488.full_2

* Academy of Management Toutnal1999, Vol. 42. No, 5, 486-506.

DOES STAKEHOLDER ORIENTATION MATTER? THERELATIONSHIP BETWEEN STAKEHOLDER MANAGEMENT

MODELS AND FIRM FINANCIAL PERFORMANCE

SHAWN L. BERMANBoston University

ANDREW C. WICKSSURESH KOTHA

THOMAS M. JONESUniversity of Washington

Little empirical work has been done on the effect of stakeholder management oncorporate performance. In this study, we contributed to stakeholder theory develop-ment by (1) deriving two distinct stakeholder management models from extant re-search, (2) testing the descriptive accuracy of these models, and (3) including impor-tanl variahles from the strategy literature in the tested models. The results providesupport for a strategic stakeholder management model hut no support for an intrinsicstakeholder commitment model. Implications of these findings for management prac-tice and future research are discussed.

Freeman (1984) made a persuasive case that sys-tematic managerial attention to stakeholder inter-ests is critical to firm success, a claim not yet testedin the literature. Although Freeman's early workintroduced many of the central themes of stake-holder-related research, the conceptual contribu-tion of Donaldson and Preston (1995) has framedmuch of the recent dialogue and suggests why littleserious empirical work has been attempted. Theirtaxonomy of stakeholder theory types—normative,instrumental, and descriptive/empirical—has re-quired the authors of subsequent work to becomemore precise in their terminology and more coher-ent in their thinking about stakeholder relation-ships. Donaldson and Preston (1995) proposed thatthe normative realm, w^hich concerns how manag-ers should deal with corporate stakeholders, is themost important to stakeholder theory. Not surpris-ingly, there has been considerable discussion inboth academic and practitioner circles over tbe nor-mative principles firms should use to shape theirrelations witb stakeholders (Collins & Porras, 1994;

The authors wish to thank Jeffrey Harrison, Ed Free-man, and three anonymous reviewers for their helpfulromments. We also thank Steve Lydenberg of Kinder.Lydenberg, Domini, and Company (KLD) for access to theKLD database and acknowledge the financial support ofthe Department of Management and Organization at theUniversity of Washington. At the time the reported re-search was conducted. Thomas Jones was a visitingscholar at Georgetown University.

Freeman, 1994; Paine, 1994). By contrast, relativelylittle theory bas been advanced in the instrumentalrealm, which is related to what happens i/manag-ers treat stakeholders in a certain manner, or in thedescriptive/empirical realm, which concerns howmanagers actually deal witb stakeholders. Thus, ona variety of levels there is conceptual agreementthat managers should proactively address stake-holder interests, yet little has been done to identifywhich stakeholder interests should be attended toand what managers should do to address tbem.Consequently, scholars wishing to do empiricalwork on stakeholder management bave had little togo on except broadly defined models of stakeholder-related behavior.

This study is an attempt to begin empirical workin this area by comparing the descriptive accuracyof tbe two most commonly beld views (implicitmodels) on tbe efficacy of stakeholder managementpractices. In one such model, wbich we term thestrategic stakeholder management model, the na-ture and extent of managerial concern for a stake-holder group is viewed as determined solely by theperceived ability of sucb concern to improve firmfinancial performance. In tbe second, tbe intrinsicstakeholder commitment model, firms are viewedas baving a normative (moral) commitment to treat-ing stakeholders in a positive way, and this com-mitment is, in turn, seen as shaping their strategyand impacting their financial performance.

To compare the accuracy of the two models, wedeveloped two propositions, one for each model.

488

1999 Berman. Wicks, Kotha, and Jones 489

and tested them using data from the Kinder, Lyden-berg, Domini, and Company (KLD) Socrates data-base. The KLD database has been used previouslyin management studies. Graves and Waddock(1994) and Waddock and Graves (1997) used thesedata as proxies for corporate social performance.Graves and Waddock (1994) condensed KLD rat-ings of eight areas of corporate social performanceinto a single measure and assessed the relationshipbetween the resulting variable and institutionalownership while controlling for industry, firm size,profitability, and leverage. Results were mixed. Theauthors found a positive and significant relation-ship between the KLD measure and the number ofinstitutions owning shares in a particular firm.They found no relationship, however, between thepercentage of sbares owned by institutions andKLD ratings. In a similar study, Waddock andGraves (1997) assessed tbe relationship betweenKLD ratings (again calculated as a single measure)and firm financial performance. Attempting todetermine a causal relationship, they found thatprior-year KLD ratings were positively related tosuch financial performance measiu-es as return onassets (ROA). return on equity (ROE), and return onsales (ROS), but tbe reverse causal relationship wasnot supported. No previous researchers, however,have attempted to isolate the effects of stakeholderrelationships on firm financial performance afterincluding measures of firm strategy and controllingfor operating environment.

The reported study advances understanding ofstakeholder phenomena in three important ways.First, we formalized the empirical models behindmuch of the theorizing (explicit and implicit) doneon the stakeholder concept. Second, we began test-ing tbese theoretical models, using longitudinaldata. Third, we incorporated two important vari-ables fVom the strategic management literature byincluding measures of firm strategy and operatingenvironment in the models. In addition, this studyhighlights the need for future research that canbuild on tbese results and develop more refinedstakeholder models. Such work is significant forboth management researchers and practitioners.Addressing these questions will allow scholars tooffer concrete advice on the likely outcomes ofvarious stakeholder relationship practices.

KEY STAKEHOLDER RELATIONSHIPS ANDFIRM STRATEGY

Before we describe the models tbat were tested intbe study, we discuss tbe roles tbat key stakebolderrelationships may play in corporate decision making.As the discussion of the basic theoretical models in

the following section will make clear, tbe connectionof stakeholder relationships to firm strategy and fi-nancial perfonnance depends on which model is be-ing examined. We focus on five major stakeholderareas important to firm operations: employees, thenatical environment, workplace diversity, customersand issues of product safety, and community rela-tions. We briefly review tlie literature that suggestshow each stakeholder relationship may affect linnfinancial performance and discuss how we concep-tualize firm strategy. The models presented here ex-amine the links among stakebolder relationships,firm strategy, and firm financial performance.

Key Stakeholder Relationships

Employees. A range of tbeory and some empiricalevidence suggest that how a firm manages its employ-ees can affect its financial performance [Delery &Doty. 1996; Huselid. 1995; Pfeffer. 1994; Youndt,Snell, Dean, & Lepak, 1996). Indeed, recent work ex-plicitly positions human resources (HR) as an ex-tremely valuable source of competitive advantage forfirms (Huselid, 1995; Pfeffer, 1994). Broadly speak-ing, this advantage is achieved through increased ef-ficiency or differential revenue growth (Becker & Ger-hart, 1996). More specific claims include thepotential for HR practices to lower turnover and ab-senteeism, improve productivity, and increaseworker commitment and effort. There is also evi-dence suggesting tbat properly designed and inte-grated HR practices may, in combination, producepositive effects that go beyond what specific individ-ual initiatives could accomplish. Although evidenceindicates tbat tliere is a universal set of "best" HRpractices that can benefit all organizations, somegood theoretical reasons (Becker & Gerhart, 1996;Delaney & Huselid. 1996; Youndt et al., 1996) andsome empirical evidence also suggest tbat firm strat-egy-HR fit is important for enhancing financial per-formance (Youndt et al.. 1996).

Natural environment. Several different argu-ments have been advanced as to wby concern forthe natural environment could enhance firm finan-cial performance. First, being proactive on environ-mental issues can lower the costs of complyingwith present and future environmental regulations(Dechant, Altman. Downing, & Keeney, 1994; Hart,1995; Shrivastava, 1995). Second, environmentalresponsiveness can enhance firm efficiencies anddrive down operating costs (Russo & Fouts, 1997;Shrivastava, 1995). Third, firms can create distinc-tive, "ecofriendly" products that appeal to custom-ers, thereby creating a competitive advantage fortbe firms (Slirivastava. 1995). Fourth, being envi-ronmentally proactive not only avoids the costs of

490 Academy of Management Journnl October

negative reactions on the part of key stakeholders,but can also improve a firm's image and enhancethe loyalty of such key stakeholders as customers,employees, and government (Dechant et al., 1994;Hart, 1995; Shrivastava, 1995).

Diversity. Though the rationales for the positiveimpact on financial performance of employing adiverse workforce are not highly developed andlack significant empirical testing, many cogent ar-guments have been advanced. Lack of diversitymay cause higher turnover and absenteeism fromdisgruntled employees (Robinson & Dechant, 1997;Thomas & Ely, 1996). Diversity may enhance theability of a firm to attract the best talent from thelabor pool, regardless of race, ethnicity, or gender(Robinson & Dechant, 1997; Thomas & Ely, 1996). Ithas also been argued that employee diversity im-proves the ability of a firm to relate to a broadcustomer base and compete more effectively in thehighly diverse global marketplace (Robinson &Dechant, 1997; Thomas & Ely, 1996). In short, adiverse workforce may: (l) create cost savings for afirm, (2) enhance its productive capabilities, and(3) expand its markets.

Customers/product safety. A great deal of re-search has been conducted to assess the effects offirm-customer relationships on financial perfor-mance. Most of this research, however, has as-sessed the impact of irresponsible (and/or illegal)firm activities. Frooman (1997) noted that the evi-dence from event studies examining market reac-tions to corporate irresponsibility and illegal be-havior is fairly unequivocal: the market value offirms engaged in such activity decreases. Studiesinvestigating reactions to product recalls in partic-ular (e.g., Bromiley & Marcus, 1989; Davidson &Worrell, 1988: Hoffer, Pruitt, & Reilly, 1988) haveconsistently found market reactions to be stronglynegative, except for those occurring in the autoindustry. These results suggest that investors ex-pect customers to react to recall announcementswith actions that directly affect the bottom line,either through lawsuits, decreased patronage, orboth. There is reason to expect a positive relation-ship as well. For example, positive customer per-ceptions about product quality and safety may leadto increased sales or decreased costs associatedwith stakeholder relationships (Waddock & Graves,1997).

