From Stockholder to a Stakeholder Theory William Sin Jan, 2014

“A STAKEHOLDER THEORY OF THE MODERN CORPORATION” by R. Edward Freeman

(Milton) Friedman ≠ (Edward) Freeman Shareholder ≠ Stakeholder Remember -- (Milton) Friedman ≠ (Edward) Freeman Shareholder ≠ Stakeholder

Milton (Friedman) vs. Edward (Freeman) The only group that has a moral claim on the corporation is the people who own shares of the stock (that is, the shareholders). Edward (Freeman) Many groups have a moral claim on the corporation because the corporation has the potential to harm or benefit them (call these groups stakeholders).

Moral claim What is a moral claim? Under what circumstance will one person (party) make a moral claim against another person (party)? Who can make a moral claim? What can we make a moral claim against?

Who are the stakeholders and why?

Who are these stakeholders?

What characterizes these stakeholders? They are vital to the survival and success of the corporation. Their relationship with the corporation enables them to be benefited by the corporation’s actions and operations. This relationship also makes it possible for the corporation to harm them or to violate their rights.

Being legal and being moral

So, what does Edward (Freeman’s) theory require corporations to do? Corporations have to take all of the stakeholder groups into account when making a decision.

Scanlon on amoralism “If someone does not see the point of music, or of chess, or does not appreciate the grandeur of nature, then one cannot discuss these things with him or enjoy them together. “Blind spots” such as these may stand in the way of certain relations with a person, but they leave much of life untouched.  

A fundamental difference “A person who cannot share our enthusiasm for one or another valuable pursuit can still be a good neighbor, co- worker, or even friend. The effects of a failure to be moved by considerations of right and wrong are not, however, confined in this way. This failure makes a more fundamental difference.” Scanlon, What We Owe to Each Other, p. 159.

Morality and Reasons

Freeman’s Kantian example. Paying attention to customer’s needs → stable business processes (sales of products and purchases of raw materials). Means and Ends: But paying attention to customer’s needs IS a Kantian treatment of the customer as an end rather than exploiting them as a means only.

KANT ON ENDS-IN-THEMSELVES Kant’s Categorical Imperative “Act in such a way that you treat humanity, whether in your own person or in the person of any other, always at the same time as an end and never merely as a means to an end.” Groundwork of the Metaphysics of Morals, 4:428

Kant on the Importance of Rational Beings “Now I say that man, and in general every rational being, exists as an end in himself, not merely as a means for arbitrary use for this or that will: he must in all his actions, whether they are directed to himself or to other rational beings, always be viewed at the same time as an end. …

“Beings whose existence depends, not on our will, but on nature, have none the less, if they are non-rational beings, only a relative value as a means and are consequently called things. Rational beings, on the other hand, are called persons because their nature already marks them out as ends in themselves – that is, as something which ought not to be used merely as a means – and consequently imposes to that extent a limit on all arbitrary treatment of them (and is an object of reverence). Persons, therefore, are not merely subjective ends whose existence as an object of our actions has a value for us: they are objective ends.” Groundwork of the Metaphysics of Morals, 4:428

Freeman’s Rawlsian example. View the mutual relationships among a corporation’s stakeholders as a set of contracts. Basic equality among the stakeholders in terms of their moral rights (each “contract” is as morally important as the others). Inequalities in the amount of benefits to the stakeholder groups demonstrably raise the level of the least well-off stakeholder group.

How do Friedman and Freeman differ in analyzing a case? (Milton) Friedman says to maximize profit a) within the law and b) without violating social standards. So, in looking at a business decision (or analyzing a case), identify relevant laws and regulations – and also identify current social standards and opinions. Maximize profit without breaking laws/regulations AND without “disturbing” society so much that it decreases profits. (Edward) Freeman says to a) identify stakeholder groups and b) make a decision that “takes them into account.” So, in looking at a business decision (or analyzing a case), identify all stakeholder groups. Identify available options and determine the effect they will have on the stakeholders. Select and apply an ethical theory to these options to determine the best one.

Invisible hands & Laissez-faire In a free market, everyone acts to promote their self-interest, and the distribution of resources may achieve efficiency. This natural force of resource distribution may be attributed to what Adam Smith calls the Invisible Hand. But, note that even if there is a free market mechanism and an invisible hand, it does not imply that people should act selfishly. And there are instances in which people’s self-interested actions may contribute to collective disaster. The idea of laissez-faire on Wikipedia.

Sustainability Amartya Sen: “And to understand how exchange might actually work in practice, it is not adequate to concentrate only on the motivation that makes people seek exchange. It is necessary to look at the behavior patterns that could sustain a flourishing system of mutually profitable exchanges.” (“Do Business Ethics Make Economic Sense?” p. 201 in Business Ethics: Critical Perspectives On Business and Management, edited by Alan Malachowski.)