Stakeholder engagement pays!

This blog positions stakeholder engagement at the leading edge of sustainability and also, as a core process underpinning a superior business model is transforming older, extractive and exploitative models. However, it is also great to have evidence that stakeholder engagement supports financial sustainability in addition to environmental and social sustainability.

Witold Henisz led a major Wharton School research project to deliver such evidence summarised in Spinning Gold: The Financial Returns to External Stakeholder Engagement. Here is the abstract from their document:

We provide direct empirical evidence in support of instrumental stakeholder theory‘s argument that increasing cooperation and reducing conflict with stakeholders enhances the financial valuation of a firm holding constant the objective valuation of the physical assets under its control. We undertake this analysis using panel data on 26 gold mines owned by 19 publicly traded firms over the period 1993-2008. We code over 50,000 stakeholder events from media reports to develop an index of the degree of stakeholder cooperation or conflict for these mines. By incorporating this index in a market capitalization analysis, we reduce the discount placed by financial markets on the net present value of the gold controlled by these firms from 72 to between 33 and 12 percent.

My (limited) understanding is that the reduction in net present value is increased significantly when stakeholder co-operation is low and stakeholder conflict is high. Here is a video explanation of net present value.

Apart from the great result, what impresses here is the size of the study and the stunningly positive result for stakeholder engagement. Notable too, is the assertion that mining companies that were once known for a myopic short-term view, are now “global leaders in the implementation of stakeholder engagement”.  A participant in the research commented:

It used to be the case that the value of a gold mine was based on three variables: the amount of gold in the ground, the cost of extraction, and the world price of gold. Today, I can show you two mines identical on these three variables that differ in their valuation by an order of magnitude. Why? Because one has local support and the other doesn‘t. (Yani Roditis, COO Gabriel Resources, interview by authors)

The researchers position the two factors of high stakeholder co-operation and low stakeholder conflict as essential to building the implicit or explicit social license to operate. Investing in positive stakeholder relations builds both social and political capital.

The nature of the research confines analysis of the benefits of stakeholder engagement to financial factors and shareholder value. As such it removes the tension between proponents of shareholder value, such as Milton Friedman and the broader stakeholder theory such as Edward Freeman.

Broader stakeholder benefits

In addition to the financial benefits of effective stakeholder engagement, there are other less tangible and quantifiable benefits. As more businesses learn to take a less extractive stance and engage more, the benefits of greater social capital compound. Trust is built and fractured communities develop more cohesion. If the ethos of external engagement of these mining companies becomes culturally embedded throughout the organisation, local people employed in mining operations, should also benefit from a more engaging workplace. Ideally these cultural practices become more manifest and normalised in worker’s families and the wider community. How is this quantified?

This landmark research in sustainability provides much-needed hard data to demonstrate the benefits of stakeholder engagement. One disappointment is the title – associating the PR metaphor of “spin” is unfortunate, as effective stakeholder engagement is the antithesis of spin. Ideally engagement is based on authentic and transparent communication rather than the more manipulative intention of spin. But hats off to Witold Henisz and his team for a superb research contribution.

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2 thoughts on “Stakeholder engagement pays!

  1. Peter, another great post. I saw this article via the twitterverse and put it in my [rapidly expanding] ‘to read’ file so thanks for the commentary in advance. It appears to be a significant contribution to the field.

  2. Pingback: Stakeholder engagement pays – a silver bullet? | Stakeholder Engagement

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