should be assessed
customers, employees, competitors,
against a ‘triple bottom line' of economic
suppliers, and debt holders, have economic
development, environmental quality and
stakes or interests in a company - they can
social justice or equity (Elkington, 1997).
directly affect or be affected by a
corporation's financial success. Labour
A number of business leaders and
unions, community groups, environmental
management theorists have sought to place
organizations, human rights organizations
environmental or sustainable development
and consumer advocates have a stake in the
considerations in a strategic business
company's impact on people and the
context. Research shows that the inclusion
environment, as well as their economic
of sustainability issues in corporate mission
impact.
and values statements - particularly in larger
companies - is becoming more common and
there is a parallel increase in measuring,
reporting and communicating on such
issues in real time (Wheeler and Elkington,
2000).

PAGE 3 MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE

Companies are increasingly learning their (strong links with communities), and Suncor
way into sustainability issues - whether it be Energy, Placer Dome, Weyerhaeuser and
the rapid growth of ethical finance, the Shell Canada (relationships with non-
increasing interest of consumers in certified governmental organizations and
sustainable products and services, or the communities).
downward (and occasionally lateral or
upward) pressure on supply chain partners Not all companies, however, have adopted
to demonstrate environmental and social the sust ainability agenda and the
responsibility (Elkington, 1998; Beloe, assumption that establishing positive
2000). relationships with stakeholders makes good
business as well as ethical sense. By
Finally, the magnitude of sustainability examining the levels of corporate response
issues, such as global climate change, to stakeholders we can distinguish between
population growth, and economic various orientations and better understand
globalization, means that companies which the role that certain kinds of stakeholder
are not ready for major instability in relationships play in the creation of business
marketplaces and political regimes may see and societal value.
their competitive advantage eroded and
their business success threatened (Hart and In 1975, management theorist Sethi
Milstein, 1999). developed a three tier model for corporate
social responsibility which included i) social
Levels of Corporate Response: obligation (a response to legal and market
Compliance to Stakeholder constraints), ii) social responsibility
(congruent with societal norms), and iii)
Engagement
social responsiveness (adaptive,
anticipatory and preventive). Sethi's second
A number of prominent Canadian
tier requires that a company move beyond
companies have focused on building strong
compliance and recognize and internalize
stakeholder relationships as a key element of
societal expectations. The third tier requires
their business strategy. Simply by way of
that a company develop the competence to
illustration, consider companies such as
navigate uncertainty, maximize opportunity
United Parcel Service, Dupont and Dofasco
and engage effectively with external
(employee commitment and loyalty), IKEA,
stakeholders on issues and concerns.
H o n d a a n d Toy o t a ( s u p p l y c h a i n
engagement), VanCity and Scotiabank

MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE PAGE 4

 A Stakeholder View of the Corporation

If we take Sethi's model as a starting point, we might describe it thus:

Level 1 Compliant: avoiding harm in three dimensions of sustainability, for example

ensuring safety of products and workers, avoiding economic losses,
corruption and (illegal) environmental damage.

Level 2 Responsive: meeting reasonable individual stakeholder expectations in three

dimensions, for example, achieving good levels of customer
satisfaction, employee morale, returns to investors and reducing
environmental impacts of operations, products and services.

Level 3 Engaged: maximizing economic, social and environmental value, for

example, achieving simultaneous sales and stock value growth,
customer and employment growth and eliminating or offsetting
environmental impacts.

This project is especially concerned with firms operating in the second and third levels of
the model as it is here that firms may create synergistic and self-reinforcing value in the
economic, environmental and social dimensions of sustainability. These relationships may
also help the company and its stakeholders avoid dissipating value.

In level 1, we assume that synergistic value is not actively eroded, but neither is it actively
created, and, of course, it is more likely to be put at risk through failures in compliance. But is
there a business case for operating beyond compliance? We believe that the answer to this
question is an emphatic yes. Below we set out evidence for a positive correlation between
social (stakeholder) responsiveness, engagement and business success.

PAGE 5 MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE

 Maximizing
ED economic, social
AG
and environmental
ENG

value.
IVE

Meeting reasonable
NS

stakeholder
SPO

expectations on
value.
RE
NT

Avoiding harm in
LIA

three dimensions
MP

of sustainable
development.
CO

Figure 1: Model developed by Wheeler et al (2001 a, b) for classifying organizations with respect
to corporate responsibility and degree of engagement with stakeholders in three
dimensions of sustainability (developed from US Committee for Economic
Development, 1971; Sethi, 1975 and Carroll, 1979).

MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE PAGE 6

 Evidence of Link Between Quality of Stakeholder
Relationships and Business Success

Stakeholder-Focus and Performance

The past thirty years have seen a rapid evolution in understanding about whether and how
stakeholder relationships contribute to business success. While research which looks at the link
between corporate social responsibility and financial performance have shown mixed results,
there are a few significant studies which show there seems to be a strong correlation between
good stakeholder relationships and business success.

Harvard researchers John Kotter and James In a Canadian context, a path-breaking

Heskett, in their book Corporate Culture and study by Max Clarkson, former director of
Performance (1992), for example, showed the Clarkson Centre for Business Ethics at the
that over an eleven-year period, sales and University of Toronto, found that firms that
employment growth at stakeholder- place a premium on ethics and social
oriented companies were significantly performance make the most money.
higher than at shareholder-focused C l a r k s o n ' s re s e a rc h s u g g e s t s t h a t
companies. Specifically, stakeholder- companies that concentrate exclusively on
oriented companies reported four times the the bottom line often make poorer
growth in sales and eight times the growth decisions. He suggested this may be
in employment. The authors argued that because they lack information from
successful, visionary companies, although stakeholders and the environment that
very diverse in other ways, put a lower would allow them to anticipate
priority on maximizing shareholder wealth opportunities and solve problems when
and greater emphasis on serving the they are small and less costly to remedy
interests of a broad mix of stakeholders. (Clarkson, 1991).

