Creating Firm Value through Stakeholder Management and Regulation

The unprecedented increase in the pressure on business organizations to help alleviate the concerns about a deteriorating natural environment and social well-being (Wall and Greiling, 2011) have brought to the foreground a heated discussion on the stakeholder approach to management (Freeman, 1984). This approach prompts executives to consider a multitude of stakeholders' interests. It is often said, however, that decisions which account for stakeholders' interests reduces firm value (Allen et at., 2009). Stakeholders comprise (groups of) individuals who affect and can be affected as organizations pursue their goals (Freeman, 1984). Stakeholder management acknowledges managers must meet their fiduciary obligations to shareholders (Sundaram and Inkpen, 2004); however, it prompts them to meet their commitment to societal interests as well (Freeman et at., 2004). In contrast, non-profit shareholder management pursues a fundamentally "subversive social doctrine" (Friedman, 2002: 133). Stakeholder management explicates the organization's raison d'etre (Freeman, 1984). It depicts a firm's stakeholder network, recommends sound organizational attitudes, structures, and practices, and defines how managers' perceptions affect stakeholder management decisions and firm outcomes (Mitchell et at., 1997). Research signifies that firms' primary stakeholders (such as customers, employees, and suppliers) are essential to value creation; the relationships with secondary stakeholders (such as the government, consumer advocacy groups, the community, and the media) are either loathed or ignored (Easley and Lenox, 2006a). Two theoretical frameworks have informed the stakeholder performance-firm value link: (1) the resource-based view (RBV), which purports that stakeholder management encompasses valuable capabilities that increase firm value (Hart, 1995; Judge and Douglas, 1998), and (2) the institutional theory (IT), which prompts firms to seek legitimacy and social approval (Dimaggio and Powell, 1983; Hoffman, 1999; Hoffman and Ventresca, 2002) for access to vital organizational resources. Institutional pressures for isomorphism (e.g., an IT argument) can also foster firm deviance, entrepreneurship, and improvisation by managers to restore some level of heterogeneity (e.g., an RBV argument) among firms (Heugens and Launder, 2009). Therefore, the RBV and IT explanations of the stakeholder management-firm value link are complementary; however, in the context of firm value creation, these perspectives have not been examined together. Gjolberg (2009) uses this approach to explore the adoption of corporate social responsibility, and Bansal (2005), to assess corporate commitment to sustainable development. Stakeholder management extends beyond regulatory compliance (Delmas and Toffel, 2004; McWilliams and Siegel, 2001), but varies by industry, and Godfrey et al. (2010) call for research that can shed more light on the unique industry characteristics that drive it (p. 337). One characteristic is the level of industry regulation which affects a firms day-to-day operations, from pricing and profits to production and marketing efforts. This study integrates RBV and IT to investigate the stakeholder performance-firm value relationship addressing the following questions: (1) What is the effect of the primary and secondary stakeholder performance on firm value and (2) what is the impact of the level of industry regulation (i.e., acceptable versus significant) on this relationship? Shareholders are a group of stakeholders, however, in this study, the term "stakeholders" means non-shareholder stakeholders. Subsequently, stakeholder performance represents the quality of relationships with constituents other than shareholders (Garsia-Castro et al, 2011). Primary stakeholder performance concerns the firm's relationship with primary stakeholders. For example, to assess the relationship with one such group--employees--strong performance indicators (such as cash and profit sharing and employee involvement) can be weighed against poor performance indicators (such as workforce reductions and retirement benefits underfunding). …