measuring the business value of stakeholder relationships

Ann C. Svendsen, M.A.

Robert G. Boutilier, Ph.D

Robert M. Abbott, M.A.

David Wheeler, Ph.D

Measuring The

Business Value

Of Stakeholder

Relationships

PART ONE

MEASURING THE BUSINESS VALUE OF STAKEHOLDER RELATIONSHIPS - PART ONE

This research project is a joint initiative between the Centre for Innovation in Managementat Simon Fraser University and the Haub Program in Business and Sustainability, SchulichSchool of Business at York University. It has been sponsored by the Canadian PerformanceReporting Initiative (CPRI) of the Canadian Institute of Chartered Accountants.

The , located in Simon Fraser University'sFaculty of Business, is a partnership of faculty, researchers, business leaders and socialentrepreneurs dedicated to helping business create social as well as shareholder value. CIMconducts research, facilitates collaborative learning and disseminates new ideas in the areas ofnon-financial performance measurement and stakeholder relations.

The is Canada's largest school of management and arecognized leader in the field of sustainability research and education. Within the School, theHaub Program draws upon an interdisciplinary faculty to conduct fundamental and appliedresearch in sustainability with an emphasis on sustainability performance measurement and itscorrelation with competitiveness.

The represents over 66,000professional accountants and 8,500 students in Canada and Bermuda. Its CPRI collaborateswith disciplines and business leaders to provide innovative performance measurement toolsthat address information and reporting needs in areas such as intellectual capital andknowledge management, environmental performance, social and ethical responsibilities,customer satisfaction and shareholder value creation.

Centre for Innovation in Management (CIM)

Schulich School of Business

Canadian Institute of Chartered Accountants (CICA)

RESEARCH DIRECTORS STEERING COMMITTEE

ADVISOR:

Ann Svendsen, Executive Director

David Wheeler, Chair and Director

Beverly Brennan, FCA

Len Brooks, FCA

Mathew Kiernan

David Moore, CA

Lynn Morley, CIA, CGA

Walter Ross, FCA

David Selley, FCA

Alan Willis, CA

John Waterhouse, Ph.D

Centre for Innovation in ManagementSimon Fraser University7200-515 West Hastings StreetVancouver, British Columbia CanadaV6B 5K3Email: [email protected]: cim.sfu.ca

Erivan K. Haub Program in Business andSustainabilityYork University, 4700 Keele StreetToronto, Ontario, Canada M3J 1P3Email:[email protected]: schulich.yorku.ca

Philom Bios Inc.

University of Toronto

Innovest Strategic Value Advisors Inc.

Canadian Institute of Chartered Accountants

Suncor Energy Inc.

Laidlaw Foundation

Canadian Centre for Ethics & Corporate Policy

Alan Willis & Associates

Simon Fraser University


T H E C E N T R E F O R


Introduction 1

Context 2

A Stakeholder View of the Corporation 3

Evidence of the Link Between Quality ofStakeholder Relationships and Business Success 7

How Do Stakeholder RelationshipsCreate Competitive Advantage? 9

A Conceptual Model of the BusinessValue of Stakeholder Relationships 13

Measuring the Business Value ofStakeholder Relationships 19

Defining Pathways 26

Next Steps 29

References 31

Endnotes 30

Table of Contents




This report presents the conclusions of thefirst phase of a CICA sponsored researchproject on the business value of stakeholderrelationships. The research addresses thefollowing questions:

Under what conditions, and through whichpathways, do stakeholder relationshipscreate business value?

What are the essential attributes of anorganization that facilitate the creation ofpositive stakeholder relationships?

What measures are most useful in assessingthe quality of stakeholder relationships?

As a first step toward answering thesequestions, this report includes a review andcritique of academic research on thebusiness value of stakeholder relationships.We also propose a model of the contributionof stakeholder relationships to businessvalue and suggest a provisional set ofmeasures for assessing the quality ofstakeholder relationships drawing on theconcept of social capital.

This report outlines a research framework forexamining the various ‘pathways’ that linkstakeholder relationships to competitiveadvantage. During the next phase of theproject, case studies will be conducted incollaboration with approximately sixCanadian companies who strive to createcompetitive advantage, and ultimatelybusiness value, from their stakeholderrelationships.

“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 areshifting 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, webelieve that relationships between a firm, its employees and other stakeholders constitute animportant and yet undervalued business asset.

PAGE 1

Introduction



Context

Shifting Paradigms and theCriticality of StakeholderRelationships

Contemporary organizations are flatter andcharacterized by more diffuse decisionmaking, accelerated information flows andan emphasis on learning than are theirpredecessors. With this in mind, thecreation and nurturing of relationships mayrival the primacy of human and financialresources. As Charles Leadbeater notedrecently in (1999),corporate-stakeholder relationships matterbecause they “foster[s] the co-operation andrisk-sharing that promote innovation andflexible responses to change in a globaleconomy.” (p. 152)

Although we do not seek to address thecorporate governance implications of thisanalysis, we have little doubt thatfundamental changes occurring around andwithin businesses are leading to aredefinition of how companies mustfunction in order to optimize the creation ofeconomic value.

Living on Thin Air

PAGE 2

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

The Rise of the Network Society

New Rules for the New Economy


Defining Stakeholders

Sustainability and the BusinessValue of Stakeholder Relationships

Secondary stakeholders, on the other hand,have indirect influences on an organizationor are less directly affected by its activities.They include the media and pressuregroups, and others that inhabit the businessand social networks of the organization.

A typology of stakeholders reveals thevariety of interests or “stakes” that groups ofpeople hold in organizations or causes. Thestakes of investors, for example, are based onequity. Other direct stakeholders, includingcustomers, employees, competitors,suppliers, and debt holders, have economicstakes or interests in a company - they candirectly affect or be affected by acorporation's financial success. Labourunions, community groups, environmentalorganizations, human rights organizationsand consumer advocates have a stake in thecompany's impact on people and theenvironment, as well as their economicimpact.

Increasingly, large companies, includingmembers of the World Business Council onSustainable Development are using the term‘sustainability' to reconcile how value iscreated for firms, as well as for theirstakeholders, in economic, social andenvironmental terms. This more inclusiveapproach is based on the premise thatcorporate performance should be assessedagainst a ‘triple bottom line' of economicdevelopment, environmental quality andsocial justice or equity (Elkington, 1997).

A number of business leaders andmanagement theorists have sought to placeenvironmental or sustainable developmentconsiderations in a strategic businesscontext. Research shows that the inclusionof sustainability issues in corporate missionand values statements - particularly in largercompanies - is becoming more common andthere is a parallel increase in measuring,reporting and communicating on suchissues in real time (Wheeler and Elkington,2000).

