The evidence is in: public companies that focus on multiple stakeholders are the least volatile and most lucrative bet for investors over the long term.

The findings may prompt changes at the many companies that still don’t abide by the strategy, according to a joint report from FCLT Global, a non-profit research institute, and the Wharton School of the University of Pennsylvania released Tuesday. That’s because it doesn’t always work in the short term and investors need to be patient. 

As companies feel increasing pressure to address social responsibilities, they’ve made themselves accountable to various stakeholders, including regulators, lenders, creditors, communities, suppliers, and governments. These constituents are in addition to shareholders, once most companies’ primary audience.

But not everybody is a believer. “That lack of consistency in operationalizing a multi-stakeholder strategy has left many investors – and other stakeholders – skeptical of firms that pursue this approach to business,” wrote the lead authors, including Ariel Babcock, Witold Jerzy Henisz, Allen He, Rachelle Sampson, and Xuchong Shao. 

Researchers asked the question: “What does it take to earn a return from implementing a multi-stakeholder strategy and offer a rebuttal to skeptics?” It takes a winning combination of strong stakeholder-oriented language (what the authors refer to as “the talk”) and strong performance on material environmental, social, and governance measures (“the walk”). The winning combination of high talk and high walk (or "walking the talk") constitutes a “true multi-stakeholder strategy,” the report said. 

“The paper contributes to a growing body of research which highlights what we call the pathways to a win-win — the pathways to materiality — how you get from a multi-stakeholder orientation to financial performance,” Witold Jerzy Henisz, a professor of management at Wharton, told Institutional Investor. 

Researchers at the ESG Analytics Lab at the Wharton School analyzed the annual reports of over 3,000 global companies from the MSCI’s All Country World Index and identified the presence of stakeholder-oriented language. Once the language was identified, researchers compared the presence of the language to the companies’ financial and ESG performance. 

Compared to companies that are only focused on shareholders, the authors found that firms that “paired strong stakeholder language” with strong ESG performance delivered a 4 percent higher return on invested capital (ROIC) over a three-year period, invested twice as much in research and development as a percentage of sales, had 1.5 percent higher sales growth over a three period period, delivered more stable returns, and were 50 percent more likely to issue long-term guidance.

Specifically, firms that had the highest scores for both stakeholder-oriented language (“the talk”) and performance on a range of capital allocation and ESG metrics (“the walk”) averaged 0.85 percent higher ROIC compared with the sample median. Conversely, firms that had high talk and low walk scored 0.36 percent below the median, on average. Firms with both low walk and talk scored 0.44 percent below the median. 

“​Translated into dollar amounts, if all firms performed like companies in the top walk/talk tercile, they would combine to generate $3.2 trillion in additional firm value over our study period,” the authors wrote. 

A true multi-stakeholder strategy is one that doesn’t overemphasize one stakeholder group. While stakeholders include regulators, lenders, creditors, and shareholders, companies tend to prioritize shareholders in the decisions they make, the report said. While this approach can prove successful in the short term, it’s not profitable for companies on a longer horizon. 

“Taking a multi-stakeholder view is part and parcel of the investment objectives,” Jim Neumann, chief investment officer at Sussex Partners, an alternative investment manager, told II in an email. “While share price is a key measure, it is increasingly recognized that keeping the interests of a broader range of stakeholders including customers, employees, and better world objectives adds value that will eventually accrue to the share price (at least relatively).”

The paper’s authors compared the effect of multi-stakeholder strategies with single-stakeholder (shareholder) strategies on ROIC over time. In the short term, a multi-stakeholder orientation and a single stakeholder focus generated similar ROIC — 3 percent and 3.7 percent, respectively. 


But, as time passed, the percentages moved apart. When the authors implemented a three-year ROIC lag, the multi-stakeholder orientation generated 2.4 percent ROIC, while the shareholder orientation delivered 1.4 percent ROIC. In essence, companies that prioritize shareholders may keep up with those that court multiple stakeholders in the short-term, but it’s the latter companies that outperform in the long run. 

“We often view this as a tradeoff: You’re either shareholder- or stakeholder-oriented,” Henisz said. “If we just look contemporaneously, we do see that you’re slightly better off in terms of your return on invested capital of having a more shareholder orientation, but that effect diminishes over time. By the first year, you’re already seeing an inversion, and that gap widens [over time].” 

The result suggests that a broader stakeholder orientation (i.e. prioritizing the values of a wide range of stakeholders) ultimately also delivers shareholder value, Henisz added. After all, shareholders are encompassed in the broad definition of a stakeholder. 

“In the longer time period, just focusing on the short-term needs of your shareholders delivers worse financial performance because you’re too driven by the quarterly earnings calls, by the short term incentives,” Henisz said. “There’s a little bit of patience you need to have.” 

But, for companies looking to implement a multi-stakeholder orientation, this patience can be challenging, particularly when the high talk, low walk companies see slightly higher rates of ROIC in the zero-year period. 

“The time horizon is really the central piece missing from the conversation around stakeholder oriented businesses,” Ariel Babcock, FCLT’s managing director of research, told II. 

Still, Babcock added, while companies need to be patient, management and boards also need to collaborate to identify the core objectives of the company. In short, companies need to identify which social (stakeholder) responsibilities they can and cannot realistically uphold. 

“Company management and boards still need to work together to sort through those expectations, identify the ones that are the real responsibility of the company and aligned with corporate purpose and growth objectives, and then treat those with the appropriate care and consideration when they’re thinking about capital allocation and long term strategic planning,” Babcock said. “Every single [issue] someone lobs at you isn’t going to be your responsibility.” 

Henisz said there also needs to be more robust data and measures available for companies to understand and ultimately implement a multi-stakeholder approach. 

While the report didn’t name any specific companies with robust multi-stakeholder approaches, last week JUST Capital published its JUST 100 list, which showcases the U.S. companies with the strongest ESG and stakeholder performance. 

Alphabet held the number-one spot, followed by Intel and Microsoft. JUST Capital factored in the top-20 stakeholder issues of 2021 when researching its rankings. Issues included paying a fair, living wage, creating jobs in the U.S., and prioritizing accountability to all stakeholders — not just shareholders.

As the authors of the FCLT Global/Wharton paper, said, “Separating the empty talk from the talk of companies that may simply be earlier in their journey is a challenge for stakeholders (especially investors).”