Academy of Management Review Discussion 2022
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How Applying Instrumental Stakeholder Theory Can Provide
Sustainable Competitive Advantage
Journal: Academy of Management Review
Manuscript ID AMR-2016-0111-Original.R3
Manuscript Type: Original Manuscript
Theoretical Perspectives:
Stakeholder Theory, Business Ethics, Resource Based View, Strategy,
Leadership theories, Microfoundations of strategy, Knowledge-based view,
Human capital theory, Behavioral theory of the firm
Topic Areas:
Business-level resources/capabilities < Business and Competitive Strategy
< Business Policy and Strategy, Knowledge management < Strategic
Management Process < Business Policy and Strategy, Stakeholder
management < Upper Echelons/Corporate Governance < Business Policy
and Strategy, Capabilities and Competencies < Organization and
Management theory, Culture < Organization and Management theory,
Knowledge Flows and Knowledge Management < Organization and
Management theory, Trust and Cooperation < Organization and
Management theory, Ethics and codes of conduct < Social Issues in
Management, Organizational virtues and ethics < Organizational
Development and Change
Abstract:
Instrumental stakeholder theory (IST) 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 IST-based stakeholder treatment is so valuable, why isn’t it the
dominant mode of relating to stakeholders? We argue that the existing IST
literature has three shortcomings that limit its ability to explain variance in
performance. 1) Little theory exists around how IST-based stakeholder
management could provide sustainable competitive advantage. 2) The IST
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
IST-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 to a close relationship capability, which
we argue to be 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.
Academy of Management Review
Sustainable Competitive Advantage
Journal: Academy of Management Review
Manuscript ID AMR-2016-0111-Original.R3
Manuscript Type: Original Manuscript
Theoretical Perspectives:
Stakeholder Theory, Business Ethics, Resource Based View, Strategy,
Leadership theories, Microfoundations of strategy, Knowledge-based view,
Human capital theory, Behavioral theory of the firm
Topic Areas:
Business-level resources/capabilities < Business and Competitive Strategy
< Business Policy and Strategy, Knowledge management < Strategic
Management Process < Business Policy and Strategy, Stakeholder
management < Upper Echelons/Corporate Governance < Business Policy
and Strategy, Capabilities and Competencies < Organization and
Management theory, Culture < Organization and Management theory,
Knowledge Flows and Knowledge Management < Organization and
Management theory, Trust and Cooperation < Organization and
Management theory, Ethics and codes of conduct < Social Issues in
Management, Organizational virtues and ethics < Organizational
Development and Change
Abstract:
Instrumental stakeholder theory (IST) 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 IST-based stakeholder treatment is so valuable, why isn’t it the
dominant mode of relating to stakeholders? We argue that the existing IST
literature has three shortcomings that limit its ability to explain variance in
performance. 1) Little theory exists around how IST-based stakeholder
management could provide sustainable competitive advantage. 2) The IST
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
IST-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 to a close relationship capability, which
we argue to be 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.
Academy of Management Review
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HOW APPLYING INSTRUMENTAL STAKEHOLDER THEORY CAN PROVIDE
SUSTAINABLE COMPETITIVE ADVANTAGE
Thomas M. Jones
Professor Emeritus
University of Washington
Seattle, WA 98195 USA
rebozo@uwashington.edu
Jeffrey S. Harrison
W. David Robbins Chair in Strategic Management
University of Richmond
Richmond, VA 23173 USA
harrison@richmond.edu
Will Felps
Associate Head of the School of Management
University of New South Wales Business School
Sydney NSW 2052 Australia
w.felps@unsw.edu.au
Forthcoming in Academy of Management Review
Acknowledgement: We greatly appreciate the constructive advice we received from
Associate Editor Mike Pfarrer and three anonymous reviewers during the preparation of
this manuscript.
