Giving Compass' Take:

• Chirantan Chatterjee discusses research that indicates that stakeholder orientation can improve equality while improving companies financial sustainability. 

• How can social entrepreneurs best serve their stakeholders? 

• Learn how social enterprises can protect their triple bottom line. 

I often start the first-year managerial economics classes I teach by showing a graph to my MBA students.

It shows that in 1951, middle-income Indians (from the middle 40th percentile, leaving out the 30 percent at the top and bottom) earned about 42 percent of the country’s total income, whereas in 2014 they earned only about 30 percent. In contrast, the percentage of income share of the top 10 percent of Indians rose from 35 percent in 1951 to 55 percent in 2014. This evolution toward acute inequality is now well documented—not just in India, but globally.

The question I ask my students after they see this graph is whether companies have any role in solving this growing inequality. The answer divides the class. Social welfare-oriented students start highlighting the role of stakeholder orientation (how much a company attends to its full range of stakeholders, including customers, competitors, employees, and shareholders) and business models focused at the base of the pyramid. Free-market proponents argue that the objective of companies is to maximize profits, citing troves of evidence for shareholder (vs. stakeholder) orientation that point to enhanced profitability, productivity, and survivability. The shareholder-focused company view usually prevails in these classroom debates.

However, other studies have indicated that there are important market benefits to the stakeholder orientation, including greater employee motivation, enhanced channel relationships, higher consumer loyalty, reputation spillovers from corporate community involvement in the ecosystem, and sustainable business operations in the long run. Extending this line of thought, and building on the work of R. Edward Freeman and other scholars who espouse this approach, a recent report I coauthored with Arzi Adbi and Ajay Bhaskarabhatla presents some early empirical evidence from developing economies showing that the entry of stakeholder-oriented companies into the market impacts market dynamics by influencing pricing and product differentiation norms. The report, which focuses on Indian pharmaceutical companies, also illustrates the potential for the approach to improve consumer access to products, in this case medicines.

Read the full article about stakeholder orientation by Chirantan Chatterjee at Stanford Social Innovation Review.