A Stakeholder View of the Corporation

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

PAGE 3



Companies are increasingly learning theirway into sustainability issues - whether it bethe rapid growth of ethical finance, theincreasing interest of consumers in certifiedsustainable products and services, or thedownward (and occasionally lateral orupward) pressure on supply chain partnersto demonstrate environmental and socialresponsibility (Elkington, 1998; Beloe,2000).

Finally, the magnitude of sustainabilityissues, such as global climate change,population growth, and economicglobalization, means that companies whichare not ready for major instability inmarketplaces and political regimes may seetheir competitive advantage eroded andtheir business success threatened (Hart andMilstein, 1999).

A number of prominent Canadiancompanies have focused on building strongstakeholder relationships as a key element oftheir business strategy. Simply by way ofillustration, consider companies such asUnited Parcel Service, Dupont and Dofasco(employee commitment and loyalty), IKEA,Honda and Toyota (supply cha inengagement), VanCity and Scotiabank

(strong links with communities), and SuncorEnergy, Placer Dome, Weyerhaeuser andShell Canada (relationships with non-g ove r n m e n t a l o r g a n i z a t i o n s a n dcommunities).

Not all companies, however, have adoptedthe sustainabil ity agenda and theassumption that establishing positiverelationships with stakeholders makes goodbusiness as well as ethical sense. Byexamining the levels of corporate responseto stakeholders we can distinguish betweenvarious orientations and better understandthe role that certain kinds of stakeholderrelationships play in the creation of businessand societal value.

In 1975, management theorist Sethideveloped a three tier model for corporatesocial responsibility which included i) socialobligation (a response to legal and marketconstraints), ii) social responsibility(congruent with societal norms), and iii)s o c i a l r e s p o n s i v e n e s s ( a d a p t i v e ,anticipatory and preventive). Sethi's secondtier requires that a company move beyondcompliance and recognize and internalizesocietal expectations. The third tier requiresthat a company develop the competence tonavigate uncertainty, maximize opportunityand engage effectively with externalstakeholders on issues and concerns.

Levels of Corporate Response:Compliance to StakeholderEngagement

PAGE 4



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

avoiding harm in three dimensions of sustainability, for exampleensuring safety of products and workers, avoiding economic losses,corruption and (illegal) environmental damage.

meeting reasonable individual stakeholder expectations in threedimensions, for example, achieving good levels of customersatisfaction, employee morale, returns to investors and reducingenvironmental impacts of operations, products and services.

maximizing economic, social and environmental value, forexample, achieving simultaneous sales and stock value growth,customer and employment growth and eliminating or offsettingenvironmental impacts.

This project is especially concerned with firms operating in the second and third levels ofthe model as it is here that firms may create synergistic and self-reinforcing value in theeconomic, environmental and social dimensions of sustainability. These relationships mayalso 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 activelycreated, and, of course, it is more likely to be put at risk through failures in compliance. But isthere a business case for operating beyond compliance? We believe that the answer to thisquestion is an emphatic yes. Below we set out evidence for a positive correlation betweensocial (stakeholder) responsiveness, engagement and business success.

Level 1 Compliant:

Level 2 Responsive:

Level 3 Engaged:

PAGE 5

A Stakeholder View of the Corporation



Maximizingeconomic, socialand environmentalvalue.

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

Meeting reasonablestakeholderexpectations onvalue.

Avoiding harm inthree dimensionsof sustainabledevelopment.

PAGE 6

ENG

AGED

RESP

ON

SIV

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PLIA

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Evidence of Link Between Quality of StakeholderRelationships and Business Success

Harvard researchers John Kotter and JamesHeskett, in their book

, for example, showedthat over an eleven-year period, sales andemployment growth at stakeholder-oriented companies were significantlyhigher than at shareholder-focusedcompanies. Specifically, stakeholder-oriented companies reported four times thegrowth in sales and eight times the growthin employment. The authors argued thatsuccessful, visionary companies, althoughvery diverse in other ways, put a lowerpriority on maximizing shareholder wealthand greater emphasis on serving theinterests of a broad mix of stakeholders.

Arie de Geus reinforced this finding in hisbook, . Here, theauthor found that stakeholder-orientedcompanies remained in harmony with theirenvironment by keeping “feelers” out andby developing strong relationships. He alsonoted that companies which survived fortwenty five years or longer tended to becohesive, conservative in their financialdealings, and more likely to havedecentralized decision-making.

In a Canadian context, a path-breakingstudy by Max Clarkson, former director ofthe Clarkson Centre for Business Ethics at theUniversity of Toronto, found that firms thatplace a premium on ethics and socialperformance make the most money.Clarkson's research suggests thatcompanies that concentrate exclusively onthe bottom line often make poorerdecisions. He suggested this may bebecause they lack information fromstakeholders and the environment thatwo u l d a l l ow t h e m to a n t i c i p a t eopportunities and solve problems whenthey are small and less costly to remedy(Clarkson, 1991).

A number of studies have used CSRdatabases to correlate measures ofstakeholder relationship quality withfinancial performance (Collins and Porras,1995; Waddock & Graves; 1997, Berman etal, 1999; Roman et al, 1999). Waddock andGraves and Berman et al., used measures forthe quality of relationships with employees,customers, communities, minorities andwomen, and the natural environment thatwere based on CSR ratings derived from the

Corporate Culture andPerformance (1992)

The Living Company (1997)Corporate Social Responsibility(CSR) and Financial Performance

Stakeholder-Focus and Performance

The past thirty years have seen a rapid evolution in understanding about whether and howstakeholder relationships contribute to business success. While research which looks at the linkbetween 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 betweengood stakeholder relationships and business success.

PAGE 7



Kinder, Lydenberg, Domini (KLD) Socratesdatabase. Waddock and Graves (1997)correlated companies' previous year CSRratings with financial performance onmeasures such as return on assets (ROA),return on equity (ROE), and return on sales(ROS). They found quantitative support forthe assertion that there is a connectionbetween how a company treats itsstakeholders and financial performance.

More recently, Berman et al, (1999) tried todetermine which kinds of CSR behaviorswere most strongly tied to ROA. They foundthat CSR behaviors that dealt with thecompany's relationships with employeesand with customers had significant directeffects on ROA. The authors also examinedthe possible mediating role of companystrategy, which was deduced from financialreports as selling intensity, capitalexpenditure efficiency, or capital intensity.Behaviors related to communities,minorities and women, and the naturalenvironment proved to have a mediatingeffect, depending on the company'sstrategy.

