Stakeholder Approach to Corporate Moral Responsibility

Defining Stakeholders and the Stakeholder Model

Any discussion of the effectiveness of stakeholder theory must begin by addressing 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 a 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 firm's activities. But without the element of risk there is no stake." This position clearly has implications for the effectiveness of stakeholder theory.

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

Shareholder Value vs. Managing for Stakeholders

The modern corporation has its roots in a managerial model that places shareholder interest as the highest priority. Increasing shareholder value is deeply entrenched in corporate culture as the organization's driving force, with many companies developing complex incentive plans intended to align the interests of executives with those of shareholders. As Freeman points out, however, many of the prominent corporate scandals at firms such as Enron, WorldCom, Tyco, and Arthur Andersen occurred at least in part because their executives pursued 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 places shareholders' interests above those of customers, suppliers, employees, and others assumes that these interests must inevitably conflict. However, the law recognizes constraints that must be applied to such 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 practice managing for stakeholders. He 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 or financiers — typically thought of as shareholders — have a financial stake in the firm in the form of stocks, bonds, and other 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. 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 one single 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 view stakeholder interests as joint rather than oppositional, and to find ways to accommodate all stakeholder interests alongside those of shareholders. Managing for stakeholders implies that executives reframe the management questions they seek to answer so that there is no either-or trade-off. In Freeman's words: "Managing for stakeholders is about creating as much value as possible for stakeholders, without resorting to tradeoffs" (2008).