By Witold J. Henisz | In the late 1990s, a small Canadian mining company called Gabriel Resources was hoping to develop the largest open-pit gold mine in Europe, at Rosia Montana in the heart of Transylvania, Romania. The company quietly worked with the Romanian government to obtain mining and construction permits and the project looked set to go forward. The stock price reflected that, with a market valuation rising to over $260 million. Things changed when villagers, who were expected to relocate to make room for the mine, caught word of Gabriel’s plans and began to mount a campaign against the project. What ensued was a powerful lesson in the value of a concept that tends to find more proponents outside corporate boardrooms than inside them: engaging “stakeholders” as assiduously as actual shareholders is imperative.
Members of the community near the proposed mine who were opposed to the project found Stephanie Roth, a determined environmental activist, and worked with her to organize a campaign against the project. Continued and rising opposition from a wide range of local, national, and international stakeholders—including part of the Rosia Montana community, the Romanian Orthodox Church, the Romanian Academy of Sciences, the Hungarian minority in Romania, the Hungarian government and public, Greenpeace, Friends of the Earth, and various other environmental organizations—translated into a steady decline in Gabriel’s stock in the first half of the 2000s, with the company’s market valuation falling as low as $181.3 million. In the face of this opposition, a new management team took over in 2005 and embarked on a broad public-relations campaign intended to generate more positive sentiment towards the project. Despite their efforts—which were received well by shareholders, who drove the market valuation up to over $1.13 billion—the government suspended the procedure of reviewing Gabriel Resources’ environmental impact assessment in late 2007, further undercutting its prospects of developing the gold mine in the near future. The company’s market value plummeted by nearly 70 percent, down to $344 million.
The tide turned again in 2009 with the arrival of yet another management team. This time, the new team focused not on stealthy manoeuvres or public-relations campaigns, but on more systematically engaging stakeholders. The result is reflected in Gabriel’s market valuation, which has more recently soared as high as $1.84 billion.
While the argument that winning the hearts and minds of external stakeholders can benefit a company’s shareholders is both intuitively and morally appealing, proving that this is actually the case has posed substantial challenges to scholars. One challenge is measuring the opinions of a wide array of external stakeholders—including everyone from local, national, and international politicians to priests, warlords, paramilitary groups, non-governmental organizations, and multilateral bodies like the World Bank. Another challenge is measuring the objective value of the company to shareholders. But in current work funded by the National Science Foundation, I and my colleagues Sinziana Dorobantu, a senior research fellow and lecturer at Wharton, and Lite Nartey, an assistant professor at the University of South Carolina, have overcome these twin hurdles. We have linked the degree of cooperation or conflict with external stakeholders to market capitalization for 26 gold mines owned by 19 publicly traded firms over a 15-year period. What we find is both heartwarming and quite striking: the value of cooperative relationships with external stakeholders is worth twice as much as the value of the gold that these 19 companies ostensibly control.
By systematically coding more than 50,000 “stakeholder events” found in media reports, we developed an index of the degree of stakeholder cooperation or conflict for these mines. These events included reported actions or expressions of sentiment from groups that indicate cooperation with the mine owners, as well as conflict with them. At one extreme would be militia attacks on mines in the Congo. At the other would be groups in the Congo organizing to defend a mine from such an attack. In between lie events ranging from peaceful protests by community leaders or demonstrations by environmental NGOs, to pledges of additional financial support from multilateral lenders.
Our analysis linked this data to audited information provided to the Toronto Stock Exchange (where all of these firms were listed) on the quantity of gold reserves, the cost of extraction, and the forecast price of gold. We calculated an estimate of what the gold from each mine and thus the market valuation of the parent company should be assuming the company is able to follow the optimal strategy for extracting the gold. When we compared the two figures, however, it turned out that the companies traded at a 72 percent discount on average. Next, we examined whether firms that scored higher on the stakeholder cooperation and conflict index were expected to have fewer delays and disruptions— allowing them to come closer to the optimal extraction plan and therefore maintain market valuations discounted less steeply from the intrinsic value of their assets. In such cases, the discount fell from 72 percent to as little as 12 percent.
We studied the mining industry because the nature of their products requires companies to enter some of the riskiest areas in the world. Several companies made every mistake possible and got completely burned. But then they learned. Now, ironically, some of these firms that many regard as uncaring practitioners of scorched-earth tactics leading to environmental devastation are actually at the forefront of sustainability and stakeholder engagement. Most multinationals could learn a great deal by studying what these mining companies are doing around the world.
Our research quantifies what many firms have already realized: that reducing conflict with external stakeholders in favor of winning their cooperation improves the companies’ chances that a business plan can proceed on budget and on time, and most importantly, generate sustainable shareholder value. Furthermore, it’s possible to approach the question of how to engage stakeholders with the same degree of analytic precision as one models competitive strategy, customer retention, or supply chain management. Such an approach requires that company managers move sustainability or corporate social responsibility from a cost center or monitoring function to a more central role in enterprise risk management and strategic planning. Absent sufficient up-front investments in political and social capital, assets that would otherwise produce revenues—from a billion-dollar gold mine to an oil field, generating facility, manufacturing plant, or distribution system—can quickly become dormant or even become liabilities that require further expenditure just to liquidate.
Our results also provide an immediate retort to those who state that pure profit maximization—and the highest returns for shareholders—should be the only goal of public companies. It’s a false dichotomy. If companies want to maximize their profits, there is a powerful business case to win the hearts and minds of external stakeholders. Those able to recognize the need for and implement sophisticated stakeholder strategies will increasingly find these skills to be a source of competitive advantage. As the head of sustainability for a major mining company recently said, “If a modern mining company thinks its competitive advantage is in mining, they are sadly mistaken.” The implication is that being good at sustainability will be the key differentiator among mining companies in the future.
The same could be said of energy suppliers, construction contractors, development agencies, hoteliers, and retailers. In short, the social license to operate is more than rhetoric. It is empirically testable and strategically relevant. For these mining firms and for a growing number of organizations active in emerging markets or politically salient activities in their home markets, the pursuit of organizational change, data gathering, strategic analysis, and novel practices designed to enhance cooperation and minimize conflict with stakeholders is not just corporate social responsibility, but enlightened self-interest.
Witold Henisz is the Deloitte & Touche Associate Professor of Management in Honor of Russell E. Palmer at Wharton.