Many individuals readily concur that the primary responsibility of business leaders is to enhance the long-term value of their companies. However, this agreement marks the starting point of a debate: What defines value, and how should it be quantified and managed? Should a company's value be optimized by focusing on shareholders, customers, employees, or other stakeholders? In a complex ecosystem where each stakeholder affects the outcomes of others – where engaged employees bolster customer satisfaction, which in turn accelerates profitable growth, and so forth – can any stakeholders be safely neglected?
While numerous high-profile CEOs, including 181 signatories of a 2019 Business Roundtable statement, pledge to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities, and shareholders – few have articulated explicit strategies for achieving this goal. Most seem to rely on intuitive approaches, which are challenging to scale and sustain because they are rooted in leaders' instincts about what matters most, rather than specific criteria that can be codified to ensure consistent decision-making aligned with the company's strategic intent. Furthermore, when leaders who have steered their companies based on intuition depart, they take their intuitive strategies and commitment with them.
The encouraging news is that companies can harness data, which is increasingly accessible and rigorous, to design and implement effective growth strategies that acknowledge the intricate interdependencies among stakeholders, create mutual benefits, and augment the net value generated collectively for all stakeholders. This article will elucidate how to do so and detail how to translate these strategies into organizational objectives while measuring and managing progress towards them.
Improved Measurement Tools
For a long time, the argument against holistic stakeholder strategies was that it's impossible to create value across all performance dimensions without compromising shareholder value. However, a decade's worth of data unequivocally demonstrates otherwise.
In recent years, numerous firms have significantly enhanced the quantity and quality of publicly available data concerning companies' impact on their stakeholders. For example, firms like London Stock Exchange Group/Refinitiv and Institutional Shareholder Services have established standardized methodologies to gauge the level, quality, and sustainability of financial results and shareholder returns. Data on customers has seen improvements through tools like Bain & Company's Net Promoter Scores, J.D. Power's satisfaction ratings, and the American Customer Satisfaction Index. Employee engagement and compensation data are abundant thanks to platforms like Glassdoor and Payscale. Companies such as Sustainalytics and MSCI have compiled extensive data on companies' impact on their communities. With increased access to high-quality data, independent rating agencies like the Drucker Institute, Just Capital, and the Embankment Project for Inclusive Capitalism have begun conducting sophisticated analyses of the intricate relationships among stakeholder interests.
This data unequivocally supports the idea that companies creating the most overall value across all performance dimensions do not do so at the expense of shareholder value. For example, the Drucker Institute's annual rankings, published in partnership with the Wall Street Journal, in conjunction with S&P Global analyses, reveal that a portfolio of the top 200 creators of stakeholder value in the S&P 500 Index consistently delivers total shareholder returns as high as the entire index. Over the past decade, the 100 companies on the S&P/Drucker Institute Corporate Effectiveness Index, composed of S&P 500 firms excelling in employee engagement, customer satisfaction, social responsibility, innovation, and high-quality earnings, yielded average total shareholder returns more than 200 basis points higher per year than those of the S&P 500.
Just Capital's data corroborates this finding. Since 2016, the nonprofit has been rating companies in the Russell 1000 Index based on their impact on workers, communities, shareholders, customers, and the environment. Those ranking in the top 50% in each industry are included in the Just U.S. Large Cap Diversified Index, which has outperformed the Russell 1000 by 6.55% since inception. Some venerable companies in the index, like Procter & Gamble and Merck, consistently create substantial value for multiple stakeholders, making it reasonable to assume that such firms are more likely to generate long-term shareholder value compared to flashier companies plagued by disengaged employees and distrustful customers.
Stakeholder Strategies in Practice
Now, let's delve into how companies can leverage data to craft and execute successful stakeholder strategies, following a three-step process. To illustrate how it works, we'll refer to the experiences of a hypothetical company we'll call "Health Tech," which draws from several firms we've advised over the past five years.
Health Tech, a provider of medical equipment, was initially known for its rapid innovation and expansion of product lines, earning favor on Wall Street. However, in 2018, its CEO, Brian Ward, was taken aback to discover that Health Tech ranked middling among over 800 companies in ratings by both Just Capital and the Drucker Institute. Initially tempted to dismiss these findings as flawed or biased, Ward chose instead to investigate how these ratings were formulated to develop a compelling response.
**Step 1: Make Sense of Outside Perspectives**
Your initial objective is to comprehend how rating agencies perceive your company. Each agency believes that companies should maximize something, although the objective may vary. They establish the end goal, develop criteria for assessing if a firm is achieving it (with varying weights), and then rank all firms accordingly. It's important to acknowledge these assessments, though not necessarily accept them as gospel. Instead, ask if these assessments fairly depict your current performance in comparison to other companies, and if not, what might be flawed or raise questions about your strategy, its future prospects, and necessary adjustments?
