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Strategic Management Journal

Strat. Mgmt. J., 35: 107–125 (2014)


Published online EarlyView 26 April 2013 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2089
Received 15 May 2012 ; Final revision received 13 December 2012

MICROFOUNDATIONS FOR STAKEHOLDER THEORY:


MANAGING STAKEHOLDERS WITH
HETEROGENEOUS MOTIVES
FLORE BRIDOUX* and J. W. STOELHORST
Amsterdam Business School, University of Amsterdam, Amsterdam,
The Netherlands

Instrumental stakeholder theory proposes a positive relationship between fairness toward


stakeholders and firm performance. Yet, some firms are successful with an arms-length approach
to stakeholder management, based on bargaining power rather than fairness. We address this
puzzle by relaxing the assumption that all stakeholders care about fairness. Empirical evidence
from behavioral economics and social psychology suggests that firms face a population of
potential stakeholders that consists not only of so-called ‘reciprocators,’ who do care about
fairness, but also of self-regarding stakeholders, who do not. We propose that a fairness approach
is more effective in attracting, retaining, and motivating reciprocal stakeholders to create value,
while an arms-length approach is more effective in motivating self-regarding stakeholders and
in attracting and retaining self-regarding stakeholders with high bargaining power. Copyright
 2013 John Wiley & Sons, Ltd.

INTRODUCTION et al., 2010; Jones, 1995; Wood, 1991). But if this


is the case, why do we observe in practice suc-
How should firms manage the relationships with cessful firms with radically different approaches to
their stakeholders to create value? Despite the stakeholder management such as Southwest Air-
renewed interest in instrumental stakeholder the- lines and Ryanair? These two airlines employ a
ory in the discussion of the strategy–performance very similar business model, and both have a
relationship (e.g., Bosse, Phillips, and Harrison, record of sustaining profitable growth while most
2009; Choi and Wang, 2009; Harrison, Bosse, of their competitors struggle to survive. Yet, they
and Phillips, 2010; Hillman and Keim, 2001), differ radically in how they treat their stakehold-
there is not much literature that systematically ers: Southwest is widely seen as a role model of
explains how different approaches to stakeholder how to build fair relationships with stakeholders,
management affect firm performance (Harrison while Ryanair’s approach to stakeholders is reg-
et al., 2010). Existing research typically argues ularly under attack from industry observers and
that treating stakeholders well, in the sense of stakeholder groups.
fairly, contributes to firm performance (Donald- This paper addresses the puzzle that both a
son and Preston, 1995; Freeman, 1984; Harrison fairness approach and an arms-length approach
to stakeholder management can lead to sustained
Keywords: instrumental stakeholder theory; value cre- value creation. A fairness approach means treating
ation; social value orientation; self-interest; reciprocity. stakeholders on the basis of fairness consid-
*Correspondence to: Flore Bridoux, Amsterdam Business erations, as exemplified by Southwest, and an
School, University of Amsterdam, Plantage Muidergracht 12,
1018TV Amsterdam, The Netherlands. arms-length approach means treating stakeholders
E-mail: f.m.bridoux@uva.nl strictly on the basis of bargaining power, as

Copyright  2013 John Wiley & Sons, Ltd.


108 F. Bridoux and J. W. Stoelhorst

exemplified by Ryanair. It addresses this puzzle paper responds to a call in the stakeholder man-
by relaxing the assumption in the instrumental agement literature to establish causality in the
stakeholder literature that all individual stake- stakeholder management–firm performance rela-
holders value fairness and therefore will be more tionship by considering the effect of stakeholder
motivated to create value when treated fairly by a management on stakeholders’ contributions to
firm (e.g. Bosse et al., 2009; Harrison et al., 2010; value creation (Lev, Petrovits, and Radhakrishnan,
Hillman and Keim, 2001). In doing so, the paper 2010). Specifically, the paper develops theory that
answers a call to take into account the complexity suggests that while a fairness approach is more
of human psychology in building stakeholder effective in attracting, retaining, and motivating
theory (Freeman and Phillips, 2002; Freeman reciprocal stakeholders to create value, an arms-
et al., 2010) and acknowledges the need to ground length approach is more effective in motivating
strategy theories in more solid microfoundations self-regarding stakeholders and in attracting and
(Felin and Foss, 2005; Felin and Hesterly, 2007; retaining self-regarding stakeholders with high
Foss, 2011). bargaining power.
The assumption that all stakeholders care about Our analysis of the effects of different stake-
fairness is at odds with the findings of social holder management approaches on different types
psychologists and behavioral economists (e.g., of individuals has implications for research, for
De Cremer and Van Lange, 2001; Fehr and management practice, and for the moral discourse
Fischbacher, 2004a). Research in these two fields in stakeholder theory. For research, it suggests
has demonstrated that motives to cooperate are that the relationship between stakeholder manage-
heterogeneous across individuals and that these ment approaches and firm performance is more
motives affect behaviors in collective endeavors complex than instrumental stakeholder theory typ-
such as value creation (Bridoux, Coeurderoy, and ically assumes. For practice, it implies that, if
Durand, 2011). The empirical evidence suggests consciously managed, both a fairness and an arms-
that individual stakeholders can be categorized length approach can be a source of sustained value
into two main types: self-regarding and reciprocal creation. This also has moral implications: the
stakeholders. Self-regarding individuals only care conclusion that both approaches can contribute to
about their personal payoffs and do not value economic performance suggests that the mere
instrumental argument that fairness contributes to
fairness as such (Fehr and Falk, 2002). In contrast,
firm performance may not be enough to convince
reciprocators are inclined to reward a fair, and
all firms to treat their stakeholders fairly.
punish an unfair, treatment of themselves or others,
even if rewarding or punishing is personally costly
(Engelmann and Strobel, 2004; Fehr and Gächter, STAKEHOLDER MANAGEMENT
2002). AND HETEROGENEOUS MOTIVES
The paper uses these microfoundations to
explain why both a fairness and an arms-length This paper addresses the impact of different
approach to stakeholder management can lead stakeholder management approaches on individu-
to sustained value creation. It does so by ana- als who are primary stakeholders; i.e., investors,
lyzing two mechanisms through which the two employees, customers, and suppliers (cf. Clark-
approaches affect the contribution to value cre- son, 1995). The firm can be seen as a nexus of
ation of individual stakeholders. First, it considers relationships among its primary stakeholders with
how a fairness and an arms-length approach impact the objective to create value (Freeman, 1984; Free-
value creation through a motivational effect; i.e. man et al., 2010; Jones, 1995; Parmar et al., 2010).
by affecting the motivation to contribute to value Primary stakeholders create value by perform-
creation of the self-regarding and reciprocal stake- ing productive activities or providing impor-
holders currently associated with the firm. Sec- tant resources. Some do both. For example,
ond, it considers how the two approaches affect some investors, in addition to providing finan-
value creation through a sorting effect over time; cial resources, also contribute to value creation by
i.e. by affecting whether self-regarding and recip- advising managers. And, customers, in addition to
rocal stakeholders will join, stay with, or leave purchasing products, can create value by adopting
the firm. By studying these mechanisms, the advocacy behaviors toward the firm or its brands
Copyright  2013 John Wiley & Sons, Ltd. Strat. Mgmt. J., 35: 107–125 (2014)
DOI: 10.1002/smj
Managing Stakeholders with Heterogeneous Motives 109