Community. The effects of community relationson financial performance are less clear. Recentwork by Altman (1998) and Waddock and Boyle(1995) suggests that companies are reorienting cor-porate community relations to fit broader strategicplans. Altman conducted interviews with both topmanagers and community relations officers and

found that many executives "believe that commu-nity involvement is a business imperative, oftencreating a competitive advantage" (1998: 222). Thesupporting research is based on case analyses, how-ever, with broad studies of the financial impact ofcoirununity involvement limited to examinationsof corporate philanthropy (Wood & [ones, 1995}.Although work like Gabor's (1991), detailingKodak's commitment to revitalizing Rochester as acenter for optics manufacture, stresses the strategicimportance of community relations to some com-panies, the generalizability of such findings is de-batable. Other researchers have suggested that goodcommunity relations can help a firm obtain com-petitive advantage through tax advantages, a de-creased regulatory burden, and improvement in tbequality of local labor (Waddock & Graves, 1997).

The preceding subsections demonstrate that man-agerial handling ofthe five stakeholder relationshipswe have discussed can affect firm financial perfor-mance. They also offer a number of extant theoreticalreasons as to why one might expect a given manage-ment approach to positively or negatively affect firmfinancial performance. We now turn to defining firmstrategy and discussing bow it was operationally de-fined for our study and used in our models.

Strategy

To capture the broad strategic orientation ofa firm,we employed Hambrick's (1983) operational defini-tion ofthe strategy construct. We adopted Hambrick'sapproach because it was based on a strong and widelyaccepted theoretical foundation (e.g.. Porter, 1980).Hambrick used four strategy measures along which afirm's strategy can he parsimoniously captured. Theyinclude cost efficiency, asset parsimony, differentia-tion, and scale/scope.

Cost efficiency measures assess the degree towhich costs per unit of output are low. Asset par-simony highlights the degree to which assets perunit of output are few. Together, these measurescapture a firm's cost leadership orientation.Broadly, the cost efficiency measure captures sev-eral conditions that have been linked to greater firmproductivity (that is, efficiency) and profitability.To the extent that a firm succeeds in driving downcosts per unit of output, thereby increasing grossmargins, firm profitability should, ceteris paribus,increase (Miller, 1987; Porter, 1980). Gapital inten-sity, an important measure of asset parsimony, hasbeen shown to be a crucial strategic option (cf.Capon, Farley, & Hoenig, 1990; Gale, 1980). Also,capital intensity has often been presumed to varyinversely with direct costs (Kotha, Caledries, &Schendel, 1997; Porter, 1980). Moreover, a strong

1999 Berman, Wicks, Kotha. and Jones 491

return on assets, not jnst profits, is the presumedaim of most corporations (Hambrick, 1983). Thetwo measures—cost efficiency and asset parsimo-ny— overlap to the extent that depreciation com-prises overall costs (Hambrick, 1983). Further,since tbe impacts of cost efficiency and asset par-simony may differ across industries, both are nec-essary to adequately capture a firm's approach tocost reduction activities.

Differentiation, as discussed by Hambrick (1983),broadly captures a firm's attempts to differentiateitself from its rivals using a variety of marketingand marketing-related activities. It relates to thedegree to which a product and its enhancementsare perceived as unique. Tbe key to making thisstrategy successful is an ability to charge above-market prices, which is possible because of thecustomer's perception that the product is special insome way. This ability to command a premiumprice could, in turn, lead to greater profitability(Kotba & Vadlamani, 1995; Porter, 1980). Finally,scale/scope measures the relative size and range ofactivities of a business within its industry. Differ-entiation based on scale and scope may involve, forexample, competing in a narrow segment that canbe based on buyer type, product type, geography, orother factors (Hambrick, 1983; Mintzberg, 1988).

When we refer to firm strategy, therefore, we arediscussing strategic resource allocation decisions,such as tbe mix of capital and labor (capital inten-sity), rather than broader strategy typologies suchas those developed by Porter (1980) and Miles andSnow (1978). Witb our discussions of tbe five keystakebolder relationships and of how we conceptu-alized firm strategy as a foundation, we now de-scribe tbe two models of stakeholder orientationimplicit in tbe stakeholder theory literature.

STAKEHOLDER ORIENTATION MODELS

The terminology used in Freeman's (1984) workon stakeholder management establishes a usefulframework for the examination of the basic empir-ical models that are implicit in stakeholder theoryresearch. Freeman defined a stakeholder as "anygroup or individual who can affect or is affected bythe achievement of the organization's objectives"(1984: 46). Groups typically cited as stakeboldersinclude (but are not limited to) customers, suppli-ers, employees, local communities, governments,and shareholders. Freeman's definition suggests atwo-way relationship between a firm (that is, itsmanagement) and its stakeholders. Each element ofthis relationship represents the foundation for amodel of stakeholder management. First, if stakehold-ers can affect the achievement of a firm's objectives, it

follows that tbe firm's decisions, and hence its per-formance, may be affected by tbe activities of itsstakeholders. This link suggests tbe possibility of aninstrumental posture toward stakeholders on the partof the firm, with the firm seeking to manage thosestakeholders in order to maximize profits (orientation1). Second, if stakeholders are affected by the achieve-ment of the firm's objectives, it follows that the firm'sdecisions affect the well-being of its stakeholders,which in turn suggests the possibility of a normativeobligation to stakeholders on the firm's part. That is,managers may feel they have a fundamental moralobligation to stakeholders that grounds their manage-rial approach (orientation 2). For both orientations,we examine firm-stakeholder relationships from afirm-centered perspective.

Strategic Stakeholder Management: AnInstrumental Approach

The first element of the firm-stakeholder relation-ship (how the firm is affected by stakebolder actions)implies that firms bave a stake in the behavior of theirstakeholders. Further, if prudent management offirms' operating envirormients, including relation-ships with their stakeholders, is a part of good man-agement in general, good stakeholder managementhas clear instrumental value for the firms. The notionthat stakeholder management has instrumental valueforms the core of Freeman's original argument, asrefiected in the following:

We need to worry about enterprise level strategy forthe simple fact that corporate survival depends inpart on there being some "fit" between the values ofthe corporation and its managers, thtf expectation ofstakeholders in the firm and the societal issueswhich will determine the ability of the firm to sellits products. . . . Whether such changes are sociallydesirable or morally praiseworthy is an importantquestion, but it is yet a further question which ananalysis of enterprise strategy does not address.(1984: 107; emphasis added)

A fundamental assumption of this type of modelis that the ultimate objective of corporate decisionsis marketplace success. Firms view their stakehold-ers as part of an environment that must be managedin order to assure revenues, profits, and ultimately,returns to shareholders. Attention to stakebolderconcerns may help a firm avoid decisions thatmight prompt stakeholders to undercut or thwartits objectives. This possibility arises because it isthe stakeholders who control resources that canfacilitate or enhance the implementation of corpo-rate decisions (Pfeffer & Salancik, 1978); in short,stakeholder management is a means to an end. The

492 Academy of Management Journa] October

end. or the ultimate result, may have nothing to dowith the welfare of stakeholders in general. Instead,the firm's goal is the advancement of the interestsof only one stakeholder group—its shareholders.Employing the terminology used by Donaldson andPreston (1995) and Quinn and Jones (1995), werefer to the firm's interest in stakeholder relation-ships as instrumental and contingent on the valueof those relationships to corporate financial suc-cess. As Quinn and Jones made clear, "Instrumen-tal [strategici ethics enters the picture as an adden-dum to the rule of wealth maximization for themanager-agent to follow" (1995: 25).

In this formulation, stakeholder management ispart of a company's strategy but in no way drives thatstrategy. The firm's relationships with its stakehold-ers enter into its strategic calculus, and the types ofrelationships that produce the best prospective out-comes for the firm are pursued. It should be notedthat, although Friedman (1970) did not use the term"stakeholder theory," the approach to stakeholdermanagement described in this section is fully com-patible with his view that the "social responsibility ofbusiness is to increase its profits" (1970; 32).

Implicit in this perspective is the assumption thatmodes of dealing with stakeholders that prove uponadoption to be unproductive will be discontinued, aswill those that involve resources that are no longerneeded. For example, a firm might adopt total qualitymanagement (TQM) as part of its strategy to enhanceproduct sales. Presumably, the firm would attempt tosignificantly improve its relationships with bothworkers and suppliers, two key stakeholders, in theprocess (Adler, 1992). However, if TQM did not resultin improved sales through greater product quality,the firm's commitment to improved worker and sup-plier relations would collapse as well. Similarly, afirm might adopt an employee stock ownership plan(ESOP) to increase the stake of employees in thefirm's success and hence, their commitment to itsobjectives. If the desired result—improved corporatefinancial performance—were not achieved, the firmmight eliminate its ESOP.

We call the model derived from this view ofstakeholder relationships the strategic stakeholdermanagement mode! because the concerns of stake-holders enter a firm's decision-making processesonly if they have strategic value to the firm. Figuresla and lh graphically depict the connection be-tween stakebolder relationships, corporate strat-egy, and corporate financial performance (after theoperating environment has been controlled for) aspostulated in this model. Since we have no theoreti-cal means of predicting the precise way that stake-holder relationships enter the performance equation,we offer two alternative formulations of strategic

stakeholder management. Both models rest on thesupposition that the objective of managers is to max-imize profits, not to advance the morally legitimateclaims of stakeholders other than shareholders (Free-man, 1984). That is. managers care only about servingshareholder interests and treat other stakeholdersonly as a means to realizing that goal. In the directeffects model, managers' attitudes and actions towardstakeholders (their stakeholder orientation) are per-ceived as having a direct effect on firm financial per-formance, independent of firm strategy. In the mod-eration model, managerial orientation towardstakeholders does impact firm strategy hy moderatingthe relationship between strategy and financial per-formance.