Berman et al, speculated that mediatingfactors (e.g., impacts on the naturalenvironment, and thus relationships withenvironmental groups), might not be ofequal importance across industries.Similarly, relationships with minorities, asindexed by board and senior executivediversity, might be more important to

financial performance in more racially andethnically homogeneous geographicregions than in more diverse regions.

Rather more indirectly, correlations betweensocial and environmental performance andstock price performance have beenexamined in the context of indices such asthe Dow Jones Sustainability Index, theInnovest EcoValue Index and the Jantzi SocialIndex. Where these indices include thesocial dimension, their measurement is notbased on the quality of stakeholderrelationships. Rather, they equate socialperformance with observers' subjectiveratings of actual corporate behaviors. In thatrespect, they focus on the outcomes orconsequences of corporate stakeholderrelationship quality. Moreover, thecorrelations are claimed to be thesimultaneous manifestation in threedimensions of performance of a commonfactor, namely, management competence.

We propose to investigate the hypothesisthat the ability to create and sustain highquality stakeholder relationships is anecessary management competence,without which financial success becomesunlikely. In any case, the fact that suchcorrelations exist does provide someempirical evidence for the existence of linksbetween social and financial performance.

PAGE 8



How Do Stakeholder RelationshipsCreate Competitive Advantage?

(i) The failure to establish and nurturestakeholder relationships creates

(ii) Strong relationships with and betweenemployees, and with supply chain andbusiness alliance partners are aprerequisite for .

(iii) A dense network of relationshipsprovides resources and informationnecessary for the development of

(iv) Relationships are the source of a goodand enhanced

, both of which create a myriadof business benefits.

Companies like McDonalds, Mitsubishi,Monsanto, Nestlé, Nike, Shell, and Texacohave suffered damage to their reputationsand sales as a result of public awarenesscampaigns by advocacy stakeholder groups(Schwartz and Gibb, 1999; Wheeler et al,2001a, b). At its most obvious, the Internethas made it possible for activists around theworld to coordinate boycotts againstcorporations with direct impacts on sales,albeit usually by a rather small percentage of

their potential markets. For example,a c t i v i s t s i t e s s u c h a s h t t p : / /www.corporations.org/corplist .html(updated to Oct. 31, 2000) list dozens ofcompanies currently being boycotted.

In addition to sales impacts, there areprobably more damaging long termimplications for shareholder value ofcontroversies such as those suffered by theaforementioned companies. Althoughuncomfortable for companies to discuss andrecord, and difficult for them to quantify,they may include:

• diminution of license to operate incertain markets (e.g., Monsanto and itsgenetically modified products inEurope);

• diminution of 'supplier' or employer ofchoice' status (e.g., Shell's experienceafter the twin shocks of Brent Spar andNigeria);

• diminution of brand equity.

shareholder risk.

innovation

new markets and opportunities.

reputation brandvalue

Risk Reduction

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

PAGE 9



These impacts also result in direct costs ascompanies re-invest in reputation by, forexample:

a) employing extra staff to monitorinternal practices which are underquestion (e.g. Nike's experiencewith human rights controversiesin its supply chain);

b) tying up of senior management timeduring conflicts (e.g., McDonalds'experience in its libel case againstLondon Greenpeace);

c) advertising spending (e.g., Shell'sinvestments in corporate publicrelations post-Brent Spar and Nigeria);

d) excessive compensation claims (e.g.,Texaco's experience in dealing withcharges of systematic racism in its USbusiness practices);

e) costs of physical damage to property(e.g., McDonalds experience duringanti-globalization protests).

In today's highly competitive economy,innovation is of fundamental importance tobusiness survival and success. Researchshows that creating highly innovative workteams is largely dependent on establishingpositive relationships both betweenmanagement and employees, and betweenemployees themselves (Cooke and Wills,1999; Leanna and van Burren, 1999).

Conversely, employees who are motivatedby a common vision and set of goals, trusttheir colleagues, and are linked into diverseand stimulating information networks willtend to be more innovative. In other words,positive relationships are necessary totransform an intangible asset (knowledge)into a tangible one (new processes,products, and services).

Similarly, positive, trust-based relationshipswith suppliers and business partners arefundamental to spurring innovation, as wellas enhancing effectiveness and efficiency. Inthe past, supply chain relationships weregoverned by arms-length, explicit contracts.Considerable management effort was spentmonitoring and controlling the behavior ofsuppliers and when contract terms are notmet, attempting to remedy the problem andresolve conflicts. Today, supply chainrelationships are more likely to be based onimplicit, trust-based contracts that arenegotiated and renegotiated as demandsand opportunities change. This kind ofrelationship requires more flexibility andhence depends on shared knowledge,interaction and trust (Matthews et al, 1998).

Innovation

“No matter how knowledgeable

employees are, if they believe

they are working in a hostile,

low-trust environment they will

hoard information, avoid

collaboration, and display very

low levels of creativity”

(Nahapiet and Ghoshal, 1998).

PAGE 10



Reputation

Research shows that a company's reputationis an important determinant of businesssuccess. A 1997 national study of consumerattitudes by Cone/Roper (1997) found that76 percent of consumers would be likely toswitch to a brand associated with a goodcause. This represents an increase from 63percent in 1993. Other studies show adownturn in the value of a company's stockwhen a company is accused of ethicalwrongdoing.

Technology and the increased power of themedia to influence public opinion havecontributed to a rise in the importance ofreputation. Companies recognize that theirreputation depends on developing crediblerelationships with their employees,customers, nearby residents, and suppliers.This is especially true in a networked worldwhere everything about a company can beknown globally and almost instantaneously.

The influence of reputation is perhaps bestillustrated with reference to the well knowncases of Shell in the UK and Merck in the U.S.On June 10, 1995 Shell UK began towing aused oil rig, the Brent Spar, into the NorthAtlantic to sink it. The disposal was theculmination of four years of study and wasapproved and supported by the regulatorsand, indeed, by British Prime Minister JohnMajor when he was challenged on the pointin Parliament. Greenpeace galvanizedcommunity opposition to the project, andcompelled Shell to halt the project onJune 20.

The cos t s to the company wereconsiderable. Shell estimated that the directcost to change the disposal decision was$200 million (US). Additionally, boycottsand threats against Shell service stations ledto lost sales. Fifty Shell service stations werevandalized, two firebombed, and one rakedwith gunfire. Moreover, employee moraleplummeted.

