The relation between employee perceptions of stakeholder balance and corporate...

The standard corporate mission is to maximize stockholder value, but doing so successfully may involve also attempting to maximize satisfaction among stakeholders--employeees, customers, and the public. A survey drawn from the top 75 publicly held firms in North Carolina (by market capitalization)

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The creation of "value" has long been at the heart of corporate mission statements. MBA students learn in introductory finance that a firm's objective is to maximize the wealth of its shareholders, who provide the necessary investment for the capital organization's future. Serven (1999) says that most CEOs believe shareholder wealth maximization is, indeed, the fundamental purpose of their organization. However, some companies have found that such a focus, exclusive of other stakeholders, is too narrow. During the Depression, General Electric identified four major stakeholder groups: shareholders, employees, customers, and the general public. A decade later, the president of Johnson & Johnson listed the firm's "strictly business" stakeholders as customers, employees, managers and shareholders. Nowadays, corporate annual reports often set forth objectives related to providing "superior returns to shareholders, better value to customers, and above-market salaries and career opportunities to employees" (Campbell and Alexander 1997, p. 42).

Reichheld (1996) contends that paying attention to stakeholders is more than merely philosophically important. He demonstrates that enormous potential exists for improving a company's performance by increasing loyalty among customers, investors, and employees. Saying that "mystifying" levels of cash flow can result from improvements in customer retention, he notes that the critical factor in keeping customers is keeping employees. This is because knowledgeable, experienced employees come to understand the needs of customers over time and are better able to serve those needs. Davis and Landa (2000, p. 24) agree, arguing that "customer loyalty, the outcome of superior customer service, and investor loyalty, the outcome of protected and enhanced shareholder value, are each dependent upon the business gaining the commitment and loyalty of its employees."

Whether a corporation adopts a narrow or broad view of its constituents, it is the employees who must develop and implement strategies and tactics designed to create value for all the groups (Bowden, 2000). Some companies recognize this fundamental role by making employee satisfaction a top priority, at least in theory. Richard Deupree, chairman of Procter & Gamble during the 1950s, regarded employees as the company's most valuable asset. He maintained that while shareholders provide necessary capital, employees generate returns on that capital. He maintained that the company could live without its money, its physical facilities and its brands, but it could not live without its employees, who could build the other assets. Likewise, Howard Schultz, who until last year was CEO of Starbucks Coffee, credits the corporation's commitment to putting employees first with its rise from a single Seattle storefront to the world's largest retail chain of coffee shops (2,800). If employees are not happy, Schultz believes , they cannot possibly make customers happy, and consequently, cannot generate returns for shareholders.

However, Stewart (1996) sees frequent disconnects between what companies profess and what they practice. He cites employee-attitude studies showing that workers believe companies care most about "hard" values, such as profitability, and overlook or ignore "soft" values such as trust and respect for individuals. Guaspari (1998, p.20) concurs, suggesting that creation of employee value is "still more of a philosophical abstraction than an operating principle." He says businesses "suck more and more from people's lives," engendering a growing sense of dispiritedness as employees are forced to create greater shareholder value for the same or less money.

A review of literature indicates no existing research on the concept of stakeholder balance. However, a current study by Bridges and Harrison (2002) finds that employees do, indeed, believe they are valued less than other stakeholders. Moreover, their research results show that these beliefs are significantly correlated with commitment to the firm. Specifically, employee perceptions of inequity or imbalance in an organization's value-creating activities are associated with lower levels of employee commitment to the company.

The present research extends Bridges and Harrison (2002) by investigating whether employee perceptions of their status relative to shareholders and customers affect a firm's marketplace performance. The fundamental question is not whether shareholder wealth maximization is an appropriate objective, but whether the interests of shareholders may be better served by accommodating other stakeholders. Empirically, the issue is whether a more balanced approach to value creation -- one in which employees, shareholders, and customers are separate but equal constituents -- has bottom-line significance. Is including employees in the stakeholder tent important simply because it makes employees feel better about the way organizations treat them or because it actually helps companies do better in the marketplace? The question is examined from employee viewpoints because of their unique and central role in building and delivering value for all stakeholder groupsshare-holders and other stakeholders.