Arie de Geus reinforced this finding in his Corporate Social Responsibility

book, The Living Company (1997). Here, the (CSR) and Financial Performance
author found that stakeholder-oriented
companies remained in harmony with their
A number of studies have used CSR
environment by keeping “feelers” out and
databases to correlate measures of
by developing strong relationships. He also
stakeholder relationship quality with
noted that companies which survived for
financial performance (Collins and Porras,
twenty five years or longer tended to be
1995; Waddock & Graves; 1997, Berman et
cohesive, conservative in their financial
al, 1999; Roman et al, 1999). Waddock and
dealings, and more likely to have
Graves and Berman et al., used measures for
decentralized decision-making.
the quality of relationships with employees,
customers, communities, minorities and
women, and the natural environment that
were based on CSR ratings derived from the

PAGE 7 MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE

Kinder, Lydenberg, Domini (KLD) Socrates financial performance in more racially and
database. Waddock and Graves (1997) ethnically homogeneous geographic
correlated companies' previous year CSR regions than in more diverse regions.
ratings with financial performance on
measures such as return on assets (ROA), Rather more indirectly, correlations between
return on equity (ROE), and return on sales social and environmental performance and
(ROS). They found quantitative support for stock price performance have been
the assertion that there is a connection examined in the context of indices such as
between how a company treats its the Dow Jones Sustainability Index, the
stakeholders and financial performance. Innovest EcoValue Index and the Jantzi Social
Index. Where these indices include the
More recently, Berman et al, (1999) tried to social dimension, their measurement is not
determine which kinds of CSR behaviors based on the quality of stakeholder
were most strongly tied to ROA. They found relationships. Rather, they equate social
that CSR behaviors that dealt with the performance with observers' subjective
company's relationships with employees ratings of actual corporate behaviors. In that
and with customers had significant direct respect, they focus on the outcomes or
effects on ROA. The authors also examined consequences of corporate stakeholder
the possible mediating role of company relationship quality. Moreover, the
strategy, which was deduced from financial correlations are claimed to be the
repor ts as selling intensity, capital simultaneous manifestation in three
expenditure efficiency, or capital intensity. dimensions of performance of a common
Behaviors relat ed to communities, factor, namely, management competence.
minorities and women, and the natural
environment proved to have a mediating We propose to investigate the hypothesis
effect, depending on the company's that the ability to create and sustain high
strategy. quality stakeholder relationships is a
necessary management competence,
Berman et al, speculated that mediating without which financial success becomes
factors (e.g., impacts on the natural unlikely. In any case, the fact that such
environment, and thus relationships with correlations exist does provide some
environmental groups), might not be of empirical evidence for the existence of links
equal importance across industries. between social and financial performance.
Similarly, relationships with minorities, as
indexed by board and senior executive
diversity, might be more important to

MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE PAGE 8

 How Do Stakeholder Relationships
Create Competitive Advantage?

Increased attention to the link between positive stakeholder relationships and competitive
advantage has been manifested in at least four areas:

(i) The failure to establish and nurture their potential markets. For example,
stakeholder relationships creates activist sites such as http://
shareholder risk. www.corporations.org/corplist .html
(updated to Oct. 31, 2000) list dozens of
(ii) Strong relationships with and between companies currently being boycotted.
employees, and with supply chain and
business alliance partners are a In addition to sales impacts, there are
prerequisite for innovation. probably more damaging long term
implications for shareholder value of
(iii) A dense network of relationships controversies such as those suffered by the
provides resources and information aforementioned companies. Although
necessary for the development of uncomfortable for companies to discuss and
new markets and opportunities. record, and difficult for them to quantify,
they may include:
(iv) Relationships are the source of a good
reputation and enhanced brand • diminution of license to operate in
value, both of which create a myriad certain markets (e.g., Monsanto and its
of business benefits. genetically modified products in
Europe);
Risk Reduction
• diminution of 'supplier' or employer of
Companies like McDonalds, Mitsubishi, choice' status (e.g., Shell's experience
Monsanto, Nestlé, Nike, Shell, and Texaco after the twin shocks of Brent Spar and
have suffered damage to their reputations Nigeria);
and sales as a result of public awareness
campaigns by advocacy stakeholder groups • diminution of brand equity.
(Schwartz and Gibb, 1999; Wheeler et al,
2001a, b). At its most obvious, the Internet
has made it possible for activists around the
world to coordinate boycotts against
corporations with direct impacts on sales,
albeit usually by a rather small percentage of

PAGE 9 MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE

These impacts also result in direct costs as Conversely, employees who are motivated
companies re-invest in reputation by, for by a common vision and set of goals, trust
example: their colleagues, and are linked into diverse
and stimulating information networks will
a) employing extra staff to monitor tend to be more innovative. In other words,
internal practices which are under positive relationships are necessary to
question (e.g. Nike's experience transform an intangible asset (knowledge)
with human rights controversies into a tangible one (new processes,
in its supply chain); products, and services).

b) tying up of senior management time “No matter how knowledgeable

during conflicts (e.g., McDonalds'
employees are, if they believe
experience in its libel case against
London Greenpeace); they are working in a hostile,
low-trust environment they will
c) advertising spending (e.g., Shell's
hoard information, avoid
investments in corporate public
relations post-Brent Spar and Nigeria); collaboration, and display very
low levels of creativity”
d) excessive compensation claims (e.g.,
(Nahapiet and Ghoshal, 1998).
Texaco's experience in dealing with
charges of systematic racism in its US
business practices); Similarly, positive, trust-based relationships
with suppliers and business partners are
e) costs of physical damage to property fundamental to spurring innovation, as well
(e.g., McDonalds experience during as enhancing effectiveness and efficiency. In
anti-globalization protests). the past, supply chain relationships were
governed by arms-length, explicit contracts.
Innovation Considerable management effort was spent
monitoring and controlling the behavior of
In today's highly competitive economy, suppliers and when contract terms are not
innovation is of fundamental importance to met, attempting to remedy the problem and
business survival and success. Research resolve conflicts. Today, supply chain
shows that creating highly innovative work relationships are more likely to be based on
teams is largely dependent on establishing implicit, trust-based contracts that are
positive relationships both between negotiated and renegotiated as demands
management and employees, and between and opportunities change. This kind of
employees themselves (Cooke and Wills, relationship requires more flexibility and
1999; Leanna and van Burren, 1999). hence depends on shared knowledge,
interaction and trust (Matthews et al, 1998).

MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE PAGE 10

 How Do Stakeholder Relationships
Create Competitive Advantage?

Reputation The costs to the company were

considerable. Shell estimated that the direct
Research shows that a company's reputation cost to change the disposal decision was
is an important determinant of business $200 million (US). Additionally, boycotts
success. A 1997 national study of consumer and threats against Shell service stations led
attitudes by Cone/Roper (1997) found that to lost sales. Fifty Shell service stations were
76 percent of consumers would be likely to vandalized, two firebombed, and one raked
switch to a brand associated with a good with gunfire. Moreover, employee morale
cause. This represents an increase from 63 plummeted.
percent in 1993. Other studies show a
downturn in the value of a company's stock Within one month of the Shell episode,
when a company is accused of ethical phosphorous trichloride leaked from Merck
wrongdoing. & Co. Inc.'s Flint River plant in Albany, New
York. The leak produced a clearly visible
Technology and the increased power of the toxic cloud above the plant. Forty-five
media to influence public opinion have people were taken to hospital, 400 workers
contributed to a rise in the importance of were evacuated, and a TV crew broadcast
reputation. Companies recognize that their the event. The community response ranged
reputation depends on developing credible from indifference to laudatory support of
relationships with their employees, Merck.
customers, nearby residents, and suppliers.
This is especially true in a networked world The reasons why Merck was given the
where everything about a company can be benefit of the doubt are twofold. Firstly, the
known globally and almost instantaneously. company's vision, forged in the 1920s, was
built upon the core values of integrity,
The influence of reputation is perhaps best contribution to society, responsibility to
illustrated with reference to the well known customers and employees, and the
cases of Shell in the UK and Merck in the U.S. unequivocal pursuit of quality and
On June 10, 1995 Shell UK began towing a excellence. As early as 1993, CEO George
used oil rig, the Brent Spar, into the North Merck articulated the operating philosophy
Atlantic to sink it. The disposal was the of the company:
culmination of four years of study and was
approved and supported by the regulators “We pledge our every aid that this enterprise
and, indeed, by British Prime Minister John shall merit the faith we have in it … that those
Major when he was challenged on the point who hold aloft that torch of Science and
in Parliament. Greenpeace galvanized Knowledge through these social and
community opposition to the project, and economic dark ages, shall take new courage
compelled Shell to halt the project on and feel their hands supported”.
June 20.

PAGE 11 MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE

Merck believed that the company operated Brand Value
with the consent of the community and the
company has, over the years, worked very Spurred on by the rapid rise of the service
hard to earn that consent. The company sector, the quality of a company's
benefits from what Fombrun (1996) has relationships with its customers began to
called reputational capital. receive a great deal of attention in the 1980s.
Customer satisfaction measurement
Expanded Markets and Opportunities merged with one-to-one (Peppers and
Rogers, 1993) database marketing to
The capability to engage essential become customer relationship value.
stakeholders in positive relationships can
give a firm a competitive advantage (Grant, In a similar vein, brand loyalty has been
1998, 177). The advantage might be recognized as a valuable intangible asset.
manifested in any number of ways in Our growing understanding of the links
different industries and with different among intangibles like customer
stakeholders. This phenomenon has been satisfaction, customer loyalty, and brand
well demonstrated by Suncor in its loyalty has facilitated estimates of the
development of oil sands in Alberta and BP financial value of brands, the annual brand
in its securing of a community license to “rankings” by Interbrand for the Financial
operate in Alaska (Wheeler et al, 2001a). Times being a conspicuous example. The
2000 rankings estimated brand values for
Coca Cola and Microsoft at US$72.5 and
In the case of Suncor, $70.2 billion respectively (Financial Times,
environmental permits were 2000).

obtained 18 months ahead of

schedule as a result of strong
community support for its
operations.

In the case of BP, a positive reputation for

community involvement was key to its
successful bid for oil rights in Alaska.

MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE PAGE 12

 A Conceptual Model of the Business Value
of Stakeholder Relationships

The Resource Based View (RBV) of the Firm

The proposed research framework begins with a “resource-based view” of the firm that
suggests firms have resources, consisting of tangible and intangible assets, which give them
distinctive capabilities. When those resources are not widely held or cannot be replicated by
competitors (and cannot be replaced by other resources or purchased), they can produce a
competitive advantage that can be sustained over the long term (Wernerfelt, 1984, Barney,
1991, Grant, 1991; Dierickx and Cool, 1989).

The advantage of taking the RBV as a starting Figure 2 summarizes how a firm's resources
point is that: affect its activities. Productive activity
requires that an organization mobilize its
(i) RBV is established in the mainstream 4
resources to create various capabilities . The
strategy literature; rarity and inimitability of resources
determines the extent to which they confer a
(ii) it provides a link to the language of competitive advantage upon the firm.
resources (including tangible and Drawing on that advantage, the
intangible assets, relationships and organization takes strategic actions to
competencies) and thus to the notion achieve its goals. Those actions have
of preserving and building capital: impacts on the company's operations and
economic, social, and natural; on society. The organization then assesses
the gaps between the intended and actual
(iii) it recognizes the inherent value in impacts. If the gap is unacceptable, the
social relationships within and beyond organization may seek dif ferent or
the firm. additional resources, or may try to develop
different or better capabilities with the
resources it has or can acquire.