Within one month of the Shell episode,phosphorous trichloride leaked from Merck& Co. Inc.'s Flint River plant in Albany, NewYork. The leak produced a clearly visibletoxic cloud above the plant. Forty-fivepeople were taken to hospital, 400 workerswere evacuated, and a TV crew broadcastthe event. The community response rangedfrom indifference to laudatory support ofMerck.

The reasons why Merck was given thebenefit of the doubt are twofold. Firstly, thecompany's vision, forged in the 1920s, wasbuilt upon the core values of integrity,contribution to society, responsibility tocustomers and employees, and theunequivocal pursuit of quality andexcellence. As early as 1993, CEO GeorgeMerck articulated the operating philosophyof the company:

“We pledge our every aid that this enterpriseshall merit the faith we have in it … that thosewho hold aloft that torch of Science andKnowledge through these social andeconomic dark ages, shall take new courageand feel their hands supported”.

How Do Stakeholder RelationshipsCreate Competitive Advantage?

PAGE 11



Merck believed that the company operatedwith the consent of the community and thecompany has, over the years, worked veryhard to earn that consent. The companybenefits from what Fombrun (1996) hascalled reputational capital.

The capability to engage essentialstakeholders in positive relationships cangive a firm a competitive advantage (Grant,1998, 177). The advantage might bemanifested in any number of ways indifferent industries and with differentstakeholders. This phenomenon has beenwell demonstrated by Suncor in itsdevelopment of oil sands in Alberta and BPin its securing of a community license tooperate in Alaska (Wheeler et al, 2001a).

In the case of BP, a positive reputation forcommunity involvement was key to itssuccessful bid for oil rights in Alaska.

Spurred on by the rapid rise of the servicesector, the quality of a company'srelationships with its customers began toreceive a great deal of attention in the 1980s.Customer satisfaction measurementmerged with one-to-one (Peppers andRogers, 1993) database marketing tobecome customer relationship value.

In a similar vein, brand loyalty has beenrecognized as a valuable intangible asset.Our growing understanding of the linksamong int ang ib les l i ke customersatisfaction, customer loyalty, and brandloyalty has facilitated estimates of thefinancial value of brands, the annual brand“rankings” by Interbrand for the FinancialTimes being a conspicuous example. The2000 rankings estimated brand values forCoca Cola and Microsoft at US$72.5 and$70.2 billion respectively (Financial Times,2000).

Expanded Markets and Opportunities

Brand Value

In the case of Suncor,

environmental permits were

obtained 18 months ahead of

schedule as a result of strong

community support for its

operations.

PAGE 12



A Conceptual Model of the Business Valueof Stakeholder Relationships

The advantage of taking the RBV as a startingpoint is that:

(i) RBV is established in the mainstreamstrategy literature;

(ii) it provides a link to the language ofresources (including tangible andintangible assets, relationships andcompetencies) and thus to the notionof preserving and building capital:economic, social, and natural;

(iii) it recognizes the inherent value insocial relationships within and beyondthe firm.

Figure 2 summarizes how a firm's resourcesaffect its activities. Productive activityrequires that an organization mobilize itsresources to create various capabilities . Therarity and inimitability of resourcesdetermines the extent to which they confer acompetitive advantage upon the firm.Drawing on that advant age , theorganization takes strategic actions toachieve its goals. Those actions haveimpacts on the company's operations andon society. The organization then assessesthe gaps between the intended and actualimpacts. If the gap is unacceptable, theorganization may seek dif ferent oradditional resources, or may try to developdifferent or better capabilities with theresources it has or can acquire.

4

The Resource Based View (RBV) of the Firm

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

Step 5:ASSESS GAPS

Step 1:LOCATE

Step 2:DEVELOP

Step 3:CHOOSE/DEFINE

Step 4:IMPLEMENT

STRATEGICACTION

COMPETITIVEADVANTAGE

RESOURCES

CAPABILITIES

Figure 2: The Resource-Based View (RBV) of the FirmSource: Adapted from Grant, R.M. (1998, 180)

PAGE 13



Stakeholder Relationships andAccess to Resources

Differences Across Industriesand Life Cycle Stage

Historically, competitive advantage wasthought to be the product of economicfactors such as price, quality, and service.However, when products becomecommodities, economic factors becomemore or less equal across competitors andprice, quality and service are no longer thedifferentiators or drivers of advantage.Advantage is more likely to accrue from theleveraging of intangible assets such as brandawareness, which encompasses bothemotional and cognitive characteristics likeproduct quality perceptions, lifestyleassociations, or perceived environmental orsocial responsibility of the firm and itsproducts.

Thus, the ability to engage stakeholderspositively is a vital organizational capabilityin todays information based economy. Itsimportance seems to be related to the factthat these relationships enable the flow anduse of other resources like financial capital,intellectual capital, and human capital.

Stakeholders act as gatekeepers to resourcesthat firms need. For example, customersdecide whether or not to give the companymoney, communities decide whether or notto let a company occupy a location in theirarea, and employees decide whether or notto share their innovative ideas with theiremployer or defect to a competitor.Likewise, poor stakeholder relationshipsmake stakeholder controlled resources lessaccessible.

Depicting resources as only accessiblethrough stakeholders might be overstatingthe case. However, if employees arestakeholders, then even resources that thecompany owns cannot be accessed withoutthe cooperation of those stakeholders. Atthe very least, stakeholders can increase ordecrease the cost and speed of access toresources. In that sense, it is not anoverstatement to call them gatekeepers ofresources.

The literature reminds us that differentindustries will derive different businessbenefits from stakeholder relationships. Forexample, companies involved in naturalresource extraction (e.g., mining, forestry)have significant impacts on the environmentand therefore must work especially hard atmaintaining their social license to operate.They must pay more attention to theirrelationships with environmental non-government organizations (ENGOs) andregulators. High tech companies havedifferent preoccupations and must ensureaccess to highly trained and motivatedworkers. Under normal economic

The quality of a company's

relationships with its

stakeholders can be seen as

an indicator of the

organization's capability to

access valuable resources.

PAGE 14



conditions, technology companies placeless emphasis on relationships withcommunities compared with naturalresource companies. Biotechnology firmsworking on genetically modified food on theother hand may be concerned with multiplestakeholder relationships - with employees,consumers, and ENGOs, as they need toprotect their access to social license tooperate as well as to ensure the creativityand motivation of highly trained employees.