Theoretical Background

As employees create value for organizations, they expect such value to be reciprocated (Miner, 1980). When they feel they are unjustly treated or rewarded, they may reduce their level of productivity, even to the point of leaving the organization. Therefore, employee perceptions of equitable treatment have long been of interest and concern to organizations and scholars (Roberts, Coulson, and Chonko, 1999).

Surprisingly, a review of the literature found no research on perceived equity as it relates to stakeholder groups. Traditional measures of employee attitudes tend to focus on their reactions to organizational factors, processes, or events (Bowden 2000), while their perceptions of treatment relative to customers and shareholders have been overlooked.

Nevertheless, employee motivation and performance research suggests that applying distributive justice theory to the issue of comparative stakeholder equity is appropriate and warranted. Distributive justice is concerned with the fairness of the distribution of the conditions and goods that affect individual well-being, which is broadly defined to include psychological, physiological, economic, and social aspects (Deutsch, 1985). Fairness issues have been found to affect employees' judgments in such areas as pay satisfaction, work values, status relations, attitudes towards management, and organizational citizenship behaviors (Kabanoff, 1991). The scope of situations in which an employee's actions will be governed by considerations of justice depends on the extent of the employee's conception of community (Deutsch, 1985). Given that stakeholder relations involve status issues (Wallace, 1995), managerial actions (Lerner and Fryxell, 1994), and good citizenship (Organ, 1988) within an organizational community (Freeman, 1983), it follows that employees will expect justice and equity to prevail in relation to customers and shareholders.

Based on distributive justice theory, if employees feel that they are not treated equitably compared with customers and shareholders, their performance will decline to a point that corrects the perceived inequity. In fact, equity and justice in the work setting appear to be stronger predictors of the ultimate decline in productivity--intent to quit--than core work attitudes (Dailey and Kirk, 1992). Conversely, as perceived equity increases, then performance will increase (Williams, 1999), with a subsequent impact on corporate performance (Lewin and Mitchell, 1995). Specifically, organizations that involve employees in efforts to enhance business processes and reward them for improvements have been shown to have greater market value, higher annual sales, and larger profits per employee (Huselid, 1995). Therefore, the following proposition is set forth:

Firms whose workers perceive inequity in the value created for them relative to customers and shareholders will be associated with poorer marketplace performance than firms whose employees perceive equity.

Research Method

The sample for this study included the top 75 publicly held firms in North Carolina, ranked by market value (number of shares outstanding x price per share) and reported in the May 2000 issue of Business North Carolina. The sample population included 23 members of the Fortune 1000, 12 of which are in the Fortune 500.

The CEO of each corporation was sent a packet containing five copies of a questionnaire and a letter explaining the purpose of the research. The CEOs were asked to distribute the surveys to employees with perspectives on and opinions about the organization's value-creation activities.

The respondents were asked to assess the attention their company pays to its shareholders, customers, and employees by indicating on a five-point Likert scale (1 = strongly disagree, 5 = strongly agree) the extent of their agreement with a series of statements. Three sets of statements were categorized according to whether they related to shareholders, customers, or employees, and were identical across the sets except that the name of the focal constituency was changed as appropriate.

The employee's perceptions of the corporation's attitude toward the focal stakeholder group were measured by a series of six statements: (my company is committed to shareholder/customer/employee value; my company believes shareholders/customers/employees are important; my company does a good job of creating shareholder/customer/employee value; my company treats shareholders/customers! employees as if they are important; my company focuses a great deal of attention on shareholders! customers/employees). The reliability coefficient for the six items was greater than .84 for each stakeholder group, so they were summed to form a single measure of attitude toward the focal stakeholder.