Ward embarked on a comparison with Health Tech's primary competitor, referred to as "Global Medical." The rankings revealed a surprising disparity: Health Tech appeared to create significantly less value for its stakeholders compared to Global Medical.
To gain a deeper understanding of these differences, Health Tech set out to calculate a net value creation score for both companies. They employed multiple-criteria analysis tools to convert Drucker Institute performance data into a scale from -100 (severe value extraction) to +100 (extraordinary value creation). The data was then multiplied by the Drucker Institute's weights for each stakeholder group. The individual category scores were subsequently aggregated to determine net value scores. This analysis indicated that while Health Tech generated substantial short-term value for shareholders and customers, it was extracting value from other stakeholders – its workforce, communities, and suppliers. In contrast, Global Medical created significantly more net value across all stakeholders.
**Step 2: Create Your Stakeholder Strategy**
In this phase, it is crucial to move beyond public rankings that treat all stakeholders of all companies equally and rely solely on publicly available data. You must integrate external data with internal insights and analyze the interdependencies among your specific stakeholders. After this, you can formulate your stakeholder strategy, including defining your company's purpose, establishing criteria to measure progress, prioritizing stakeholders, and quantifying value creation for each group.
Health Tech realized that stakeholder priorities and weights should align with the company's objectives and actual experiences. They created a simulation model using a decade of stakeholder data to approximate interdependencies among stakeholders. This model helped identify actions that would maximize net value creation for all stakeholders over time.
By using statistical techniques, such as multivariate regressions, Health Tech determined the weights for each stakeholder group based on three factors: the company's ability to influence the stakeholder's outcomes, the stakeholder's direct impact on business results, and the stakeholder's influence on other stakeholders that subsequently affect business outcomes. For instance,
customers were assigned a weight of 30%, employees 25%, shareholders 20%, suppliers 15%, and communities 10%. Criteria were established for assessing each stakeholder's performance on a scale from -100 to +100. Multiplying the stakeholder's weight by their performance score allowed Health Tech to calculate the value created for each stakeholder and the entire company. They then set minimum acceptable performance scores for each stakeholder group and aimed to increase their proprietary net value creation score from 10 units to 45 units over the next three years.
**Step 3: Create Systems for Sustaining Your Stakeholder Strategy**
To ensure the longevity of your strategy, it must outlast the tenures of individual executives. This involves ensuring the entire organization understands the strategy, everyone's role in it, and how individual goals align with stakeholder objectives. It also necessitates implementing disciplined routines for decision-making and execution.
Health Tech took five key steps to establish a lasting operating model:
1. **Building a stakeholder-focused culture:** The board was educated about the strategy, leading to changes in its composition to better represent all stakeholders. Ward also introduced a separate bonus tied to net value creation for the company's top 250 executives.
2. **Designing structures for cross-stakeholder collaboration:** Experts in behavioral science, technology, and innovation were added to the stakeholder-strategy team, integrating it into the strategy department reporting to the CFO.
3. **Establishing processes for growing stakeholder value:** Business units were required to start their quarterly reviews with descriptions of their value creation trends and targets. Investment proposals were also revamped to project the impact on stakeholders.
4. **Redesigning business processes:** Health Tech identified process improvements to collect feedback on stakeholders' needs and satisfaction, leading to more reliable products and streamlined service processes.
5. **Communicating to attract the right stakeholders:** Health Tech segmented stakeholders based on their importance and value to the company. This approach allowed them to tailor messages and initiatives to different segments.
These efforts paid off over time. Health Tech's rankings improved, and their proprietary net value creation score increased significantly over two years.
A 2019 survey commissioned by Fortune revealed that two-thirds of U.S. adults believe a company's primary objective should be making the world a better place. Adults worldwide, according to the 2022 Edelman Trust Barometer, expect businesses to play a role in shaping balanced policies on a wide range of issues. There is a growing demand for companies to create strategies that benefit all stakeholders, and the evidence suggests that this approach leads to more successful and resilient businesses.
Companies embracing stakeholder strategies reduce the risk of customer defections, employee turnover, loss of shareholder confidence, protests from communities, regulatory challenges, and disruptions from competitors. Additionally, stakeholder-based approaches make leadership roles more meaningful and rewarding, as demonstrated by companies like Costco, Microsoft, and P&G.
In summary, prioritizing stakeholder value creation is not only a noble aspiration but also a pragmatic and strategic choice for businesses in today's complex and interconnected world.