(Bhattacharya and Sen, 2003) or by taking part in 2001; Rousseau and Wade-Benzoni, 1994), we
user-led innovation processes (von Hippel, 1988). conceive of a stakeholder management approach
What matters for the purpose of our analysis is that as a bundle of organizational practices. Moreover,
primary stakeholders can influence value creation because empirical studies indicate that firms tend
because, first, they are free to join, stay with, or to be consistent in how they bundle practices,
leave the nexus of relationships (Hill and Jones, favoring one or the other approach in their dealings
1992) and, second, because they can contribute with stakeholders (Berman et al., 1999; Harrison
more or less to the value creating activities of the et al., 2010; Hillman and Keim, 2001; Preston and
firm with which they choose to associate. Sapienza, 1990; Waddock and Graves, 1997), we
Among primary stakeholders, managers are in treat the two approaches as opposites.
a unique position: although managers are techni- In a fairness approach, the firm’s interactions
cally primary stakeholders, they are at the center with stakeholders are based on fairness consid-
of the nexus of relationships among stakeholders erations. This is manifested in three ways. First,
and make the vast majority of the decisions that fairness drives the process to divide the value
shape the nature of these relationships (Freeman, created by the nexus of stakeholders among the
1984; Hill and Jones, 1992; Jones, 1995). Impor- different parties, as well as the outcome of this
tantly, managers can influence stakeholders’ value process and the interpersonal treatment stakehold-
creation by choosing how the firm treats its stake- ers receive (Cropanzano et al., 2001). This trans-
holders (e.g., Eesley and Lenox, 2006; Harrison lates into organizational practices such as an open
et al., 2010; Hillman and Keim, 2001). and honest exchange of relevant information and
In line with instrumental stakeholder theory, an inclination to resolve problems through collab-
we are interested in explaining firms’ economic oration (Chiles and McMackin, 1996; Dyer and
performance (Donaldson and Preston, 1995; Jones, Singh, 1998; Phillips, 2003). Second, the formal
1995). To do so, researchers have shown that it contracts linking the firm to its stakeholders tend
is important to distinguish value creation from not to be very detailed because parties rely to
value appropriation (e.g., Bosse et al., 2009; Coff, a large extent on trust and self-enforcement in
1999; Peteraf and Barney, 2003). In fact, this the form of social sanctions, rather than legal
distinction is crucial for our analysis because enforcement (Chiles and McMackin, 1996; Dyer
value appropriation is one aspect of stakeholder and Singh, 1998; Richman, 2006; Rousseau and
management. Consequently, this paper examines Wade-Benzoni, 1994). As a consequence, perfor-
how a firm’s approach to stakeholder management mance standards and requirements in contracts
affects value creation. We adopt the typical also tend to be relatively poorly defined (Chiles
conception of value creation used in the strategy and McMackin, 1996; Rousseau, 1989; Rousseau
literature and, thus, focus on the economic value and Wade-Benzoni, 1994), which allows them
created by the firm, which is the difference to evolve over time. Finally, relationships with
between customers’ willingness to pay for the stakeholders tend to be long lasting (Dyer, 1996;
firm’s products and the sum of the payments Rousseau and Wade-Benzoni, 1994).
stakeholders would receive if they joined the best In contrast, in an arms-length approach inter-
alternative nexus of relationships (Brandenburger actions with stakeholders are based on bargain-
and Stuart, 1996; Peteraf and Barney, 2003). ing power. This leads to three important differ-
ences with a fairness approach. First, stakeholders’
relative bargaining power1 drives the process to
Fairness and arms-length approaches
to stakeholder management
1
A stakeholder’s bargaining power is an attribute of the
This paper focuses on two specific approaches stakeholder–firm relationship (Eesley and Lenox, 2006). It is
to stakeholder management: a fairness approach primarily determined by (1) the stakeholder’s contribution to
and an arms-length approach. Building on the value creation, (2) the stakeholder’s outside options, (3) the
relative costs incurred by the firm versus the stakeholder when
extensive management literature that has discussed the stakeholder leaves the nexus of relationships, and (4) the
many of the organizational practices underlying extent to which the stakeholder is able to unify with other
these two approaches in relation to specific stake- stakeholders to increase their joint bargaining power (Coff,
1999). So, for instance, a professional who possesses unique
holder groups such as suppliers (e.g., Dyer and knowledge that makes an important contribution to the firm’s
Singh, 1998) or employees (e.g. Cropanzano et al., products and who is headhunted by other companies has more

Copyright  2013 John Wiley & Sons, Ltd. Strat. Mgmt. J., 35: 107–125 (2014)
DOI: 10.1002/smj
110 F. Bridoux and J. W. Stoelhorst

divide the value created by the nexus of stakehold- Donaldson, 1995); and, as pointed out by Van
ers among the different stakeholders, as well as Buren (2001), power asymmetries hollow out the
the outcome of this process and the interpersonal notion of consent and thus undermine fairness. In
treatment stakeholders receive. An arms-length the arms-length approach, the practices and deci-
approach is manifested in organizational prac- sions of a firm are explicitly aimed at exploiting
tices such as the use of secrecy and information existing asymmetries in bargaining power. More-
asymmetries in the firm’s favor, resolving prob- over, these practices are geared toward actively
lems through confrontation, and playing stake- increasing these asymmetries in favor of the firm
holders off against each other to weaken their to more easily wrest stakeholders’ consent. Given
bargaining position (Nesheim, 2001). Following these practices, the quality of the consent of stake-
the principles of Williamsonian transaction-cost holders with low bargaining power is question-
theory (Williamson, 1975, 1985), an arms-length able. Consequently, we choose to reserve the term
approach is also characterized by a reliance on eco- ‘fair’ for a stakeholder management approach that
nomic and legal sanctions to enforce obligations revolves around practices that would be acceptable
specified in elaborate formal contracts that typi- to free individuals in the absence of differences in
cally include detailed performance standards and bargaining power (Rawls, 1971).
requirements (Chiles and McMackin, 1996; Dyer
and Singh, 1998; Rousseau, 1989). For example, An empirical puzzle
motivating stakeholders tends to be based on close
The stakeholder literature has long recognized that
monitoring of behaviors or strong outcome-based
a fairness approach can contribute to firm per-
financial incentives (Rousseau, 1989; Rousseau
formance (Donaldson and Preston, 1995; Free-
and Wade-Benzoni, 1994). Finally, relationships
man, 1984; Jones, 1995) and competitive advan-
with stakeholders tend to be short-term (e.g. the
tage (Harrison et al., 2010). However, it has largely
use of a large pool of temporary workers, or reg-
been silent about how other ways of treating stake-
ular rotation of suppliers) (Dyer, 1996; Rousseau
holders might relate to firm performance. One of
and Wade-Benzoni, 1994).
the reasons for the emphasis on a fair treatment
Our distinction between a fairness approach
of stakeholders is the, often implicit, assumption
and an arms-length approach implies a particular
borrowed from traditional justice research that all
philosophical perspective on what fairness is.2 In
stakeholders care about fairness per se. Yet, if this
labeling the first set of practices (and not the
were the case, it is puzzling that firms with very
second) as ‘fair,’ we are adopting a liberal con-
similar business strategies can be successful while
ception of fairness that aligns with Phillips’ (1997,
treating their stakeholders very differently. A com-
2003) ‘principle of stakeholder fairness’ accord-
parison of Ryanair and Southwest Airlines illus-
ing to which firms and stakeholders have mutual
trates this puzzle. Founded in 1985, Ryanair grew
obligations of fairness in proportion to the ben-
into one of the largest European airlines after it
efits from cooperation that they have accepted.
adopted a low-cost strategy in 1991. Most aspects
On another, more conservative, conception of fair-
of Ryanair’s low-cost model were copied directly
ness, an arms-length approach could also be called
from Southwest Airlines, America’s largest low-
fair, on the argument that all primary stakeholders
cost carrier. Yet, despite emulating most of
have consented to take part in the activities of the
Southwest’s low-cost practices (such as rapid
firm (cf. Donaldson and Dunfee, 1994; Dunfee and
turnaround, low fares, simplified ‘no-frills’ ser-
Donaldson, 1995).3 But consent is only deemed
vice, point-to-point flying), Ryanair chose to differ
valid when uncoerced and informed (Dunfee and
fundamentally from Southwest in how it treats its
stakeholders. Southwest’s and Ryanair’s treatment
bargaining power than a factory worker with limited skills who of customers and employees are illustrative.
lives in an area where jobs are scarce.
2 We thank our reviewers for pointing this out and pushing us While Southwest is regularly rated American
to clarify our position. customers’ favorite airline, Ryanair has acquired
3 Note that the terms ‘liberal’ and ‘conservative’ here are only

used to refer to two classical conceptions of fairness. In the


classical liberal conception, the notion of fairness revolves Donaldson, 1995) is ‘conservative’ only in the limited sense
around not making an exception for oneself, while the classical that it revolves around consent. It leaves open the possibility
conservative conception revolves around consent. Contractarian that the social contract to which individuals consent specifies
business ethics (Donaldson and Dunfee, 1994; Dunfee and liberal norms.

