Companies that fail to take a multi-stakeholder approach are missing out on far higher potential returns, according to a new study from FCLTGlobal, a not-for-profit research organization, and the ESG Analytics Lab at the Wharton School at the University of Pennsylvania.
The research, published in a report titled Walking the talk: Valuing a multi-stakeholder strategy, analyzes the annual reports of more than 3,000 companies around the world, drawn from MSCI’s All Country World Index. Researchers were looking for ‘stakeholder-oriented language’ (the talk) before going on to compare the use of such language with ESG outcomes (the walk).
The report finds that companies that prioritize a multi-stakeholder approach generate higher returns than those that do not. In fact, researchers claim that if all the companies in the study had performed at the highest level – like those in the top walk/talk tercile – they would have generated a collective $2.9 tn in additional value between 2010 and 2020. The research period is actually 11 years, with the study authors estimating the full additional value that could have been generated over that time at $3.2 tn.
Until now, ‘there has been too much focus on the question of whether ESG outcomes contribute to financial performance and not enough on how, when and where that contribution occurs,’ says Witold Henisz, Deloitte & Touche professor of management and founder of the ESG Analytics Lab, in a press statement announcing the findings. ‘This research highlights the importance of a firm’s stakeholder orientation and its presentation thereof for the level and stability of its return on invested capital (Roic), especially over a two to three-year time horizon.’
Researchers were looking to answer the question: what does it take to earn a return from implementing a multi-stakeholder strategy and offer a rebuttal to the skeptics [of such an approach to business]? To answer it, FCLTGlobal teamed up with the ESG Analytics Lab to compare the characteristics and performance of thousands of companies pursuing various stakeholder-oriented strategies.
The study uncovers a number of benefits to pairing strong stakeholder language with strong performance on material ESG measures. The companies that did so:
- Generated 4 percent higher returns over a three-year period, as measured by Roic
- Delivered 1.5 percent higher sales growth over a three-year period
- Delivered more stable returns resulting in 9 percent lower predicted Roic volatility over three years
- Invested twice as much in R&D as a percentage of sales
- Were 50 percent more likely to issue long-term guidance.
Talk and walk
A ‘high walk, high talk’ approach may take time to yield returns, note the researchers, but even talking the talk before you walk the walk can produce results, at least in the short term.
‘High talk/high walk firms had higher sales growth in the long run (over more than three years) but, initially, in the short run (zero and one-year periods), the firms that had high talk and low walk scores did better,’ notes the study.
‘Essentially, there is some meaningless stakeholder talk: firms high on talk but low on walk underperform on many metrics of success over time. But talk can also be a leading indicator of improving returns. Firms that start using more stakeholder-oriented language and then back it up over time with improving walk metrics also do better.’
The researchers acknowledge, however, that separating empty talk from the talk of companies that may simply be earlier in their journey is a challenge for stakeholders – especially investors.
What the findings don’t mean is that shareholder-centric strategies don’t pay off, add researchers – ‘In the short run, firms focused primarily on their shareholders also perform well,’ they say – but the effect decreases over the long run.
‘The positive effects of an approach to business that over-indexes to a single group of stakeholders (to the exclusion of others) appear to fade over longer periods of time,’ write the researchers. ‘Those over-indexed firms also produce more volatile performance (as measured by the standard deviation in Roic) compared with multi-stakeholder-oriented firms, making firms with a narrow focus less resilient in a rapidly evolving operating environment.
‘In essence, while there is often a natural gravitational pull to prioritize one set of stakeholders over another (shareholders, in many cases), prioritizing one group continuously is not a winning long-term strategy.’
Acknowledging that ‘competing definitions, inconsistent priorities and lack of proof have led to skepticism’ around the real impact of a multi-stakeholder approach, Ariel Babcock, managing director and head of research at FCLTGlobal, says the new study changes that.
‘This research presents empirical facts about the behaviors and outcomes of multi-stakeholder-oriented firms for the first time,’ she says in a statement. ‘Our hope is that companies use this study to frame their stakeholder strategies, and to communicate those decisions to investors and other key stakeholders.’
Last year, IR Magazine published the Stakeholder Management Report, looking at how companies and IR teams specifically are engaging with different stakeholder groups.