Balance in value creation was captured with a ratio, EMSAT, with the numerator reflecting the employee's rating of the company's attitude and actions toward employees and the denominator the sum of the employee's rating of the company's attitude and actions toward share-holders, and the employee's rating of the company's attitude and actions toward customers. If the ratio was less than 0.5, the employee perceived inequity in value creation; if the ratio was 0.5 or greater, the employee perceived equity. Respondents also provided information about their job position (nonsupervisory, firstline supervisor, middle manager, or upper manager), number of employees under their direct supervision (1-10, 11-20, 21-30, or over 30). length of employment with the organization (less than 1 year, 1-5 years, 6-10 years, or over 10 years), whether the organization offered an employee stock option plan (yes or no), and, finally, whether the employee participated in the plan if available (yes or no).

Measures of performance--sales, net income, and market value--were compiled from the information accompanying the Business North Carolina (May 2000) rankings. Sales (SALES) and net income (NETINC) were selected as dependent measures not only because they are the most basic measures of firm performance (Johnson, Marsh and Tyndal 1998), but also--and more important -- because they can be linked most directly to employee activities and efforts. All else being equal, firms with employees who design, develop, and deliver superior offerings, superior strategies for marketing those offerings, and superior customer service to support those offerings, can expect to perform better in the marketplace than firms with inferior offerings, strategies, or service. And it is from sales that investments in superiority flow.

Because many companies now offer stock option plans that give employees shareholder status, it is important to include a variable capturing stock performance. Market value (MKTVAL), which is the price of a share of the company's stock times the total number of shares outstanding (as of April 2000), was chosen because it is a relatively stable measure of stock performance, controlling as it does for changes resulting from splits and buybacks.

Results

A total of 92 completed surveys were received from 22 firms, representing an overall response rate of 24.5% and a company response rate of 29%.

The average market value of the firms in the sample was $3.9 billion, with a high of $34.6 billion and a low of $71 million. The average sales level was $2.9 billion, with $3.9 billion as the high and $54 million as the low. Average net income was $262 million, with a high of $613 million and a low of -$21.1 million.

As shown in Table 1, almost 53% of survey respondents classified themselves as upper managers, 35% classified as middle managers, 3% as first-line supervisors, and 9% as nonsupervisory. Slightly more than 59% directly supervised 1-10 employees, with 21% supervising 11-20, 7% supervising 21-30, and 13% supervising more than 30. Half of the respondents had been with their firms longer than 10 years, 22% for 6-10 years, 24% for 1-5 years, and 4% for less than one year. Ninety percent of respondents said their firm offered an employee stock option plan, with 90% of respondents participating in such a plan when available.

To examine the nature of the relationships among the variables, correlations between EMSAT and the dependent measures were computed using one-tailed tests in conjunction with the hypothesized sign (see Table 2). All correlations were positive and significant, indicating that greater perceived equity is associated with higher sales, net income and market value (pEMSAT, SALES = .203, p = .03; pEMSAT, NETINC = .200, p = .03; pEMSAT, MKTVAL = .208, p = .02). Thus, the proposition is supported.

To gain additional insight into the balance issue, the data were split into two sets, EMSAT [greater than or equal to] . 5 and EMSAT < .5, reflecting employee perceptions of equity or inequity in value creation. The data were analyzed using single-tailed t-tests, in which the means of the dependent measures for the "equitable" group ([X.sub.EQ]) were compared to the means of the dependent measures for the "inequitable" group ([X.sub.INEQ]) (see Table 3). Further supporting the proposition, average sales, net income, and market value were all higher for equitable than for inequitable firms, and the difference was significant for all three measures: ([X.sub.EQ], MKTVAL = $6.6 billion, [X.sub.INEQ], MKTVAL = $3.2 billion, t = 1.68, p < .05; [X.sub.EQ], SALES = $4.78 billion, [X.sub.INEQ], SALES = $2.24 billion, t = 1.79, p < .04; [X.sub.INEQ], NETINC = $551 million, [X.sub.INEQ], NETINC = $183 million, t = 2.23, p < .02).

