First: Do No Harm. Second: Strategize for Stakeholders After You Do.

On 1 January 2020, a new bill goes into effect in California that aims to reclassify contract workers, giving these workers access to many benefits and protections already available to other workers in the state. Known as Assembly Bill 5 (AB5), it formalizes a 2018 California Supreme Court Ruling on a case in which employees of a delivery company argued that the systematic and long-term labor practices of the company — classifying the drivers as independent contractors — caused harm to the drivers and that they should be considered as part of the core of the business. The drivers won the case, and AB5 moves the court ruling into law with a stringent three-part test for worker classification. Under the new law, if workers pass this classification test, they receive employment benefits such as minimum wage, paid sick days and rest periods, and health insurance.           

While this bill is specific to California, it has drawn national attention for the implications it could have for big tech companies — among them, Uber, Lyft, Instacart and GrubHub. Depending on the interpretation of the law, it could force these companies to reclassify all their drivers as employees, rather than contractors, giving the drivers increased benefits and protections — and increasing costs for the companies.            

For its part, Uber has argued that the new rules do not apply to the firm because it is a “technology platform,” not a transportation company, and as such, “drivers’ work is outside the usual course of Uber’s business.”           

How this law is enacted, and contested, remains to be seen, but it is clear that various stakeholders in companies such as Uber see the new law in different ways. For some stakeholders, it is a nonevent. For others, like some of the drivers, Uber’s labor practices are seen as harmful. A newly released article, by Darden Professor Andy Wicks and his co-author Jeffrey Harrison, provides a stakeholder framework for understanding the perceptions of harm (if any), the reactions on the part of stakeholders, and response on the part of firms to both stakeholders and AB5.

Understanding Stakeholder Response to Corporate Strategies

Harrison and Wicks argue that understanding how stakeholders respond to the strategies of firms — and how those firms, in turn, respond to stakeholders — is crucial for the creation of value within firms. While existing literature on stakeholder theory holds that firms operating from a stakeholder perspective always create value for their core stakeholders, this is not the case. Even firms with the best of intentions toward their stakeholders can, at times, cause harm, even if it is unintentional. And when the actions of a firm are perceived as harmful by stakeholders, it ultimately destroys value for all the stakeholders involved.

Not all harmful strategies are equal: They should be considered on a spectrum, with some actions more harmful or unethical than others. Where on that spectrum a strategy falls will impact how much harm is perceived by stakeholders. A strategy is perceived by stakeholders as more harmful, or further along the spectrum of unethical behavior, if:

• It directly harms the stakeholders in question or a stakeholder with whom others identify
• Involves a large amount or degree of harm
• It is optional
• It violates an important value espoused by the firm
• It violates a widely accepted ethical principle
• The affected stakeholders are unable to escape the harm

In arguing this framework, Harrison and Wicks are talking about an intentional strategy or a “pattern in a stream of decisions,” not a one-time incident or a bad public relations moment.

Stakeholders React to Perceived Harm

Upon the realization of these actions by the firm, stakeholders have the choice of whether to attempt to restore the value lost in the firm or to respond with retribution against the firm. Thus, the extent to which they are harmed and their perception of where the strategy lies on the spectrum of harm both play roles in determining the stakeholder response. The more the stakeholders are harmed and the more harmful they perceive the strategy to be, the more likely they are to take concrete, negative action against the firm in retribution, assuming they have the agency to do so. This can include ceasing future interactions with the firm, discontinuing cooperation with the firm, ceasing the transfer of valuable information to the firm or behaving in such a way to limit the effectiveness of the firm. In the case of Uber, its drivers — one stakeholder group — have staged strikes, and some have sued the organization over labor practices that they perceive as a sustained pattern of strategic behaviors.

Firm Response

Once the stakeholder reacts to the strategy perceived as harmful, the firm has the ability to respond to the reaction. Harrison and Wicks lay out three possible responses on the part of the firm:

• Reactive: denial of responsibility, with very little action taken
• Accommodative: accepting responsibility, with minimal action taken to address the issue
• Proactive: anticipatory for what the firm will be responsible for and what would need to be done to resolve it

The strategy taken by the firm depends in part on the nature of the relationship between the firm and affected stakeholder. Some of the factors that impact firm response are:

• Importance of the stakeholder to the firm
• How recently the strategy was implemented
• The risk and the cost associated with the strategy perceived as harmful

When these criteria are met, firms are more likely to take a proactive response — accepting responsibility and working to resolve the issue — to address stakeholder actions. In general, firms prefer to respond in ways that do not change the current operations at the firm in a drastic manner and minimize monetary costs. In the case of Uber, the firm views itself as a technology company and as a result does not view its drivers as stakeholders that are central to its mission. Furthermore, Uber sees its actions with regards to their drivers as consistent with its mission, further reducing their need to respond to the harm perceived by its drivers.

Other firms, theorize Harrison and Wicks, may rationalize their actions as a way to avoid responding altogether. A common rationalization for firms is to attribute the unethical behavior of a leader as being in service to another firm goal — namely, of maximizing profits. These leaders do not want to engage in unethical behaviors but are acting in ways that produce the most value for their shareholders. Through this rationalization, the firm avoids any form of accepting blame or instituting change as a result of the harmful strategy.

Irreversible Harm?

In the end, all firms harm their stakeholders at one point or another, even if they are truly committed to creating value for them. When that happens, the affected stakeholders likely perceive less utility from their relationships with the firms. If the strategy is not perceived as excessively harmful and the correct actions are taken by the firm in response, the relationship between the firm and stakeholders may well be repaired. However, when the harm is perceived to be serious, the firm’s response (or lack thereof) could lead to irreversible damage of the relationship between the firm and one or more of its key stakeholders.

When it comes to AB5, firms that resist the new law may end up working against their best interests. Where stakeholders already perceive harmful labor practices, any attempt by firms to avoid the spirit of the bill may further damage their relationships with their employees.

In the case of Uber, the drivers may take the company seriously when it says “drivers’ work is outside the usual course of … business” and decide that they don’t want to be part of the business at all.

Andrew C. Wicks co-authored “Harmful Stakeholder Strategies,” which appeared in the Journal of Business Ethics, with Jeffrey S. Harrison of the University of Richmond Robins School of Management.

This article was developed with the support of Darden’s Institute for Business in Society, at which Rebecca Little is a research assistant and Megan Juelfs is associate director of research initiatives.