Copyright  2013 John Wiley & Sons, Ltd. Strat. Mgmt. J., 35: 107–125 (2014)
DOI: 10.1002/smj
Managing Stakeholders with Heterogeneous Motives 111

a reputation for relatively poor customer service. 236). Although Ryanair’s salaries are competitive
Southwest’s policy is to treat customers with for some categories of employees such as pilots,
respect, decency, and friendliness (Sisodia, Wolfe, all employees fork out for many expenses usu-
and Sheth, 2007). In the words of Colleen Barrett, ally born by airlines such as training, uniforms,
former Executive Vice President Customers and refreshments, health checks, airport passes, vet-
Chief Operations Officer: ‘Southwest doesn’t pur- ting procedures, and car parking spaces (Boru,
port to be all things to all people, and we’re very 2006; Ruddock, 2008). In reaction, the Interna-
upfront about it. We tell our customers why we tional Transport Workers’ Federation is currently
don’t do this, that, and the other . . . and then running a campaign ‘Ryanair-be-fair.’4
we just kill them with kindness, caring, and atten- In keeping with the traditional tenets of instru-
tion’ (Sisodia et al., 2007: 226). As a consequence, mental stakeholder theory, Southwest’s choice to
Southwest consistently receives the lowest ratio of invest in maintaining good relationships among
complaints per passengers boarded of all major managers, employees, and business partners has
U.S. airlines, according to the U.S. Department been identified as a major source of the air-
of Transportation’s Customer Satisfaction statis- line’s success (e.g., Gittell, 2005; Sisodia et al.,
tics. In contrast, Ryanair only commits to get- 2007). However, the case of Ryanair suggests
ting its customers safely from point A to point that an arms-length approach to stakeholders can
B at a low price and has a strict no-refund pol- also be compatible with sustaining long term
icy: when flights are delayed passengers are not value creation. This is difficult to explain if
compensated with a free refreshment or meal, and we assume that all stakeholders care about fair-
when flights are cancelled passengers are left on ness but can be accounted for when we real-
their own to arrange a taxi or a hotel (Boru, ize that stakeholders may differ in their motives
2006; Ruddock, 2008). Ryanair has also been crit- to contribute to value creation, as suggested by
icized for misleading customers by making few empirical evidence from social psychology and
tickets available at the rock-bottom prices quoted behavioral economics.
in ads and by ‘mislabeling’ its destinations (e.g.
flights to ‘Frankfurt’ actually go to Hahn, a for- Heterogeneous human motives
mer air force base located 79 miles from Frankfurt)
Social psychologists and behavioral economists
(Boru, 2006).
have long studied how individuals’ motives drive
Similarly, while Southwest features among For-
their behavior in social interactions; i.e. situations
tune magazine’s best companies to work for in the
in which outcomes are the result of one’s own and
United States, Ryanair is known for poor employee
others’ actions, as is the case for value creation by
relationships. Southwest has shown high dedica-
stakeholders. Social psychologists have adopted
tion to its employees since its inception. It fol-
the label ‘social value orientations’ for individuals’
lows an ‘Employees Come First’ policy according
preferences for different distributions of payoffs
to which the primary responsibility of executives
to themselves and others in social interactions
is to care for employees. Southwest is, among
(McClintock, 1972; Messick and McClintock,
others, committed to giving its employees a sta-
1968). More specifically, social value orientations
ble work environment, and it is one of the few
capture how individuals transform the objective
airlines in the world that never used mass lay-
payoffs for themselves and others into a subjective
offs, even after the terrorist attacks of September
representation of these payoffs, which then forms
11 in 2001 or during the economic recession of
the basis of individuals’ actions (Van Lange,
2008 and 2009. Southwest also works to maintain
1999).
strong partnership relationships with its employ-
Research in social psychology has proposed a
ees’ unions, which represent more than 80 percent
model of payoff transformation that includes three
of Southwest’s employees (Gittell, 2005; Siso-
dimensions: (1) the weight assigned to payoffs
dia et al., 2007). In contrast, Ryanair has opted
for self, (2) the weight assigned to payoffs for
for ‘autocratic management, controlling employees
others, and (3) the weight assigned to the fairness
through fear, unilateral wage and benefit cuts, high
of these payoffs (De Cremer and Van Lange, 2001;
turnover to keep employees ‘fresh,’ little empha-
sis on customer satisfaction and employee morale
and extreme hostility to unions’ (Marshall, 2010: 4 www.iftglobal.org/campaigns/ryan-be-fair.cfm

Copyright  2013 John Wiley & Sons, Ltd. Strat. Mgmt. J., 35: 107–125 (2014)
DOI: 10.1002/smj
112 F. Bridoux and J. W. Stoelhorst