Figure 2: The Resource-Based View (RBV) of the Firm

Source: Adapted from Grant, R.M. (1998, 180)

Step 1:
RESOURCES
LOCATE

Step 2:
CAPABILITIES
DEVELOP
Step 5:
ASSESS GAPS
Step 3: COMPETITIVE
CHOOSE/DEFINE ADVANTAGE

Step 4: STRATEGIC
IMPLEMENT ACTION

PAGE 13 MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE

Stakeholder Relationships and The quality of a company's
Access to Resources relationships with its
stakeholders can be seen as
Historically, competitive advantage was
thought to be the product of economic an indicator of the
factors such as price, quality, and service. organization's capability to
H owe ve r, w h e n p r o d u c t s b e c o m e
access valuable resources.
commodities, economic factors become
more or less equal across competitors and
price, quality and service are no longer the Depicting resources as only accessible
differentiators or drivers of advantage. through stakeholders might be overstating
Advantage is more likely to accrue from the the case. However, if employees are
leveraging of intangible assets such as brand stakeholders, then even resources that the
awareness, which encompasses both company owns cannot be accessed without
emotional and cognitive characteristics like the cooperation of those stakeholders. At
product quality perceptions, lifestyle the very least, stakeholders can increase or
associations, or perceived environmental or decrease the cost and speed of access to
social responsibility of the firm and its resources. In that sense, it is not an
products. overstatement to call them gatekeepers of
resources.
Thus, the ability to engage stakeholders
positively is a vital organizational capability Differences Across Industries
in todays information based economy. Its and Life Cycle Stage
importance seems to be related to the fact
that these relationships enable the flow and The literature reminds us that different
use of other resources like financial capital, industries will derive different business
intellectual capital, and human capital. benefits from stakeholder relationships. For
example, companies involved in natural
Stakeholders act as gatekeepers to resources resource extraction (e.g., mining, forestry)
that firms need. For example, customers have significant impacts on the environment
decide whether or not to give the company and therefore must work especially hard at
money, communities decide whether or not maintaining their social license to operate.
to let a company occupy a location in their They must pay more attention to their
area, and employees decide whether or not relationships with environmental non-
to share their innovative ideas with their government organizations (ENGOs) and
employer or defect to a competitor. regulators. High tech companies have
Likewise, poor stakeholder relationships different preoccupations and must ensure
make stakeholder controlled resources less access to highly trained and motivated
accessible. workers. Under normal economic

MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE PAGE 14

 A Conceptual Model of the Business Value
of Stakeholder Relationships

conditions, technology companies place the local merchants' association, and

less emphasis on relationships with customers. Both of these bakers has a set of
communities compared with natural unique capabilities that confer competitive
resource companies. Biotechnology firms advantages. Those advantages, however,
working on genetically modified food on the must be used strategically in order to create
other hand may be concerned with multiple business value.
stakeholder relationships - with employees,
consumers, and ENGOs, as they need to The capabilities of our two hypothetical
protect their access to social license to bakers re f lect their strengths and
operate as well as to ensure the creativity weaknesses as they would be conceived in a
and motivation of highly trained employees. strategic planning SWOT analysis (i.e.,
strength, weaknesses, opportunities,
The stage of development of a business can threats). The opportunities and threats
also affect the business value of various presented by the external environment are
stakeholder relationship. Startup companies the same for both of them, but their
with no revenues depend on their initial capabilities give them differential abilities to
investors for money, advice, contacts, and respond. The baker with the better
e n c o u r a g e m e n t ( S t e i n e r, 2 0 0 0 ) . relationships with the banker can respond
Established high tech companies, on the better to changing interest rates while the
other hand, may find that relationships with one with the better recipe can respond
business partners and sub-contractors take better to a consumer trend towards
on proportionately greater importance. developing connoisseur tastes in bread. The
strategic action step of the RBV model refers
Bakers do not Prosper by Bread to the actions that these business people
Alone: Relationships as a Source take on the basis of whatever SWOT analysis
they have formally or informally done.
of Competitive Advantage

Notice that the two bakers in our example do

To illustrate the model, lets consider how
not have an equal likelihood of learning
two hypothetical bakers access various
about the opportunities and threats in their
resources in unique ways to create
external environment. The one with the
competitive advantage.
better relationships with the employees and
the banker is better positioned to receive
The first baker has the capability to bake
information from those sources about both
bread according to a unique award winning
changes in consumer tastes and changes in
bread recipe. The second baker has
interest rates. Thus, this baker has an
developed strong relationships with the
additional capability-the ability to detect
miller, the water supplier, the yeast
opportunities and threats before other
producer, and the equipment maker, as well
bakers.
as the banker, the accountant, the landlord,

PAGE 15 MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE

The above example with the two bakers is (i) Corporations exist in a network of
satisfactory for illustrating how the RBV interdependent stakeholder
model might elucidate the linkages between relationships These relationships are
stakeholder relationships and business symbiotic, evolve over time and are
value, but it does not prove that such mutually defined (Svendsen, 1998).
linkages actually exist. Moreover, it does not
even begin to identify what all the possible (ii) A company must have the ability to
linking pathways might be. For that, 'sense and respond' to a changing
empirical research is needed. environment (Haeckel, 1999).

Stakeholders and Business This gives them the ability to filter out
“noise” in the environment and the
Value Creation
ability to make decisions that will ensure
the fiscal well-being of the corporation
While the resource based view of the firm
and the relationships upon which they
allows us to better understand how
depend.
stakeholder relationships can restrict or
facilitate a company's access to various
(iii) Stakeholder oriented companies
tangible and intangible resources, it does
depend on multi-layered information
not explicitly address how a stakeholder
and per formance measurement
orient ation is ref lect ed in various
systems. Such systems allow the
management functions, nor how such
company to constantly improve
functions create value for an organization.
organizational effectiveness and adapt
The proposed stakeholder model (see Figure
corporate strategy to changing
3) is an adaptation of the Performance
circumstances. Such systems and their
Monitoring and Management System
outputs also help to satisfy the
developed by Waterhouse and Svendsen
accountability demands of internal and
(1998). The model is based on four
external stakeholders and can help a
interrelated ideas.
company diagnose relationship
problems early and take steps to
improve those relationships.

The ability to understand and satisfy the

expectations of multiple stakeholders
who have diverging and sometimes
conflicting interests, is an essential
corporate competency.

MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE PAGE 16

 A Conceptual Model of the Business Value
of Stakeholder Relationships

While performance measurement The Model

systems have traditionally been
designed and used by organizations for In this section we describe and explain the
control purposes, we view information model illustrated in Figure 3. We begin with
and measurement systems as vehicles corporate strategy which defines what a
for feedback, learning and company plans to do to achieve its business
accountability. Given that a company goals. Once a company has established its
depends on its stakeholder goals, it identifies the stakeholders who have
relationships for its continued survival, the greatest capacity to influence the
information and measurement systems achievement of those goals. It chooses a set
that improve organizational of strategies and processes that reflect and
effectiveness and build trust are of support its web of stakeholder relationships.
critical importance.
To ensure that its strategy will meet the
(iv) There are different levels or orientations e x p e c t a t i o n s a n d re q u i re m e n t s o f
toward stakeholders and relationship stakeholders, the company creates
building. Some organizations may view opportunities for stakeholder dialogue.
stakeholders as important because they Through face to face and technology-
are legally obligated to do so. Others enabled stakeholder conversations, the
may feel a sense of social responsibility company can refine strategies, adapt
towards stakeholder groups who are business processes and identify new
affected by corporate activities. Still opportunities to work collaboratively with
others may see stakeholder stakeholders for mutual benefit. An example
relationships as essential for creating might be a automobile manufacturer that
value for the company, stakeholders and invites interested customers to visit its
society as a whole. We believe our website to identify new design features, or a
model is most powerful when applied forest company that meets regularly with
to organizations who are operating leaders of international environmental
within a sustainability (e.g. triple organizations to discuss emerging issues
bottom line) framework and who are and to identify forest management
focused on maximizing economic, approaches which are acceptable to these
social and environmental value. groups.

Stakeholder oriented The company then establishes business

p r o c e s s e s t h a t re f l e c t s t a ke h o l d e r
companies use their
expectations and requirements. This is an
relationships to systematically important managerial task because such
search out, capture and processes, once established, are hard to
change while stakeholder expectations and
interpret clues from the
the environmental context are in constant
environment in real time.

PAGE 17 MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE

 flux. Also, the capacity of corporate are in their infancy. Accordingly, the focus in
management to simultaneously consider this study is on measuring the level of social
the interests and expectations of multiple capital in corporate-stakeholder
stakeholders while dealing with the harsh relationships.
realities of global competition and cost-
cutting is extremely difficult. Once measurement systems are in place and
data has been collected, the company can
Measurement systems can help managers determine how its activities are affecting
deal with a complex and rapidly changing stakeholders and also whether it is meeting
environment and understand and respond stakeholder expectations. By considering its
to shifts in stakeholder and public financial, environmental and social
expectations. While financial measures are performance in an integrated fashion, a
well developed, non-financial performance company can adapt its strategy to improve
measures and especially those dealing with corporate performance and maximize
corporate social /stakeholder performance stakeholder benefits.

Figure 3: Stakeholder Model of Business Value Creation Model

How should we STRATEGY Who are our

adapt our strategy key stakeholders?
to account for Why is each group
performance results? strategically
important?
How should we What do we and
adapt our strategy our stakeholders
to maximize expect to give
stakeholder and receive?
PERFORMANCE benefits? STAKEHOLDER
DATA/RESULTS RELATIONSHIPS

How are Are we meeting CAPABILITIES AND Do we have How can we

our activities stakeholder dialogue/engagement work with our
affecting our expectations? COMPETENCIES processes in place? stakeholders for
stakeholders? mutual benefit?

What systems,
structures and
policies are
required?

MEASUREMENT BUSINESS
SYSTEMS PROCESSES

What measures
do we need
to track social
performance?

MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE PAGE 18

 Measuring the Business Value of
Stakeholder Relationships

Non-Financial Performance Measures

There are very few studies which provide guidance on how we might measure the business
value of stakeholder relationships. There is, however, growing interest in more robust
performance measurement systems that go beyond traditional financial measures to help
companies measure and manage various aspects of corporate social performance. For
example, the balanced scorecard concept, introduced several years ago by Robert Kaplan and
David Norton (Kaplan & Norton, 1993, 1997), includes measures of customer satisfaction as
well as financial performance, effectiveness of business processes, and employee learning and
growth.

There is growing interest in A recent CICA research report suggests that

non-financial performance measures (which
more robust performance
would include measures of the quality of
measurement systems that go stakeholder relationships) are useful
beyond traditional financial because they (1) improve decision-making
by helping managers understand and
measures to help companies
predict the links between activities and
measure and manage various outcomes; (2) enhance the ability of
aspects of corporate social companies to manage st akeholder
relationships and issues; and (3) improve
performance.
corporate accountability (Waterhouse &
Svendsen, 1998).
Interest in non-financial measures of
performance is growing because it is Leading and Lagging Measures of
recognized that intangible assets such as
Social Performance
human capital (e.g., employee knowledge
and skills); natural capital, and
Within the nascent corporate social
organizational or structural capital are
performance field, there are two broad types
becoming more important to wealth
of measures under development. The first
creation (CICA, 1996; AICPA, 1994).
category of measures focuses on the social
Traditional financial performance measures
impacts or “outcomes” of corporate activity.
fail to capture the wealth creation effects of
The second category of measures focuses on
intangibles in a timely fashion and do not
the quality of relationships that exist
p r ov i d e s u f f i c i e n t i n fo r m a t i o n fo r
between a company and its stakeholders.
management to create value from those
intangibles.

