How Applying Instrumental Stakeholder Theory Can Provide Sustainable Competitive Advantage

Abstract

Instrumental stakeholder theory considers the performance consequences for firms of highly ethical relationships with stakeholders, characterized by high levels of trust, cooperation, and information sharing. While research suggests performance benefits, an obvious question remains: If instrumental stakeholder theory–based stakeholder treatment is so valuable, why isn’t it the dominant mode of relating to stakeholders? We argue that the existing instrumental stakeholder theory literature has three shortcomings that limit its ability to explain variance in performance. (1) Little theory exists around how instrumental stakeholder theory–based stakeholder management could provide sustainable competitive advantage. (2) The literature has largely neglected the potential downsides (i.e., costs) associated with pursuing these sorts of stakeholder relationships. (3) There is a paucity of theory on the contexts in which the incremental benefits of instrumental stakeholder theory–based stakeholder relationships are most likely to exceed the costs. As our primary contribution, we develop a theoretical path from a communal sharing relational ethics strategy—characterized by an intention to rely on relational contracts, joint wealth creation, high levels of mutual trust and cooperation, and communal sharing of property—to a close relationship capability, which we argue is valuable, rare, and difficult to imitate and, thus, a potential source of sustainable competitive advantage. We also consider the potential costs of achieving this capability and identify contexts in which the resulting relationships are likely to have the greatest net value.