Stouten, De Cremer, and Van Dijk, 2005; Van reciprocators are stable personality traits (Dehue,
Lange, 1999). Empirical research supports this McClintock, and Liebrand, 1993; Nauta, De
model and shows that most individuals can be Dreu, and Van Der Vaart, 2002). This does
classified as either ‘individualists’ (20–40%) or not necessarily mean that the two types will
‘prosocials’ (40–60%) (e.g. De Cremer and Van always behave differently. As reciprocators’
Lange, 2001; De Dreu and Boles, 1998; Kuhlman behavior is conditional on others’ fairness,
and Wimberley, 1976; Kurzban and Houser, 2005; reciprocators may exhibit the same behavior
Liebrand et al., 1986; Stouten et al., 2005). as self-regarding individuals. However, recip-
Individualists are inclined to focus on increasing rocators’ seemingly self-regarding behavior in
their own payoffs (i.e., dimension 1), while a specific social situation should not be inter-
prosocials are inclined to enhance joint payoffs (of preted as a change in motive: these behaviors
self and others), as well as the fairness of payoffs are not driven by the sole pursuit of personal
(i.e., dimensions 1 through 3) (De Cremer and Van payoffs but are a response to the unfairness of
Lange, 2001). Working independently from social the situation or others’ noncooperation (e.g.,
psychologists, behavioral economists identified the Gächter and Fehr, 1999; Ostrom, Gardner,
same motives but labeled them differently: they and Walker, 1994).
use the term ‘self-regarding’ for individualists and Behavioral economists have gone further than
‘reciprocators’ for prosocials. We adopt behavioral social psychologists in studying reciprocity. They
economists’ terminology because it captures better have identified a category of individuals that is
the behavior of the latter type of individuals in particularly important for sustaining high levels
social interactions. of cooperation in social situations. These individ-
Social psychologists and behavioral economists uals, called ‘strong reciprocators,’ do more than
have found that the different ways in which reciprocating others’ fairness (or lack thereof).
self-regarding individuals and reciprocators value Strong reciprocators are ready to sacrifice mate-
objective payoffs translate into different behaviors rial resources (1) to reward those whom they see
in collective endeavors. For example, studies on as acting fairly and (2) to punish those they per-
repeated interactions (e.g., De Cremer and Van ceive as acting unfairly (Fehr and Gächter, 2002).
Lange, 2001; Liebrand et al., 1986) have shown Interestingly, strong reciprocators do not sanction
that reciprocators generally begin by cooperating, (un)fairness because of their expectation that sanc-
but cease to cooperate if other participants fail to tioning will increase their present or future mate-
reciprocate, while self-regarding individuals tend rial payoffs: they also sanction perfect strangers
only to cooperate if doing so increases their per- with whom they will not interact again (Fehr
sonal payoffs. Reciprocators exhibit such condi- and Gächter, 2002).5 Furthermore, strong recip-
tional behavior in social interactions because they rocators are not self-centered when sanctioning:
value fairness (Abbink, Irlenbusch, and Renner, they are also willing to punish those who behave
2000; Fehr and Falk, 1999; Van Lange, 1999). unfairly toward a third person (Engelmann and
They have been found to use more and remem- Strobel, 2004; Fehr and Fischbacher, 2004b; Fehr
ber better decision-making heuristics that focus and Gächter, 2002).
on the enhancement of joint outcomes and the To sum up, the empirical evidence suggests that
enhancement of the fairness of payoffs, such as firms face a population of potential stakeholders
‘play fair’ and ‘share and share alike’ (De Dreu that consists of reciprocal and self-regarding indi-
and Boles, 1998). Whether reciprocators assess viduals. We will now use these microfoundations
others’ behavior as fair depends on the under- to help explain why both fairness and arms-length
lying intentions as well as the outcome (Bolton, approaches to stakeholder management can lead to
Brandts, and Ockenfels, 2005; Turillo et al., sustained value creation.
2002). This contrasts with self-regarding individ-
5 Strong reciprocity differs fundamentally from ‘reciprocal
uals, who tend to assess others’ behavior only
altruism,’ which is often given as an explanation for sustained
in terms of its effect on their personal outcome cooperation in infinitely repeated games and in finitely repeated
(Stouten et al., 2005). games with incomplete information about when the game will
Empirical evidence (e.g., Van Lange and end (e.g., Trivers, 1971). Reciprocal altruists are willing to
sanction only when this behavior is likely to lead to future
Semin-Goossens, 1998) suggests that the dif- material rewards that offset the costs of sanctioning—as such,
ferent motives of self-regarding individuals and they are self-regarding.

Copyright  2013 John Wiley & Sons, Ltd. Strat. Mgmt. J., 35: 107–125 (2014)
DOI: 10.1002/smj
Managing Stakeholders with Heterogeneous Motives 113

WHY CAN BOTH FAIRNESS AND with the assumption in the stakeholder literature,
ARMS-LENGTH APPROACHES PAY reciprocators value fairness per se. In contrast,
OFF? self-regarding stakeholders do not. Liebrand et al.
(1986) and De Dreu and Boles (1998) found
To understand how a firm’s stakeholder man- that reciprocators view behaviors as varying
agement approach impacts contributions to value on a ‘moral’ dimension (what is good or bad),
creation by self-regarding and reciprocal stake- whereas self-regarding individuals tend to inter-
holders, we will consider the motivational and the pret behaviors along the ‘effectiveness’ dimension
sorting effect of the firm’s stakeholder manage- (what works). This distinction is reflected in their
ment approach (e.g. Coff and Kryscynski, 2011; emotional reactions to situations in which others
Lazear, 2000). Our analysis of the effect of a are not willing to cooperate. Stouten et al. (2005)
fairness and arms-length approach on the motiva- found that reciprocators’ emotional reactions to
tion of the stakeholders currently associated with noncooperation are linked to the violation of the
the firm will lead to the proposition that recipro- norm of fairness itself but that self-regarding
cal stakeholders contribute more to value creation individuals’ emotional reactions arise from effec-
with a fairness approach than with an arms-length tiveness concerns. In contrast to reciprocators,
approach, but that the reverse is true for self- self-regarding individuals are no longer upset
regarding stakeholders. It will also suggest that when it becomes clear that their individual payoffs
a fairness approach requires consistency across are unaffected by others’ noncooperation.
stakeholders to motivate reciprocal stakeholders. Because reciprocators value fairness per se, a
Our analysis of the effect of the two stakeholder fair treatment motivates reciprocal stakeholders to
approaches on stakeholders’ sorting will lead to create more value, even if their contribution is
the proposition that both a fairness and an arms- not fully compensated in the form of a personal
length approach to stakeholder management can economic benefit. This is illustrated by behavioral
lead to sustained value creation if applied consis- economists’ findings regarding reciprocation in
tently over time. Finally, we will argue that a firm the relationship between employees and employ-
adopting a fairness approach may find it difficult ers (e.g., Fehr and Falk, 1999; Fehr, Klein, and
to maintain the needed consistency over time in Schmidt, 2007; Fehr and Schmidt, 2000, 2004;
the face of certain types of change in its external Gächter and Falk, 2002). In a series of experi-
environment. ments, reciprocal employees reciprocated employ-
ers’ generous wage offers by selecting effort levels
significantly higher than the minimum level, even
The motivational effect of the two stakeholder
when employers had no possibility to punish or
management approaches
reward employees as a function of their effort
We can expect a firm’s stakeholder management (Fehr, Gächter, and Kirchsteiger, 1997).
approach to affect the motivation to create value Conversely, reciprocators are likely to infer hos-
of the stakeholders currently associated with the tile intentions from the choice of an arms-length
firm; e.g., how hard employees work or whether approach and to respond to these perceived hostile
customers spend time on providing feedback on intentions by contributing less to value creation
the firm’s products. Research in social psychology than if the firm chooses a fairness approach. Find-
and behavioral economics suggests that this moti- ings from laboratory experiments show that the
vational effect depends on whether a stakeholder use of financial rewards or sanctions in formal
is reciprocal or self-regarding. contracts damages reciprocators’ voluntary con-
More specifically, the empirical evidence tributions to value creation (e.g., Fehr and Falk,
gathered by social psychologists and behavioral 2002; Lubell and Scholz, 2001; Tenbrunsel and
economists indicates that the positive relationship Messick, 1999). Reciprocators seem to interpret
between a fair treatment of stakeholders and value financial rewards or sanctions as a signal of hos-
creation hypothesized in the existing stakeholder tile intentions and distrust, which leads them to
literature only holds for reciprocators: reciprocal lower their effort (Fehr and Falk, 2002; Fehr and
stakeholders will indeed create more value for Rockenbach, 2003). Therefore, a firm’s use of an
firms that adopt a fairness approach than for arms-length approach will, at best, limit recipro-
firms that adopt an arms-length approach. In line cal stakeholders’ level of contribution to what is
Copyright  2013 John Wiley & Sons, Ltd. Strat. Mgmt. J., 35: 107–125 (2014)
DOI: 10.1002/smj
114 F. Bridoux and J. W. Stoelhorst