Thus, our first overall proposition states the stra-tegic stakeholder management model: Managerswill attend to stakeholders' interests to the extentthat those stakeholders can affect firm financialperformance.

Two specific hypotheses follow. The first al-lowed us to test the direct effects model; the secondallowed tests ofthe moderation model:

Hypothesis la. Both strategy variables andstakeholder relationship variables will have di-rect and separate effects on firm financial per-formance.

Hypothesis lb. Strategy variables will have adirect effect on firm financial performance,which will be moderated by stakeholder rela-tionship variables.

We now turn to a model derived from perspectivesin which, for normative, conceptual, and practicalreasons, the strategic management of stakeholderrelations is rejected.

Intrinsic Stakeholder Commitment: A NormativeApproach

According to the second broad perspective, theintrinsic stakeholder commitment model, manage-rial relationships with stakeholders are based onnormative, moral commitments rather than on adesire to use those stakeholders solely to maximizeprofits. In short, a firm establishes certain funda-mental moral principles that guide how it doesbusiness—particularly with respect to how it treatsstakeholders—and uses those principles to drivedecision making.

This model can be generated from two distinct,albeit related, sources within the business ethicsliterature. One genesis of this normative model isthe fact that firm decisions affect stakeholder out-comes. Ethics, generally speaking, deals with obli-


FIGURE 1Strategic Stakeholder Management Models"

(la) The Direct Effects Model

StakeholderRelationships

Finn Strategy

Firm FinancialPerformance

(lb) The Moderation Model

Firm Strategy

StakeholderRelationships

Firm FinancialPerformance

In all models, it is assumed that operating environment is a control variahle.

gations that arise when an individual or corporateagent's decisions affect others; regardless of pre-cisely what constitutes an ethical decision, deci-sions made without any consideration of their im-pact on others are usually thought to be unethical.Donaldson and Preston (1995) captured the impli-cations of this view for stakeholder managementquite well by stating that stakeholder interests haveintrinsic worth. That is, certain claims of stake-holders are based on fundamental moral principlesunrelated to the stakeholders' instrumental value toa corporation. A firm cannot ignore or abridge theseclaims simply because honoring them does notserve its strategic interests. In a sense, these claimsare independent of, and should be addressed priorto, corporate strategic considerations. Stakeholderinterests are thought to form the foundation of cor-porate strategy itself, representing "what we are"and "what we stand for" as a company.

Given such a stakeholder orientation, a firmshapes its strategy around certain moral obligationsto its stakeholders. In this vein, a Kantian posture(Bowie, 1994; Evan & Freeman, 1983), a feministperspective (Wicks, Gilhert, & Freeman, 1994), anda fair contracts approach (Freeman, 1994; Phillips,1997) are examples of moral principles that canform the normative foundation for stakeholder-oriented management. Freeman and Gilbert expli-cated this perspective:

We cannot connect ethics and strategy unless thereis some point of intersection between the values andethics we hold and the business practices that ex-emplify these values and ethics. In order to buildstrategy on ethics and avoid a process that looks a

lot like post hoc rationalization of what we actuallydid, we need to ask "what do we stand for?" inconjunction with our strategic decisions. (1988: 70-71)

The second genesis of a normative stakeholderorientation based on moral principles is the argu-ment that making a strategic commitment to moral-ity is not only conceptually flawed but is also in-effective. First, strategically applying ethicalprinciples—that is, acting according to moral prin-ciples only when doing so is to your advantage—is,by definition, not following ethical principles atall. In addition, Quinn and Jones (1995) argued thatif the purpose of acting ethically is to acquire agood reputation that, in turn, will provide a firmwith economic benefits, why not pursue tbe goodreputation directly without the intellectual excur-sion into moral philosophy? In some cases, ofcourse, the behavior called for will coincide withthat dictated by ethics, but in others it may not.What difference does ethics make if one can actinstrumentally without reference to ethics?

From a practical perspective, Jones (1995) arguedthat the instrumental benefits of stakeholder man-agement paradoxically result only from a genuinecommitment to ethical principles. He argued thatfirms that create and sustain stakeholder relation-ships based on mutual trust and cooperation willhave a competitive advantage over those that do not(cf. Barney & Hansen, 1994). If a firm's commitmentto trust and cooperation is strategic rather thanintrinsic, it will be difficult for the firm to maintainthe sincere manner and reputation (Frank, 1988)

494 Academy of Management Journal October

FIGURE 2The Intrinsic Stakeholder Commitment ModeP

StakeholderRelationships Firm Strategy Firm Financial

Performance

' In all models, it is assumed that operating environment is a control variable.

required for its differential desirability as an eco-nomic partner. In other words, trustworthiness,honesty, and integrity are difficult to fake. Thus, inorder to reap the instrumental benefits of stake-holder management, a firm must be committed toethical relationships with stakeholders regardlessof expected benefits. Strategically applied moralcommitments are not really moral and, paradoxi-cally, cannot lead to the strategic outcomes desired.

We call the model derived from this view ofstakeholder relationships the intrinsic stakeholdercommitment model because the interests of stake-holders have intrinsic value, enter a firm's decisionmaking prior to strategic considerations, and form amoral foundation for corporate strategy itself. Fig-ure 2 graphically depicts the connection betweenstakeholder relationships, corporate strategy, andcorporate performance postulated in this model.

Thus, our second hypothesis captures the intrin-sic stakeholder commitment model:

Hypothesis 2. Managerial commitment tostakeholder interests will drive strategic deci-sion making, which in turn will affect firmfinancial performance.

In other words, strategy variables will mediate theassociation between stakeholder relationship vari-ables and firm financial performance.

In this exploratory research, the link betweenthese two theoretical models and the correspond-ing mathematical models discussed below can bedescribed as follows: We have reasons to believethat the way in which a firm handles the variousaspects of stakeholder relationships described inthe beginning of this article—its treatment of em-ployees, the natural environment, diversity, cus-tomer/product issues, and community relations—will affect its financial performance. We also havetwo theoretical formulations of stakeholder orien-tation derived from tbe stakeholder literature, stra-tegic stakeholder management and intrinsic stake-holder commitment, that describe how firms mighthandle these relationships and the subsequent ef-fects on financial performance. Our approach wasto empirically investigate which of these two mod-els best fitted the data. If one of the two descrip-

tions of the model in whicb key stakeholder vari-ables are seen by firms as instrumental to theirprimary goals was found to be statistically signifi-cant, empirical support would be lent to the strate-gic stakeholder management model. If the model inwhich stakeholder interests are seen as prior toother strategic concerns was found to be statisti-cally significant, empirical support would go to theintrinsic stakeholder commitment model.

METHODS

Sample and Data . .

Our initial sample was the top 100 firms on the1996 Fortune 500 list. We chose these companiesbecause they cover a broad range of industrial ac-tivity and account for a significant portion of theU.S. economic output. Data for these firms werecollected for the years 1991 through 1996, the yearsfor which tbe data on socially responsive actionsare available in the KLD database.

As some firms were acquired during the periodconsidered or were not publicly traded for the wholetime period, we found complete data on 81 out ofthe100 firms. These 81 firms constituted our final longi-tudinal data set. We collected six years of data foreach firm, for a total sample size of 486. Stakeholderrelationship data were collected from tlie KLDSocrates database. The strategy and performance datawere gathered from Compact Disclosure, Standard &Poor's stock reports, and the companies' annual re-ports. Data for estimating the variables capturing thefirms' operating environments came from the U.S.Bureau ofthe Census ^nnuai Survey o/Ma/iu/acfuresand the U.S. Bureau of Economic Analysis GrossProduct by Industry. Botli of these data sources arepublished by the Department of Commerce (DOC)and are available electronically at the DOC Web site.

• • ) ; • •

Measures

Independent variable: Stakeholder relation-ships. Tbe ratings provided by KLD cover a broadset of socially responsive actions taken by the firmsin the database. To assess stakeholder relation-

1999 Berman, Wicks, Kotba, and Jones 495

ships, we focused on five items that were consis-tently reported in the KLD database for the timeperiod 1991-96. These include measures relatingto (1) employee relations, [2] diversity, (3) localcommunities, (4) the natural environment, and(5) product safety/quality. (See Appendix A for adetailed list of KLD items.)

In the KLD database, firm actions toward eachof the five stakeholder groups are measured onfive-point Likert-type scales; - 2 suggests nega-tive actions toward that stakeholder group, and+ 2 suggests positive actions undertaken by thefirm toward the group.' Analysts at Kinder, Ly-denherg, Domini, and Company establish theseratings by using both primary and secondary dataon approximately 650 firms operating in theUnited States. KLD is the investment advisor forthe Domini Social Equity Fund, a mutual fundinvesting in the firms in the Domini Social Index.The KLD database includes all firms in the Stan-dard & Poor's 500 as well as 150 additional firmsin the Domini Social Index. To determine areas ofstrength and concern for each company in thedatabase, KLD relies on public records of notablesocially responsible activities (such as sponsor-ing local educational initiatives or recycling pro-grams) and signs of disregard for particular stake-holders (such as violations of environmentalregulations or payment of civil damages for prod-uct safety). The KLD ratings are also heavily in-fluenced by qualitative data, such as evaluationsof corporate advertising and charitable givingprograms. Additionally, since the primary mis-sion of the Domini Social Equity Fund is to pro-vide financial returns to investors by taking eq-uity positions in socially responsible firms,analysts from KLD frequently visit corporate sitesto directly observe and appraise the actions ofparticular firms.

