Strategic Management Focus on Shareholders and Stakeholders: A Comparative Analysis of Portfolio Financial Performance.

• Author: Wasilewski, Nikolai

INTRODUCTION

It has been argued that to prosper long-term, because competitive advantage is bestowed upon companies by the consumer becoming the customer of the company, companies compete against their rivals for customers to repeatedly purchase the company's goods and services (Wasilewski, 2012). Similarly, so to do companies compete for investor capital. "In the competition for investor capital, [companies] strive to provide increasingly positive rates of return to the investor. For publically traded corporations, the returns are generally measured in terms of shareholder value, i.e., the total return on investment, also commonly referred to as the 'holding period return', which is computed from the change in the share price plus dividends. The stock price has generally been viewed as a reflection of the investor's expectations of the corporation's future earnings and earnings growth, a subject where extant studies have devoted considerable investigations (e.g., into the relationships of historical and projected earnings on the changes in stock price and maximizing shareholder value)" (e.g., Boudoukh, Richardson, & Whitelaw, 2008; Fama and French, 2017; Stanley & Wasilewski, 2017:141). This perspective reflects the 'shareholder' theory' of the strategic management of the firm, which states that the company's responsibility is to the shareholder with the focus being maximizing long-term returns to the shareholders (Friedman, 1970). Thus, the financial performance of the company (for maximizing shareholder value) is the 'bottom line' measure for strategic decision making about the future of the company (Carrott & Jackson, 2009). (However, this perspective, implicitly, seems to recognize that the company is subject to the rules embodied in, and expected to meet its obligations to, both the legal and the ethical bases of the society (The Editorial Board, 2019b).)

As there developed in the general society an increased awareness of and concern for both social issues (e.g., employee job safety and satisfaction, good corporate citizenship in a community through philanthropy, promoting positive relationships with suppliers by paying them on time, etc.) and environmental (ecological) issues (e.g., air and water pollution, depletion of renewable resources (e.g., overfishing), increasing mounds of non-decomposable plastic waste, etc.), noticeable socio-cultural shifts emerged in the companies' macro-environment. These socio-cultural changes became reflected in expectations by investors for the company to evaluate and publish its performance in addressing the social and environmental issues, in addition to its financial performance (cf, Zwetsloot & Marrewijk, 2004). In response, the company enabled a 'strategy dynamics' (Lovallo & Mendonca, 2007) whereupon the strategic management of the company reevaluated a core basis for strategic decision making--primacy of the 'shareholder theory'. There emerged an alternative perspective, the 'stakeholder theory', which argued that while shareholders are stakeholders (those entities, external or internal to the company, that influence or are influenced by the decisions and performance of the company), there are also other types of stakeholders (e.g., communities, employees, etc.) which the strategic management of the company should include in the strategic decision making about the company (Freeman & McVae, 2001). (For examples of company foci on stakeholders, see e.g., Holger, 2019, Krouse & Francis, 2019). Thus, in the company 'bottom line', along with financial performance there are the two additional measures of the company's performance, on its social responsibilities (corporate social responsibility, CSR) and on its environmental responsibilities (ER), denoted as a 'Triple Bottom Line' (TBL) (Elkington, 1994). (Additional information about the TBL may be found in: Elkington (1999); Savitz (2006; Slaper & Hall (2011)).

The expectation from the 'stakeholder perspective' was that stakeholders would prefer to do business with those companies whose performance on the three (but especially the CSR and ER) components of the TBL was considered 'better' including: (i) consistent with Wasilewski (2012), consumers, to support their own social and environmental causes, would likely give preference to purchasing goods and services from those ('better TBL') companies as the companies likely also support similar causes (Bhattacharya & Sen, 2004) and, thereby, the customers would bestow competitive advantage on those ('better performing' TBL) companies (Porter & Kramer, 2006), and increasingly, the ('better performing' TBL) companies would exhibit better financial performance than the non--(or lesser) performing TBL rivals; (ii) suppliers would prefer to do business with companies that demonstrated more repeat and favorable business relationships; (iii) investors would include ('better performing') TBL firms in their investment portfolio because the company's CSR activities are aligned with the investor's priorities for social causes (but perhaps also because 'better performing' TBL companies are expected to exhibit better financial performance than the non--(or lesser) performing TBL rivals). Thus, over time, the financial performance of an investment portfolio composed of the 'better performing' TBL companies is expected to be superior to an investment portfolio composed of non--(or lesser) performing TBL companies. As such, the foregoing suggests, for the strategic management of the company, that the 'stakeholder theory' may be more desirable than the 'shareholder theory'.

An initial literature review found there exist voluminous studies exploring CSR, ER, TBL, and the performance, financial and otherwise (e.g. preference of one company's products over another). An evaluation of a sample of the studies showed that, overall, the study results were mixed regarding the financial (or other measure of) performance reflected by the TBL and 'stakeholder theory'. For example, in a study of the relationship between company employees' job satisfaction and the company's stock price, the companies with higher employee job satisfaction had higher stock returns (Edmans, 2012). Yet, companies, that included corporate social responsibility into their strategic management, failed (O'Toole, 2019). Significantly, "research over 35 years shows only a weak link between socially responsible corporate behavior and good financial performance" (Margolis, Elfenbein, & Walsh, 2008). Possible explanations for the mixed results of these past studies include: difficulty in conceptualizing and measuring the elements in the CSR and ER components of the TBL (e.g., should the company...