It's not all about the bottom line, and firms can be strongly competitive even when they funnel fewer profits to shareholders
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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.
Imagine two firms that are nearly identical in size, product type and industry. However, Firm A reports $1 million in profits, while Firm B reports $1.5 million. It might be tempting to assume that Firm B is performing better, perhaps due to greater investments in technology or more efficient operations. Based on these numbers alone, we might quickly conclude that Firm B has a competitive advantage.
However, this quick assessment fails to take into account how much value a firm may be sharing with stakeholders.
[This article has been reproduced with permission from IESE Business School. www.iese.edu/ Views expressed are personal.]