necessary to secure personal payoffs. In fact, the referent others (Adams, 1965). This social com-
negative impact on reciprocal stakeholders’ contri- parison with others’ payoffs has repeatedly been
bution to value creation is likely to be even larger. shown to lead to payoff compression in order to
If firms adopt the hard bargaining that is central preserve feelings of fairness (Akerlof and Yellen,
to an arms-length approach, the strong recipro- 1990; Frank, 1984; Güth et al., 2001). The expla-
cators among a firm’s stakeholders may actively nation that has been offered for this phenomenon
destroy value. Behavioral economists have found is that fairness appraisals are based on subjec-
that strong reciprocators are willing to sacrifice tive evaluations of one’s own and others’ inputs
significant amounts of resources (money, time, and outcomes, rather than the objective inputs and
effort) to punish perceived unfairness (Fehr and outputs (Adams, 1965) and that people typically
Gächter, 2002). This is consistent with findings overestimate their own inputs compared to those
from justice research that when treated unfairly of others (Meyer, 1975; Ross and Sicoly, 1979).
a small fraction of employees react by engaging Together, these arguments lead us to formulate
in counterproductive work behaviors such as not the following propositions about the effect of the
cooperating, stealing, and damaging firm property two approaches to stakeholder management on the
(Greenberg, 1990, 1993; Harder, 1992; Skarlicki contribution to value creation of reciprocal and
and Folger, 1997). self-regarding stakeholders:
In contrast to reciprocators, self-regarding stake-
holders are motivated to create value from a purely Proposition 1: A reciprocal stakeholder con-
self-serving concern. These stakeholders are driven tributes more to value creation if the firm adopts
primarily by their personal monetary benefits and a fairness approach toward this stakeholder
costs. The motivations of self-regarding stake- than if it adopts an arms-length approach.
holders are consistent with the assumptions that
traditional economic approaches such as agency
theory and transaction cost economics make about Proposition 2: A self-regarding stakeholder con-
human behavior. Self-regarding stakeholders do tributes more to value creation if the firm adopts
not value fairness per se, and a fair treatment an arms-length approach toward this stake-
therefore will not motivate them to contribute holder than if it adopts a fairness approach.
to value creation beyond what is rewarded by
the firm. Self-regarding stakeholders will create We have so far considered how a firm’s
more value when a firm applies an arms-length treatment of a specific stakeholder affects the
approach to stakeholder management, as, by def- motivation to contribute to value creation of that
inition, an arms-length approach uses strong eco- particular stakeholder. But the motivation of a
nomic incentives to tie stakeholders’ contributions focal stakeholder to contribute to value creation
closely to stakeholders’ personal payoffs (Bebchuk may also be affected by the way in which
and Fried, 2004). the firm treats other stakeholders. In particular,
Note that a fair treatment could, in principle, reciprocators are not self-centered when appraising
also make stakeholders’ personal payoffs condi- the firm’s fairness and reciprocating its behaviors.
tional on their contribution. Deutsch (1975) iden- They positively value the firm’s fairness toward
tified three fairness principles: equity, equality, and third parties they care about (e.g., Goldstein,
need. Of these three, the equity principle (i.e. allo- Griskevicius, and Cialdini, 2011). In consequence,
cating proportionally to one’s merits) prescribes reciprocators’ fairness appraisals and motivation to
relating stakeholders’ payoffs (e.g., pay, prices, or contribute to value creation will be influenced by
profits) to their inputs (e.g., effort, time, cogni- how these third parties are treated, even when this
tive resources, or money). However, in practice treatment has no direct impact on their personal
maintaining feelings of equity is not compatible payoffs (Engelmann and Strobel, 2004).
with monetary incentives that very tightly align There is a lot of evidence that some stakehold-
stakeholders’ contribution and personal payoffs, as ers show concern not only for how they are treated
an arms-length approach does. The equity prin- themselves (e.g., customers asking higher product
ciple calls for appraising fairness by examining quality) but also for how other stakeholders are
the ratio of one’s inputs and outcomes and com- treated (e.g., customers boycotting products of
paring this ratio to the input-to-outcome ratio of firms using child labor). For instance, customers
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Managing Stakeholders with Heterogeneous Motives 115

who deem a layoff procedure unfair are less likely 2010; Venkataraman, 2002). Prospective stake-
to buy the firm’s products (Skarlicki, Ellard, and holders who expect a satisfactory treatment from
Kelln, 1998). Some stakeholders’ reactions to a firm may join it, while current stakeholders dis-
the unfair treatment of others can even lead to satisfied with their treatment can exit: customers
value destruction: strong reciprocators have been can take their business elsewhere, employees can
found to punish at a cost to themselves those quit their job, and shareholders can sell their stocks
who behave unfairly toward a third person they (Hill and Jones, 1992). Venkataraman (1997, 2002)
care about (Fehr and Fischbacher, 2004a, 2004b; has argued that an important function of the
Fehr, Fischbacher, and Gächter, 2002; Fehr and entrepreneurial process is to give stakeholders a
Gächter, 2002). choice of which nexus of relationships to associate
In other words, treating a reciprocal stakeholder with. In the short to medium term, entrepreneur-
fairly is not enough to motivate fully this stake- ship acts as a weak equilibrating force by creating
holder to contribute to value creation because the alternatives for individual stakeholders who are not
perception that the firm treats some other stake- satisfied with their current nexus (Venkataraman,
holders in an arms-length way will have a negative 1997, 2002). And if, in the longer term, the rede-
impact on a reciprocal stakeholder’s motivation. ployment of individual stakeholders does not work
This leads us to propose: freely and efficiently and serious stakeholder dis-
satisfaction accumulates within firms and societies,
Proposition 3: A reciprocal stakeholder con- entrepreneurship will act as a strong equilibrating
tributes more to value creation if this stake- force by bringing about a fundamental qualitative
holder perceives the firm as adopting a fair- change in relative stakeholder power through the
ness approach toward all its stakeholders, introduction of innovative products, methods, and
rather than adopting a fairness approach toward forms (Venkataraman, 2002).
some stakeholders and an arms-length approach Stakeholders’ motivational type influences the
toward others. extent to which they are attracted to a firm with
a fair or an arms-length approach to stakeholders
In contrast to reciprocators, self-regarding stake- and, thus, the extent to which they want to enter,
holders do not value fairness per se and so do not maintain, or end a relationship with the firm.
care about how other stakeholders are treated as In that sense, stakeholder management can be a
such. How others are treated will only affect their source of differentiation in the competition among
behavior if it influences their expectations of how firms for stakeholders. In particular, stakeholders
their own contribution will be rewarded. In other driven by reciprocity will tend to end their
words, self-regarding stakeholders’ contribution to relationship or avoid entering into a relationship
value creation will not depend directly on whether with firms that consistently favor an arms-length
the firm treats other stakeholders fairly or in an approach to stakeholder management, or with firms
arms-length way. that are not consistent over time and repeatedly
switch between a fair and an arms-length approach.
For example, Evans and Davis (2011) found
The sorting effect of the two stakeholder that job applicants who were higher in other-
management approaches regarding value orientation were less inclined to
Considering how the firm’s stakeholder manage- join a firm that scored poorly on corporate social
ment approach affects the motivation of the stake- responsibility than individuals who were more
holders currently associated with the firm is not self-regarding. Thus:
enough to grasp fully the impact of stakeholder
management on value creation. It is also necessary Proposition 4: A reciprocal stakeholder is more
to adopt a dynamic view of stakeholder relation- likely to join and stay with a firm that adopts a
ships that takes into account the sorting effect of fairness approach than with a firm that adopts
the firm’s stakeholder management approach. an arms-length approach or a firm that switches
A first sorting mechanism is stakeholders’ self- from one approach to another over time.
selection: in the longer run stakeholders can
join or leave a nexus of relationships (cf. Free- Self-regarding stakeholders will similarly self-
man, Wicks, and Parmar, 2004; Freeman et al., select and will tend to choose the firm with the
Copyright  2013 John Wiley & Sons, Ltd. Strat. Mgmt. J., 35: 107–125 (2014)
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116 F. Bridoux and J. W. Stoelhorst