Page 2 of 53Academy of Management Review
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HOW APPLYING INSTRUMENTAL STAKEHOLDER THEORY CAN PROVIDE
SUSTAINABLE COMPETITIVE ADVANTAGE
Thomas M. Jones
Professor Emeritus
University of Washington
Seattle, WA 98195 USA
rebozo@uwashington.edu
Jeffrey S. Harrison
W. David Robbins Chair in Strategic Management
University of Richmond
Richmond, VA 23173 USA
harrison@richmond.edu
Will Felps
Associate Head of the School of Management
University of New South Wales Business School
Sydney NSW 2052 Australia
w.felps@unsw.edu.au
Forthcoming in Academy of Management Review
Acknowledgement: We greatly appreciate the constructive advice we received from
Associate Editor Mike Pfarrer and three anonymous reviewers during the preparation of
this manuscript.
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HOW APPLYING INSTRUMENTAL STAKEHOLDER THEORY CAN PROVIDE
SUSTAINABLE COMPETITIVE ADVANTAGE
ABSTRACT
Instrumental stakeholder theory (IST) 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 IST-based stakeholder treatment is so valuable, why isn’t it the dominant mode of
relating to stakeholders? We argue that the existing IST literature has three shortcomings that
limit its ability to explain variance in performance. 1) Little theory exists around how IST-based
stakeholder management could provide sustainable competitive advantage. 2) The IST 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 IST-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 to a close relationship capability, which we argue to be 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.
Keywords: Stakeholder theory, stakeholder management, instrumental stakeholder theory,
resource-based perspective, competitive advantage, sustainability, business ethics, relational
ethics, close relationship capability
Page 3 of 53 Academy of Management Review
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HOW APPLYING INSTRUMENTAL STAKEHOLDER THEORY CAN PROVIDE
SUSTAINABLE COMPETITIVE ADVANTAGE
ABSTRACT
Instrumental stakeholder theory (IST) 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 IST-based stakeholder treatment is so valuable, why isn’t it the dominant mode of
relating to stakeholders? We argue that the existing IST literature has three shortcomings that
limit its ability to explain variance in performance. 1) Little theory exists around how IST-based
stakeholder management could provide sustainable competitive advantage. 2) The IST 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 IST-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 to a close relationship capability, which we argue to be 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.
Keywords: Stakeholder theory, stakeholder management, instrumental stakeholder theory,
resource-based perspective, competitive advantage, sustainability, business ethics, relational
ethics, close relationship capability
Page 3 of 53 Academy of Management Review
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3
Stakeholder theory is an umbrella term for a genre of theories that help scholars and
managers understand relationships between firms and their stakeholders, as well as some of the
performance outcomes of these relationships. The theory is often characterized as being divided
into three interrelated streams: descriptive, normative, and instrumental (Donaldson & Preston,
1995). The focus of this article is instrumental stakeholder theory (hereafter IST), although we
recognize that there are both descriptive and normative elements in our narrative (cf., Harris &
Freeman, 2008). Specifically, the core hypothesis of IST is that developing stakeholder
relationships governed by the norms of traditional ethics – e.g., fairness, trustworthiness, loyalty,
care, and respect (Hendry, 2001, 2004) – will lead to improved financial performance. As
summarized by Jones (1995), IST holds that “...firms that contract (through their managers) with
their stakeholders on the basis of mutual trust and cooperation will have a competitive advantage
over those that do not (422).”
Although IST is a powerful theory with strong prescriptive and normative conclusions,
the IST literature has failed to answer a vital question: if the performance effects of ethical
relationships with stakeholders are positive, according to both theory and empirical studies (Choi
& Wang, 2009; Harrison, Bosse, & Phillips, 2010; Henisz, Dorobantu, & Nartey, 2014; Jones,
1995; Jones & Wicks, 1999; Sisodia, Wolfe, & Sheth), why do so many firms treat stakeholders
selfishly at best (Mintzberg, Simons, & Basu, 2002) and unethically at worst (Clement, 2006;
Greve, Palmer, & Pozner, 2010)? We provide some answers to this question by addressing three
shortcomings that limit the ability of scholars to fully understand the performance effects of IST-
based measures and to provide guidance to practicing managers.
