Jonathan Knowles and Tom Hunsaker have an article in the MIT Sloan Management Review that considers the change in thinking needed when a firm is managed for multiple stakeholders. How then to go about measuring performance in multistakeholder firms?
When Money Is All that Matters
For the past generation or two firms have often been run focused on those supplying a single resource. This resource was the money that goes into the firm. In Milton Friedman’s thinking, this was money from the owners, i.e., those investing in the firm. (See here for some comments on this view). This is a shareholder-value focused view of capitalism. Firms are there only to make money for their owners, i.e., shareholder primacy.
Knowles and Hunsaker, set up a slightly different viewpoint as the baseline but still one that they suggest we need to get past. They suggest that customers may be also seen to matter in firms focused only on the money. Customers too give money to the firm. Esshentially what they are moving beyond is the idea that business is all conducted for those who supply the money. Nothing else.
The authors argue that these money-focused ways of thinking are compensatory. By which they mean doing badly on one element of the business can be made up for, as long as the money keeps on rolling in somewhere else. For example, a firm may treat the employees badly but if the funding and customers remain in place this poor treatment of employees wouldn’t be seen as a major problem.
A Multistakeholder Focus
A multistakeholder view of the firm is quite different. It sees all those bringing something to the firm, or even those impacted by the firm, as mattering to decisions made.
In such a view investors still matter. Customers continue to matter too. Yet, so do employees; they have a right to expect good pay and decent working conditions. So does the local community; which does not want pollution but does want the firm to positively contribute to life around its business locations. So does government; paying taxes is an obligation of multistakeholder firms, not something that should be avoided out of some misplaced duty to give as much money as possible back to the owners. Some stakeholders can be a bit harder to define clearly, e.g., the needs of future generations. Still, the firm’s actions impact future generations who, therefore, do matter to the decisions made in a stakeholder-focused view of the firm.
Measuring Performance In Multistakeholder Firms
If you have a firm that aims to consider multiple stakeholders what does this mean for performance measurement? Knowles and Hunsaker say we need to start thinking of firms differently.
The new multistakeholder approach to strategy involves thinking of business as a biological system — one in which the success of the whole requires the health of each of the parts.Knowles and Hunsaker, 2022
In multistakeholder capitalism, you are only as strong as your weakest behavior.Knowles and Hunsaker, 2022
Thus, in the shareholder primacy model of capitalism you can measure performance on a single metric. This would be profits or shareholder value. (BTW both of these “measures” are a lot vaguer ideas than they seem but that is a discussion for another day). In a new multistakeholder view, there are a range of performance measures related to different stakeholders all of which need to be positive. Managers can’t say, ‘we are great for our employees, customers, and investors. Unfortunately, we are poisoning the people who live near our factories. Still, helping three out of four stakeholders ain’t bad’.
When you measure performance in multistakeholder firms this is closer to measuring your personal health. (You are a biological system after all). The doctor doesn’t just say, your blood pressure is great while ignoring the fact that you are are coughing all over the place. We can analogize the multistakeholder firm as a person, you need to get everything right and in proper balance to be healthy. (As an aside, I do find it ironic that many people in the US argue corporations are people but they think you can measure corporate success on a single metric. These people would make terrible medical doctors).
What Does This Mean?
When you are running a firm for a variety of stakeholders this does makes things complex. You can’t just say that you want to make some single metric bigger. You can’t just ignore weaknesses, like treating employees badly, hoping to make up for the weakness on another dimension. In many ways managing for multiple stakeholders, and measuring success, is a much more interesting challenge than managing for the benefit of shareholders alone. I’m not saying that this is the main reason to adopt a stakeholder viewpoint, but doing so should give managers, and, most critically obviously, academic researchers, lots of fascinating problems to think through.
Read: Jonathan Knowles and B. Tom Hunsaker (2022) The New Math Of Multistakeholderism, MIT Sloan Management Review,