stakeholder approach that brings them the highest This brings us to the second sorting mecha-
personal payoffs. We can expect self-regarding nism: the selection of stakeholders by firms. What-
stakeholders with high bargaining power to be ever their preferences may be, self-regarding stake-
attracted to firms that stick to an arms-length holders with low bargaining power may have to
approach to stakeholder management because such settle for firms with an arms-length treatment of
firms allow them to use their bargaining power stakeholders. Firms that adopt a fairness approach
to secure higher personal payoffs than would be will want to avoid entering or maintaining rela-
the case if value were divided on the basis of tionships with self-regarding stakeholders in order
fairness criteria. This argument finds supports in to maintain feelings of fairness among their recip-
the literature on the sorting effects of compensation rocal stakeholders. They must have mechanisms in
schemes as a function of employees’ ability, place to select in stakeholders who have a repu-
which is one source of employees’ bargaining tation for fair behaviors and to avoid or dismiss
power. This literature shows that, compared to less stakeholders who exhibit self-regarding behaviors
able self-regarding employees, more able ones are (Jones, 1995). While reciprocators might perceive
much more likely to select compensation schemes a firm without such selection mechanisms as kind,
that tightly link personal payoffs to individual their sense of fairness also requires that those who
performance because their higher ability enables free ride on others’ contributions are sanctioned.
them to earn high personal payoffs with such In fact, research has shown that the exclusion of
schemes (e.g., Cadsby, Song, and Tapon, 2007; individuals who do not contribute much to the col-
Lazear, 2000). This leads us to propose: lective good is one of the solutions to maintain
high contributions over time (Kollock, 1998).
Proposition 5: A self-regarding stakeholder with Combining the arguments for the selection
high bargaining power is more likely to join and self-selection of stakeholders, we expect the
and stay with a firm that adopts an arms- following for self-regarding stakeholders with low
length approach than with a firm that adopts a bargaining power:
fairness approach or a firm that switches from
one approach to another over time. Proposition 6: A self-regarding stakeholder with
low bargaining power is more likely to join
For self-regarding stakeholders with low bar- and stay with a firm that adopts an arms-
gaining power, the self-selection effect is more length approach or a firm that switches from one
complex. As argued above, these stakeholders approach to another over time than with a firm
are more motivated to create value in a firm that adopts a fairness approach.
with an arms-length approach than with a fair-
ness approach. In fact, heterogeneity in bargain- In line with these arguments, Southwest’s
ing power does not matter for the motivational employees are screened on the basis of attitude,
effect summarized in Propositions 1–3: all self- following the philosophy that ‘you hire for attitude
regarding individuals, regardless of their level and train for skills’ (Box and Buys, 2009). South-
of bargaining power, create more value under west’s selection procedures are time-consuming
strong performance-based individual incentives and aimed at identifying prospective employees
than under weak ones (Cadsby et al., 2007). How- who are ready to cooperate with others to get
ever, when given a choice about which firm to the work done and who are ready to go above
join, self-regarding stakeholders with low bar- and beyond the call of duty (Gittell, 2005). In
gaining power may prefer a firm that treats its addition, managers watch newcomers carefully to
stakeholders fairly because their low bargaining correct potential hiring mistakes: new hires who
power means low payoffs in a firm with an do not adopt Southwest’s teamwork approach are
arms-length approach. In other words, for self- fired or counseled out (Gittell, 2005). As former
regarding stakeholders with low bargaining power, Southwest’s CEO, Herb Kelleher, said ‘There is
the motivational and self-selection effects of the a lot of altruism, an ‘everybody-pitches-in’ atti-
two stakeholder management approaches may tude, a sense that life should be enjoyed. There’s
diverge. Weighing their personal costs and ben- a lot of tolerance, but one area where there’s no
efits, they may prefer to join a firm with a fairness compromise is values. An employee who com-
approach. promises on those is out’ (Sisodia et al., 2007:
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Managing Stakeholders with Heterogeneous Motives 117

213). Propositions 5 and 6 highlight that, in con- treatment of stakeholders over time increases the
trast to firms like Southwest, a firm applying an proportion of self-regarding stakeholders among
arms-length approach does not need costly tools to the firm’s stakeholders, which, in turn, has a
select stakeholders according to their social value positive effect on value creation.
orientation. It will automatically tend to attract
self-regarding stakeholders: self-regarding stake-
holders whose large potential contribution to value Environmental change, consistency,
creation gives them high bargaining power and and sustaining value creation
self-regarding stakeholders with low bargaining Sustaining value creation not only requires moti-
power who do not have the option to join a firm vating and sorting stakeholders, but also seizing
with a fairness approach. opportunities and deflecting threats in the firm’s
Propositions 4–6 imply that firms applying one competitive environment. It has been argued in the
of the two stakeholder management approaches stakeholder management literature that a fair treat-
consistently over time are likely to end up with ment of stakeholders provides a better basis for
a set of stakeholders that is relatively homoge- responding to external changes, turbulences, and
neous in terms of motivational type. This homo- crises than arms-length relationships (e.g., Harri-
geneity will positively affect value creation at son et al., 2010; Russo and Fouts, 1997). This
the individual and firm level. At the individual argument is consistent with the sorting and motiva-
level, the more reciprocal (self-regarding) stake- tional effects of stakeholder management on recip-
holders a firm applying a fairness (arms-length) rocal stakeholders. A firm with a consistent fair
approach has, the higher the average individual treatment of stakeholders will have a high propor-
contribution to value creation on the basis of tion of reciprocators among its stakeholders, whom
the motivational effects described in Propositions it can expect to reciprocate its investments in fair
1–3. Higher individual contributions from stake- relationships when help is needed to address exter-
holders should, most of the time, also lead to nal changes. Reciprocal stakeholders can help the
higher value creation at the firm level, as indi- firm to seize opportunities by investing more in
vidual contributions from stakeholders belonging value creation (e.g. employees working overtime)
to the same group are usually additive or superad- or to recover from a crisis by serving as advocates
ditive (e.g., economies of scale coming from more for the firm and by providing crisis-mitigating
customers’ purchases) and individual contributions resources, even if the crisis affects them negatively
from stakeholders belonging to different groups are (Ulmer, 2001). In contrast, a firm with a consis-
likely to be complementary. tent arms-length treatment of stakeholders should
In contrast, firms that regularly switch between not count on its stakeholders’ support to deflect
the two approaches will be attractive neither to threats or seize opportunities: self-regarding stake-
reciprocators, who will fear a switch from a fair holders, as well reciprocators in an arms-length
to an arms-length treatment, nor to self-regarding relationship with the firm, are likely to decrease
stakeholders with high bargaining power, who their contribution and leave the nexus when the
will fear a switch from an arms-length to a fair firm faces an external change that negatively
treatment that would lower their personal payoffs. affects their personal outcomes. On this basis,
For value creation at the firm level, this leads us we propose:
to propose that:
Proposition 9: In the face of external changes,
Proposition 7: Compared to an arms-length reciprocal stakeholders of a firm that adopts a
or an inconsistent approach, a consistent fair fairness approach will increase their contribu-
treatment of stakeholders over time increases tion to value creation more, or decrease their
the proportion of reciprocal stakeholders among contribution less, than self-regarding stakehold-
the firm’s stakeholders, which, in turn, has a ers and reciprocal stakeholders of a firm that
positive effect on value creation. adopts an arms-length approach.