Independent variables: Strategy. To isolate theimpact of firms' strategic decision making on per-formance, we used Hambrick's (1983) measure-ment ofthe strategy construct (see Appendix B). Asnoted earlier, we adopted Hambrick's approach be-cause it parsimoniously captures the classification

^ Other measures collected by KLD, such as the ex-istence of firm operations in South Africa and the salesgenerated through military contracts, were not in-cluded in this study for two reasons. First, these mea-sures were not available for the entire time periodunder consideration. Second, the literature has yet toprovide strong theoretical arguments for includingsome of these measures (that is, miHtary contracts) aspart of the large set of items that measure a firm'sstakeholder responsiveness.

dimensions (cost leadership and differentiation)put forward by Porter (1980).

For a firm's cost leadership position, we used mea-sures of cost efficiency and asset parsimony (Ham-brick, 1983). The cost efficiency measure was the ratioofthe cost of goods sold to total sales; thus, a smallervalue indicates better firm operating efficiency.Therefore, we would expect a negative relationshipbetween cost efficiency and ROA. We measured assetparsimony using capital intensity and capital expen-diture variables (Gale, 1980; Kotha & Nair. 1995; Mac-Millan, Hambrick, & Day, 1982). The capital intensityvariable was total firm assets for a given year dividedby the number of employees for that year. The capitalexpenditures variable was the net capital expendi-tures made by a firm in a given year divided by itssales for that year. The capital intensity variable wasdivided by 100, and the capital expenditures variablewas multiplied by 100, so tliat the means of thesevariables were roughly similar.

The differentiation measure was the ratio of gen-eral, selling, and administrative expenses to totalsales. This measure, selling intensity, captures afirm's willingness to spend on marketing- and sell-ing-related activities in an effort to differentiateitself from its rivals.

Control variables. When performance is the de-pendent variable of concern, the operating environ-ment plays a significant role (lauch & Kraft, 1986: 781;cf, Pfeffer & Salancik, 1978). Further. "One's measure-ment strategy should depend on what is being pre-dicted: perceptual measures are . . . not sufficient ifwe wish to predict the outcome .. . of choices, sinceoutcomes are a product of many forces, some ofwhich are outside the control of the organization"(Scott. 1981: 173). Hence, we introduced objectivemeasures of the operating environment as controlvariables to isolate tbeir impact on performance. Fol-lowing Dess and Beard (1984), Boyd (1990), and otherresearchers in organizational theory, we measuredthe operating environment at the industry level.

The theoretical organizing concept for our oper-ating environment construct was environmentaluncertainty (e.g., Dess & Beard, 1984; Scott, 1981;Thompson, 1967), and the structural conditionsleading to environmental uncertainty include mu-nificence, power, and dynamism (Dess & Beard,1984: Jurkovitch, 1974: Scott. 1981; Thompson.1967), We followed Boyd's (1990) procedures formeasuring these three constructs. Munificence wasthe coefficient (slope) ofthe regression of industry-level sales for the period 1987-95. We normalizedthis variable by dividing the coefficient by themean of industry sales for the nine-year period. Fordynamism, we took the standard error ofthe regres-sion used to calculate munificence and divided it


by the mean of industry sales during the 1987-95period. Finally, power was measured at the four-firm concentration level, calculated as the percent-age of sales generated by the top four firms relativeto total industry sales. Each operating environmentvariable was calculated for all four-digit StandardIndustrial Classification (SIC) codes present in ourdata set (see Appendix B).

Dependent variable. Financial performance wasoperationally defined as return on assets (ROA)(cf. Venkatraman & Ramanujam, 1986). computedas the ratio of operating income to total assets.

Model Specification

We used the following regression model to esti-mate the performance effect of the independent(stakeholder relationship, strategy, and operatingenvironment) variables:

i, = a'C+ + b/Stj, + i, + e,-,.

The subscript i indexes the firms [i = 1, . . . , 81),and t indexes the time periods {? = 1 [19911, . • . , 6[1996]). Yf defines the dependent (performance)variable for year (. C is a constant. EnVj, representsthe vector of operating environment variables, St,,the vector of strategy variables, and Sf/?,, the vectorof stakeholder relationship variables. Finally, e,, isthe error term associated with each firm-year.

To analyze the data, we used a pooled time seriesmodel. In such models, error terms may be correlatedover time (autocorrelation) and over cross-sectionalunits (heteroskedasticity). Under conditions of bothheteroskedasticity and autocorrelation, the ordinaryleast squares (OLS) estimators of the regression coef-ficients are imbiased and consistent. Clearly, theseare desirable properties. The problem with respect tothe use of OLS rests with the estimated variances ofthe regression coefficients. The principal objectiveis to find consistent estimates of the variance-covariance matrix. Kmenta (1986: 618-622) showedthat such consistent estimates can be found bysubjecting the original data set to a double transfor-mation.

We implemented Kmenta's double transformationapproach for correcting heteroskedasticity and auto-correlation problems using the time series cross sec-tion (TSCS) procedure in LIMDEP (Greene, 1992), inwhich the coefficient vector is assumed to be constantover time for all firms and "groupwise" heteroskedas-ticity, cross-group correlation, and within-group au-tocorrelation are controlled for (Kmenta, 1986).

We tested the validity of the two stakeholderorientation models presented in tlie preceding the-ory section by using tbe KLD stakeholder relation-

ship and strategy variables, after controlling for theoperating environment. In this examination, a fun-damental theoretical question arose: Should we ex-pect stakeholder relationships to affect the firmstrategy variables defined here? We believed theywould, because our measurement of firm strategycaptured the generic strategic resource allocationdecisions made by firms as they attempt to success-fully compete in their marketplaces (Hambrick,1983; Porter, 1980). The strategy variables used inthis study—cost efficiency, capital intensity, costexpenditures, and selling intensity—bave beenshown to have consistent impacts on firm financialperformance in prior studies (Capon et al., 1990).The first three variables capture a firm's fundamen-tal cost posture, and the fourth variable, sellingintensity, captures the firm's (marketing) differen-tiation posture vis-a-vis its competitors.

Earlier, we noted that Freeman (1984) made a per-suasive case tbat systematic managerial attention tostakeholder interests is critical to financial success.But translating systematic managerial attention intoaction involves making the necessary changes in thestrategic resource allocation decisions of a firm. Inother words, these actions should manifest them-selves in the variables that we used to measure afirm's strategic resource allocations. For example, be-ing proactive on environmental issues can lower thecosts of complying with present and fijture environ-mental regulations (Dechant et al., 1994; Hart, 1995).Also, environmental responsiveness can enhancefirm efficiencies and drive down operating costs(Shrivastava, 1995). In sum, such actions improve thefirm's overall cost posture.

The opportunity for dramatic improvement inoperating costs comes only with new buildings andfacilities. Such improvement may also require re-designing production systems to reduce environ-mental impacts by such means as cleaner technol-ogies and more efficient production techniques(Shrivastava, 1995). Additionally, improvementmay require more preventive maintenance, saferworking conditions for employees, and enhancedecological and health conditions in the organiza-tion (United Nations Educational. Scientific, andCultural Organization, 1992). In general, such ac-tions tend to increase the cost of operations. Ulti-mately, however, the overall impact of these ac-tions will be reflected in the realized cost efficiencyand asset parsimony (capital intensity and cost ex-penditures) measures ofthe firm.

We also noted that firms might create distinc-tive, ecofriendly products that appeal to custom-ers, thereby creating competitive advantage.Shrivastava (1995) highlighted tbe concept of de-sign for disassembly as one ofthe techniques that

1999 Bennan. Wicks. Kotha. and Jones 497

firms use to realize this objective. Products de-signed for disassembly have the maximum usefuliife and are easy to disassemble and recycle. Theyare ecofriendly in the sense that they maximizethe use of material in the form of products andrecycled materials. But to benefit from these ac-tivities, a firm has to effectively communicate itsecofriendly approach to its relevant customergroups. It can do so through marketing and ad-vertising campaigns tbat differentiate its ap-proach from its rivals'. It is reasonable, therefore,to expect that these sorts of actions will be re-flected in strategic allocation decisions pertain-ing to marketing and selling costs.

We recognize that the complex relationship be-tween attitudes toward stakeholders and strategic re-source allocation decisions is open to other interpre-tations. By focusing on capital intensity and capitalexpenditures, a firm may be investing in automationto replace workers, a stance that is not usually asso-ciated with a commitment to workers. Similarly,firms may undertake capital expenditures to increaseproduction capacity without any concern about theimpact increased production activity has on the nat-ural environment. In each of the cases above, how-over, the associated rating on tiie KLD variableswould be less favorable. It is the myriad interactionsbetween tbe strategy and stakeholder relationshipvariables that make empirical explorations such astbe study undertaken here necessary.

The stakeholder orientation models help explainhow the interactions between stakeholder relation-ships and strategy variables occur. We tested forcausal relationships in the interactions to see whichmodel best explained the data. We could then makebroader claims about tbe associated managerial deci-sion making. For instance, if the data best fitted tbestrategic stakeholder management model, then wewould infer that it was concern with profits that wasdictating bow and to what extent managers paid at-tention to a given stakebolder {for example, the nat-ural environment). If the data fitted the intrinsicstakebolder commitment model, then we had reasonto believe that an ongoing moral commitment to astakeholder or stakeholders drove strategic decisionmaking and the ultimate impact on financial perfor-mance.

