A company's relations with its stakeholders can have an important bearing on its financial performance. And while this obviously holds true for shareholders, it is also the case for non-financial stakeholders such as employees, suppliers and the community. In fact, the state of relations with this group can also be a determining factor in affecting the persistence of a firm's financial performance.

Jaepil Choi and Heli Wang of HKUST looked at 518 US public firms from 1991 to 2001 and investigated the relationship between the quality of their non-financial stakeholder relations and the persistence of their financial performance. They found that not only did good relations enable firms to sustain a good financial return longer, but they had an even greater effect in helping firms to recover more quickly from a downturn in their fortunes.

"Good stakeholder relations are valuable, rare and costly for rival firms to imitate and/or substitute for," they said.

"They may lead to performance advantages for the firm: employees will work harder to enhance firm effectiveness, customers will increase demand or pay a premium, suppliers will be more willing to engage in knowledge sharing, and local communities may provide favourable terms for the use of local infrastructure."

The benefits to firm performance are apparent in the measures taken by the authors. For each unit increase in the stakeholder relations measure, a firm's above-average financial performance persisted 27-32 per cent longer (the authors measured financial performance in two different ways, hence the spread).

Most interestingly, a firm's inferior performance dissipated 23-55 per cent faster for each unit increase in the stakeholder relations measure, which runs counter to the existing arguments about companies' "core resources". These resources are thought to propel good financial performance, but also to lock firms in when things go wrong and thus are a disadvantage in recovering from an inferior performance. The authors showed this was in fact the case with other core resources, for instance, technological knowledge, but not with stakeholder relations.

Although both a high stakeholder relations rating and a greater level of technological knowledge predict the persistence of superior profits, the predictive power of technological knowledge is apparently greater. However, the two factors show opposite effects on the persistence of inferior profits. While technological knowledge tends to lock a poorly-performing firm into disadvantageous positions, good stakeholder relations make inferior profits more transient.

"Already-established good stakeholder relations will remain valuable because they encourage stakeholders to maintain their commitment and support, which may in turn enable the firm to implement strategic changes."

The authors also found that some stakeholder dimensions might be more effective than others in determining the persistence of financial performance. They measured five dimensions - employee relations, product dimensions (related to marketing), good management of diversity, positive relations with local communities, and environment dimensions. Employee relations and product quality were the most critical in making superior performance persist, while respect for diversity and product quality helped in overcoming a poor performance more quickly. "Having good stakeholder relations is the only factor that promises to help a firm recover from an inferior performance," the authors said.

However, they cautioned that there were many complexities in establishing good relations and these needed to be established over the long term. If a firm waited until a poor performance was incurred to begin building stakeholder relations, it was probably too late.