How Strong Stakeholder Relationships Can Help Firms Avoid A Crisis

Wharton’s Witold Henisz and NYU’s Sinziana Dorobantu discuss their research on crisis management and stakeholder relationships.

One negative news article or community protest can be enough to derail a company’s reputation, even its bottom line. In the digital age, the potential damage is accelerated through the power of instant, nonstop communication and social media. Crisis management has become so important in the corporate world that businesses hire teams of people just to handle it. But there is a better way. Witold Henisz, a management professor at Wharton, and Sinziana Dorobantu, a management professor at New York University, say the best way to handle a crisis is to avoid it. To do that, companies must invest the time in building relationships with stakeholders.

Stakeholder Relationships
Image source: Pixabay
Stakeholder Relationships

Henisz and Dorobantu visited with [email protected] to discuss their paper, “Not All Sparks Light a Fire: Stakeholder and Shareholder Reactions to Critical Events in Contested Markets,” which was co-authored with Lite Nartey of the University of South Carolina. The paper is forthcoming in the journal Administrative Quarterly. An edited transcript of the conversation follows.

[email protected]: Can you summarize your research?

Sinziana Dorobantu: We’re asking a fairly straightforward question: What happens to companies when they’re faced with a critical event, such as an unfavorable court decision or a negative news report from an environmental organization? How do their shareholders and stakeholders respond?  You see this in the news all the time. You see it with Uber. I would probably use Uber as an example of a company that’s trying to expand internationally very quickly. Because of the pace of its international expansion, it doesn’t have the time and the resources to engage with every community that it affects and with every government and every regulator in every country. Every single time there is a news story about Uber, it’s usually surrounded by a lot of negative reactions from other stakeholders who have something negative to say about, as well as reactions from stakeholders who have something positive to say and from consumers who are very happy with a new product. Companies that do this well, you don’t see in the news as much. Airbnb in the shared economy space is a good example. In the 1990s, Ikea faced a number of allegations of child labor being used by one of its employers in India. It took its time to work with nongovernmental organizations and with UNICEF to understand the problem, then put in place long-term solutions to make sure that whatever they do is in the best interest of the children.

[email protected]: We’re talking about a situation where a company was doing things to make it right, as opposed to just taking a public relations approach?

Witold Henisz: Yeah. It’s very much about what it takes to build up the relationship with stakeholders. It’s not enough just to put out a glossy press release, to have a pretty sustainability report. You have to really engage the stakeholders. In fact, there is some other research that really gets into the nuts and bolts of how you build up that relationship. But it’s a lot more than a press release. It’s a lot more than a check. It’s some deep, long-held interactions.

[email protected]: Could you give a summary of what that other research looked for and what it found?

Henisz: I’ll give you the nutshell version, which is that it’s worth investing in relationships. Once you have a strong, positive relationship, once you have a friend from a stakeholder, that friend is going to stick up for you. When you’re attacked, when you’re facing a down day, when someone’s coming after you, you’re not going to be first in front of the microphone. In Ikea’s case, it was Save the Children defending them against the allegations of a human rights abuse. The community members are talking about how, “It’s our mine, it’s our factory, we don’t want it shut down.” We’re getting someone else in front of the microphone to be what one could call an upstander, or an advocate, for the company.

[email protected]: The lesson is that you want to do this spade work ahead of time. But do you talk about how to do that spade work?

Dorobantu: In this particular paper, we take those relationships as given. We’re comparing firms that have good relationships with their stakeholders with firms that don’t. And we’re doing this at the individual stakeholder level, so we’re looking at every single stakeholder. The stakeholder can be a local community. The stakeholder can be an NGO or an activist group. It can be a mayor, a governor, a regulatory agency.  We found a way to measure their perceptions of the company using newspaper reports. We essentially coded 22,000 articles about 26 mines in 20 countries around the world. For each of these mines, we have a very detailed timeline of which stakeholders spoke about the firm or took action against the mining firm, and what exactly they did. Is it an act of cooperation or conflict? Using this timeline, we showed that the stakeholders with whom the firm has built good relationships in the past are the stakeholders that, when something bad happens or a negative core decision comes about, are going to stand up and speak to defend the firm because they see this as a good firm. Whereas the stakeholders with whom the firm has a really bad relationship are going to use this as an opportunity to reiterate their opposition. Before you know it, for firms that have really bad relationships with their stakeholders, you have a chorus of voices. Uncoordinated voices, but what the public hears in the media is this sort of chorus of voices speaking negatively about the firm. And that’s the making of a crisis in today’s world.

Henisz: In the second part of the paper, we showed that it’s those choruses of negative opinion that contribute to a collapse in shareholder value. We can look at a similar set of critical events, about 160 in total, and the ones in which you see this negative chorus of opinion are the cases in which shareholder value collapses. The cases where you have the upstanders, where you have the stakeholders speaking on your behalf, the same degree of negative opinion at the onset doesn’t translate into a collapse in shareholder value. It’s not just this good thing to have, it actually contributes to the protection of shareholder value.

“It’s not enough just to put out a glossy press release. You have to really engage the stakeholders.”–Witold Henisz

[email protected]: Are there other key takeaways from the paper?

Dorobantu: To me, it’s really the benefits of stakeholder engagement and doing this in a strategic and systematic way. The same process that the firm would apply to managing its relationships with suppliers and employees and customers needs to be applied to managing a much broader set of stakeholders, including the local communities, the activists, the NGOs and the government. That’s one big takeaway. If you manage to put in place these good stakeholder relationships, you prevent the crisis. The best way of managing

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