Analysis

Methodological techniques to test for the me-diating and moderating relationships implicit instakeholder tbeory are well established. To ex-plore tbe exact association between resource al-location decisions and stakebolder relationships,however, would require analysis of additional

information, such as data on managerial inten-tions. Tbe current study provides a foundationfor inferring such relationships, wbich could besupplemented by sucb additional data, should itbecome available.

To test the tliree hypotheses, it was necessary toestimate four different regression models. In all cases,we controlled for the operating environment with themeasures of munificence, dynamism, and power ex-plained above. Testing Hypothesis la, the direct ef-fects model, was relatively straightforward. All rele-vant strategy and stakeholder relationship variableswere entered into the model simultaneously, as inde-pendent variables. The hypothesis would be sup-ported if variables from botb groups were signifi-cantly related to firm financial performance. TestingHypothesis lb, tlie moderation model, was similarlyclear. This test required the inclusion of all interac-tions between the stakeholder relationship and strat-egy variables in the regression equation. Moderationwould be supported if tbis model represented a sta-tistically significant improvement over tbe model in-cluding only the direct effects.

Hypothesis 2. tbe mediation model, was testedusing a method outlined by Baron and Kenny(1986) and requiring the estimation of at least tworegression models, one containing only the stake-holder relationship variables and one includingboth the stakeholder relationship and strategy vari-ables. If strategy mediated the association betweenstakeholder relationships and firm financial perfor-mance, the significance of the stakeholder relation-ship variables would be suppressed wben strategyvariables were included in the regression equation.In other words, perfect mediation would hold if tbestakeholder relationship variables had no effect onperformance when the mediating variables (in thiscase, the strategy variables) were included in tbeequation. If this proved true, then a third modelwould have to be estimated, with the stakeholderrelationship variables regressed on tbe strategyvariables to determine which aspects of firm strat-egy mediated the association between stakeholderrelationships and performance.^

^ To test the significance of each model, we em-ployed likelihood ratio tests. The goodness-of-fit sta-tistic, G . is -2 times the "log likelihood" functionreported for that model. The difference between the Gvalues of the nested models is the likelihood ratio teststatistic, which is asymptotically distributed as chi-square [x^: Seabright, Levinthal, & Fidiman, 1992). Inthe discussion that follows and in the tables, we reportmodel results in terms of the significance of the chi-square statistic. The significance of individual vari-ables is reported using standard (-statistics.

498 Academy of Management fournal October

TABLE 1Descriptive Statistics and Zero-Order Correlations'

Variables

1. ROA2. Dynamism3. Munificence4. Power5. Selling intensity6. Capital expenditures7. Efficiency8. Capital intensity9. Employees

10. Product safety/quality11. Diversity12. Natural environment13. Community

Mean

9.520.040.010.22

25.3218.760.637.970.20

-0.330.77

-0.420.82

s.d.

6.900.040.010.24

17.3033.280.19

20.021.030.870.890.940.85

VarianceInflationFactor

1.581.421.651.231.051.541.071.291.151.421.531.54

1

.10"-.10*-.05

.01

.05-.20**-.26**

.22**

.10*

.01

.07

.04

2

-.09-.46**-.08-.04- .11*

.09

.07

.07

.07

.37"*-.04

3

.39**-.24**

.01

.29**-.05-.08

.02-.05-.26**

.01

4

-.06-.05

.08

.03-.06-.06

.09-.16**

.20**

5

.09*-.34**

.07

.08-.07

.23**

.08

.23*'

6

-.03-.09

.03

.00

.14**

.00

.05

7

-.17**-.30**

.07-.40**-.22**-.35**

8

.04-.01-.01

.11*

.08

9

.25**

.28**

.24**

.27**

10 11 12

-.03.21** .17**

-.04 .49**.20**

" N = 486.* p < .05, two-tailed tests

"* p < .01, two-tailed tests

RESULTS

Models

Table 1 provides the descriptive statistics for thestrategy, stakeholder relationship, performance,and control variables. Examining the variance in-flation factors, we found no multicollinearity prob-lems in the data set, as the observed values of thesefactors never exceeded the critical limit of 10(Neter, Wasserman. & Kutner, 1989).

Tables 2,3, and 4 provide the results of the variousregression models. Table 2 reports tbe models used totest Hypothesis la, whicb states that stakeholderrelationships and strategy each have direct andseparate impacts on firm financial performance.Model 1, the restricted model, includes the con-trol and strategy variables. Model 2. tbe fullmodel, includes the control, stakeholder relation-ship, and strategy variables. Model 2 does notrepresent a significant improvement over model1 (; 5 - 3.58, n.s.); however, out of the fivestakeholder relationships, two are significant: theemployees and the product safety/quality mea-sures. We therefore estimated a third model in-cluding only these stakeholder relationship vari-ables. This model, model 3, is a significantimprovement over model 1 {x^2 ~ 6.54, p < .05).

Table 3 presents the regression models necessaryto test Hypothesis lb, which states that stakeholderrelationships moderate the strategy-performancerelationship. Table 3 includes the full model (mod-el 4) and model 5, which includes all the variablesin tbe full model and all tbe interaction terms be-

tween the strategy and stakeholder relationshipvariables. Model 5 is a significant improvementover model 4 (;y 2o = 30.90. p < .10). In otherwords, tbe addition of tbe interaction terms signif-icantly improved explanatory power.

The regression results presented in Table 4 testHypothesis 2, wbich states that firm strategy medi-ates the relationship between stakeholder relation-ships and firm financial performance. Model 6 is arestricted model including only tbe control andstakeholder relationship variables. Strategy vari-ables are included in the full model, model 7. Ifstrategy mediated the stakeholder relationship-performance link, any statistically significantstakeholder relationship variables in model 6should no longer be significant in model 7. Tberesults lend little support to the intrinsic stake-bolder commitment model since both of the vari-ables significant in model 6 [employees and prod-uct safety/quality) are still significant in model 7.

Tests of Hypotheses

Strategic stakeholder management Hypothesisla states that stakeholder relationships will be pos-itively related to performance, after strategy and op-erating environment (control) effects are accountedfor. Results provided in Table 2 (model 2) indicatethat two stakeholder relationship variables, employ-ees [b = 0.33. p < .01) and product safety/quality [b =0.27. p < .05), are positively and significantly relatedto firm financial performance and, importantly, thatmodel 3, the parsimonious model, is a significant


TABLE 2Results of Two-Step GLS Regression Results on ROA; Tests for Direct Effects*

Variable

Constant

EnvironmentDynamismMunificencePower

StrategySelling intensityCapital expendituresEfficiencyCapital intensity

Stakeholder relationshipsEmployeesProduct safety/qualityDiversityNatural environmentCommunity

Model statistics

df

Model 1, Strategy and Environment

16.9200**' (0.9902)

4.0518-56.8870*

0.6856

-0.0337**-0.0050

(7.4910)(33.8700)(0.9245)

' (0.0120) .(0.0038)

-8.5607'** (1.0190)-0.0005*** (0.0001)

1,495.84

Model 2.

16.3920

5.4765-60.1760

1.4564

-0.0296-0.0040-7.8130-0.0006

0.32700.26520.13350.07360.1499

1,492.263.585

Full Model

*** (1.1070)

(7.4960)^ (34.1400)^ (0.8086)

* (0.0129)(0.0040)

* ' * (1.1910)*** (G.OOOl)

* ' (0.1162)* (0.1359)

(0.1229)(0.1658)(0.1443)

Model 3, Parsimonious Model

16.8130*** (1.0320)

9.2091-81.1410*

1.6727*

-0.0363**-0.0029

(7.2100)(33.0800)

(0.84B4)

(0.0125)(0.0041)

-8.4055*** (1.1110)-0.0006*** (0.0001)

0.3747**0.2471^

1,489.306.542

(0.1161)(0.1352)

" N 486. Unstandardized regression coefficients are shown, with standard errors in parentheses.*p < .10* p < .05 • _

** p < .01 : '** p < .001 ' .

improvement over model 1. Taken together, theseresults provide support for Hypothesis la.

Hypothesis lb states that stakeholder relationshipsmoderate the relationship between strategy and per-formance. To test the impact of moderation, we intro-duced interaction terms in model 5 (Table 3). Wefound that model 5 is a significant improvement overmodel 4 and that 9 of 20 interaction terms are signif-icant at p < .10 or above. Specifically, we found thatthese interactions were significant and related to firmfinancial performance: employees and efficiency;product safety/quality and capital intensity, sellingintensity, and efficiency; diversity and selling inten-sity, capital expenditures, and efficiency; the naturalenvironment and capital expenditures; and commu-nity and capital expenditures. These results confirmour argument that stakeholder relationships moder-ate the relationship between strategy and firm finan-cial performance.

Intrinsic stakeholder commitment. Based on theintrinsic stakeholder commitment model. Hypoth-esis 2 states that commitment to multiple stake-bolders mediates the relationship between strategyand performance, after the impact of the operatingenvironment is controlled for. An examination ofTable 4 yields little support for this hypothesis.

Thus, the results do not support the intrinsic stake-holder commitment model.

Operating environment and strategy variables.It is interesting to note that the cost efficiency variableis negative and strongly related to performance. Asnoted earlier, the smaller this ratio, the better a firm'soperating efficiency; thus, the negative sign is in theexpected direction. Additionally, capital intensity isnegatively related to performance and is significant.Previous studies have shown that capital intensity isgenerally negatively related to financial perfor-mance.'' Among the variables controlling for the op-erafing environment, munificence is negatively re-lated to performance, and power exhibits a positiverelationship, findings that are consistent with priorstrategy studies (e.g.. Capon et al., 1990).