The stage of development of a business canalso affect the business value of variousstakeholder relationship. Startup companieswith no revenues depend on their initialinvestors for money, advice, contacts, ande n c o u r a g e m e n t ( S t e i n e r, 2 0 0 0 ) .Established high tech companies, on theother hand, may find that relationships withbusiness partners and sub-contractors takeon proportionately greater importance.

To illustrate the model, lets consider howtwo hypothetical bakers access variousresources in unique ways to createcompetitive advantage.

The first baker has the capability to bakebread according to a unique award winningbread recipe. The second baker hasdeveloped strong relationships with themiller, the water supplier, the yeastproducer, and the equipment maker, as wellas the banker, the accountant, the landlord,

the local merchants' association, andcustomers. Both of these bakers has a set ofunique capabilities that confer competitiveadvantages. Those advantages, however,must be used strategically in order to createbusiness value.

The capabilities of our two hypotheticalbakers ref lect their strengths andweaknesses as they would be conceived in astrategic planning SWOT analysis (i.e.,strength, weaknesses, opportunities,threats). The opportunities and threatspresented by the external environment arethe same for both of them, but theircapabilities give them differential abilities torespond. The baker with the betterrelationships with the banker can respondbetter to changing interest rates while theone with the better recipe can respondbetter to a consumer trend towardsdeveloping connoisseur tastes in bread. Thestrategic action step of the RBV model refersto the actions that these business peopletake on the basis of whatever SWOT analysisthey have formally or informally done.

Notice that the two bakers in our example donot have an equal likelihood of learningabout the opportunities and threats in theirexternal environment. The one with thebetter relationships with the employees andthe banker is better positioned to receiveinformation from those sources about bothchanges in consumer tastes and changes ininterest rates. Thus, this baker has anadditional capability-the ability to detectopportunities and threats before otherbakers.

Bakers do not Prosper by BreadAlone: Relationships as a Sourceof Competitive Advantage


PAGE 15



The above example with the two bakers issatisfactory for illustrating how the RBVmodel might elucidate the linkages betweenstakeholder relationships and businessvalue, but it does not prove that suchlinkages actually exist. Moreover, it does noteven begin to identify what all the possiblelinking pathways might be. For that,empirical research is needed.

While the resource based view of the firmallows us to better understand howstakeholder relationships can restrict orfacilitate a company's access to varioustangible and intangible resources, it doesnot explicitly address how a stakeholderorientation is ref lected in variousmanagement functions, nor how suchfunctions create value for an organization.The proposed stakeholder model (see Figure3) is an adaptation of the PerformanceMonitoring and Management Systemdeveloped by Waterhouse and Svendsen(1998). The model is based on fourinterrelated ideas.

(i) Corporations exist in a network ofi n t e r d e p e n d e n t s t a k e h o l d e rrelationships These relationships aresymbiotic, evolve over time and aremutually defined (Svendsen, 1998).

(ii) A company must have the ability to'sense and respond' to a changingenvironment (Haeckel, 1999).

This gives them the ability to filter out“noise” in the environment and theability to make decisions that will ensurethe fiscal well-being of the corporationand the relationships upon which theydepend.

(iii) Stakeholder oriented companiesdepend on multi-layered informationand per formance measurementsystems. Such systems allow thecompany to constantly improveorganizational effectiveness and adaptcorporate strategy to changingcircumstances. Such systems and theiroutputs also help to satisfy theaccountability demands of internal andexternal stakeholders and can help acompany diagnose relationshipproblems early and take steps toimprove those relationships.

Stakeholders and BusinessValue Creation

The ability to understand and satisfy the

expectations of multiple stakeholders

who have diverging and sometimes

conflicting interests, is an essential

corporate competency.

PAGE 16



While performance measurementsystems have traditionally beendesigned and used by organizations forcontrol purposes, we view informationand measurement systems as vehiclesf o r f e e d b a c k , l e a r n i n g a n daccountability. Given that a companyd e p e n d s o n i t s s t a k e h o l d e rrelationships for its continued survival,information and measurement systemst h a t i m p r o v e o r g a n i z a t i o n a leffectiveness and build trust are ofcritical importance.

(iv) There are different levels or orientationstoward stakeholders and relationshipbuilding. Some organizations may viewstakeholders as important because theyare legally obligated to do so. Othersmay feel a sense of social responsibilitytowards stakeholder groups who areaffected by corporate activities. Stillo t h e r s m a y s e e s t a k e h o l d e rrelationships as essential for creatingvalue for the company, stakeholders andsociety as a whole. We believe ourmodel is most powerful when appliedto organizations who are operatingwithin a sustainability (e.g. triplebottom line) framework and who arefocused on maximizing economic,social and environmental value.

In this section we describe and explain themodel illustrated in Figure 3. We begin withcorporate strategy which defines what acompany plans to do to achieve its businessgoals. Once a company has established itsgoals, it identifies the stakeholders who havethe greatest capacity to influence theachievement of those goals. It chooses a setof strategies and processes that reflect andsupport its web of stakeholder relationships.

To ensure that its strategy will meet theexpectat ions and requirements ofstakeholders, the company createsopportunities for stakeholder dialogue.Through face to face and technology-enabled stakeholder conversations, thecompany can refine strategies, adaptbusiness processes and identify newopportunities to work collaboratively withstakeholders for mutual benefit. An examplemight be a automobile manufacturer thatinvites interested customers to visit itswebsite to identify new design features, or aforest company that meets regularly withleaders of international environmentalorganizations to discuss emerging issuesand to identify forest managementapproaches which are acceptable to thesegroups.

The company then establishes businessprocesses that ref lect stakeholderexpectations and requirements. This is animportant managerial task because suchprocesses, once established, are hard tochange while stakeholder expectations andthe environmental context are in constant

The Model


PAGE 17

Stakeholder oriented

companies use their

relationships to systematically

search out, capture and

interpret clues from the

environment in real time.T H E C E N T R E F O R


flux. Also, the capacity of corporatemanagement to simultaneously considerthe interests and expectations of multiplestakeholders while dealing with the harshrealities of global competition and cost-cutting is extremely difficult.

Measurement systems can help managersdeal with a complex and rapidly changingenvironment and understand and respondto shifts in stakeholder and publicexpectations. While financial measures arewell developed, non-financial performancemeasures and especially those dealing withcorporate social /stakeholder performance

are in their infancy. Accordingly, the focus inthis study is on measuring the level of socialc a p i t a l i n c o r p o r a t e - s t a k e h o l d e rrelationships.

Once measurement systems are in place anddata has been collected, the company candetermine how its activities are affectingstakeholders and also whether it is meetingstakeholder expectations. By considering itsf inancial, environmental and socialperformance in an integrated fashion, acompany can adapt its strategy to improvecorporate performance and maximizestakeholder benefits.

