It’s not all about the bottom line, and firms can be strongly competitive even when they funnel fewer profits to shareholders.
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.
The authors’ study focuses on workforce rents as a way of measuring stakeholder value, but it reminds us that compensation is just one part of the equation. Companies that prioritize their stakeholders — whether through better wages, sustainability initiatives, wellness programs or community outreach — shouldn’t be penalized for distributing more value to society.
In fact, these practices often give them an edge in fostering loyalty, innovation and lasting relationships, offering a competitive advantage that isn’t reflected in traditional financial assessments. While they may not directly boost shareholder returns, they create value that is crucial when evaluating a company’s long-term competitiveness.
In other words, overall value — the sum of all rents — is what really constitutes competitive advantage.
Read the full article here/ By Jeroen Neckebrouck / IESE Insights