Proposition 8: Compared to a fairness or an What the literature has not yet acknowledged is
inconsistent approach, a consistent arms-length that successfully adapting to external changes may
Copyright  2013 John Wiley & Sons, Ltd. Strat. Mgmt. J., 35: 107–125 (2014)
DOI: 10.1002/smj
118 F. Bridoux and J. W. Stoelhorst

be at odds with maintaining a fair treatment of Proposition 11: In the face of external changes,
stakeholders. While a firm that has invested in fair a consistent fair treatment of stakeholders will
relationships with stakeholders can benefit from lead to more value creation than an arms-
reciprocal stakeholders’ goodwill when faced with length approach as long as responding to these
unexpected events, the need for a consistent fair- changes does not require actions that would be
ness approach also constrains the firm’s capacity perceived as a breach of fairness by reciprocal
to take actions to respond to external changes. In stakeholders.
particular, maintaining fair relationships is likely to
be incompatible with strategic actions such as low-
ering employees’ compensation when unemploy- Proposition 12: In the face of external changes,
ment is high, switching suppliers to get access to an arms-length treatment of stakeholders will
the latest technologies, or outsourcing activities to lead to more value creation than a fairness
partners in low-cost countries. Reciprocators have approach when responding to these changes
been shown to consider such actions as unfair and requires actions that are perceived as a breach
to sanction the firm for these actions by decreasing of fairness by reciprocal stakeholders.
their contribution to value creation (Charness and
Levine, 2000; Kahneman, Knetsch, and Thaler,
1986). Moreover, they are likely to experience DISCUSSION AND CONCLUSION
much more intense feelings of betrayal and anger if
these actions come from a firm historically known Our paper contributes in three ways to instrumen-
for its fair treatment of stakeholders than if they tal stakeholder theory: by putting forward more
are in an arms-length relationship (Morrison and realistic microfoundations, by specifying the moti-
Robinson, 1997). These arguments lead to the fol- vational and sorting effect of two stakeholder man-
lowing proposition: agement approaches on stakeholders of different
motivational types, and by explaining the puz-
Proposition 10: Faced with firm actions that zling empirical phenomenon that some firms can
they perceive as a breach of fairness, recipro- successfully sustain value creation while ignor-
cal stakeholders of a firm that adopts a fair- ing fairness. We now turn to the implications of
ness approach will increase their contribution to our analysis for research, for practice, and for
value creation less, or decrease their contribu- the moral discourse in stakeholder theory and
tion more, than self-regarding stakeholders and point out some limitations that future research
reciprocal stakeholders of a firm that adopts an could address.
arms-length approach.
Implications for research
Proposition 10 implies that a firm that has con-
sistently treated stakeholders fairly has a more lim- Stakeholder theorists have emphasized the need to
ited repertoire of actions it can take to respond take into account the complexity of human psy-
to environmental changes than a firm that has chology (e.g. Bosse et al., 2009; Freeman and
adopted an arms-length approach. If environmen- Phillips, 2002; Harrison et al., 2010). Our analysis
tal events call for actions that may be perceived shows that the robust empirical evidence on moti-
as unfair by reciprocators, the firm’s response to vational heterogeneity from social psychology and
these external events is likely to unleash negative behavioral economics provides a fruitful starting
reactions from reciprocators. These negative reac- point to do so. Distinguishing between recipro-
tions will hurt value creation more than the nega- cators and self-regarding individuals helps recon-
tive reactions of self-regarding stakeholders, who cile arguments about how to motivate stakeholders
will simply modify their behavior so as to protect from stakeholder management and justice theories
their personal payoffs, or the negative reactions of (e.g. Bosse et al., 2009; Harrison et al., 2010;
reciprocators in an arms-length relationship with Hillman and Keim, 2001), with those from the
a firm, because these stakeholders were already traditional economics literature on incentives (e.g.
expecting an unfair treatment. This leads us to agency theory and transaction cost economics).
propose the following for value creation at the While the arguments from the stakeholder manage-
firm level: ment and justice literatures apply to reciprocators,
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DOI: 10.1002/smj
Managing Stakeholders with Heterogeneous Motives 119

who form the majority of the general population, namely the firm’s owners. As such, accounting
the traditional arguments from economics cannot profit is not just the result of how much value is
be entirely discarded as they hold for the sizable created, but also in part reflects the firm’s stake-
minority of self-regarding individuals. This recon- holder management approach. Firms that adopt an
ciliation can help avoid both utopian and dystopian arms-length treatment of their stakeholders and
views on how firms should manage their stake- have owners with high bargaining power may
holders and, in doing so, increase the external exhibit higher accounting profits than firms that
validity of stakeholder theory. divide value more fairly among stakeholders, even
Acknowledging motivational heterogeneity also if the latter category may well be creating more
has implications for empirical work. Large-scale value. Studies that use accounting measures of firm
studies of the relationship between stakeholder performance as their dependent variable are there-
management and firm performance typically fore likely to underestimate the positive effect of
ignore stakeholder sorting. Yet, if firms actively fairness on value creation for firms that adopt a
select certain types of stakeholders and stake- fairness approach.
holders self-select to associate with certain firms,
then firms are likely to face higher motivational Limitations and areas for future research
homogeneity than in the stakeholder population
as a whole. As a result, samples of stakeholders The previous point also highlights some limita-
drawn from the general population are unlikely tions of the present paper, with its specific focus
to be representative of the set of stakeholders on the impact of the firm’s approach to stakeholder
of any specific firm, and conclusions about the management on individual stakeholders’ contribu-
link between stakeholder management and firm tions to economic value creation. First, in line with
performance based on such samples may be the typical conception of value creation in strat-
misleading. Specifically, studies that sample the egy, we have sought to explain economic value.
general population are likely to (1) underestimate However, value can be defined more broadly as
the positive effect of a fairness approach on ‘anything that has the potential to be of worth to
firm performance for firms that apply a fairness stakeholders’ (Harrison and Wicks, 2013: 100). On
approach consistently across stakeholders and such a broader definition, the total value created
over time and (2) overestimate the positive effect by a firm that treats its reciprocal stakeholders
of a fairness approach on firm performance for fairly amounts to more than the economic value
firms that employ an arms-length approach. created, because reciprocal stakeholders value fair-
A further implication of our analysis concerns ness for its own sake. They will therefore derive
the choice of dependent variable in the empirical utility from a fairness approach that goes beyond
instrumental stakeholder literature. Recent contri- the monetary value they appropriate. In the theory
butions to stakeholder theory have argued that we developed above, the noneconomic value cre-
stakeholder theory is about value creation (e.g., ated by firms is treated in a purely instrumental
Freeman et al., 2010; Harrison et al., 2010; Har- way: firms that treat reciprocal stakeholders fairly
rison and Wicks, 2013). Similarly, we developed provide these stakeholders with something non-
our arguments in terms of the effect of stake- monetary that they value, which motivates them
holder management on economic value creation, to create more economic value than they would
rather than on financial performance as expressed in an arms-length relationship. Adopting a broader
in terms of traditional accounting measures such as conception of value creation could help researchers
accounting profit, as is common in extant empiri- go beyond our instrumental analysis of the effects
cal work. While economic value creation is more of a fairness approach.
difficult to measure than accounting profit, Garcia- Second, given its focus on stakeholders’ con-
Castro and Lieberman (2012) recently proposed a tribution to value creation, our theory does not
technique to measure value creation and its divi- fully account for competition among stakehold-
sion among stakeholders by building on the pro- ers to appropriate the value they jointly create
ductivity literature. Measures of economic value (Coff, 1999). The two approaches to stakeholder
creation should be preferred in empirical work, management capture to some extent how the firm
because accounting profit represents the value manages this competition for value appropriation.
appropriated by a specific stakeholder group, If the firm adopts: (1) a fairness approach it must
Copyright  2013 John Wiley & Sons, Ltd. Strat. Mgmt. J., 35: 107–125 (2014)
DOI: 10.1002/smj
120 F. Bridoux and J. W. Stoelhorst