In sum. the results suggest tbat stakeholder rela-

^ According to Buzzell and Gale (1987). a negative rela-tionship emerges because (1) capital intensity leads to ag-gressive and often destructive competition, (2) heavy capi-tal investment acts as a barrier to exit irom unprofitablebusinesses, (3) management often sets a normal proFU-to-sales target for businesses exhibiting higher-than-normalinvestment/sales ratios, and (4) capital-intensive businessesmay be less efficient in using fixed or working capital.

500 Academy of Management journal October

TABLE 3Results of Two-Step GLS Regression Results on ROA: Tests for Moderation Effects'

Variable Model 4, Full Model Model 5, Moderated Model

Constant

EnvironmentDynamismMunificencePower ' * •


Stakeholder relationships ' •Employees • _: ,,Product safety/qualityDiversity ' ••"Natural environmentCommunity

InteractionsCapital intensity x employeesCapital intensity X product safety/qualityCapital intensity X diversityCapital intensity X natural environmentCapital intensity X communitySelling intensity x employeesSelling intensity X product safety/qualitySelling intensity X diversitySelling intensity X natural environmentSelling intensity X communityCapital expenditures x employeesCapital expenditures x product safety/qualityCapital expenditures x diversityCapital expenditures x natural environmentCapital expenditures x communityEfficiency X employeesEfficiency x product safety/qualityEfficiency X diversityEfficiency X natural environmentEfficiency X community

Model statistics

df

16.3920**" (1.1070)

5,4765 (7.4960)-60,1760* (34.1400)

1.4564* (0.8086)

-0,0296* (0.0129)-0.0040 (0.0040)-7,8130*** (1.1910)-0.0006*'* (0.0001)

0.3270*' (0.1162)0.2652* (0.1359)

(0.1229)(0.1658)

0.13350.07360.1499 (0.1443)

1.492.26

11,6550*** (1.3730)

6.2912 (7.8360)

-68,9760* (35,3300)

1,8167*

0,0196

0,0044

-2,9202*

-0.Q007***

-0.4987

-3.1098*'*

2.6160*'

0,7350

0.6450

0,0000

0,0004*

0,0000

-0.0000

-0.0001

-0.0016

0.0275*

-0.0321**

-0.0087

-0.0106

-0.0065

0.0031

0.0083*

0.0095*

-0.0093*

1.5485*

3.9532*'*

-2.6631*

-0.8834

-0.4112

1,461.36

30.90

20

(0.9292)

(0,0171)

(0.0064)

(1.6050)

(0.0002)

(0.7639)

(0.9404)

(0.9266)

(0.9999)

(0.9136)

(0.0002)

(0,0002)

(0.0001)

(0.0001)

(0.0001)

(0.0090)

(0.0116)

(0.0103)

(0.0108)

(0.0113)

(0.0043)

(0,0063)

(0,0049)

(0.0046)

(0.0056)

(0.9218)

(1,0820)

(1.1380)

(1,2530)

(1,0970)

N = 486, Unstandardized regression coefficients are shown, with standard errors in parentheses,*p < .10" p < .05

* * p < .01 :""• p < .001

tionships have both direct and indirect (modera-tion) effects on firm financial performance. Inter-estingly, all five of the stakeholder relationshipvariahles used in the study have indirect (that is,moderating) effects on firm performance. Giventhat nine of the interaction terms employed in the

regression model are significant, these findingssuggest that the connections among stakeholder re-lationships, strategy, and financial performance arefairly complex. Finally, our results provided nosupport for the intrinsic stakeholder commitment(mediation) model of stakeholder management.

1999 Bennan. Wicks, Kotha. and Jones 501

TABLE 4Results of Two-Step GLS Regression on ROA: Tests for Mediation Effects*

Variable

Constant

EnvironmentDynamismMunificencePower


Stakeholder relationshipsEmployeesProduct safety/qualityDiversityNatural environmentCommunity

Model statistics

Model 7.Stakeholder Relationships

and Environment

10.2340*** (0.4612)

3,6288-87.1050*

1.1494

(7.3720)(34.7300)

(0.7881)

0.4045*** (0.1068)0.2331^0.09740.06450.1658

1,505.74

(0.1337)(0.1087)(0.1526)(0,1391)

Model 8,Full Model

16.3920**' (1.1070)

5.4765-60.1760^

1.4564""

-0.D296*-0.0040-7.8130**

(7.4960)(34.1400)(0.8086)

(0.0129)(0.0040)

* (1.1910)-0.0006*** (0.0001)

0.3270**, 0.2652*

0.13350.07360.1499

1,492.2613.464

(0,1162)(0.1359)(0.1229)(0.1658)(0.1443)

" JV = 486. Unstandardized regression coefficients are shown, with standard errors in parentheses,^ p < .10* p < .05

** p < .01' * ' p < ,001

DISCUSSION AND CONCLUSION

The purpose of this article is to advance theoreticaland empirical research in stakeholder theory. We be-gan by (l) highlighting two theoretical approaches toa firm's stakeholder orientation and (2) showing howthese two approaches could be empirically tested us-ing longitudinal data available in external databases.Although much has been written on stakeholder the-ory, no previous research has specified the modelsimplicit in the writings of normative theorists orsought to test the empirical relationships they as-sume. This research also provides an important ad-vance in the empirical testing of these distinct stake-holder theory models, particularly their instrumentaland empirical/descriptive strands.

To measure our constructs of stakeholder rela-tionships, we employed the KLD database, whichuses five broad variables to capture a firm's stake-holder posture. We found that only two of thesefive variables, employees and product safety/qual-ity, directly affected financial performance. Theseresults reinforce the perception of stakeholder the-orists that emphasizing how a firm manages its

relationships with employees and customers (espe-cially product safety/quality issues) can have a sig-nificant impact on financial performance. The re-sults also support previous management researchcontaining arguments for a connection between thetreatment of a given stakeholder (such as customersor employees) and firm financial performance [e.g.,Huselid, 1995; Pfeffer, 1994; Waddock & Graves,1997). More specifically, these two variables can bea source of differentiation for an individual firmand improve its financial performance.

It is surprising that the other three variables—community, diversity, and the natural environ-ment—failed to exhibit statistically significant im-pacts on firm financial performance. This isparticularly true for the measures relating to com-munity relations and diversity. In the theory sec-tion, we pointed to prior research (e.g., Robinson &Dechant, 1997; Waddock & Graves, 1997) that sug-gests these variables should be positively related toan organization's achievement of its financial goals.

It may be that we found no direct effects forcommunity relations and diversity because isolat-


ing these variables does not help to differentiate anindividual firm. That is, even though these twovariables are normatively important, their ability todirectly enhance financial performance may benegligible. It is also possible that other contextualfactors not examined here, such as the geographiclocation ofa corporation, can determine the impor-tance of these two variables.

A plausible explanation for tbe lack of significanceof tbe natural environment variable may be that oursample contained firms from many industries. It islikely that environmental regulations do not bave auniform impact across industries and tbus are iudus-try-specific. Concern for tbe natural envirotmientmay also vary across industries' cultures. Tbat is,some industries may take environmental actionsmore seriously tban otbers, regardless of regulatoryregime. Sucb a stance within a particular industrymay be obscured by our sample. Therefore, focusingon a broad cross section of industries, as we did intbis study, does little to isolate the direct impact oftbis variable on financial performance.

Finally, as tbe results of tbe moderated modelsdiscussed below suggest, althougb tbese tbree vari-ables bad no direct effect on financial performance,tbey did in fact moderate tbe relationsbip betweenstrategy and performance.

Strategic stakehalder majnagement. We arguedthat witb strategic stakebolder management, firms ad-dress stakebolder concerns wben tbey believe doingso will enbance firm financial performance. To iso-late tbe impact of stakeholder relationsbips on per-formance, we developed two distinct models—tbedirect effects model and the moderated model.

Tbe results for tbe direct effects model sbow thatonly two of tbe five variables tested exbibitedstrong effects on financial performance. In otberwords, tbe findings indicate tbat managerial atten-tion to two important stakebolder variables, em-ployees and product safety/quality, can belp im-prove firm financial performance. Tbis resultsuggests tbat managers may be better off isolatingtbese two stakeholder relationsbips from otherstrategy dimensions sucb as cost efficiency, assetparsimony, and (marketing) differentiation in orderto improve performance.

Results from tbe moderated model indicate tbatnine interaction effects are significant. Also, all fivestakebolder relationsbip variables moderate tbe strat-egy-performance relationsbip. Tbis suggests that tbeassociations among stakeholder relationships, strat-egy (that is, resource allocation decisions), and finan-cial performance are more complex tban those sug-gested by tbe direct effects model. Altbougb thestance a firm takes toward its key stakeholders isimportant in its own rigbt (as noted in our arguments

for tbe direct effects model), managers sbould notignore tbe interdependence between strategy andstakebolder relationsbips. For example, altbougbtbree of five stakebolder variables (diversity, naturalenvironment, and community) exhibited no directeffects, tbey did moderate tbe strategy-performancerelationsbip.

Intrinsic stakeholder commitment. We arguedtbat witb intrinsic stakebolder commitment, firmsaddress stakebolder concerns because of a moralcommitment to stakeholder groups and that thiscommitment will drive strategic decision making,wbicb in turn impacts firm financial performance.We tested this proposal via a mediated regressionmodel. Our findings indicate no support for tbeintrinsic stakeholder commitment model; stake-bolder relationsbips did not empirically drive strat-egy in our sample. It is possible tbe firms used intbe study did not view stakebolder relationsbips asa normative driver for strategy formulation and im-plementation. Alternatively, a more complexmodel incorporating a range of managerial motiva-tions/values may be required to better capture tbeintrinsic stakebolder commitment orientation.

