Stakeholder Capital and Performance in Tough Times

By October 3, 2012News

The authorship is joint with Sinziana Dorobantu (NYU-Stern) and Lite Nartey (University of South Carolina)

Abstract:
Corporate operations are increasingly contested and occasionally disrupted by opposition from political and social actors. We argue that stakeholder capital, which we define as the level of mutual recognition, understanding and trust established by the firm with its stakeholders, mitigates the adverse financial impact of negative stakeholder events. Stakeholder capital preserves a firm’s social license to operate during times when the firm’s actions and operations are being challenged by opponents. The mechanism is two-fold: first, firms with higher levels of stakeholder capital are more likely to get the benefit of the doubt when they become the target of criticism, lowering the risk that stakeholders will be easily swayed to rally against them; second, these firms are also more likely to see some of their stakeholders rise to defend their activities, thus increasing the likelihood that the companies will maintain their social license when this is being challenged. In this way, investments in stakeholder capital can, like insurance, generate benefits or payoffs after adverse events. We use a media-based measure of stakeholder capital that considers a broad range of engagements, including activities related to community relations, CSR programs, lobbying, employee training and public relation campaigns. Using an event study, we evaluate the stock market impact of adverse stakeholder events affecting 19 gold mining firms between 2000 and 2008 and show that firms with higher levels of stakeholder capital fare better financially during tough times. Our results also analyze the evolution of stakeholder capital at the stakeholder level and, consistent with the underlying psychological mechanisms we identify, show that actors with low stakeholder capital reinforce their negative priors of the firm during tough times whereas stakeholders with high stakeholder capital actually rally to support the firm mitigating the impact of the event on the overall level of stakeholder capital.

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