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Companies’ Efforts To Build Strong Relations With Stakeholders Can Prevent Crises And Lessen Their Financial Impact, According to New Research from NYU Stern

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Warren Buffett and Charlie Munger at Berkshires Annual Meeting

Variations in stakeholders’ perceptions explain why some negative news events pass unnoticed while others spark crises

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NYU Stern Professor Sinziana Dorobantu

From the Dakota Access Pipeline to EpiPen’s profit margins to water supply issues in Flint, Michigan, reputational value can be more important to an organization’s success than its products, pricing, or marketing spend combined. New research by NYU Stern Professor Sinziana Dorobantu and co-authors, Wharton School Professor Witold Henisz and Moore School Professor Lite Nartey, reveals that stakeholders’ perceptions of an organization are critical in understanding whether a negative news event escalates into a bigger crisis by sparking a broader social movement against the organization.

The study shows that the information revealed by public statements and actions allows a wide range of unconnected stakeholders to sync their reactions without the need for explicit coordination. By examining the differences between firms that have engaged proactively with their stakeholders and those that have not, this research proves the benefit of building strong stakeholder relations (including community involvement) to lessen the impact when crises happen.

Looking at the mining industry as an example, the authors explore the widespread implications of stakeholder perceptions and relationship-building for shareholder value. They analyzed a dataset of more than 22,000 media reports on interactions between 19 publicly traded gold mining firms and their political, social, and economic stakeholders to find:

  • Small variations in stakeholders’ prior beliefs (or perceptions) explain why some negative news events escalate into a cascade of reactions while others pass unnoticed.
  • Faced with another stakeholder’s negative statement or action against an organization, stakeholders who held prior positive beliefs about the organization are more likely to make a public stand in support of it and question the validity of accusations against it.
  • Conversely, stakeholders who held prior negative beliefs about an organization may be spurred by reports of others holding similar beliefs, making them more likely to mobilize in protest against the organization.
  • High-status stakeholders (e.g., famous actors, politicians, prominent NGOs, etc.) have greater influence on the mobilization of other stakeholders and, ultimately, on shareholder value.

This first-of-its-kind study provides important insights for corporate organizations operating in a complex stakeholder landscape. “Rather than waiting until a crisis occurs, managers can invest in building good relationships with their stakeholders and fostering positive beliefs about their organization in order to prevent a social movement against them,” explained Professor Dorobantu.

The paper, “Not All Sparks Light a Fire: Stakeholder and Shareholder Reactions to Critical Events in Contested Markets,” is to be found in Administrative Science Quarterly.

Source: NYU Stern

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