PAGE 19 MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE

Common “impact” indicators include a The “perceptual as leading/impact as
company employee safety record, reports of lagging” premise has become well accepted
human rights violations and the amount of in marketing and human resources.
money a company donates to community Companies routinely measure the quality of
groups. The Global Reporting Initiative (GRI) relationships with customers, employees,
and the Task Force on Churches and and citizens through market research,
Corporate Responsibility Benchmarks are employee surveys and public opinion polls.
examples of impact oriented social Satisfaction measurement with employees
performance measures. has evolved into a vast array of standardized
tests and specialized surveys. Reputation
Companies have begun to measure and and brand studies (Fombrun, 1996) are also
report on their social impacts, at least in part becoming more prevalent.
because of accountability pressure from
stakeholders. These types of ‘outcome' Quality of relationship or perceptual
indicators have the advantage of being measures have yet to be developed in many
observable and verifiable. For example, stakeholder areas (e.g., relationships with
companies can report on the number of e nv i r o n m e n t a l g r o u p s , re g u l a to r s ,
women in senior management, or the exact suppliers, communities). Nor is there a
amount spent on community projects in a robust theory to account for the synergistic
given year. One disadvantage of outcome effects of high quality relationships with
measures is that they are retrospective. The multiple st akeholders on f inancial
information does not help managers performance. However, the World Business
u n d e r s t a n d a n d re s p o n d to w h a t Council for Sustainable Development
stakeholders want and expect. (WBCSD) and a number of their member
firms identified information about the
A second category of measures focuses quality of stakeholder relationships as a key,
“upstream” on the quality of relationships. but under developed, area of social
Often these measures are perceptual (e.g. performance measurement and reporting
employee trust and satisfaction). One (World Business Council on Sustainable
advantage of these kinds of measures is that Development, 2000).
they focus attention on the drivers of
performance and can therefore be used to
predict outcomes. In the Balanced Scorecard
framework, leading measures like customer
satisfaction and spending on employee
learning and growth are treated as
predictors of “lagging” measures like sales
and return on equity.

MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE PAGE 20

 Measuring the Business Value of
Stakeholder Relationships

Social Capital: A Measure of Definition of Social Capital

Relationship Quality
It has only been in the past several years that
We propose to operationalize the researchers have turned their attention to
measurement of relationship quality using studying social capital within organizations
the concept of social capital. and specifically within business
organizations. For the purposes of this study
Social capital has generally been defined as we adopt the definition proposed by Don
the relationships among people that Cohen and Laurence Prusak, in their recent
facilitate collective action and access to book, In Good Company: How Social Capital
resources. Jacobs (1965) used the concept in Makes Organizations Work (2000):
the context of neighborhoods functioning
as communities. Coleman (1988) discussed This definition supports the view within the
social capit al's impor t ance in the management literature (Nahapiet &
mobilization of human capital. Putnam Ghoshal, 1998; Tsai & Ghoshal, 1998;
(1995) and Fukuyama (1995) have drawn Cohen and Prusak, 2000 ) that social capital
popular attention to the concept in the has the following three key dimensions.
context of declining public participation in
voluntary organizations and increasing (i) The structural quality of a relationship
mistrust of formal institutions in the United refers to the structure of the social
States. The concept has also gained currency network in which the relationship is
in the public health area as a mediating embedded.
variable in the relationship between income (ii) The relational quality of the
inequality and health status (Kawachi, relationship deals with the levels of
Kennedy, Lochner, and Prothrow-Stith, mutual trust and reciprocity.
1997). In a community context social capital
has been defined in terms of levels of (iii) The cognitive quality of the
trust and participation in voluntary relationship reflects the levels of
organizations. shared understanding and goals.

“Social capital consists of the stock of active

connections among people: the trust, mutual
understanding, and shared values and behaviors
that bind the members of human networks and
communities and make cooperative action possible”.

PAGE 21 MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE

Network/Structural Dimension different implications depending on the
structure of the network in which they are
Social capital is relational. By that we mean embedded.
that social capital is embedded in
relationships between people who are For example, Rowley (1997) describes how a
joined in some form of community or stakeholder group that has a single link with
network. a company has more influence on the
company if it also has links with multiple
Companies and stakeholder groups other stakeholders (e.g., suppliers to the
typically have single link relationships with company). Linkages among the
many organizations. Together these stakeholders themselves forestall any use of
constitute a network. Exploring the a “divide and conquer” strategy by the
structure of such networks is known as company. Therefore, fully understanding
“social network analysis”. The social the power and significance of single
network analysis literature contains many company-stakeholder link requires knowing
studies (see Wasserman and Faust, 1994) the structure of the larger network in which
that show how single linkages can have very the link is embedded.

Figure 4: Hypothetical Social Network Structure of a

Company’s Relationships with its Stakeholders

STK 04
STK 06 STK 11
STK 01

CORP.
STK 10
STK 02 STK 07

STK 03 STK 05 STK 08 STK 09

Figure 4 shows a hypothetical social network structure for a company and eleven of its
stakeholders. Note how stakeholder six is socially isolated. All else being equal, that single link
will have less influence on the company than the single link with stakeholder seven.
Stakeholder seven has direct links with three other stakeholders (i.e., 5, 8, 10) and once
removed indirect links with another three (i.e., 3, 9, 11). If the stakeholders were all suppliers,
stakeholder 7 would be in a better position to hold a higher price than stakeholder six.
Generally, the structure of the network in which a relationship is embedded is a good predictor
of the power, influence, and similarity patterns that will be observed in the relationship.

MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE PAGE 22

 Measuring the Business Value of
Stakeholder Relationships

Relational Dimension: Norms, Social Capital in a Systems Context

Trust and Reciprocity
Bridging, Bonding,
The relational dimension of social capital and Boundary Spanning
deals with trust, norms, and reciprocity.
These concepts are all interlinked. This Putnam (2000) popularized the terms
second dimension reinforces the notion that bridging social capital and bonding social
social capital is not the property of an capital to describe two patterns of social
individual or an organization. Individuals capital that appear particularly relevant to
and organizations draw on their social the study of the business value of
capital with others in their networks who relationships with different types of
they trust and who share a sense of stakeholders inside and outside the firm. As
reciprocity. If a member of the network an illustration of the differences between the
ceases to follow established norms, and if two types of social capital, Onyx and Bullen
trust and reciprocity are withdrawn, social (2000) used the term bonding social capital
capital may be depleted or cease to exist. to describe high levels of community
participation and mutual support in rural
Cognitive Dimension: Shared Language communities, but not for those outside the
and Mutual Understanding community or for minorities in the
community.
The cognitive dimension of social capital
deals with interpersonally shared codes, Onyx and Bullen associated bridging social
language, and narratives. Tsai and Ghoshal capital with the inner-urban area in their
(1998) extended the cognitive dimension to study where there was greater tolerance,
include shared goals, values, and vision. In a more ties with members of minorities and
case study, Boutilier and Svendsen (2001) outside communities, and more reliance on
found the cognitive aspects of a company- individual initiative instead of mutual
stakeholder relationship to be more support. Onyx and Bullen's two types of
impor tant to the emergence of social capital can be differentiated as the
interorganizational trust. Before two group's internal cohesiveness (i.e., bonding
organizations can collaborate, they must social capital) versus the group's external
have agreed on common goals and that ties (i.e., bridging social capital).
agreement, in turn, is facilitated by shared
values.

