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October 14, 2020

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On balancing conflicting stakeholder interests

By Paul Strebel | 00:00 UTC+8 October 14, 2020 | Print Edition

Are executives supposed to manage the tradeoffs between conflicting stakeholder interests? For example, between the interests of shareholders and supporting society to help manage a pandemic?

Executives need a practical criterion or objective for deciding how to allocate resources across various stakeholders: Those who create value for the company must be treated differently from those wanting short-term payouts. Equally, stakeholders who benefit from the company’s largesse must be treated differently from those suffering the business model’s undesired side effects.

To reconcile shareholders with other stakeholders, executives must identify who will create long-term value — and avoid the value-destroying traps associated with others. They can make stakeholder capitalism work by doing three things:

• Focusing on the creation of long-term shareholder value as the objective and resisting the demands of short-term stakeholders.

• Identifying, mobilizing and rewarding those stakeholders critical for the long-term value of the firm.

• Avoiding the hidden risks in short-changing weak stakeholders.

One of Europe’s most durable and financially successful companies, Royal DSM, the Dutch biotech sustainability champion with a market cap of over 20 billion euros, has applied these principles over time and especially during two major transformations, from coal mining to base chemicals and later from base chemicals to biotech products.

Tomorrow’s corporate champions will be firms that use today’s cash flow to increase long-term shareholder value, involving as many stakeholders as possible in win-win initiatives.

Long-term value

These are based on a corporate purpose that mobilizes stakeholders, supported by relationships based on trust, a positive culture and expectations of rewards.

It cannot be a matter of public relations gestures. They require more rewards for stakeholders up to the point where no additional long-term value is created for the company. Short-term shareholders, activists and some CEOs may not like it, but it is what’s needed to increase the firm’s long-term value.

Top management conducted business strategy dialogues with these stakeholders and signed a strategic value contract based on the resources required and mutually agreed key performance indicators reflecting how the development of new business would shape their compensation.

It is often tempting to increase short-term gains at the expense of weak stakeholders, and this is difficult to resist because the negative side effects are often delayed. There may be little apparent danger in extracting value from unprotected employees, weak customers and partners; from short-changing society by gaming the tax code; from the degradation of the physical environment; or from stifling competition and developing a monopoly.

However, value extraction creates hidden risks, as BP discovered when — after prioritizing low costs — it had to pay US$65 billion for the damage from the oil rig explosion in the Gulf of Mexico.

Instead of trying to extract value from weak stakeholders, DSM has tried to turn them into value creators.

More recently, DSM has become a champion of environmental sustainability by tying executive compensation to sustainability as the corporate purpose. To fight COVID-19 it has launched an open collaborative digital platform to generate solutions for healthcare professionals.

All initiatives are tied to the value of the firm. According to its CEO Geraldine Matchett, “You have the privilege of being a purpose-led organization, if — and only if — you deliver on financial performance.”

Paul Strebel is a professor of governance and strategy at IMD. Copyright: IMD.

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