[7.6.] Stakeholder Theory.

 

This theory has been defended by a number of different business ethicists. DesJardins discusses the stakeholder theory as it is defended by William Evan and R. Edward Freeman.[1]

 

On the two models of corporate social responsibility that we’ve examined so far (viz. the classical, free market model, and the neo-classical, “moral minimum” model), a corporation’s owners, including its stockholders, should “be the primary beneficiaries of business decisions.” (66) When making important decisions (e.g., about which products to manufacture and how much to sell them for; about how much to pay employees in salary and benefits; about whether to engage in philanthropic activities), executives should make it their top priority to benefit the company’s owners (without breaking the law, engaging in fraud or coercion, or otherwise causing harm).

 

Stakeholder theory “begins with the insight that every business decision affects a wide variety of people, benefiting some and imposing costs on others.” (66) These include...

·         business owners / stockholders

·         consumers

·         employees

·         suppliers

·         competitors

·         members of the community

·         the environment (not a person, but still a stakeholder!)

All of these parties count as stakeholders in the business decisions of the company.

 

[Note that there are two conceptions of stakeholders. On the narrow conception, a stakeholder is “any group [or individual] who [is] vital to the survival and success of the corporation”; on the broad conception, a stakeholder is “any group or individual who can affect or be affected by the corporation.” (quoted at 67) As DesJardins notes, Evan and Freeman employ the narrow conception in their own work. This distinction will play a role in one criticism of this theory; see below.]

 

From this point of view, both the Classical Model and the Neo-Classical Model make the mistake of assuming that owners/stockholders are the primary beneficiaries of business activity.

 

Managers are morally obligated to somehow balance the interests of stockholders and stakeholders, because their ethical responsibilities toward these other stakeholders are just as important as the responsibilities they have toward their stockholders.

 

So the obligation of managers to benefit owners/stockholders by maximizing profit (an obligation emphasized by both the classical and neo-classical models) can be trumped by more than just the obligation to do no harm.

 

How does this compare to the classical and neo-classical views of corporate responsibility in the case of Wal-Mart?

 

 

classical (free market)	moral minimum	stakeholder
Wal-Mart executives should “make decisions (as allowed by law) that benefit stockholders at the expense of employees, suppliers, customers, and local communities.” (67)   Justifications: ·         utilitarianism ·         rights-based	Wal-Mart executives should pursue profits within legal constraints AND ensure that they cause no harm.	“Wal-Mart’s executives have ethical responsibilities to employees, suppliers, customers, and local communities that are ethically equal to their responsibilities to shareholders.” (67)

 

 

[7.6.1.] Evan and Freeman’s Arguments Against the Classical Model.

 

1.      Taken as a description of how businesses actually operate, the classical model is simply false. Businesses have been compelled by law for decades to attend to the welfare and rights of people other than stockholders.

• This is an odd criticism, since the classical model requires that businesses pursue profits without breaking the law. Working within legal constraints is required by the classical model, and it is hard to see how the law could force businesses to do something more than working within the law. By definition, anything required by law becomes a requirement of the classical model.

 

2.      Taken as a normative principle, the classical model is unjustified on either utilitarian or Kantian grounds... and each of those normative views actually supports the stakeholder theory.

• It is unjustified on utilitarian grounds... The classical model claims that the best way to maximize utility (most often understood as preference satisfaction) is for managers to aim at maximizing profits. But as we have seen, because of market failures this will not be the case. Utilitarianism actually supports the stakeholder theory, since it requires that managers take everyone’s interests into account, not just stockholders. Sometimes this will lead them to aim at maximized profits, but sometimes it will not. Managers must judge each decision and policy as to whether it increases utility for any party who can be affected (at least, this is the case on the broad understanding of who counts as a stakeholder).
• It is unjustified on Kantian grounds... Using employees, suppliers, and other parties to make profits without respecting their autonomy, etc., is a violation of Kantian ethics. Kantian considerations actually support the stakeholder theory, since that theory requires that managers think of all parties (employees, suppliers, even competitors) as autonomous and rational ends-in-themselves, worthy of respect and equal consideration.

 

 

[7.6.2.] Criticisms of Stakeholder Theory.

 

DesJardins describes two general sorts of criticism of stakeholder theory...

 

Criticism 1: The substance of the theory is mistaken. Managers should not view all other stakeholders as equal to stockholders, and the free market view is right to say that managers should aim at maximized profits as their top priority.

 

In making this criticism, a utilitarian would have to argue that overall utility (e.g., preference satisfaction) will be raised more by a policy of aiming at maximized profit than by a policy of taking all stakeholders into consideration.

 

And a deontologist, in making this criticism, would have to argue that private property rights are more important that other personal rights, including the rights of stakeholders other than stockholders.

 

DesJardin’s response to this criticism: as we have already seen, there are serious challenges to these sorts of utilitarian and rights-based arguments.

 

 

Criticism 2: Stakeholder theory is too vague, in that it does not give enough practical guidance to managers.

 

There are two ways in which the stakeholder theory could be criticized for being vague...

 

A.     It gives too little guidance in “identifying stakeholders and their interests” (68). The two different conceptions of stakeholder mentioned above are relevant here...

·        It we adopt the broad conception (according to which a stakeholder is anybody who could be affected by a company’s decisions), then “we seem to place managers under an impossible burden of determining who might be affected by every decision.” (68-69)

·        But if we adopt the narrow conception (according to which a stakeholder is “any group [or individual] who [is] vital to the survival and success of the corporation”), then we risk “ignoring ethically relevant parties.” (69)

 

B.     It gives too little guidance in “deciding what course of action follows from the imperative to balance stakeholder interests.” (68) Even if one can identify who does and does not count as a stakeholder, it will still be extraordinarily difficult to determine how to balance all of their interests.

 

 

DesJardins’ response to these criticisms is to say that the classical model is just as vague when it comes to practical advice. Both models “leave[] business managers with significant latitude in making decisions.” (69)

 

·         With regard to the classical model... that model directs managers to maximize profits. But despite the fact that managers have expertise in this area (which is why they were hired, after all), it is unlikely—except in the case of very simple decisions—that a manager will know which possible course of action will in fact maximize profits. “To prove, after the fact, that any particular decision did maximize profits would require that we prove a counterfactual: If the manager had made an alternative decision, then profits would have been lower.” (69) And this is nearly always impossible to prove.

 

counterfactual (df.): a conditional (if-then) sentence which runs counter to fact, i.e., which begins by describing an event E that did not actually happen and then states a consequence that (according to the sentence) would have followed had E actually happened (e.g., had Gore become President in 2001, the U.S. would not have gone to war with Iraq).

 

·         The same is true with regard to the stakeholder theory... “It is difficult, if not impossible, to determine in advance what particular decision would appropriately balance stakeholder interests.” (69) So this criticism will not count in favor of the classical model, since that model is in no better position that stakeholder theory to provide practical advice.

 

 

Stopping point for Friday February 28. For next time, read DesJardins pp.97-104.