PHIL 2120: Introduction to Ethics
Dr. Robert Lane
Lecture Notes: Monday November 15, 2010

 

[9.8.] 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.” (64 / 68) When making important decisions (e.g., about which products to manufacture and for how much to sell them, about how much to pay employees in salary and benefits, and 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—according to the moral minimum model—otherwise causing harm).

 

From the point of view of Stakeholder Theory, both the Classical Model and the Neo-Classical Model make the mistake of assuming that owners/stockholders are the primary beneficiaries of business activity. Parties other than stockholders can have legitimate moral claims related to the practice of business and the decisions and activities of managers. Such parties include...

·         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, and so business managers of a given company may have moral obligations to any of them, obligations that may override the duty to make a profit for the corporation’s owners (stockholders).

 

There are two conceptions of stakeholders:

As DesJardins notes, Evan and Freeman employ the narrow conception in their own work.[2]

 

 

Managers are morally obligated to balance the interests of stockholders and other 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 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 Walmart?

 

classical (free market)

moral minimum

stakeholder

Walmart executives should “make decisions (as allowed by law) that benefit stockholders at the expense of employees, suppliers, customers, and local communities.” (64 / 69)

 

Justifications:

·         utilitarianism

·         rights-based

Walmart executives should pursue profits within legal constraints AND ensure that they cause no harm.

“Walmart’s executives have ethical responsibilities to employees, suppliers, customers, and local communities that are ethically equal to their responsibilities to shareholders.” (64-65 / 69)

 

 

[9.8.1.] 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.

 

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.

 

 

[9.8.2.] 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 (perhaps understood in terms of 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” (66 / 71). 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.” (66 / 71)

·        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.” (66 / 71)

 

B.     It gives too little guidance in “deciding what course of action follows from the imperative to balance stakeholder interests.” (66 / 71) 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.

 

 

DesJardin’s 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.” (67 / 71)

 

·         The classical 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.” (67 / 71) And according to DesJardins, 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., If George W. Bush had refused to bail out the banks in 2008, then the United States would have gone into an economic depression).

 

·         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.” (67 / 71-72) 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.

 

 

[9.9.] If Not Pursuit of Profit, Then What?

 

According to DesJardins, the idea “that the purpose of business is to maximize profits makes sense only when stockholders—the beneficiaries of profit—are given a distinctive ethical status.” (68 / 75)

 

But we have seen that there are reasons for being skeptical of the idea that stockholders have some privileged moral status when compared to other stakeholders.

 

But if the purpose of business, the very reason that a corporation is formed, is not the pursuit of profit, then what could it possibly be?

 

An alternative view of the purpose of a business was suggested in the 1970s by Theodore Levitt (1925-2006), an American economist who taught for years at Harvard’s college of business. On Levitt’s view, “The purpose of business is to create and keep a customer.” (quoted at 68 / 76; see the rest of the long passage from Levitt.)

 

 

[9.10.] The Classical Model and UWG.

 

In 2009, BB&T ( http://www.bbt.com/ ) donated $1 million to UWG’s Richards College of Business “to establish the Center for Ethics and Free Enterprise and the BB&T Lectures in Free Enterprise Series.”[3] A spokesperson for BB&T said of this grant,

 

This program will emphasize our shared interest with the University of West Georgia in giving students a hands-on perspective on capitalism and free markets, a better understanding of our economy and an enhanced ability to make meaningful contributions to the world.[4]

 

 

The first lecture in the BB&T Lectures in Free Enterprise Series was given by John Allison, former CEO of BB&T on September 28, 2010.[5] In his speech, Allison said:

 

Most people realize that capitalism and free markets produce a higher standard of living … But most people also think that capitalism is a system that’s at best amoral. Many people think it’s immoral. We don’t think that a system that is immoral could be successful. Capitalism is a moral system.[6]

 

As a condition of the BB&T gift, a new course, “Ethical Foundations of Capitalism,” is being taught in the College of Business. An undergraduate section is being taught now (ECON 4485, fall 2010), and a graduate section will be taught next semester.

 

Other schools who have accepted similar gifts from BB&T have been required, as a condition of accepting the money, that the initiate courses in which Ayn Rand’s[7] Atlas Shrugged is required reading. (Rand argued for the classical model of CSR based on a sort of virtue ethics, according to which the virtues are Rationality, Productiveness, and Pride.) Faculty at some schools have rejected the grants because of this condition.[8]

 

 

Stopping point for Monday November 15. For next time, read begin reading DesJardins ch.6 (pp.113-20).

 

 

 



[1] “A Stakeholder Theory of the Modern Corporation: Kantian Capitalism,” in Contemporary Issues in Business Ethics, 4th ed., ed. J. DesJardins and J. McCall, Belmont, CA: Wadsworth, 2005. Freeman is professor of business administration at the University of Virginia Darden School of Business ( http://www.darden.virginia.edu/web/Faculty-Research/Directory/Full-time/R-Edward-Freeman/ ).

 

[2] This distinction will play a role in one criticism of this theory; see below.

 

[3] “BB&T Pledges $1 Million to RCOB,” University of West Georgia (press release), November 5, 2009, URL = < http://www.westga.edu/ucmassets/news/1686.php >, retrieved November 14, 2010.

 

[4] Ibid.

[5] “Former BB&T Executive Opens Free Enterprise Lecture Series,” University of West Georgia (press release), September 29, 2009, URL = < http://www.westga.edu/ucmassets/news/2003.php >, retrieved November 14, 2010.

 

[6] Ibid.

 

[7] Neera K. Badhwar and Roderick T. Long, “Ayn Rand,” The Stanford Encyclopedia of Philosophy (Winter 2010 Edition), Edward N. Zalta (ed.), forthcoming URL = < http://plato.stanford.edu/archives/win2010/entries/ayn-rand/ >, retrieved November 14, 2010.

 

[8] Gary H. Jones, “Universities, the Major Battleground in the Fight for Reason and Capitalism,” Academe, July-August 2010, URL = < http://www.aaup.org/AAUP/pubsres/academe/2010/JA/feat/jone.htm >, retrieved November 14, 2010.

 




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