Taken togetber, tbese results suggest many ave-nues for future empirical work in stakebolder tbe-ory. First, tbe most obvious extension is tbat futurework could include survey data capturing manage-rial motivations and intentions pertaining to strat-egy decisions and stakebolder orientation. Capturingintentions could provide valuable insigbts botb tobelp categorize tbe commitment of firms (as support-ing either tbe strategic stakeholder management ortbe intrinsic stakebolder commitment model) and tocompare motives witb observed bebavior (are firms'acts consistent with tbeir stated intentions?). Second,a related line of research that appears relevant is tberole trust plays in stakebolder relations. For example,Barney and Hansen (1994). Hill (1995), )ones (1995),and Wicks, Berman, and Jones (1999) argued tbatestablishing trusting relationsbips with key stake-holders can significantly lower costs and, therefore,impact firm performance. Further, Calton and Lad(1995) argued tbat tbe approacb a firm uses to interactwitb one stakebolder group (the trust or mistrust tbatis establisbed) may influence bow otber stakeboldergroups perceive tbe firm (cf. Jones, 1995). Empiricalexplorations of trust and its spillover effects couldenhance understanding of firm-stakeholder relationsfurther. Therefore, studies examining the role trustplays in such relationsbips seem warranted.

Tbird, altbougb we focused on a ratber narrowfinancial definition of firm performance, researcb-ers examining corporate social performance baveargued for expanding tbe definition of firm perfor-mance to include more tban financial measures


(e.g.. Bendheim, Waddock, & Graves, 1998). A moreinclusive measure of performance might enhancethe validity of the intrinsic stakeholder commit-ment model. Indeed, if the normative elements ofstakeholder theory are to be taken seriously and theintrinsic worth of all stakeholders acknowledged,such a measure of performance seems a necessarystep. We recognize that such attempts can greatlycomplicate what constitutes the dependent or in-dependent variable. Broadening the definition ofperformance, however, may allow researchers tobetter understand the important links among stake-holder relationships, strategy, and performance.

There are also implications for research on firmstrategy. We relied on Hambrick's (1983) opera-tional definitions of Porter's (1980) generic strate-gies. Using measures like capital intensity reveals agreat deal about the allocation of resources at thecorporate level, but Porter's typology was meant todescribe business-level strategies. An examinationofthe links at the level of the strategic business unitwould also appear fruitful. Finally, the generaliz-ability of this study is limited, because ofthe sam-ple employed to uncover the relationships of inter-est. Future work should attempt to expand thesample to include smaller firms and to better con-trol for specific industry effects.

The inferences for managers seem clear. Rela-tionships with stakeholders have a direct impact onfinancial performance. Fostering positive connec-tions with key stakeholders can help firm profit-ability. More importantly, stakeholder relation-ships and resource allocation decisions areinseparable, because how managers distribute re-sources inevitably has implications for the strengthof stakeholder relationships, and these sets of vari-ahles interact to affect firm financial performance.Managers not currently considering the effects ofdecisions regarding resource allocations vis-a-viskey stakeholders are at a competitive disadvantageto those whose thinking is more holistic.

This study adds value to the existing work in stake-holder theory on a number of fronts. We began byconstructing models that make explicit the theoryimplicit within stakeholder research, thus openingup the possibility of empirically testing the validity ofthese models. Additionally, we were able to test thesemodels using the KLD database, after includingmeasures of strategy and controlling for operatingenvironment. Examining the relationships amongstrategic decision making, a firm's stakeholder rela-tionships, and financial performance represents animportant link in the process of gaining understand-ing of firm-stakeholder relations. The current resultssupport the idea tliat managerial attention to multiplestakebolder interests can affect firm financial perfor-

mance, providing concrete support for an argumentlong advanced by stakeholder theorists (e.g.. Free-man, 1984; Freeman & Gilbert, 1988). This study pro-vides a foundation future empirical researchers canuse to further explore the relationships between at-tention to stakeholders and firm performance, anagenda that has considerable significance for theo-rists and managers alike.

REFERENCES

Adler, P. 1992. Time and motion regained. HarvardBusiness Review, 70(1): 97-108.

Altman, B. W. 1998. Corporate community relations inthe 1990s: A study in transformation. Business B-Society, 37: 221-227.

Barney, J. B., & Hansen. M. H. 1994. Trustworthiness as asource of competitive advantage. Strategic Manage-ment Journal, 15: 175-190.

Baron, R.,& Kenny. D. 1986. The moderator-mediator variabledistinction in social psychological research: Conceptual.strategic and statistical fxmsiderations. Journal of Per-sonality and Social Psychology, 51: 1173-1182.

Becker. B., & Cerhart. B. 1996. The impact of humanresource management on organizational perfor-mance: Progress and prospects. Academy of Man-agement Journal, 39: 779-801.

Bendheim, C. L., Waddock, S. A., & Graves, S. B. 1996.Determining best practice in corporate-stakeholderrelations using data envelopment analysis: An in-dustry-level study. Business &• Society, 37: 306-338.

Bowie, N. E. 1994. A Kantian theory of capitalism. Huf-fin lectures in business ethics: 1-40. Charlottes-ville, VA: Darden School, University of Virginia.

Boyd, B. 1990. Corporate linkages and organizational envi-ronment: A test of the resource dependence model.Strategic Management Journal, 11: 419-430.

Bromiley, P., & Marcus, A. 1989. The deterrent to dubi-ous corporate behavior: Profitability, probability,and safety recalls. Strategic Management Journal,10: 233-250.

Buzzell. R. D., & Gale, B. T. 1987. The PIMS principles:Linking strategy to performance. New York: FreePress.

Galton, ). M., & Lad, L. J. 1995. Social contracting as atrust-building process of network governance. Busi-ness Ethics Quarterly, 5: 271-296.

Gapon, N., Farley, J. U., & Hoenig, S. 1990. Determinantsof financial performance: A meta-analysis. Manage-ment Science, 36: 1143-1156.

Collins. J.. & Porras, J. 1994. Built to last: Successfulhabits of visionary companies. New York; HarperBusiness.

Davidson, W. N., & Worrell. D. L, 1988. The impact ofannouncements of corporate illegalities on share-


holder returns. Academy of Management Journal,31: 195-200.

Dechant, K., Altman, B., Downing, R. M., & Keeney, T,1994. Environmental leadership: From complianceto competitive advantage. Academy of Manage-ment Executive, 8(3): 7-28.

Delaney, J. T., & Huselid, M. A. 1996. The impact ofhuman resource management practices on percep-tions of organiziitional performance. Academy ofManagement Journal, 39: 949-969.

Delery, |.. & Doty, D. H. 1996. Modes of theorizing instrategic human resource management: Tests of uni-versalistic, contingency, and configurational perfor-mance predictions. Academy of Management Jour-nal, 39: 802-835,

Dess, G. D., & Beard, D. W. 1984. Dimensions of organi-zational task environments. Administrative ScienceQuarterly, 29: 52-73.

Domini Social Investments. 1997. Domini Social Invest-ments: 1997 social screening criteria and proxy vat-ing guidelines. Boston: Domini Social Investments.

Donaldson. T., & Preston, L. 1995. The stakeholder theoryof the corporation: Concepts, evidence, and implica-tions. Academy of Management Review, 20; 65—91.

Evan, W., & Freeman, R. E. 1983. A stakeholder theory ofthe modern corporation: Kantian capitalism. In T.Beauchamp & N. Bowie (Eds.), Ethical theory in busi-ness: 75-93. Englewood Cliffs, NJ: Prentice-Hall.

Frank, R. H. 19R8. Passions within reason: The strategicrole of emotions. New York: Norton.

Freeman. R. E. 1984. Strategic management: A stake-holder approach. Englewood Cliffs, NJ: Prentice-Hall.

Freeman, R. E. 1994. The politics of stakeholder theory:Some future directions. Business Ethics Quarterly,4: 409-422.

Freeman, R. E., & Gilbert. D. R., Jr. 1988. Corporatestrategy and the search far ethics. EnglewoodCliffs. NJ: Prentice-Hall.

Friedman, M. 1970. The social responsibility of businessis to increase profits. New York Times Magazine,September 13: 32.

Frooman, J. 1997. Socially irresponsible and illegal be-havior and shareholder wealth: A meta-analysis ofevent studies. Business & Society, 36: 221-249.

Gabor, A. 1991. Rochester focuses: A community's corecompetence. Harvard Business Review, 69(4): 116-126.

Gale. B. T. 1980. Can more capital buy higher productiv-ity? Harvard Business ileview, 58(4): 78-86.

Graves, S., & Waddock. S. A. 1994. Institutional ownersand corporate social performance. Academy ofManagement Journal, 31: 195-200.

Greene, B. 1992. LIMDEP, version 6.0. New York: Econo-metric Studies.

Hamhrick. D. C. 1983. High profit strategies in maturecapital goods industries: A contingency approach.Academy of Management Journal, 26: 687-707.

Hart, S. 1995. A natural-resource-based view ofthe firm.Academy of Management Review, 20: 986-1014.

Hill, C. W. L. 1995. National institutional structures,transaction cost economizing and competitive ad-vantage; The case of Japan. Organization Science, 6:119-131.

Hoffer, G. E., Pruitt, S. W., & Reilly, R. J. 1988. The impactof product recalls on the wealth of sellers: A reexami-nation. Journal of Political Economy, 96: 663-670.

Huselid, M. 1995. The impact of human resource man-agement practices on turnover, productivity, andcorporate fmancial performance. Academy of Man-agement Journal, 3ii: 635-672.

Jauch, L. R.. & Kraft. K. L. 1986. Strategic management ofuncertainty. Academy of Management Review, 11:777-790.