CAPABILITIES ANDCOMPETENCIES

STRATEGY

PERFORMANCEDATA/RESULTS

STAKEHOLDERRELATIONSHIPS

BUSINESSPROCESSES

MEASUREMENTSYSTEMS

Who are ourkey stakeholders?Why is each groupstrategicallyimportant?

What do we andour stakeholdersexpect to giveand receive?

Do we havedialogue/engagementprocesses in place?

How can wework with ourstakeholders formutual benefit?

Are we meetingstakeholderexpectations?

How areour activitiesaffecting ourstakeholders?

What systems,structures andpolicies arerequired?

What measuresdo we needto track socialperformance?

How should weadapt our strategyto account forperformance results?

How should weadapt our strategyto maximizestakeholderbenefits?

Figure 3: Stakeholder Model of Business Value Creation

PAGE 18



Measuring the Business Value ofStakeholder Relationships

Interest in non-financial measures ofperformance is growing because it isrecognized that intangible assets such ashuman capital (e.g., employee knowledgea n d s k i l l s ) ; n a t u ra l c a p i t a l , a n dorganizational or structural capital arebecoming more important to wealthcreation (CICA, 1996; AICPA, 1994).Traditional financial performance measuresfail to capture the wealth creation effects ofintangibles in a timely fashion and do notprovide suf f ic ient information formanagement to create value from thoseintangibles.

A recent CICA research report suggests thatnon-financial performance measures (whichwould include measures of the quality ofstakeholder relationships) are usefulbecause they (1) improve decision-makingby helping managers understand andpredict the links between activities andoutcomes; (2) enhance the ability ofcompanies to manage stakeholderrelationships and issues; and (3) improvecorporate accountability (Waterhouse &Svendsen, 1998).

Within the nascent corporate socialperformance field, there are two broad typesof measures under development. The firstcategory of measures focuses on the socialimpacts or “outcomes” of corporate activity.The second category of measures focuses onthe quality of relationships that existbetween a company and its stakeholders.

Leading and Lagging Measures ofSocial Performance

Non-Financial Performance Measures

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

There is 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.

PAGE 19



Common “impact” indicators include acompany employee safety record, reports ofhuman rights violations and the amount ofmoney a company donates to communitygroups. The Global Reporting Initiative (GRI)and the Task Force on Churches andCorporate Responsibility Benchmarks areexamples of impact oriented socialperformance measures.

Companies have begun to measure andreport on their social impacts, at least in partbecause of accountability pressure fromstakeholders. These types of ‘outcome'indicators have the advantage of beingobservable and verifiable. For example,companies can report on the number ofwomen in senior management, or the exactamount spent on community projects in agiven year. One disadvantage of outcomemeasures is that they are retrospective. Theinformation does not help managersunderstand and respond to whatstakeholders want and expect.

A second category of measures focuses“upstream” on the quality of relationships.Often these measures are perceptual (e.g.employee trust and satisfaction). Oneadvantage of these kinds of measures is thatthey focus attention on the drivers ofperformance and can therefore be used topredict outcomes. In the Balanced Scorecardframework, leading measures like customersatisfaction and spending on employeelearning and growth are treated aspredictors of “lagging” measures like salesand return on equity.

The “perceptual as leading/impact aslagging” premise has become well acceptedin marketing and human resources.Companies routinely measure the quality ofrelationships with customers, employees,and citizens through market research,employee surveys and public opinion polls.Satisfaction measurement with employeeshas evolved into a vast array of standardizedtests and specialized surveys. Reputationand brand studies (Fombrun, 1996) are alsobecoming more prevalent.

Quality of relationship or perceptualmeasures have yet to be developed in manystakeholder areas (e.g., relationships withenvironmental groups, regulators,suppliers, communities). Nor is there arobust theory to account for the synergisticeffects of high quality relationships withmultiple stakeholders on f inancialperformance. However, the World BusinessCouncil for Sustainable Development(WBCSD) and a number of their memberfirms identified information about thequality of stakeholder relationships as a key,but under developed, area of socialperformance measurement and reporting(World Business Council on SustainableDevelopment, 2000).

PAGE 20




Social Capital: A Measure ofRelationship Quality

Definition of Social Capital

We propose to operationalize themeasurement of relationship quality usingthe concept of social capital.

Social capital has generally been defined asthe relationships among people thatfacilitate collective action and access toresources. Jacobs (1965) used the concept inthe context of neighborhoods functioningas communities. Coleman (1988) discussedsocial capital's impor tance in themobilization of human capital. Putnam(1995) and Fukuyama (1995) have drawnpopular attention to the concept in thecontext of declining public participation involuntary organizations and increasingmistrust of formal institutions in the UnitedStates. The concept has also gained currencyin the public health area as a mediatingvariable in the relationship between incomeinequality and health status (Kawachi,Kennedy, Lochner, and Prothrow-Stith,1997). In a community context social capitalhas been defined in terms of levels oftrust and participation in voluntaryorganizations.

It has only been in the past several years thatresearchers have turned their attention tostudying social capital within organizationsa n d s p e c i f i c a l l y w i t h i n b u s i n e s sorganizations. For the purposes of this studywe adopt the definition proposed by DonCohen and Laurence Prusak, in their recentbook,

:

This definition supports the view within themanagement literature (Nahapiet &Ghoshal, 1998; Tsai & Ghoshal, 1998;Cohen and Prusak, 2000 ) that social capitalhas the following three key dimensions.

(i) The structural quality of a relationshiprefers to the structure of the socialnetwork in which the relationship isembedded.

(ii) The relational quality of therelationship deals with the levels ofmutual trust and reciprocity.

(iii) The cognitive quality of therelationship reflects the levels ofshared understanding and goals.

In Good Company: How Social CapitalMakes Organizations Work (2000)

PAGE 21

“Social capital consists of the stock of activeconnections among people: the trust, mutual

understanding, and shared values and behaviorsthat bind the members of human networks and

communities and make cooperative action possible”.



Network/Structural Dimension

Social capital is relational. By that we meanthat social capital is embedded inrelationships between people who arejoined in some form of community ornetwork.

Companies and stakeholder groupstypically have single link relationships withmany organizations. Together theseconstitute a network. Exploring thestructure of such networks is known as“social network analysis”. The socialnetwork analysis literature contains manystudies (see Wasserman and Faust, 1994)that show how single linkages can have very

different implications depending on thestructure of the network in which they areembedded.

