In Good Times but Not in Bad: The Role of Managerial Discretion in Moderating the Stakeholder Management and Financial Performance Relationship

AuthorAli M. Shahzad,Mark P. Sharfman,Matthew A. Rutherford
Date01 December 2016
Published date01 December 2016
In Good Times but Not in Bad:
The Role of Managerial
Discretion in Moderating the
Stakeholder Management and
Financial Performance
We examine the role of managers in controlling the posi-
tive impact of stakeholder management (SM) on firm
financial performance (FP) in the long term. We develop
and test competing hypotheses on whether managers act
as “good citizens” or engage in “self-dealing” when allowed
greater discretion. We test our assertions using dynamic
panel data analysis of a sample of 806 U.S. public firms
operating in 34 industries over 5 years (2005–2009). Our
results indicate a nuanced influence of managerial discre-
tion contexts on the SM-FP relationship. We infer that giv-
en more latitude in decision making, as long as the “going
is good” managers act as good citizens, but otherwise they
revert to managerial self-dealing. In light of our results,
firms designing governance mechanisms to encourage
Ali M. Shahzad is Assistant Professor at the Department of Management, James Madison Uni-
versity, Harrisonburg, VA, 22801. E-mail: Matthew A. Rutherford. E-
mail: Mark P. Sharfman. E-mail:
C2016 W. Michael Hoffman Center for Business Ethics at Bentley University. Published by
Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington
Road, Oxford OX4 2DQ, UK.
Business and Society Review 121:4 497–528
managers to balance the needs of both shareholders and
stakeholders must remain cognizant of contextual
Prior research suggests that managing relationships with pri-
mary stakeholders such as customers, suppliers, employ-
ees, local government, and communities (Clarkson 1995) is
key to eliciting the enhanced co-operation of these groups toward
the fulfillment of organizational goals (Harrison et al. 2010).
Indeed, extensive prior research confirms that effective stakeholder
management (SM) is not only the right thing to do (Wood 1991),
but from an instrumental perspective, also may be linked with
superior financial performance (FP) (Berman et al. 1999; Hillman
and Keim 2001).
An important assumption inherent within these arguments is
that when managers are given the opportunity for their decisions
to prevail, their actions allow the benefits from SM to enhance
shareholder value. Challenging this assumption, a contrasting SM
perspective is offered by the agency theory, or shareholder, per-
spective of public corporations. According to this view, managers
are assumed to be rational self-interested individuals whose per-
sonal goals may be at odds with those of both shareholders and
stakeholders (Donaldson and Lorsch 1983). Given the opportunity
to exercise their will, managers are considered likely to engage in
self-dealing. For example, managers may reap personal gains by
using the benefits of SM to placate some stakeholder groups and
entrench themselves while continuing to destroy potential share-
holder value (Cespa and Cestone 2007). From an agency perspec-
tive, the positive outcomes from SM investments may end up being
usurped by managers for their own benefit or for the benefit of a
select group of stakeholders negating their potentially positive
influence on FP. In this vein, pursuing a strategy of continued
investments in SM is viewed as an agency problem between the
firm’s managers and both shareholding and non-shareholding
stakeholders (Barnea and Rubin 2010; Hill and Jones 1992; Jen-
sen and Meckling 1976).
In this study we evaluate the SM and FP relationship within con-
texts that vary in terms of the discretion they provide to managers.
Research on top managers’ strategic decision-making supports the
assertion that the extent to which managers are able to exercise dis-
cretion or “latitude of managerial action” (Hambrick and Finkelstein
1987, p. 371) over strategy formulation and resource allocation activi-
ties varies with different contexts. In certain contexts (Hambrick and
Abrahamson 1995) managerial decisions have a greater impact on the
relationship between firm strategies and outcomes (Hambrick and
Finkelstein 1987). Hence, managerial discretion is “central to discus-
sions of strategy formulation and implementation” (Carpenter and
Golden 1997, p. 187) and facilitates a more complete understanding
of the links between strategic managerial decisions and FP (Adner and
Helfat 2003). As channeling the positive externalities arising out of
superior SM is an important strategic managerial decision (Ackerman
1975), it seems appropriate to include consideration of managerial
discretion contexts when investigating the link between SM and FP.
Examining the SM-FP relationship using managerial discretion as
a moderating condition is an appropriate research setting for at
least two reasons. First, SM is synonymous with a firm’s strategic
of deploying firm resources to address the social and envi-
ronmental issues concerning primary stakeholders (Agle et al. 1999;
Money et al. 2012). Such choices help generate socially complex and
causally ambiguous intangible resources and capabilities (Surroca
et al. 2010) which may lead to competitive advantages and the crea-
tion of firm value (Hillman and Keim 2001; Wood 1991). We assert
that the appropriability or “ability of the firm to extract economic
benefits” (Husted and Allen 2007, p. 599) from the use of such valu-
able, rare, and inimitable (VRI) resources or capabilities depends
heavily on their effective management. In modern firms, managers
control most of the resources required to address stakeholder-
related issues (Frooman 1999). Under pressure from shareholders
and other stakeholder groups to “do good,” managers are expected
to make strategic choices and address stakeholder demands in pur-
suit of activities that may help the firm jointly enhance stakeholder
welfare and generate competitive advantages (McWilliams and Siegel
2011; Mitchell et al. 1997). The managerial discretion view suggests
that there is variation in managerial influence over the link between
organizational strategy and outcomes. Given that situations which
offer managers latitude in decision-making impact their resource-

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