Editor’s Note: The Goff Strategic Leadership Center theorizes that successful strategic leaders demonstrate skills across six specific dimensions (what we refer to as the Six Principles of Strategic Leadership). This model of leadership indicates that competence in these six areas contributes to high levels of individual, team, and organizational success. Research conducted by faculty at the University of Utah provides insights into each of these principles and describes specific strategies for how leaders can apply these principles. Read more below.
Strategic leaders are value creators who know how to align their resources effectively to create the maximum amount of value. Non-shareholder stakeholders are one of a firm’s resources, and it takes some consideration to identify how to engage them effectively and compensate them fairly. So, should firms maximize the wealth of their shareholders or address the interests of all their stakeholders?
This debate has raged for some time and has often been couched in these two extreme positions. But according to recent work by Jay Barney, Presidential Professor of Strategic Management at the David Eccles School of Business at the University of Utah, both these extremes are difficult to defend. Barney’s work on this debate – along with his research in many other areas – has made him a world-renowned expert in strategy, with more than 170,000 citations – the most citations of any scholar at the University of Utah and among the top in the field of strategic management.
According to Barney, a firm that focuses only on maximizing the wealth of its shareholders effectively makes the following offer to its non-shareholder stakeholders: “You work like crazy, demonstrate loyalty and commitment, and make the kinds of investments in us that are necessary for our firm to generate economic profits – and all the profits you help us create will go to our shareholders.”
Most rational self-interested non-shareholder stakeholders will say “no deal” to this offer. There is no reason for these stakeholders to provide a firm access to profit-generating resources if they do not have the opportunity to share in some of the profits these resources may help create. Firms that strictly implement a “shareholder supremacy” policy cannot expect their non-shareholder stakeholders to provide them access to profit-generating resources. And without these resources, where do these firm profits come from?
Most firms get this, and already reward stakeholders that help generate economic profits – critical employees, scientists, engineers, suppliers, and customers – in ways that enable these stakeholders to share in some of the profits they help create. But firms that reward these critical non-shareholder stakeholders need not jump to the other extreme and try to make decisions that address the interests of all of their stakeholders. Conflicts among stakeholders in how they would like to see a firm managed almost always emerge. And sometimes, these conflicts are impossible to resolve. Assertions that a firm will try to address the interests of all its stakeholders, without recognizing that these interests will often conflict, ring distinctly hollow.
But Barney’s research has found a middle ground. It begins by recognizing that not all stakeholders have the same claim on a firm’s profits. Some stakeholders provide resources that enable a firm to continue its operations, but are not the source of economic profits. While these stakeholders must be compensated fairly, they do not have a claim on a firm’s profits because they do not provide the firm with profit-generating resources. However, stakeholders that do provide profit-generating resources do have such a claim. Indeed, if this claim is not recognized, firms will not be able to attract these profit-generating resources. Ultimately, one of senior management’s most critical strategic tasks is to identify and assemble resources that have profit-making potential. This will usually involve gaining access to profit-generating resources from non-shareholder stakeholders.