Discussion, Limitations And Directions For Future Research

This research represents a preliminary look at the relationship between firm performance and employee perceptions of balance in stakeholder value creation. The results reveal that perceptions of inequity in a firm's value creation attitudes and activities on employees' behalf, compared with those on behalf of customers and shareholders, are associated with poorer market performance. Specifically, companies whose workers think believe their employers are less committed to them than to customers and shareholders have lower sales, lower net income, and lower market value than those whose workers think commitment levels are relatively equal.

To rule out the possibility that the relationship between EMSAT and sales, net income, and market value works in the other direction - that larger, more profitable firms are better able to achieve balance than their less successful counterparts - a regression analysis was run. The model, with EMSAT as the dependent variable, and sales, net income, and market value as explanatory variables, was not significant (p> .25), indicating that the size and success of the firm do not drive employee perceptions of equity.

The findings suggest not only that employees feel they are the low group on the stakeholder totem pole but that their feelings have a bottom-line impact. According to the results, companies would better serve not only their employees, but also themselves, by doing more to create value for those who create value for others. For example, managers should implement more "high-performance work practices" (U.S. Department of Labor, 1993), designed to involve, empower, and reward employees, thus making them feel more valued and increasing their productivity level (Cappelli and Neumark, 2001). These high-performance work practices include "an unusual reliance on front-line workers; the treatment of workers as assets to be developed, not costs to be cut; new forms of worker-management collaboration that break down adversarial barriers; and the integration of technology and work in ways that will cause machines to serve human beings and not vice-versa" (Cascio, 2003, p. 65).

Due to its preliminary nature, the research is not without limitations. The findings indicate that employee perceptions of inequity are associated with poorer marketplace performance but do not provide insight into whether the relationship is causal or merely correlational. The research also presents a static view of the equity question. Undoubtedly, firms could benefit from knowing whether changes in employee equity perceptions over time significantly affect marketplace performance over the same period. Moreover, it considers only employee perceptions regarding equity and inequity. Although their point of view is critically important, it may be that the perceptions of other stakeholder groups are equally implicative for performance.

Table 1

RESPONDENT CHARACTERISTICS

                  Non-Supervisory  First-Line Supervisor  Middle Manager

Current Position       8.8%                3.3%               35.2%

                       1-10                11-20              21-30
Employees
Supervised             59.2%               21.0%               6.6%

                      <1 year            1-5 years          6-10 years

Tenure                 4.4%                24.2%              22.0%

                        Yes                 No            Participation
Stock Option           92.4%               7.6%               90.5%
Plan

                   Upper Manager

Current Position       52.7%

                      Over 30
Employees
Supervised             13.2%

                     >10 years

Tenure                 49.4%

                  No Participation
Stock Option            9.5%
Plan

Table 2

PEARSON PAIRWISE CORRELATIONS

        SALES   NETINC   MKTVAL

EMSAT: 0.203 *  0.200 *  0.208 *

* p < .05

Table 3

ANOVA RESULTS FOR EMSAT

        [X.sub.EQ]  [X.sub.INEQ]
          (n=25)       (n=67)     t-value

MKTVAL  $6,590.56   $3,219.71     1.680 *
SALES   $4,783.76   $2,204.84     1.786 *
NETINC    $551.27     $180.79     2.226 *

* p < .05

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Dr. Bridges, teaches principles of marketing, consumer behavior and marketing communications, and has recently co-authored an article for the Journal of Advertising. Dr. Marcum, teaches principles of finance, derivatives, and multinational finance, and co-authored a recent article in the Journal of Business. Dr. Harrison, teaches organizational behavior and human resource management, and recently coauthored an article for the Journal of Management Education.