A Values-based Approach to Understanding Corporate- Stakeholder Interactions

Abstract

This paper develops a model of focal firm-stakeholder interactions incorporating the values of each party and the possible impact of incomplete contracts between them. The paper offers a values-based analysis of the forces driving the interaction between the parties. Firms exist in a web of perceived obligations and rights. We argue that entities in firm-stakeholder relationships have operational goals supported by terminal and instrumental values that affect the way that the parties behave and interact with others. Since various parties to an interaction may have different values and goals, this model allows for strategic interactions. While some relationships are bound by law or contract, others are not. Thus, the outcome cannot be prescribed with certainty, so an important question is whether the desired outcomes can be enforced. We draw upon contract theory to explore these issues, noting that performance under any contract is problematic since it cannot be assured in advance. We argue that the determinants of outcomes between the focal firm and its stakeholder groups are affected by the values and goals of each entity, while the nature of the contracts between them and the environment within which the interactions occur influence what can be achieved.

Appendix: ESD value group analysis

Value group	Terminal values	Instrumental values	Operational goals
Corporation (focal firm)*	Survival Maximized management wealth Maximized firm size High corporate reputation High growth	Behave smartly, as defined by need to achieve terminal values Justify management wealth accumulation Encourage efficiency and decision-making effectiveness Engage in effective public relations strategies Reinvest if acceptable markets provide opportunities	Have financial statements that appeal to stakeholders Attract new resources (labor, capital, prestige, credibility) Make best use of available resources to achieve terminal values Measure response to corporate behaviors Calculate meaningful ROI on investment opportunities
Shareholders	Have best available returns from invested and investable capital Maximization of own wealth Have access to best information that helps self Be secured against others who misrepresent information Enjoy investment in company that pursues desired economic and social goals Maximum risk/return available for stockholdings decisions	Keep an open mind as to investment opportunities Avoid cognitive biases such as sunk cost fallacy Seek information helpful to oneself Define one’s own goals clearly (e.g., wealth maximization, fostering social good, however defined) Select investment and corporate voting strategies that maximize one’s own economic, social, or other goals	Read investment press Think critically about information and information sources Search out management self-dealing Measure desires against performance using valid metric(s), e.g., GRI reports, CDP (Carbon Data Project) reporting, Fortune 500 ranking Use software and other tools to evaluate risk/return status of existing and proposed investments
Creditors	Have best available returns from lent capital Maximization of own wealth Have access to best information that helps self Be secured against others who misrepresent information Maximum interest income given credit risk	Keep an open mind as to investment opportunities Avoid cognitive biases such as sunk cost fallacy Seek information helpful to oneself Define one’s own goals clearly	Read investment press Employ debt covenants and required financial reporting to provide early warning system about debt sustainability Think critically about information and information sources Search out management self-dealing Monitor credit ratings by key rating organizations Monitor credibility of ratings by key rating organizations
Labor (unionized)	Labor force living a “good life” Reduced anxiety about employment conditions and status Share in employer prosperity Share in corporate governance	Promote class solidarity Promote participation in union activities Promote financial literacy Promote awareness of corporate impact on membership	Evaluate members’ participation in union activities Measure members’ awareness of union activities Calculate quality of organizing activities Monitor and publicize employer profitability Take specific steps to identify union with public interest
Community	Celebrate company participation in community Avoid imposing firm externalities (e.g., pollution) on region Have population employed fully at living wages Develop positive view of community Encourage development of community tax base and other resources	Make area palatable for firms Develop idea of corporate citizenship in local firms Provide local employers with skilled and responsible work force(s) Engage in image-building exercises/advertising Provide tax and other incentives to firms to locate in area, thereby generating tax resources	Calculate success in fostering corporate involvement in community Measure quality of school educational outputs Evaluate ability of community to attract highly skilled workers from other areas Do longitudinal evaluations of firms’ views of the community and desire to contribute to it
Environmental Groups	Have a livable world Live in a sustainable economy Have corporations accept need to behave in a sustainable fashion	Act to prevent eco-catastrophe Encourage “green” solutions to business problems Change perceptions of role of corporation with respect to the environment	Foster group membership Track public awareness of environmental issues Educate corporate executives about pressing “green” issues Develop “green” partnership ideas or initiatives to promote with focal corporations

1. *Corporate values are adapted from Kleinman and Palmon (2000)