Jones, T. M. 1995. Instrumental stakeholder theory: Asynthesis of ethics and economics. Academy ofManagement Review, 20: 404-437.

Jurkovitch, R. 1974. A core typology of organizationalenvironments. Administrative Science Quarterly,19; 380-379.

Kmenta, J. 1986. Elements of econometrics. New York;Macmillan.

Kotha, S., Caeldries, F.. & Schendel, D. 1997. Strategic andenvironmental correlates of performance: Evidencefrom the Japanese automobile manufacturers. In H.Thomas & D. O'Neal (Eds.), Strategic discovery: Com-peting in new arenas: 265-298. New York: Wiley.

Kotha, S., & Nair, A. 1995. Strategy and environment asdeterminants of performance: Evidence from the Jap-anese machine tool industry. Strategic Manage-ment Journal, 16: 497-518.

Kotha, S.. & Vadlamani, B. 1995. Assessing generic strat-egies: An empirical investigation of two typologiesin discrete manufacturing industries. StrategicManagement Journal, 16: 75-83.

MacMillan, I. C, Hamhrick, D. C, & Day. D. L. 1982. Theproduct portfolio and profitability—A PIMS-basedanalysis of industrial product businesses. Academyof Management Journal, 25: 733-755.

Miles, R., & Snow, G. 1978. Organizational strategy,structure, and process. New York: McGraw-Hill.

Miller, D. 1987. The structural and environmental corre-lates of business strategy. Strategic ManagementJournal, 8: 55-76. |

Mintzberg, H. 1988. Generic strategies; Toward a compre-hensive framework. In R. Lamb & P. Shrivastava (Eds.),Advances in strategic management, 5: 1-68. Green-wich, CT: JAI Press.

Neter, J., Wasserman, W.. & Kutner, M. H. 1989. Appliedregression models. Homewood, IL: Irwin.

1999 Berman, Wicks, Kotha, and Jones 505

Paine. L. 1994. Managing for organizational integrity.Harvard Business Review, 72{2); 106-117.

Pfeffer. J. 1994. Competitive advantage through people:Unleashing the power of the work force. Boston:Harvard Business School Press.

Pfeffer. ].. & Salancik. G. R. 1978. The external control oforganizations: A resource dependence perspec-tive. New York: Harper & Row.

Phillips, R. A. 1997. Stakeholder theory and a principleof fairness. Business Ethics Quarterly, 7: 51-66.

Porter, M. E. 1980. Competitive strategy. New York: FreePress.

Quinn. D., & Jones, T. M. 1995, An agent morality view ofbusiness policy. Academy of Management Beview,20: 22-42.

Rohinson. G., & Dechant, K. 1997. Building a hnsinesscase for diversity. Academy of Management Exec-utive, 11(3): 21-31.

Russo, M., & Fouts. P. 1997. A resource-based perspec-tive on corporate environmental performance andprofitability. Academy of Management fournal, 40:534-559.

Scott. R. W. 1981, Organizations: Bationai, natural andopen systems. Englewood Cliffs, NJ: Prentice-Hall.

Seahright, M, A., Levinthal, D, A. & Fichman, M. 1992.Role of individual attachments in the dissolution ofinterorganizational relationships. Academy of Man-agement foumal, 35: 122-160.

Shrivastava, P, 1995. The role of corporations in achiev-ing ecological sustainabillty. Academy of Manage-ment Beview, 20; 936-960.

Thomas, D., & Ely, R. 1996. Making differences matter: Anew paradigm for managing diversity. HarvardBusiness Beview, 74(5): 79-90.

Thompson, }. D. 1967. Organizations in action. NewYork: McGraw-Hill.

United Nations Educational, Scientific, and Gultural Or-ganization. 1992. Towards cleaner production meth-ods. Nature and Besources, 28(4): 4.

Venkatraman, N., & Ramanujam, V. 1986. Measurementof business performance in strategy research: A com-parison of approaches. Academy of ManagementBeview, 11: 801-814.

Waddock, S, A.. & Boyle. M. E. 1995, The dynamics ofchange in corporate community relations. Califor-nia Management Beview, 37(4): 125-140.

Waddock, S, A,, & Graves, S. 1997. The corporate socialperformance-financial performance link. StrategicManagement Journal, 18: 303-317.

Wicks, A. G., Berman, S, L,. & Jones. T, M. 1999. Thestructure of optimal trust: Moral and strategic impli-cations. Academy of Management Review, 24: 99-116.

Wicks, A. C., Gilbert, D. R., Jr., & Freeman, R. E. 1994. Afeminist reinterpretation of the stakeholder concept.Business Ethics Quarterly, 4; 475-498.

Wood, D. J., & Jones. R. E. 1995. Stakeholder mismatch-ing: A theoretical problem in empiric:al research incorporate social performance. International Journalof Organizational Analysis, 3: 229-267.

Youndt. M., Snell, S,. Dean, J.. & Lepak, D. 1996. Humanresource management, manufacturing strategy, andfirm performance. Academy of Management Jour-nal, 39: 836-866,

Shawn L. Bennan is an assistant professor of managementpolicy at the School of Management, Boston University. Hereceived his Ph.D. in strategic management from the Uni-versity of Washington, His current research interests in-clude empirical testing of the stakeholder theory of the firm,issues of corporate governance, and explorations of trust atboth the organizational and societal levels,

Andrew C. Wicks is an associate professor of businessethics at tlie School of Business Administration. Universityof Washington. He received his Ph.D. in religious ethicsfrom the University of Virginia. His research interests in-clude stakeholder theory, trust, managed care, accountingethics, and employee stock ownership programs.

Suresh Kotha is an associate professor of strategicmanagement at the School of Business Administration,University of Washington. His teaching and research in-terests are in the areas of competitive strategy, manufac-turing strategy, and U.S./Japanese comparative practices.He is also working on corporate strategy and the Internet,particularly on how firms develop competitive advantageon the Internet.

Thomas M. Jones is a professor of management and orga-nization at the University of Washington. His Ph.D. is fromthe University of California, Berkeley. His research interestsinclude stakeholder theory, corporate social performance,ethical decision-making models, business ethics, legal eth-ics, business and society paradigms, corporate governance,and shareholder litigation.


APPENDIX AKLD Rating Criteria*

Measure Area of Concern Area of Strength

Community

Diversity

Employees

Natural environment

Product safety

Payment of substantial fines or civil penalties, orinvolvement in major litigation relating to acommunity in wbich the Tirm operates. Companyrelations with local community have becomenotably strained due to plant closings or otherbreach of agreements with local community.

Payment of fines or civil penalties as a result ofaffirmative action controversies. No members oftraditionally underrepresented groups on theboard of directors or among senior linemanagement.

Notably poor union relations, payment ofsubstantial fines regarding worVer safetyconditions, dramatic workforce reductions, andunderfunded pension/benefit programs.

Current liabilities for hazardous waste sites exceed$50 million, or the company has recently paidsubstantial fines or civil penalties for wastemanagement violations. Also, a consistent patternof violations of air, water, and otherenvironmental regulations, the use of ozone-depleting chemicals, or the release of high levelsof toxic chemicals.

Payment of substantial fines or civil penaltiesrelating to product safety or antitrust violations.also involvement in controversial advertisingprograms.

Corporate giving of over 1.5 percent of net earningsbefore taxes, iruiovative giving, participating inpublic/private partnerships aimed at providinghousing for the disadvantaged. and support forlocal primary and secondary education.

Promotion of women and people of color withinthe organization, representation of women,people of color, and/or the physically andmentally challenged on the board of directors.This also includes generous family benefitsaddressing work/family issues, employment ofthe physically and mentally challenged, andprogressive policies toward gay and lesbianemployees.

Strong union relations, cash profit sharing,employee involvement in decision-makingprocesses, and strong retirement benefits.

Production of environmentally safe products orinvolvement in the environmental servicesindustry. Aggressive pollution prevention andrecycling programs.

Ongoing commitment to quality throngh a well-developed, company-wide quality program. Also,leadership in industry research and developmentand innovation or direct involvement inproviding products and services to theeconomically disadvantaged.

" Source: Domini Social Investments (1997); adapted and used by permission.'' For each measure, KLD assigns a rating of -2 (major concern) to -1-2 (major strength) to a firm, using the criteria summarized here.

APPENDIX BTheoretical Variables, Measures, and Sources: Strategy and Operating Environment

Theoretical Variable Empirical Proxy Source

StrategySelling intensity General, selling, and administrative expensesi,/

net sales j,.Capital expenditures (Net capital expendituresi,/net sales,;) x 100.Efficiency Cost of goods soldn/net saleSj,.

Capital intensity Total assetSj,/namber of employeesn.

Compact Disclosure, 1997, supplemented by annualreports.

Compact Disclosure. 1997.Compact Disclosure, 1997, supplemented by annual

reports.Assets; Compact Disclosure, 1997. Employees:

Standard & Poor's stock reports, year (.

Operating environmentDynamism

Munificence

Power

Regression of time on the value of shipments ortotal industry gross product. Standard error of theregression slope coefficient (S^ ) divided by meanvalue; 1987-95.

Regression of time on the value of shipments ortotal industry gross product. Regression slopecoefficient (B]]^divided by mean valne; 1987-95.

Four-firm concentration ratio: Sales of four leadingfirms divided hv total industry sales.

SIC codes 20—39 (value of shipments). AnnualSurvey of Manufactures. All other SIC codes(total industry gross product). Gross Product byIndustry.

SIC codes 20-39 (value of shipments). AnnualSurvey of Manufactures. All other SIC codes(total industry gross product). Gross Product byIndustry.

Dun &• Bradstreet's Business Rankings.

488.full_2

Documents