Research reveals the most important stakeholder group of organizations are employees – who come ahead of customers, suppliers, community groups, and especially far ahead of shareholders. A stakeholder is any person, group or organization who can place a claim on an organization’s attention, resources or output, or is affected by that output. They have a stake in the organization, something at risk, and therefore something to gain or lose as a result of corporate activity.
For his PhD research, Professor Nigel de Bussy, head of the business school at Curtin University in Western Australia, conducted a national study to identify the stakeholders who have the most impact on corporate financial performance. He surveyed financial managers of 626 companies, employing 100 employees or more, to investigate which stakeholder groups were the most important for developing positive relationships.
Respondents contacted for the research were chief financial officers because they were considered to be best positioned to comment on their organization’s financial performance. The participating organizations comprised companies (85%) and not-for-profit organizations (15%). The questionnaire specially developed for the research (‘STAKOR’) can be used as a diagnostic tool by organizations wishing to assess their stakeholder orientation practices.
Active stakeholder relations strategies lead to stronger financial performance
De Bussy reported that employees are the most vital stakeholder group by a long way. He found that organizations positively engaging in stakeholder orientation activities achieved greater stakeholder satisfaction, which in turn led to stronger financial performance. In other words, organizations who adopted the stakeholder concept made more money.
Image, right: Professor Nigel de Bussy
Measuring each stakeholder group’s importance
De Bussy measured how strongly orientation towards different stakeholder groups influenced financial performance. The coefficient of determination for employee orientation was 0.84 compared with much lower but still substantial values for customers (0.36), suppliers (0.35) and communities (0.32). The coefficient for shareholder orientation was minimal at 0.08.
Coefficient of determination explained
The findings from De Bussy’s research depend on the coefficient of determination between stakeholder importance and financial performance. The coefficient of determination is a measurement used to explain how much variability of one factor can be caused by its relationship to another factor. This correlation, known as the “goodness of fit,” is represented as a value between 0.0 and 1.0. A value of 1.0 indicates a perfect fit, and is therefore a highly reliable model for future forecasts, while a value of 0.0 would indicate there is no relationship at all. But a value of 0.20, for example, suggests that 20% of the dependent variable is predicted by the other (‘independent’) variable, while a value of 0.50 suggests that 50% of the dependent variable is predicted by the independent variable, and so forth. You can see from this that the correlation of 0.84 is an extremely strong fit.
On a graph, the goodness of fit measures the distance between a fitted line and all of the data points that are scattered throughout the diagram. The tight set of data will have a regression line that’s close to the points and have a high level of fit, meaning that the distance between the line and the data is small. A good example is a regression line shown on a graph, as below, which compares a student’s grade for an essay in relation to the number of hours they have spent on writing the essay. The line shows what grade would be likely as a result of a certain number of hours writing an essay. An equation can be used to determine the location and angle of the regression line.
Image: Simple regression line example.
Definition of stakeholder used in this research
A stakeholder is a group or individual who can legitimately affect or is affected by the achievement of an organization’s objectives. Stakeholder orientation is about creating social as well as economic value for stakeholders, listening and responding to stakeholder concerns, with a spirit of goodwill between the two parties.
You can also read a helpful article about the fact that effective stakeholder relations management is a key skill, and how identifying and prioritizing your stakeholders is an essential part of this skill.