External stakeholders: 3 ways to boost engagement

Guest contributor: Sumeet Malik

Assistant Professor · University of Amsterdam / Entrepreneurship & Innovation Section
2021-2022 Post-Doctoral Fellow · IESE Chair of Family-Owned Business

From investors and regulators to customers, external stakeholders are critical to the long-term success of family firms. They buy their products, regulate their operations, and provide their means of operation by supplying vital resources and raw materials.

Positive stakeholder relationships are paramount for all organizations, but especially for family-owned firms, which are invariably held to a higher standard.

Far from faceless entities, family-business owners are easily identifiable and assumed to play a direct role in the company’s management. External stakeholders also worry about family owners acting in a self-serving way.

Family firms stand out in another key aspect: the non-financial wealth reference point – also known as socioemotional wealth (SEW) – embedded in their decision-making process.

As defined by Gomez-Mejia et al. (2007), SEW entails the “non-financial aspects of the firm that meet the family’s affective needs, such as identity, the ability to exercise family influence, and the perpetuation of the family dynasty.”

For family firms, the path to creating SEW rests on enhanced stakeholder engagement. By way of example, family firms are less likely to pollute than their non-family counterparts in industries required to report their toxic emissions.

Going a step further, pioneering research by Prof. Pascual Berrone suggests that the relatively superior environmental performance of family firms may be a self-interested way to augment their SEW.

Below are three ways in which family firms can optimize stakeholder relations, and reap the strategic benefits that come with it:

(1) Embrace sustainability

Family firms should strive for sustainability in their operations, particularly if their activity is geographically concentrated. Having local roots exposes them to community sanctions and even personal shame in case of environmental transgressions.

A robust environmental commitment also helps build legitimacy among regulators and activists, while acting as “insurance” if accidents do occur since stakeholders are more apt to give them the benefit of doubt.

(2) Forge solid relationships with customers and suppliers

As noted in a previous post, family firms take a longer-term view, which offers unique opportunities for building stable relationships with suppliers over repeated interactions.

Family firms are also generally more accessible and informal in their public dealings, enabling them to forge closer personal relationships with customers.

Long-term relationships with suppliers and customers wield numerous benefits, such as network-based advantages in their innovation processes.

Meanwhile, a loyal customer base can be an outstanding marketing channel as early adopters of new products, as well as a frontline source of information to anticipate evolving market needs and changes.

(3) Aim for transparency  

External stakeholders view family firms with suspicion, assuming owners are more prone to acting opportunistically or leading in a self-serving manner in light of the considerable control they exert over their businesses.

Investors and analysts worry that information provided by family firms might be incomplete, putting them or their clients at risk.

To calm these fears, family firms need to be transparent and proactive in their disclosures, which bolsters legitimacy while mitigating the risks of litigation.

It also helps family-controlled firms to stay ahead of the curve, since the voluntary best practices of today may likely become the legal requirements of tomorrow.


Homepage image: Chris Linnett on Unsplash.