PAGE 23 MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE

Another perspective on this phenomenon Within a business context, Cohen and
appeared in the sustainability literature in Prusak assert (2000) that social capital
the context of individual and organizational creates business value in several ways:
capabilities where the particular ability to
network across and beyond the firm via • Better knowledge sharing, due to
'boundary-spanning' has been recognized established trust relationships, common
as an important 'dynamic capability' for frames of reference and shared goals.
firms dealing with sustainability in a
strategic context (Sharma and Vredenburg, • Lower transaction costs, due to a high
1998, Sharma, 2001). level of trust and a cooperative spirit
(both within the organization and
Social Capital as an Asset and Liability between the organization and its
customers and partners).
Research and commentary on the notion of
social capital has increased significantly in • Low turnover rates, reducing severance
the past five years. Policy makers, costs and hiring and training expenses,
international aid agencies, civil society avoiding discontinuities associated with
organizations and business leaders have frequent personnel changes, and
engaged in a rich debate about the maintaining valuable organizational
definition of social capital and its merits and knowledge.
limitations (Schuller, 2001).
• Greater coherence of action due to
Economist Francis Fukuyama has, for organizational stability and shared
example, linked higher levels of social capital understanding (p. 10)
with increased economic and social
prosperity (Fukuyama, 1999). On a macro While social capital has been seen to be good
level, it is believed that Silicon Valley for business, researchers have more recently
emerged as a thriving economic region at paid attention to the fact that social capital
least partly because of the social capital can also be a liability depending on the
embedded in relationships between situation and whose goals are being
networks of computer specialists associated considered. Trust-based relationships with
with Stanford university (Cohen and Fields, business partners or suppliers can, for
1999). example, provide the firm with resources
while lowering risk s and costs of
opportunism. However, those same close
relationships can also lead to malfeasance. If
managers trust suppliers without adequate
knowledge of their business processes or
trustworthiness, suppliers may take
advantage or may perform poorly.

MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE PAGE 24

 Measuring the Business Value of
Stakeholder Relationships

In a different context, high levels of social capital in a relationship between a manager and
supplier can improve coordination and lower costs for a company. Those same relationships
can create a liability for the company if the manager/employee uses the network to find a
new job.

To add to the complexity, positive stakeholder relationships can be both the cause and
consequence of business success. As an example, as a company builds reputation among its
peers for fair dealing and reliability in keeping promises, that reputation itself becomes a prized
asset useful for sustaining its current alliances and forming future ones. The reputation and the
trust are built upon a form of social capital. The social capital is embedded in the relationships
that the company has established with its business partners.

The research proposed for Phase Two of this project will undoubtedly clarify aspects of how
social capital is created and ‘drawn down' and the links between the two.

PAGE 25 MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE

 Defining Pathways

The proposed stakeholder model provides a framework within which pathways from high
quality stakeholder relationships to enhanced business value might be studied. Briefly, the
relationships can give access to valuable resources and allow the exercise of unique capabilities,
which in turn can be deployed strategically as core competencies to yield competitive
advantage. The “quality” of company-stakeholder relationships can be the measured using
the concept of social capital.

In the following table we summarize what has been learned about the pathways by which
stakeholder relationships affect business success. It is intended to stimulate fruitful discussion
about the design of research that will be conducted during Phase 2.

MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE PAGE 26

Table 1: Illustrative Pathways Between Stakeholder Relationships and Business Value

SOURCE OF COMPETITIVE
ADVANTAGE

DESIRED BUSINESS STAKEHOLDER CONTROLLED

OUTCOMES FOCAL CAPABILITY KEY STAKEHOLDERS RESOURCES

Innovation a) ability of employees to access new • business and supply chain partners, • advanced, rare technical knowledge/
ideas and information • industry, professional and R & D information about competitors,
associations innovations and practices
• universities

Innovation b) ability of employees to work • employees • valued technical information, new

collaboratively with others to create • supply chain partners ideas, knowledge and skills
value for the organization

Geographical Expansion • ability to identify and take advantage • managers • detailed market intelligence from afar
of Markets of new markets • customers • referrals to local resources
• suppliers and business partners (e.g., supplies, employees)
in distant market
• civil society leaders

• ability to establish a strong emotional • customers • positive widespread mention,

Enhancement of Brand Value connection with customers • suppliers word-of-mouth, commentary
• investors
• opinion leaders (media, analysts
etc)

• ability to manage social risk and • managers, employees • timely approval of permits/proposals
Local Community Support/Social
make a valuable contribution • local government and community • favorable interpretations of
License to Operate
to the community leaders regulations
• regulators • grace period during crisis

Sustained Business Partnerships • ability to respond quickly and • supply chain partners • supplies and services obtained
effectively to changing partner • business network partners through very efficient and effective
requirements inter-organizational
transactions

• ability to attract and retain high • prospective employees • highly productive workforce
Recruitment and Retention of Most
Talented Employees quality employees • current employees

Reduced Conflict with Unions • ability to manage relationships with • union members • labour of employees
unions to avoid strikes • union leaders
• managers

Customer Loyalty • ability to anticipate changing • customers • solid revenue floor (i.e., minimum)
customer wants • employees • word-of-mouth promotion
• ability to engage customers in • lifetime value of customers
value creation
 FACTORS NEEDED TO BUILD SOCIAL CAPITAL

