Shareholder Value, Stakeholder Management, and Social Issues: What's the Bottom Line? Author(s): Amy J. Hillman and Gerald D. Keim Source: Strategic Management Journal, Vol. 22, No. 2 (Feb., 2001), pp. 125-139 Published by: John Wiley & Sons Stable URL: http://www.jstor.org/stable/3094310 Accessed: 20/04/2010 23:11 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=jwiley. 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KEIM Ivey School of Business, University of Western Ontario, London, Ontario, Canada N We test the relationship between shareholder value, stakeholder management, and social issue participation. Building better relations with primary stakeholders like employees, customers, suppliers, and communitiescould lead to increased shareholder wealth by helping firms develop intangible, valuable assets which can be sources of competitive advantage. On the other hand, using corporate resources for social issues not related to primary stakeholders may not create value for shareholders. We test these propositions with data from S&P 500 firms and find evidence that stakeholder management leads to improved shareholder value, while social issue participation is negatively associated with shareholder value. Copyright ? 2001 John Wiley & Sons, Ltd. INTRODUCTION ments or other nongovernmentalorganizations. But, is this the appropriaterole for business in Globalizationhas increasedcalls for corporations society? Should the mandateof business extend to use firms' resources to help alleviate a wide beyond its traditionalstakeholders (shareholders, variety of social problems. The pharmaceutical customers,suppliers, employees, local communi- industry, for example, is asked to donate free ties, and government)?These are essentially nor- drugs and vaccines to ThirdWorld nations where mative questions. the afflictedcannot pay. Firms engaged in manu- Empirical researchers interested in the way facturing are encouraged to apply developed firms interact with stakeholders,however, can nation's laws and norms to issues such as child examine related but somewhat more objective labor and environmental pollution in less questions. For example, when firms do expand developed countries,regardless of local laws or their activities beyond those associated with the customs. direct stakeholderrelationships, what is the effect These calls for expanded responsibilitiesfor on the economic viability that createdthe wealth business are intuitively appealing to those who of the firm? That is, if the economic success of see existing governmentsas unable or unwilling firmsraises societal expectationsto considermore to deal with such problems. Firms may indeed than the interests of primarystakeholders when have resources that could be used to help with making resourcedecisions, can firms respond to issues that are typically dealt with by govern- these social issues and continue to be eco- nomicallyviable? In a world of increasinglycom- petitive capital markets,how are a firm's share- Key words: shareholder value; stakeholder man- holders affected by firm decisions to respond to agement; social issues; market value added these increasedresponsibilities? *Correspondenceto: Amy J. Hillman, Ivey School of Busi- ness, Universityof WesternOntario, 1151 RichmondStreet Previous literaturehas studied the relationship North,London, Ontario N6A 3K7, Canada. between firm financial performance and firm Copyright ? 2001 John Wiley & Sons, Ltd. Received 24 August 1999 Final revision received 14 August 2000 126 A. J. Hillman and G. D. Keim social responsibilityor social performance(e.g., formanceand stakeholdermanagement as well as Aupperle,Carroll, and Hatfield,1985; Griffinand the resource-basedview of the firm. Next, we Mahon, 1997; McGuire, Sundgren,and Schnee- use a sampleof S&P 500 firmsto empiricallytest weis, 1988; Pava and Krausz, 1996; Waddock the proposedrelationships. Finally, we discuss the and Graves, 1997a) but to date there is no clear implicationsof our results for future researchin empiricalrelationship. For example,Waddock and social performance,stakeholder management, and Graves (1997a) find a recursive relationship financial performanceas well as for practicing between social performanceand financial per- managers. formance. They find empirical support for both the propositionthat social performanceleads to improved financial performanceand that better VALUE CREATIONAND DECOUPLING financialperformance leads to social performance. SOCIAL PERFORMANCE Do socially responsible strategies create value for shareholders?Or, is social performancea Corporate social performance is a multi- discretionaryactivity funded by slack cash flow? dimensionalconstruct defined by Carroll (1979) The relationshipbetween social performance as having four components:economic responsi- and financial performancemay be better under- bility to investorsand consumers,legal responsi- stood by separatingsocial performanceinto two bility to the government or the law, ethical components:stakeholder management and social responsibilities to society, and discretionary issue participation.Corporate social performance responsibilityto the community.CSP incorporates (CSP) is a multidimensionalconstruct (Carroll, the interactionbetween the principles of social 1979) that is related to stakeholdermanagement responsibility,the processes of social responsive- although not synonymous (Clarkson, 1995). We ness, and the policies and programsdesigned by believe a key distinctionbetween the two compo- corporationsto addresssocial issues (Wartickand nents of CSP, stakeholdermanagement and social Cochran, 1985). Despite the lack of a shared issue participation,pertains to their respective precise definitionin the literature,CSP is gener- roles in the firm's value creationprocess. Build- ally conceived as a broadconstruct comprised of ing betterrelations with primarystakeholders like stakeholdermanagement and social issue man- employees,customers, suppliers, and communities agement (Clarkson, 1995; Swanson, 1995; (Freeman,1984) could lead to increasedfinancial Wood, 1991). returns by helping firms develop intangible but valuableassets which can be sources of competi- Stakeholder management tive advantage.For example, investing in stake- holder relationsmay lead to customeror supplier In this paper, we adopt what Mitchell, Agle, loyalty, reduced turnover among employees, or and Wood (1997) would classify as a 'narrow' improved firm reputation.These valuable assets definition of stakeholdersin that we consider in turn lead to a positive relationshipbetween primarystakeholders as those stakeholderswho stakeholdermanagement and shareholdervalue 'bear some form of risk as a result of having wherein effective stakeholdermanagement leads investedsome form of capital,human or financial, to improved financial performance.Participating something of value, in a firm' (Clarkson,1994: in social issues not related to the firm's direct 5). These stakeholdersare those without whose relationshipwith primarystakeholders, however, participation the corporation cannot survive may not create similar value for shareholders. (Clarkson, 1995). Primary stakeholdersinclude Instead, we expect that social issue participation capital suppliers(shareholders), employees, other is negatively related to shareholdervalue. Thus, resource suppliers, customers, community resi- we posit that shareholdervalue may be affected dents, and the natural environment (Clarkson, differently depending upon the nature or scope 1995; Starik,1995). Clarksonargues that 'primary of the socially responsiblestrategy/activity. stakeholder groups typically are comprised of In the following section of this paper,we build shareholdersand investors,employees, customers, a theoreticalrationale to supportthese claims and and suppliers, together with what is defined as advanceour hypotheses.Our theoreticaldevelop- the public stakeholdergroup: the governments ment draws upon existing literaturein social per- and communitiesthat provide infrastructuresand Copyright ? 2001 John Wiley & Sons, Ltd. Strat. Mgmt. J., 22: 125-139 (2001) Shareholders, Stakeholders and Social Issue 127 markets, whose laws and regulations must be outperformits rivals and create value for share-