manage the process and outcome of the divi- approaches. Future research could contrast the
sion of value among stakeholders in such a way impact of leaders’ motivational type on the
that stakeholders find them fair; and, (2) in con- firm’s choice with explanations that other theories
trast, with an arms-length treatment, competition would provide.
among stakeholders does not need to be care- Finally, in line with recent work in the stake-
fully managed: the firm simply can let competi- holder literature (e.g., Bosse et al., 2009; Harrison
tion among stakeholders play out. Yet, the two et al., 2010), our paper contributes to the micro-
approaches to stakeholder management do not cap- foundations of stakeholder theory by drilling down
ture all stakeholders’ actions to appropriate value to mechanisms that operate at an individual level
and their consequent effects on value creation. of analysis. Yet, firms also face stakeholders that
An example is the ability of stakeholder groups are organizations (e.g., trade unions, as opposed
to increase their bargaining power by acting col- to individual employees). Do our propositions
lectively (cf. Coff, 1999). Future research could generalize to organizational stakeholders? While
study the impact of such collective action on value we think it likely that the causal relationships
creation by shifting the focus from the relation- we propose would still hold for organizational
ship between the firm and its (individual) stake- stakeholders, we may expect the mechanisms that
holders to the relationships among (groups of) explain these relationships to be rather more com-
stakeholders. plex. In particular, the individual level mecha-
A further limitation of our paper is that our anal- nisms that we used to substantiate our proposi-
ysis is restricted to the impact of a fairness or arms- tions would operate only indirectly. In keeping
length approach on stakeholders’ value creation. with our argument for the focal firm above, we
We do not investigate what drives the firm’s choice would expect the reactions of an organizational
of one or the other approach in the first place. stakeholder to reflect its leaders’ motives. This is
We would expect top managers’ motives to shape most likely when these leaders themselves react
their firm’s approach to stakeholder management. to the firm’s stakeholder approach on behalf of
For instance, it is unlikely that Herb Kelleher, their organization. In these cases the individual
Southwest’s cofounder and CEO until June 2001, level mechanisms we discussed may be directly
could have kept Southwest’s stakeholders con- relevant, although they could be mediated by lead-
vinced that the company cared deeply about their ers’ role taking (i.e. not reacting on their per-
well-being if he had not really been driven by the sonal behalf, but on behalf of their organizations,
personal belief that everybody should be treated may blunt the emotional content of reciproca-
with respect (Gittell, 2005). Our expectation that tors’ reactions). When not the leaders but other
top managers’ motives shape their firm’s actions members of an organizational stakeholder react,
toward stakeholders is supported by the literatures we would expect their reactions to be shaped by
on corporate culture (Schein, 1985) and the role the culture embedding, articulation, and reinforce-
of a firm’s dominant logic (Prahalad and Bettis, ment mechanisms described above. The study of
1986). These literatures argue that leaders’ motives the mechanisms underlying the reactions of orga-
are likely to be transmitted to the rest of the orga- nizational stakeholders is an important area for
nization through ‘culture embedding mechanisms’ future research that we believe can benefit from the
(e.g., what leaders regularly pay attention to, mea- emerging understanding of how individual stake-
sure, and control; the observed criteria they use to holders are likely to react to firms’ stakeholder
allocate resources, rewards and status) and ‘cul- management practices.
ture articulation and reinforcement mechanisms’
(e.g., organizational design, structure, systems
Implications for practice
and procedures; stories, legends and myths; rites
and rituals; formal statements of organizational The main implications of our analysis for practice
values and philosophy) (Hoffman et al., 2011; are that both approaches to managing stakehold-
Schaubroeck et al., 2012; Schein, 1985; Shamir, ers have specific costs and benefits and that both
House, and Arthur, 1993). However, theories can be a source of sustained value creation when
like transaction cost economics or the resource- supported by an appropriate set of organizational
based view would suggest other explanations practices. While an arms-length approach comes
for the choice between the two stakeholder at the cost of undermining the contributions to
Copyright  2013 John Wiley & Sons, Ltd. Strat. Mgmt. J., 35: 107–125 (2014)
DOI: 10.1002/smj
Managing Stakeholders with Heterogeneous Motives 121

value creation by reciprocators, it has the benefit of managers have to spend time listening to stake-
enabling the firm to motivate self-regarding stake- holders, taking their opinions into account when
holders, to attract and retain self-regarding stake- making strategic decisions, and explaining these
holders with high bargaining power, and to pursue decisions to them (Harrison et al., 2010). With an
valuable strategic actions that are not compatible arms-length approach, this time can be invested
with maintaining fair relationships with reciproca- in other managerial tasks. Selecting stakeholders
tors. At the same time, the example of Ryanair to maintain fairness also comes at a cost: while
also suggests that successfully implementing an Southwest’s employee voluntary turnover is much
arms-length approach requires constant managerial lower than at Ryanair, it also spends more to recruit
attention at all levels in the firm. Keeping the bar- and train employees than most other airlines do
gaining power of stakeholders low drives many of and its selection standards have constrained the
Ryanair’s strategic decisions. For example, when firm’s growth rate (Gittell, 2005).
another airline enters a route already served by
Ryanair, it typically reacts with a price war in order Moral implications
to drive the other airline out of the market and
maintain its dominance on the route. An important To conclude, acknowledging heterogeneity of
reason for this strategy seems to be that Ryanair stakeholder motives helps explain that some firms
wants to protect its bargaining position with the can be successful by ignoring fairness consider-
secondary airports it uses: as long as these airports ations and adopting an arms-length approach to
are captive suppliers, Ryanair can bargain for very stakeholder management that is strictly based on
low charges, such as landing fees (Ruddock, 2008). relative bargaining power. In delivering this mes-
Consistency in organizational practices is even sage, we have made a theoretical point. An alto-
more important for firms adopting a fairness gether different question is what the moral implica-
approach than it is for firms adopting an arms- tions of our analysis are. One possible conclusion
length one. While the latter can afford to treat is that managers need not care about fairness. On
stakeholders differently, the former must be per- a purely instrumental view, this conclusion is war-
ceived as applying fair practices to all their stake- ranted: our analysis shows that firms can create
holders in order to attract, retain, and motivate economic value without caring about fairness at
reciprocators fully. In other words, to benefit from all. But, of course, a positive statement (‘what is’)
should never be mistaken for a normative stance
a fairness approach, firms must be consistently
(‘what ought to be’). There is nothing in our anal-
fair not only over time, but also across all stake-
ysis to suggest that fairness cannot be an impor-
holders. Our analysis also suggests that, compared
tant value in and of itself. In fact, the empirical
to an arms-length approach, a fairness approach
evidence from social psychology and behavioral
may have some disadvantages that have not been
economics suggests that it is exactly that for recip-
fully acknowledged by previous work in the stake-
rocators, who form the majority of the general
holder literature. First, a fairness approach is nei-
population. An important moral implication of our
ther the most attractive nor the most motivating for analysis, then, is that given the heterogeneity of
self-regarding stakeholders with high bargaining stakeholders’ motives, purely instrumental appeals
power. Moreover, we also have argued that main- to managers to abandon arms-length approaches
taining a fairness approach may make it difficult to to stakeholder management and treat their stake-
respond to some external changes because actions holders fairly will not suffice. Those who feel that
that reciprocal stakeholders perceive as a breach a just world requires firms to treat stakeholders
of fairness can unleash negative reactions from fairly should also be willing to promote fairness
these stakeholders. And finally, a fairness approach for its own sake.
comes with opportunity costs that decrease eco-
nomic value creation. To maintain reciprocators’
feelings of fairness, managers must put in place ACKNOWLEDGEMENTS
systems that ensure distributive, procedural, and
interactional fairness across stakeholders and that We thank our reviewers and Associate Editor Will
enable the firm to select out stakeholders who Mitchell who helped us refine and improve the
exhibit self-regarding behaviors. For example, ideas presented in this paper. Our appreciation
Copyright  2013 John Wiley & Sons, Ltd. Strat. Mgmt. J., 35: 107–125 (2014)
DOI: 10.1002/smj
122 F. Bridoux and J. W. Stoelhorst

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