First, although much of the IST literature explains why highly ethical treatment of
stakeholders should be valuable, thus far there has not been a thorough evaluation of such an
Page 4 of 53Academy of Management Review
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Stakeholder theory is an umbrella term for a genre of theories that help scholars and
managers understand relationships between firms and their stakeholders, as well as some of the
performance outcomes of these relationships. The theory is often characterized as being divided
into three interrelated streams: descriptive, normative, and instrumental (Donaldson & Preston,
1995). The focus of this article is instrumental stakeholder theory (hereafter IST), although we
recognize that there are both descriptive and normative elements in our narrative (cf., Harris &
Freeman, 2008). Specifically, the core hypothesis of IST is that developing stakeholder
relationships governed by the norms of traditional ethics – e.g., fairness, trustworthiness, loyalty,
care, and respect (Hendry, 2001, 2004) – will lead to improved financial performance. As
summarized by Jones (1995), IST holds that “...firms that contract (through their managers) with
their stakeholders on the basis of mutual trust and cooperation will have a competitive advantage
over those that do not (422).”
Although IST is a powerful theory with strong prescriptive and normative conclusions,
the IST literature has failed to answer a vital question: if the performance effects of ethical
relationships with stakeholders are positive, according to both theory and empirical studies (Choi
& Wang, 2009; Harrison, Bosse, & Phillips, 2010; Henisz, Dorobantu, & Nartey, 2014; Jones,
1995; Jones & Wicks, 1999; Sisodia, Wolfe, & Sheth), why do so many firms treat stakeholders
selfishly at best (Mintzberg, Simons, & Basu, 2002) and unethically at worst (Clement, 2006;
Greve, Palmer, & Pozner, 2010)? We provide some answers to this question by addressing three
shortcomings that limit the ability of scholars to fully understand the performance effects of IST-
based measures and to provide guidance to practicing managers.
First, although much of the IST literature explains why highly ethical treatment of
stakeholders should be valuable, thus far there has not been a thorough evaluation of such an
Page 4 of 53Academy of Management Review
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approach against the other resource-based criteria that help identify potential sources of
sustainable competitive advantage (Barney, 1991; Barney & Wright, 1998). Specifically, are the
resources/capabilities that result from IST-based stakeholder treatment also rare and difficult to
imitate? As noted by Freeman and colleagues (2010: 95), “the theoretical links between
stakeholder theory and the resource-based view have not been adequately established in the
minds of many strategic management scholars.”
Second, prior IST scholarship notes that close relationships with stakeholders, developed
through ethical treatment, can have a number of benefits (e.g., Bosse & Coughlan, 2016; Cooper
& Gardner, 1993; Larson, 1992; Uzzi, 1997). However, most of the field has displayed a “sunny-
side” bias, and only a few scholars have begun to consider the costs of close relationships with
stakeholders (e.g., Garcia-Castro & Francoeur, 2016; Harrison & Bosse, 2013).
Third, traditional IST generally assumes that ethically grounded stakeholder management
strategies will be associated with higher financial performance regardless of context.1 But it is
probable that the link is stronger, non-existent, or even negative in various contexts. Like
Bridoux and Stoelhorst (2014; 2016), we believe that identification of moderating influences is
critical to the stakeholder discussion. Moderators are particularly important given that the
business environment seems to be changing in important ways – i.e., becoming more dynamic,
knowledge intensive, and interdependent. As such, this article raises the question: is an IST-
based stakeholder management approach becoming a more or less viable means of achieving
sustainable competitive advantage given changes to the business environment?
1 Exceptions are found in the theoretical work of Bridoux and Stoelhorst (2014, 2016), and the empirical work of
Garcia-Castro & Francouer (2016). We extend the former work by including more moderators, and specifically
moderators that are closely associated with pervasive environmental forces. The latter work does not directly speak
to firm/stakeholder relationships.
Page 5 of 53 Academy of Management Review
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approach against the other resource-based criteria that help identify potential sources of
sustainable competitive advantage (Barney, 1991; Barney & Wright, 1998). Specifically, are the
resources/capabilities that result from IST-based stakeholder treatment also rare and difficult to
imitate? As noted by Freeman and colleagues (2010: 95), “the theoretical links between
stakeholder theory and the resource-based view have not been adequately established in the
minds of many strategic management scholars.”