POSITIVE OUTCOMES FOR

INTERPERSONAL ORGANIZATIONAL STAKEHOLDERS AND SOCIETY POTENTIAL RISKS

• employees part of active external • organization supports cross • critical mass of industries for regional • loss of employees to competitors
networks boundary information sharing specialization and innovation (e.g., • loss of advantage due to release of
• employees and business partners trust • rewards for risk taking Silicon Valley) sensitive information
each other • hiring from existing professional • stable well paid jobs
• they have developed shared language networks • avoidance of cartels and
and mental models • ethics policy in place and generally monopolies
supported by cultural norms

• cross functional teams encouraged; • organization emphasizes • highly creative workplace/job • group think
time for informal interaction learning/continuous improvement satisfaction • reduction in critical thinking
• employees trust each other and the not hierarchy and silos • innovative products and services • lower productivity
company • rewards given for teamwork and • spin-off jobs, multiplier effects • higher costs
• enough shared language and informal networking
meaning to get conversations started • company puts money/ effort into
training/human capital

• resources and time available for • marginal communities served • conflicts with dissimilar 'partners'
• cross boundary networks created with
non-traditional groups partnership development • companies invest in • lower productivity
• communication systems in place communities • higher costs
• managers have trust building skills,
cultural sensitivity and knowledge • tolerance for risk taking and 'creative
destruction'/disruptive technologies
• cultural sensitivity and knowledge

• company creates right marketing • resources for direct marketing • ethical customer practices • loss of customers who do not share
strategy to connect with value • needs met effectively and with values
• values driven culture
aligned customers good value for money
• organizational commitment to
• behavior matches rhetoric excellence in quality and service

• managers establish networks with • company invests in community • significant community benefits • over-dependency of community
opinion leaders (economic, social and • distortion of internal community
• local hiring policy
• employee practices match rhetoric environmental) economic relations
• manages environmental and other
• behavior of managers builds trust community risks proactively
• shared understanding created • respectful approach to
downsizing/termination

• sustained contact • communication systems in place • ethical business practices • lack of competition allows
• trust • cohesive economic development inefficiency to develop
• trust building routines and practises
• negotiated meaning/ agreements encouraged • avoidance of monopoly
• ethics policy in place and generally
supported by cultural norms

• strong commitment to individual • workforce developed and maintained • workforce more challenging and
• proactive networks created with right
learning and personal development in flexible and productive mode demanding in times of crisis
prospects
of employees
• company and managers build
trust/reputation • motivating compensation, incentives
and rewards

• opportunities created for dialogue • company provides desirable • higher labour costs
• stable jobs in healthy
between management and union compensation and benefits workplace • dependency of firm on unions for
• managers and employees strive for • corporate culture supports open communication
'win-win' outcomes communication, ethical
• shared understanding developed for practises
key terms and concepts

• employee behavior builds trust • company creates networks that

• managers have leadership are valuable for customers • customers are happy with their
skills • company gathers and shares product/service
information of value to all • communities receive benefits
• communication systems in place (e.g., information, cohesion)
(e.g., data bases to contact • company provides jobs
customers, websites)
• resources available for community
building
 Next Steps

The primary purpose of the next phase of this project will be to delineate the “pathways” that
link stakeholder relationships to competitive advantages. In Phase Two, we will conduct case
studies in collaboration with at least six companies that derive prima facie competitive
advantage from their stakeholder relationships in a number of different ways. Indeed, one of
our criteria for choosing the companies will be their likelihood of providing a sample rich with
diverse pathways for creating social capital.

During Phase Two we aim to lay the This approach has four potential major
groundwork for a comprehensive system for advantages:
managing and measuring one of the most
important intangibles in business today, (i) It promises to predict future impacts of
namely, the quality and value of corporate positive stakeholder relationships in
stakeholder relationships. This study will addition to noting past impacts from a
attempt to detail the structural, cognitive, triple bottom line perspective.
and relational dimensions of the
relationships from the viewpoints of both (ii) Because stakeholder relationships all
parties (i.e., the company and the have common features, it allows direct
stakeholder representative). Then we will comparisons of the quality of
explore why the relationship is perceived to relationships across diverse
represent a certain current quality. Finally, it stakeholder groups, companies,
will seek perceptions of the antecedents and and industries.
consequences of excellent versus poor
relations in each stakeholder area. (iii) It provides company executives with
the feedback they need to prioritize
and improve the company's
stakeholder relationships.

(iv) It provides for the possibility of gaining

insight into sources of strategic
competitive advantage that may have
positive implications for firms in
Canada and internationally.

PAGE 29 MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE

 Endnotes

1. Notable here are Schmidheiny's Changing Course (1992), Welford and Gouldson's
Environmental Management and Business Strategy (1993), Hawken's Ecology of Commerce
(1993), and Elkington's Cannibals with Forks (1998).

2. While these results are compelling, one must interpret them with caution. A
commitment to stakeholder engagement, for example, is not a substitute for a sound
business strategy, but rather a powerful complement or element within such a strategy.
Put another way, stakeholder engagement is a necessary, but not sufficient condition for
business success.

3. Welcoming address by George W. Merck at dedication of the Merck Research Laboratory,

25 April, 1933.

4. We assume that a combination of capabilities (usually manifested as recognizable

organizational routines) and competencies (which includes tacit and explicit knowledge
and attitudes) are necessary for a company to achieve competitive advantage (de Wit and
Meyer, 1998). For the purposes of this model, we have included knowledge and attitudes
under a company's human resources, though we recognize there may also be
organization-level competencies..

5. In accounting, “capital” is the resource(s) an owner of a business provides to the

business. For example, the resource might be in the form of equipment or cash. The
value of the resource is the owner's equity in the business. Thus, the word has a fairly
precise meaning in accounting, a meaning intimately connected to the ownership of a
business. In the fundamental accounting equation in which assets equal liabilities plus
owner's equity, capital is classified as neither an asset nor a liability. It appears under
owner's equity.

6. The literature on social contracting is also relevant here. In accessing resources controlled
by stakeholders, companies can be viewed as managing the implicit contracts with those
stakeholders (see Atkinson, Waterhouse, and Wells, 1997)

7. This is essentially the distinction between relational capital and social capital. Relational
capital is an asset embedded in singular relationships. Social capital is an asset embedded
in a 'community' or a network of multiple relationships.

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