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).

Ethical Frameworks and Business Decision-Making

Several ethical frameworks have proven influential in the development of business ethics. Utilitarian thinking claims to provide guidance to stakeholder theory by answering the fundamental questions of ethics through a single rule: maximize overall happiness. This philosophy, which has roots in Adam Smith's Wealth of Nations, nevertheless creates problems for utilitarian ethics in practice. According to Laura Hartman and Joseph DesJardins, because of the difficulty of quantifying the greatest good, utilitarianism has a "tendency to ignore consequences, especially the harmful consequences, to anyone other than those closest to us" (2010). Equally problematic, as Hartman and DesJardins note, is the focus on consequences alone. Given the difficulty of calculating all beneficial and harmful consequences of one's actions, decision-making must therefore also be grounded in 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 questions about who that person is. Given that an ethical justification of an act often requires that it be tied to self-interest, it is not surprising that this justification frequently fails. Hartman and DesJardins 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 on one's actions, and that narrowly selfish behavior is unethical (2010).

Corporations face some of the same questions as Plato's Meno, who wonders whether 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 a genuine understanding of ethics is required for corporations to truly meet their moral obligations. Their treatment of ethical business decision-making describes tools for implementing ethical theories and turning them into management best practices. They offer criteria for judging what constitutes 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 — a finding that 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 contains an implicit moral argument: that a manager is obligated to act consistently with shareholders' wishes. He points out that appealing to property rights is, in and of itself, a form of 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 the theory enables may also be one of its theoretical liabilities, allowing critics to "dress up the theory as they will in the process of attempting to lay it low" (Phillips, 2003).

Offering another perspective, Donald Mayer argues that, judged analytically, a stakeholder approach can help managers by promoting analysis of how a company fits into its larger environment; how its standard operating procedures affect stakeholders within the company (including employees, managers, and stockholders) and immediately beyond it (including customers, suppliers, and 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 both imprudent and ethically unjustified. In this sense, stakeholder theory participates in a broader debate about business and ethics — specifically, whether an ethical company will be more profitable in the long run than one 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 twentieth century, the assumption operated that what is good for corporate America is also good for America — an assumption that is now being reconsidered (Mayer, n.d.).

Conclusion: Stakeholder Theory and Corporate Moral Responsibility

After examining the literature on stakeholder theory, one has to view it as a model with significant potential to ensure corporate compliance with social responsibility. However, there is work to be done in overcoming resistance posed by staunch shareholder theory proponents. The following MBA Oath, described by Linda Trevino and Katherine Nelson, was created by business school students to articulate the values they felt an MBA degree should stand for, and serves as an illustrative example of stakeholder principles applied to personal professional commitment:

"As a business leader I recognize my role in society. My purpose is to lead people and manage resources to create value that no single individual can create alone. My decisions affect the well-being of individuals inside and outside my enterprise, today and tomorrow.

Therefore I promise: I will manage my enterprise with loyalty and care, and will not advance my personal interests at the expense of my enterprise or society. I will understand and uphold, in letter and spirit, the laws and contracts governing my conduct and that of my enterprise. I will refrain from corruption, unfair competition, or business practices harmful to society" (Trevino and Nelson, 2011).