Second, prior IST scholarship notes that close relationships with stakeholders, developed
through ethical treatment, can have a number of benefits (e.g., Bosse & Coughlan, 2016; Cooper
& Gardner, 1993; Larson, 1992; Uzzi, 1997). However, most of the field has displayed a “sunny-
side” bias, and only a few scholars have begun to consider the costs of close relationships with
stakeholders (e.g., Garcia-Castro & Francoeur, 2016; Harrison & Bosse, 2013).
Third, traditional IST generally assumes that ethically grounded stakeholder management
strategies will be associated with higher financial performance regardless of context.1 But it is
probable that the link is stronger, non-existent, or even negative in various contexts. Like
Bridoux and Stoelhorst (2014; 2016), we believe that identification of moderating influences is
critical to the stakeholder discussion. Moderators are particularly important given that the
business environment seems to be changing in important ways – i.e., becoming more dynamic,
knowledge intensive, and interdependent. As such, this article raises the question: is an IST-
based stakeholder management approach becoming a more or less viable means of achieving
sustainable competitive advantage given changes to the business environment?
1 Exceptions are found in the theoretical work of Bridoux and Stoelhorst (2014, 2016), and the empirical work of
Garcia-Castro & Francouer (2016). We extend the former work by including more moderators, and specifically
moderators that are closely associated with pervasive environmental forces. The latter work does not directly speak
to firm/stakeholder relationships.
Page 5 of 53 Academy of Management Review
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In this paper, rather than examining IST solely from the perspective of various programs
and policies that firms implement unilaterally that have either helpful or harmful effects on
stakeholders (as much of the extant IST literature has done), we use relational theory to examine
the nature of the two-way interactions that develop between managers and stakeholders. In so
doing, we draw on relational models (Bridoux & Stoelhorst, 2016; Fiske, 1992) and arm’s length
versus embedded relationships (Uzzi, 1997). This approach answers a call from Jones (2011),
who argues: “Instead of examining company policies and specific actions, researchers should be
examining the content and nature of the relationships themselves (60).”
A relational approach provides greater specification to the claim that the prescriptions of
IST can lead to sustainable competitive advantage. At the core of these arguments is the idea that
a firm’s ethics (ground rules) for managing relations with stakeholders can lead to the
development of capability that can be a source of sustainable competitive advantage. Sustainable
competitive advantage, in turn, can be defined as a firm’s ability to persistently create more
economic value than the marginal (breakeven) competitor in its product market (Peteraf &
Barney, 2003). Specifically, we argue that a communal sharing relational ethics strategy (CSRE),
characterized by an intention to rely on relational contracts, joint wealth creation, high levels of
mutual trust and cooperation, and communal sharing of property, can lead to what we call a close
relationship capability. A close relationship capability helps a firm co-create more economic
value with stakeholders. We also examine a close relationship capability’s potential to be rare
and difficult to imitate, thus explaining why such an approach can be a source of sustainable
competitive advantage.
We provide a balanced perspective of a close relationship capability by examining
incremental costs associated with developing and maintaining it. We explain further that the
Page 6 of 53Academy of Management Review
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In this paper, rather than examining IST solely from the perspective of various programs
and policies that firms implement unilaterally that have either helpful or harmful effects on
stakeholders (as much of the extant IST literature has done), we use relational theory to examine
the nature of the two-way interactions that develop between managers and stakeholders. In so
doing, we draw on relational models (Bridoux & Stoelhorst, 2016; Fiske, 1992) and arm’s length
versus embedded relationships (Uzzi, 1997). This approach answers a call from Jones (2011),
who argues: “Instead of examining company policies and specific actions, researchers should be
examining the content and nature of the relationships themselves (60).”
