Recent years have seen growing interest in firms that show corporate responsibility toward a broader set of stakeholders, including society, employees and the environment.
This shift in thinking contrasts sharply with the traditional, profit-driven approach of maximizing shareholder returns. The newer view argues that the purpose of the firm is to generate value for all stakeholders — not just shareholders.
There is widespread support for a more holistic view, except when it comes to assessing a company’s competitiveness. In this area, a strong focus on a broader approach at times puts firms at a disadvantage when it comes to financial reporting and attracting investors. But in research published in the Strategic Management Journal, IESE Professor Jeroen Neckebrouck and co-author David Kryscynski challenge the idea that financial performance alone should define a company’s value.
However, this quick assessment fails to take into account how much value a firm may be sharing with stakeholders.
Analyzing over 14,000 Belgian firms and looking specifically at the firm’s workforce as a key stakeholder, the authors found that variation in “workforce rents" — how a firm pays its workforce relative to a calculated “market appropriate" level — equaled approximately 86% of average net accounting profits. In other words, a significant portion of a company’s profits comes from the difference between what employees are paid and what they might earn in a competitive market.Interestingly, many firms were found to pay employees well above market rates. It’s not just a small margin of difference — this is a substantial factor that doesn’t show up on a balance sheet but deeply impacts how firms are perceived and valued by investors and stakeholders.
The authors’ study focuses on workforce rents as a way of measuring stakeholder value, but it reminds us that compensation is just one part of the equation. Companies that prioritize their stakeholders — whether through better wages, sustainability initiatives, wellness programs or community outreach — shouldn’t be penalized for distributing more value to society.
In fact, these practices often give them an edge in fostering loyalty, innovation and lasting relationships, offering a competitive advantage that isn’t reflected in traditional financial assessments. While they may not directly boost shareholder returns, they create value that is crucial when evaluating a company’s long-term competitiveness.
In other words, overall value — the sum of all rents — is what really constitutes competitive advantage.
First Published: Dec 26, 2024, 12:40
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