Stakeholder Approach to Corporate Responsibility This Essay

Stakeholder Approach to Corporate Responsibility

This essay examines the question of whether adopting a stakeholder approach is a sufficient means of assuring that corporations meet their moral responsibilities due society. The essay includes a survey of the literature on the subject.

Any discussion of the effectiveness of stakeholder theory must address who and what are considered stakeholders. R. Edward Freeman (1984) defines stakeholders as "any group or individual who can affect or is affected by the achievement of the organization's objectives." Clarkson (1994) provides a narrower definition, based on the stakeholder's status as voluntary or involuntary risk-bearer: "Voluntary stakeholders bear some form of risk as a result of having invested some form of capital, human or financial, something of value, in a firm. Involuntary stakeholders are placed at risk as a result of a form's activities. But without the element of risk there is no stake." Clearly this position has implications for stakeholder theory effectiveness.

Freeman (2008) examines the emerging business model of managing a business so that it creates value for stakeholders, which contrasts with the dominant model of creating business for shareholders. By using the stakeholder as the basic unit of analysis, the new model is better able to address matters of ethics. Freeman argues that the primary responsibility of the executive is creating as much value as possible for stakeholders. This view accommodates a system of social cooperation and collaboration, rather than one that is primarily that of competition (Freeman, 2008).

The modern corporation has its roots in a managerial model that puts shareholder interest as the highest priority that managers should be concerned with. Increasing shareholder value is deeply entrenched in corporate culture as the organization's driving force, with many companies evolving complex incentive plans intended to align the interests of executives with the interests of shareholders. As Freeman points out though, all of the recent corporate scandals at such firms as Enron, WorldCom, Tyco, Arthur Andersen and others occurred at least in part because of their executives' pursuit of shareholder value, often to the exclusion of compliance with accounting rules and the law (Freeman, 2008). By comparison, the stakeholder model must produce superior results.

The accepted managerial view that puts shareholders' interests above those of customers, suppliers, employees and others assumes that these interests must conflict with one another. However, the law recognizes constraints that must be applied to trade-offs, and has in effect required that the claims of customers, suppliers, local communities and employees be considered. Freeman further argues that the dominant shareholder-centric model is inconsistent with basic ethical principles (Freeman, 2008).

In its place, Freeman (2008) proposes that businesses should instead practice managing for stakeholders. Freeman describes business as a "set of relationships among groups that have a stake in the activities that make up the business. Business is about how customers, suppliers, employees, financiers…communities and managers interact and create value."

Freeman also clarifies the relationship between certain stakeholders and their stake in a company. Owners of financiers, typically thought of as shareholders, have a financial stake in the firm in the form of stocks, bonds and other such instruments. Employees, who may also be financiers through employee stock option plans, are engaged in a contractual relationship. Likewise customers and suppliers exchange resources for products and services in order to receive products and services. All of these relationships have an ethical basis that includes an element of fairness and responsibility, along with investment in the success of the company. Freeman argues that ultimately, while there may not be just one definitional model of business, whether shareholder or stakeholder-based, there is value in examining the role of stakes and the executive in the value creation process (Freeman, 2008).

There is a need to see stakeholder interests as joint, rather than oppositional, and to meet the challenge of finding a way to accommodate all stakeholder interests along with those of shareholders. Managing for stakeholders implies that executives reframe the management questions for which they attempt to find solutions so that there is no either-or tradeoff. In the words of Freeman: "Managing for stakeholders is about creating as much value as possible for stakeholders, without resorting to tradeoffs" (2008).

Several ethical frameworks have proven influential in the development of business ethics. Utilitarian thinking claims to provide guidance to stakeholder theory in that it answers the fundamental questions of ethics by reference to a rule: Maximize the overall happiness. This philosophy, which has its roots in Adam Smith's Wealth of Nations, results in problems for utilitarian ethics. According to Laura Hartman and Joseph DesJardins, because of the difficulty in quantifying the greatest good, utilitarianism has a "tendency to ignore consequences, especially the harmful consequences, to anyone other than those closest to us" (2010). Just as problematic, as Hartman and DesJardins note, is the focus on consequences. Given that it is difficult to calculate all the beneficial and harmful consequences of one's actions, decision-making must therefore be based on ethical principles.

Hartman and Desjardins also discuss Rawlsian justice, and its implications for ethical behavior. Virtue ethics shifts the focus away from questions about what a manager should do to who that person is. Given that an ethical justification of an act requires that it be tied to self-interest, it is therefore not surprising when this justification frequently fails. Hartman and Desjardins also discuss the tension between ethics and self-interest, and argue that no ethical tradition expects people to live a life of total self-sacrifice and self-denial. Nonetheless, they point out that rational self-interest still creates ethical limits to one's actions, and that narrowly selfish people are unethical (2010).

Corporations are faced with some of the same questions as Plato's Meno, who wonders if virtue can be taught. According to Hartman and Desjardins, "Designing a workplace, creating a corporate culture, to reinforce virtues and discourage vice is one of the greatest challenges for an ethical business" (2010).

Andrew Crane and Dirk Matten also explore business ethics beyond a stakeholder model for managing business relationships. They argue that an understanding of ethics is required for corporations to truly meet their moral obligations. Their treatment of ethical business decision-making describes tools to use in implementing ethical theories, turning them into management best practices. They offer criteria for judging what is an ethical decision, as well as models of ethical decision-making. After outlining both individual and situational influences on ethical decision-making, they conclude that situational factors appear to be most influential. This conclusion is significant because "it means that [they are] likely to be the most promising levers for attempts to manage and improve ethical decision-making in organizations" (2007).