A relational approach provides greater specification to the claim that the prescriptions of
IST can lead to sustainable competitive advantage. At the core of these arguments is the idea that
a firm’s ethics (ground rules) for managing relations with stakeholders can lead to the
development of capability that can be a source of sustainable competitive advantage. Sustainable
competitive advantage, in turn, can be defined as a firm’s ability to persistently create more
economic value than the marginal (breakeven) competitor in its product market (Peteraf &
Barney, 2003). Specifically, we argue that a communal sharing relational ethics strategy (CSRE),
characterized by an intention to rely on relational contracts, joint wealth creation, high levels of
mutual trust and cooperation, and communal sharing of property, can lead to what we call a close
relationship capability. A close relationship capability helps a firm co-create more economic
value with stakeholders. We also examine a close relationship capability’s potential to be rare
and difficult to imitate, thus explaining why such an approach can be a source of sustainable
competitive advantage.
We provide a balanced perspective of a close relationship capability by examining
incremental costs associated with developing and maintaining it. We explain further that the
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costs of developing this capability will vary depending on the existing stakeholder culture of the
firm (Jones, Felps, & Bigley, 2007). Thus, stakeholder culture serves as a firm specific
moderator that ultimately influences the value proposition (i.e., benefits less costs) associated
with developing and maintaining a close relationship capability. In addition, we extend the
limited research on moderators of the relationship between an IST-based stakeholder
management approach and firm performance by explaining why dynamic, knowledge intensive,
and interdependent environments increase the potential benefits associated with a close
relationship capability.
To preview the structure of the paper, we first introduce the concept of relational ethics
strategies, explain the communal sharing relational ethics (CSRE) strategy and contrast it to the
arms-length relational ethics (ALRE) strategy. We argue that the desired outcome of a CSRE
strategy is a close relationship capability. We then provide a succinct review of the IST literature
as it relates to how a close relationship capability can provide incremental value, the first of the
standard RBV criteria. We also discuss the incremental costs of developing a close relationship
capability through a CSRE strategy, noting that a capability is only valuable if the benefits
associated with creating and maintaining it outweigh the costs. We argue also that these costs are
less for firms that have an existing culture that is other-regarding. Having established the
potential of a close relationship capability to provide incremental value, we examine three
plausible contextual moderators. We then screen the close relationship capability using the other
RBV criteria of rarity and imitability. The final section discusses the implications of this more
refined IST perspective for research and practice. Figure 1 contains a model of the proposed
relationships among our primary constructs.2
2 The lines in Figure 1 associated with the RBV criteria are dotted (and do not have arrows) because they are
definitional features rather than causal variables.
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costs of developing this capability will vary depending on the existing stakeholder culture of the
firm (Jones, Felps, & Bigley, 2007). Thus, stakeholder culture serves as a firm specific
moderator that ultimately influences the value proposition (i.e., benefits less costs) associated
with developing and maintaining a close relationship capability. In addition, we extend the
limited research on moderators of the relationship between an IST-based stakeholder
management approach and firm performance by explaining why dynamic, knowledge intensive,
and interdependent environments increase the potential benefits associated with a close
relationship capability.
To preview the structure of the paper, we first introduce the concept of relational ethics
strategies, explain the communal sharing relational ethics (CSRE) strategy and contrast it to the
arms-length relational ethics (ALRE) strategy. We argue that the desired outcome of a CSRE
strategy is a close relationship capability. We then provide a succinct review of the IST literature
as it relates to how a close relationship capability can provide incremental value, the first of the
standard RBV criteria. We also discuss the incremental costs of developing a close relationship
capability through a CSRE strategy, noting that a capability is only valuable if the benefits
associated with creating and maintaining it outweigh the costs. We argue also that these costs are
less for firms that have an existing culture that is other-regarding. Having established the
potential of a close relationship capability to provide incremental value, we examine three
plausible contextual moderators. We then screen the close relationship capability using the other
RBV criteria of rarity and imitability. The final section discusses the implications of this more
refined IST perspective for research and practice. Figure 1 contains a model of the proposed
relationships among our primary constructs.2
2 The lines in Figure 1 associated with the RBV criteria are dotted (and do not have arrows) because they are
definitional features rather than causal variables.
Page 7 of 53 Academy of Management Review
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