For example, Rowley (1997) describes how astakeholder group that has a single link witha company has more influence on thecompany if it also has links with multipleother stakeholders (e.g., suppliers to thecompany) . L inkages among thestakeholders themselves forestall any use ofa “divide and conquer” strategy by thecompany. Therefore, fully understandingthe power and significance of singlecompany-stakeholder link requires knowingthe structure of the larger network in whichthe link is embedded.

PAGE 22

Figure 4 shows a hypothetical social network structure for a company and eleven of itsstakeholders. Note how stakeholder six is socially isolated. All else being equal, that single linkwill 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 onceremoved 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 predictorof the power, influence, and similarity patterns that will be observed in the relationship.

CORP.

STK 07STK 10

STK 09STK 08STK 05

STK 06 STK 11STK 04

STK 01

STK 02

STK 03

Figure 4: Hypothetical Social Network Structure of aCompany’s Relationships with its Stakeholders




R e l a t i o n a l D i m e n s i o n : N o r m s ,Trust and Reciprocity

Cognitive Dimension: Shared Languageand Mutual Understanding

Bridging, Bonding,and Boundary Spanning

Social Capital in a Systems Context

The relational dimension of social capitaldeals with trust, norms, and reciprocity.These concepts are all interlinked. Thissecond dimension reinforces the notion thatsocial capital is not the property of anindividual or an organization. Individualsand organizations draw on their socialcapital with others in their networks whothey trust and who share a sense ofreciprocity. If a member of the networkceases to follow established norms, and iftrust and reciprocity are withdrawn, socialcapital may be depleted or cease to exist.

The cognitive dimension of social capitaldeals with interpersonally shared codes,language, and narratives. Tsai and Ghoshal(1998) extended the cognitive dimension toinclude shared goals, values, and vision. In acase study, Boutilier and Svendsen (2001)found the cognitive aspects of a company-stakeholder relationship to be morei m p o r t a n t t o t h e e m e r g e n c e o finterorganizational trust. Before twoorganizations can collaborate, they musthave agreed on common goals and thatagreement, in turn, is facilitated by sharedvalues.

Putnam (2000) popularized the termsbridging social capital and bonding socialcapital to describe two patterns of socialcapital that appear particularly relevant tothe study of the business value ofrelationships with different types ofstakeholders inside and outside the firm. Asan illustration of the differences between thetwo types of social capital, Onyx and Bullen(2000) used the term bonding social capitalto describe high levels of communityparticipation and mutual support in ruralcommunities, but not for those outside thecommunity or for minorities in thecommunity.

Onyx and Bullen associated bridging socialcapital with the inner-urban area in theirstudy where there was greater tolerance,more ties with members of minorities andoutside communities, and more reliance onindividual initiative instead of mutualsupport. Onyx and Bullen's two types ofsocial capital can be differentiated as thegroup's internal cohesiveness (i.e., bondingsocial capital) versus the group's externalties (i.e., bridging social capital).

PAGE 23



Another perspective on this phenomenonappeared in the sustainability literature inthe context of individual and organizationalcapabilities where the particular ability tonetwork across and beyond the firm via'boundary-spanning' has been recognizedas an important 'dynamic capability' forfirms dealing with sustainability in astrategic context (Sharma and Vredenburg,1998, Sharma, 2001).

Research and commentary on the notion ofsocial capital has increased significantly inthe past five years. Policy makers,international aid agencies, civil societyorganizations and business leaders haveengaged in a rich debate about thedefinition of social capital and its merits andlimitations (Schuller, 2001).

Economist Francis Fukuyama has, forexample, linked higher levels of social capitalwith increased economic and socialprosperity (Fukuyama, 1999). On a macrolevel, it is believed that Silicon Valleyemerged as a thriving economic region atleast partly because of the social capitalembedded in relationships betweennetworks of computer specialists associatedwith Stanford university (Cohen and Fields,1999).

Within a business context, Cohen andPrusak assert (2000) that social capitalcreates business value in several ways:

• Better knowledge sharing, due toestablished trust relationships, commonframes of reference and shared goals.

• Lower transaction costs, due to a highlevel of trust and a cooperative spirit(both within the organization andbetween the organization and itscustomers and partners).

• Low turnover rates, reducing severancecosts and hiring and training expenses,avoiding discontinuities associated withfrequent personnel changes, andmaintaining valuable organizationalknowledge.

• Greater coherence of action due toorganizational stability and sharedunderstanding (p. 10)

While social capital has been seen to be goodfor business, researchers have more recentlypaid attention to the fact that social capitalcan also be a liability depending on thesituation and whose goals are beingconsidered. Trust-based relationships withbusiness partners or suppliers can, forexample, provide the firm with resourceswhile lowering risks and costs ofopportunism. However, those same closerelationships can also lead to malfeasance. Ifmanagers trust suppliers without adequateknowledge of their business processes ortrustworthiness, suppliers may takeadvantage or may perform poorly.

Social Capital as an Asset and Liability

PAGE 24




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

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

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

PAGE 25



The proposed stakeholder model provides a framework within which pathways from highquality stakeholder relationships to enhanced business value might be studied. Briefly, therelationships 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 competitiveadvantage. The “quality” of company-stakeholder relationships can be the measured usingthe concept of social capital.

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

Defining Pathways

PAGE 26


STAKEHOLDER CONTROLLEDRESOURCESKEY STAKEHOLDERSFOCAL CAPABILITY

DESIRED BUSINESSOUTCOMES

• advanced, rare technical knowledge/information about competitors,innovations and practices

• valued technical information, newideas, knowledge and skills

• detailed market intelligence from afar• referrals to local resources

(e.g., supplies, employees)in distant market

• positive widespread mention,word-of-mouth, commentary

• timely approval of permits/proposals• favorable interpretations of

regulations• grace period during crisis

• supplies and services obtainedthrough very efficient and effectiveinter-organizationaltransactions

• highly productive workforce

• labour of employees

• solid revenue floor (i.e., minimum)• word-of-mouth promotion• lifetime value of customers

• business and supply chain partners,• industry, professional and R & D

associations• universities

• employees

• supply chain partners

• managers

• customers

• suppliers and business partners

• civil society leaders

• customers• suppliers• investors• opinion leaders (media, analysts

etc)

• managers, employees

• local government and communityleaders

• regulators

• supply chain partners

• business network partners

• prospective employees

• current employees

• union members

• union leaders

• managers

• customers

• employees

a) ability of employees to access newideas and information

b) ability of employees to workcollaboratively with others to createvalue for the organization

