What’s Better—Broad or Focused Stakeholder Management?
Not all corporate social responsibility is created equal, especially for firms focused on implementing it and benefiting from their investment. That’s something Limin Fu, Dirk M. Boehe, and Marc O. Orlitzky have explored in their past scholarship. In this post based on their article, “Broad or Narrow Stakeholder Management? A Signaling Theory Perspective,” published in Business & Society, the trio discuss their current research into determining what is the right mix of good intentions, stakeholder engagement and competitive advantage.
ESG investment is becoming a big deal. ESG stands for environmental, social, and governance practices that improve business ethics. Companies are increasingly incentivized to become socially and environmentally responsible. After several divestments and lawsuits, executives may assume that the more corporate social responsibility (CSR), the better. Indeed, CSR enhances the organization’s reputation, strengthens relations with stakeholders, and may buffer corporate risk (Orlitzky & Benjamin, 2001). The Business Roundtable insists that “every stakeholder is essential. We commit to deliver value to all of them.” Mirroring this statement, Airbnb starts to imagine a “stakeholder world.” This reorientation acknowledges a broad scope of stakeholders being the key to the future success.
But to what extent do investors really appreciate such a broad scope? At least Airbnb’s investors do not seem to embrace this “stakeholder capitalism.” Research also shows that some investors may approach the commitments to a broad scope of stakeholders with skepticism because they “treat CSR as a signal that firms have wasteful intentions and capabilities” (DesJardine, Marti, & Durand, 2020, p. 851). Given this headwind, the big question for managers is: How broad/narrow should their investments in CSR be?
Our findings, based on a large international sample (of 2,042 companies in a panel study over 16 years) indicate that a golden middle way (i.e., moderately broad stakeholder management) may be best from a risk management perspective. Investments in CSR can be considered a signal to stakeholders: The broader it is, the more consistent and credible the company’s signal about CSR. Despite these risk-reducing benefits, attending to a large array of stakeholders incurs accelerating costs. The competitive race for ever larger ESG requires large investments in monitoring, community engagement, and public relations efforts and usually adds a new ESG-related bureaucracy to organizational structures. Many investors may regard this broad stakeholder management as a waste of resources (see also Orlitzky, 2013). The critical test that Airbnb is facing illustrates this well.
However, the other, less costly extreme—narrow or focused stakeholder management—is not ideal, either. Favoring one or few stakeholders over the rest may signal the company’s inconsistent commitments or mere window-dressing (Fu, Boehe, Orlitzky, & Swanson, 2019). If a company only focuses on climate change, green investors may consider such narrow commitment to climate change as appropriate, whereas other investors may criticize the lack of attention to other social or governance issues. The lack of consensus among investors may exacerbate stock price volatility (Orlitzky, 2013).
Consistent with signaling theory, we found a U-shaped relationship between stakeholder management scope and stock price volatility, indicating a goldilocks effect. Furthermore, externally the company’s media environment serves as an amplifier of this signaling effect, elaborated in the paper. Internally, the golden middle way of stakeholder management could be facilitated, for example, through exploiting synergies between R&D capabilities and CSR projects such as eco-innovations (Fu, Boehe, & Orlitzky, 2020).
These findings qualify the contemporary trend toward ever broader CSR because it takes a balanced, cost-benefit view of organizational signaling—at least in terms of stock price volatility. But is the golden middle way also best in terms of other possible organizational and societal outcomes? Overall, executives need to judge with independent, critical minds that pragmatically analyze specific company circumstances rather than follow the crowd.