Robert Phillips also argues that the shareholder model of corporate responsibility has an implicit moral argument, that a manager is obligated to act consistently with shareholder's wishes. He points out that talk of property rights is in and of itself moral reasoning. Phillips notes that merely assuming a moral stance without reflection, as the shareholder rationale does, does not make it any less a moral argument. In his words, "One issue that arises from the uncritical acceptance of the shareholder wealth maximization model as the moral foundation of business activity is that responses to immoral behavior in such contexts also take this foundation for granted" (2003). In discussing the limits of stakeholder theory, Phillips acknowledges that the breadth of interpretation that stakeholder theory enables may also be one of its theoretical liabilities. Phillips believes that the wide conceptual breadth of stakeholder theory "allows critics to dress up the theory as they will in the process of attempting to lay it low" (Phillips).

Offering another perspective on stakeholder theory, Donald Mayer argues that, judged from an analytical perspective, a stakeholder approach can help managers by promoting analysis of how a company fits into its larger environment; how its standard operating procedures impact stakeholders within the company (including employees, managers, stockholders), and immediately beyond the company (including customers, suppliers, financiers) (Mayer, n.d.). Mayer also argues that there is a clear contrast with Friedman's view: if a corporate manager seeks only to maximize stockholder wealth, other stakeholders can easily be overlooked. In a normative sense, stakeholder theory suggests that overlooking these other stakeholders is unwise or imprudent, and ethically unjustified. In this sense, stakeholder theory participates in a broader debate about business and ethics, the question of whether an ethical company will be more profitable in the long run than a company that looks only to the bottom line (Mayer, n.d.)

Many stakeholder theorists see the corporation not as a truly separate entity, but as part of a much larger social enterprise. For most of the 20th century, the assumption has operated that what is good for corporate America is also good for America, which assumption is now being reconsidered (Mayer, n.d.)

Half the states in the U.S. have put into law "corporate constituency statutes" that make it permissible -- but not mandatory -- for corporate managers to take non-stockholder constituencies or stakeholders into account. The legal effect of such statutes may be to insulate officers and directors from liability for failing to maximize profits to shareholders, although it may be too early to judge the impact of such laws (Mayer, n.d.)

On a more general level, there are various proposals and studies on reinventing the corporation, requiring federal charters for corporations, or adding a social responsibility amendment to the U.S. Constitution to require corporations to prove that their activities serve the common good. Legally, such proposals will gather little momentum as long as corporate activities are perceived as providing social goods, that is, jobs or new and useful products, while at the same time not producing excessive social harms, that is, pollution, or socially suspect messages or harmful products. In the meantime, business managers may beneficially consider non-shareholder constituencies. Their motivation for doing so may be pragmatic, that is promoting the long-term well-being of the company, or they may be normative, that is meeting the demands for moral reasons; but the law does not currently require corporations or their managers to implement stakeholder theory (Mayer, n.d.).

For a corporation to successfully implement stakeholder management practices requires that they be able to identify stakeholders. To that end, a theory of stakeholder identification has been proposed to reliably separate stakeholders from nonstakeholders. Ronald Mitchell, Bradley Agle, and Donna Wood (1997) argue that stakeholders can be identified by their possession of one, two, or three of the proposed attributes:

The stakeholder's ability to influence the firm

The legitimacy of the stakeholder's relationship with the firm

The urgency of the stakeholder's claim upon the firm

These attributes, power, legitimacy, and urgency define stakeholders and identify those entities to whom managers appropriately should pay attention.

In particular, the theory of stakeholder identification and salience highlights the importance of power in stakeholder-manager relations. Given that a firm's resources will almost always be limited, it is critical to understand the dynamics between stakeholders and management as a means of identifying which stakeholders really do count. Stakeholder power and urgency, in addition to legitimacy, signal to managers when stakeholders have the power to impose their will upon the firm. Mitchell et al. (1997) argue that "power and urgency must be attended to if managers are to serve the legal and moral interests of legitimate stakeholders."

As one would expect, there is not unanimous agreement on the effectiveness or viability of stakeholder theory. Freeman, Andrew Wicks and Bidhan Parmar (2004) rebut arguments against stakeholder theory's rejection of shareholder ideology. They discount the basic premise of "The Corporate Objective Revisited," that the goal of maximizing shareholder value is the only appropriate goal for managers in the modern corporation. Shareholder ideologists wish everyone else to believe that economic freedom, and therefore political freedom, is threatened by stakeholder theory. However as Freeman et al. point out, value creation and trade go together, and neither works without the other. They make the argument that management theory needs to get back to management, which undertaking requires an understanding of how value gets created and traded. For a stakeholder approach to assure that corporations meet their moral responsibilities requires the buy in of managers who understand the needs of other affected parties involved in trading the value that businesses create.

Another viewpoint which argues against stakeholder theory providing a sufficient framework for corporations to achieve their moral responsibilities is that of Eric Orts and Alan Strudler (2009). They maintain that stakeholder theory fails to address two moral challenges: how to manage people fairly and efficiently and how to determine the extent of a firm's moral responsibilities beyond its obligations to enhance its profits and economic value.