• ability to identify and take advantageof new markets

• ability to establish a strong emotionalconnection with customers

• ability to manage social risk andmake a valuable contributionto the community

• ability to respond quickly andeffectively to changing partnerrequirements

• ability to attract and retain highquality employees

• ability to manage relationships withunions to avoid strikes

• ability to anticipate changingcustomer wants

• ability to engage customers invalue creation

Innovation

Innovation

Geographical Expansionof Markets

Enhancement of Brand Value

Local Community Support/SocialLicense to Operate

Sustained Business Partnerships

Recruitment and Retention of MostTalented Employees

Reduced Conflict with Unions

Customer Loyalty

SOURCE OF COMPETITIVEADVANTAGE

Table 1: Illustrative Pathways Between Stakeholder Relationships and Business Value

• organization supports crossboundary information sharing

• rewards for risk taking

• hiring from existing professionalnetworks

• ethics policy in place and generallysupported by cultural norms

• organization emphasizeslearning/continuous improvementnot hierarchy and silos

• rewards given for teamwork andinformal networking

• company puts money/ effort intotraining/human capital

• resources and time available forpartnership development

• communication systems in place

• tolerance for risk taking and 'creativedestruction'/disruptive technologies

• cultural sensitivity and knowledge

• resources for direct marketing

• values driven culture

• organizational commitment toexcellence in quality and service

• company invests in community

• local hiring policy

• manages environmental and othercommunity risks proactively

• respectful approach todownsizing/termination

• communication systems in place

• trust building routines and practisesencouraged

• ethics policy in place and generallysupported by cultural norms

• strong commitment to individuallearning and personal developmentof employees

• motivating compensation, incentivesand rewards

• company provides desirablecompensation and benefits

• corporate culture supports opencommunication, ethicalpractises

• company creates networks thatare valuable for customers

• company gathers and sharesinformation of value to all

• communication systems in place(e.g., data bases to contactcustomers, websites)

• resources available for communitybuilding

POSITIVE OUTCOMES FORSTAKEHOLDERS AND SOCIETYORGANIZATIONAL POTENTIAL RISKSINTERPERSONAL

• employees part of active externalnetworks

• employees and business partners trusteach other

• they have developed shared languageand mental models

• cross functional teams encouraged;time for informal interaction

• employees trust each other and thecompany

• enough shared language andmeaning to get conversations started

• cross boundary networks created withnon-traditional groups

• managers have trust building skills,cultural sensitivity and knowledge

• company creates right marketingstrategy to connect with valuealigned customers

• behavior matches rhetoric

• managers establish networks withopinion leaders

• employee practices match rhetoric

• behavior of managers builds trust

• shared understanding created

• sustained contact

• trust

• negotiated meaning/ agreements

• proactive networks created with rightprospects

• company and managers buildtrust/reputation

• opportunities created for dialoguebetween management and union

• managers and employees strive for'win-win' outcomes

• shared understanding developed forkey terms and concepts

• employee behavior builds trust

• managers have leadershipskills

• critical mass of industries for regionalspecialization and innovation (e.g.,Silicon Valley)

• stable well paid jobs

• avoidance of cartels andmonopolies

• highly creative workplace/jobsatisfaction

• innovative products and services

• spin-off jobs, multiplier effects

• marginal communities served

• companies invest incommunities

• ethical customer practices

• needs met effectively and withgood value for money

• significant community benefits(economic, social andenvironmental)

• ethical business practices

• cohesive economic development

• avoidance of monopoly

• workforce developed and maintainedin flexible and productive mode

• stable jobs in healthyworkplace

• customers are happy with theirproduct/service

• communities receive benefits(e.g., information, cohesion)

• company provides jobs

• loss of employees to competitors

• loss of advantage due to release ofsensitive information

• group think

• reduction in critical thinking

• lower productivity

• higher costs

• conflicts with dissimilar 'partners'

• lower productivity

• higher costs

• loss of customers who do not sharevalues

• over-dependency of community

• distortion of internal communityeconomic relations

• lack of competition allowsinefficiency to develop

• workforce more challenging anddemanding in times of crisis

• higher labour costs

• dependency of firm on unions forcommunication

FACTORS NEEDED TO BUILD SOCIAL CAPITAL


During Phase Two we aim to lay thegroundwork for a comprehensive system formanaging and measuring one of the mostimportant intangibles in business today,namely, the quality and value of corporatestakeholder relationships. This study willattempt to detail the structural, cognitive,and relat ional d imensions of therelationships from the viewpoints of bothparties (i.e., the company and thestakeholder representative). Then we willexplore why the relationship is perceived torepresent a certain current quality. Finally, itwill seek perceptions of the antecedents andconsequences of excellent versus poorrelations in each stakeholder area.

This approach has four potential majoradvantages:

(i) It promises to predict future impacts ofpositive stakeholder relationships inaddition to noting past impacts from atriple bottom line perspective.

(ii) Because stakeholder relationships allhave common features, it allows directcomparisons of the quality ofrelationships across diversestakeholder groups, companies,and industries.

(iii) It provides company executives withthe feedback they need to prioritizeand improve the company'sstakeholder relationships.

(iv) It provides for the possibility of gaininginsight into sources of strategiccompetitive advantage that may havepositive implications for firms inCanada and internationally.

Next Steps

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

PAGE 29



Endnotes

PAGE 30

1. Notable here are Schmidheiny's (1992), Welford and Gouldson's(1993), Hawken's

(1993), and Elkington's (1998).

2. While these results are compelling, one must interpret them with caution. Acommitment to stakeholder engagement, for example, is not a substitute for a soundbusiness strategy, but rather a powerful complement or element within such a strategy.Put another way, stakeholder engagement is a necessary, but not sufficient condition forbusiness 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 recognizableorganizational routines) and competencies (which includes tacit and explicit knowledgeand attitudes) are necessary for a company to achieve competitive advantage (de Wit andMeyer, 1998). For the purposes of this model, we have included knowledge and attitudesunder a company's human resources, though we recognize there may also beorganization-level competencies..

5. In accounting, “capital” is the resource(s) an owner of a business provides to thebusiness. For example, the resource might be in the form of equipment or cash. Thevalue of the resource is the owner's equity in the business. Thus, the word has a fairlyprecise meaning in accounting, a meaning intimately connected to the ownership of abusiness. In the fundamental accounting equation in which assets equal liabilities plusowner's equity, capital is classified as neither an asset nor a liability. It appears underowner's equity.

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

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

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Cannibals with Forks



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measuring the business value of stakeholder relationships

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