Corporate Responsibility 5. Stakeholder theory

Who are the stakeholders? “Any group or person who is affected by or can affect the achievement of the firm’s objectives” (Freeman, 1984: 46) Terrorists? Generations yet unborn? Need for some clarity / distinction – “if everyone is a stakeholder of everyone else, little value is added by the theory” (Phillips, 2003)

More precise definition of ‘affects’ and ‘affected by’ (Evan and Freeman 1993) Principle of corporate rights - the corporation has the obligation not to violate the rights of others Principle of corporate effect – companies are responsible for the effects of their actions on others C&M: “A stakeholder of a corporation is an individual or a group which either: is harmed by, or benefits from, the corporation; or whose rights can be violated, or have to be respected, by the corporation”

This might get over the problem of terrorists but still draws a very wide boundary around who the stakeholders are Legitimacy often used as another test – does the stakeholder have a legitimate claim on the corporation?

Stakeholder mapping Interest Low High Minimal effort Keep informed Low Power Keep satisfied Key players High

Stakeholder theory of the firm: traditional management model Shareholders Employees Suppliers Customers

Stakeholder theory of the firm Shareholders Employees Suppliers Customers Civil society Competitors Government

Stakeholder theory of the firm: a network model Shareholders Supplier stakeholder 1 Suppliers Customers Civil society Competitors Government Employees Civil society stakeholder 2 Civil society stakeholder 1 Employee stakeholder 2 Employee stakeholder 1 Customer stakeholder 1 Customer stakeholder 2

But the real question is: “In whose interests should the business be run?” Is it just for the shareholders? Or is there a wider group of stakeholders in whose interest the business should be run? If so, who are these stakeholders?

But something on purpose and values is beginning to emerge: Stakeholder theory generally answers the question “In whose interests should the firm be run?” with “Stakeholders not just shareholders” This is a distributive view – it doesn’t ask much if anything about the purpose of the firm (so tobacco companies can be excellent at CSR?!) But something on purpose and values is beginning to emerge: What do we stand for? What are our aspirations? (Freeman et al. 2007: 86)

A typical stakeholder diagram of a firm Government Media Shareholders Suppliers FIRM Customers NGOs Employees Environment Community Creditors Competitors

Stakeholder division Stakeholders normally split into two groups – primary / secondary, active / passive, participant / non-participant One, convincing, division is as follows: Normative stakeholders are those to whom the organisation has a moral obligation, an obligation of stakeholder fairness because the organisation voluntarily accepts their contribution as part of a mutually beneficial scheme of co-operation. Derivative stakeholders are those groups whose actions and claims must be accounted for by managers due to their potential effects upon the organisation and its normative stakeholders. (Phillips, 2003) The normative stakeholders are those in whose interest the business should be run.

A refined stakeholder diagram of a firm Government Media Derivative stakeholders Normative stakeholders Shareholders Suppliers FIRM Customers NGOs Employees Environment Community Creditors Competitors

Two issues in stakeholder theory 1. Which stakeholders? The five shown are usually those that are referred to; environment is the odd one out (can / should the firm be run in the interests of the environment?) Kaler (2009) has argued for shareholders and employees as the only normative stakeholders 2. Position of management (Directors)? Management as a stakeholder in its own right? But management as responsible for allocating harms and benefits So management as representative of the firm – at the centre of a “hub and spoke” model, because they contract with all other stakeholders

Analysing the stakeholder theory of the firm Descriptive / empirical Describes the firm as a constellation of co-operative and competitive interests Instrumental Firm assumed to have conventional objectives, such as maximisation of shareholder value. Recognition that other stakeholders are instrumental (a means to an end) in pursuit of those objectives

Normative Stakeholders are identified by their interests in the firm. The interests of all (some) stakeholders are of intrinsic value The firm should be run in the interests of these stakeholders Managerial Stakeholder theory offers managers prescriptive solutions to practical problems. It recommends attitudes, structures and practices that, taken together, constitute stakeholder management (Donaldson & Preston, 1995)

Nesting of stakeholder theories Descriptive Instrumental Normative

Stakeholding regarded as … A means to an end (instrumental) An end in itself (intrinsic) Stakeholder theory Shareholder theory Stoney & Winstanley (2001)

Implications All organisations are stakeholder organisations (descriptively, instrumentally or normatively speaking) – so we need to be clear which ‘level’ we are working at / talking about The normative basis (which moral principles might be used to justify stakeholder theory) is left open – see Moore (1999) By implication, the shareholder theory of the firm (the instrumental level) is normatively wrong – but see Moore (1999) again

Stakeholder theory - summary [Normative / Pure] “Stakeholder theory is a theory of organisational management and ethics … [and] is distinct because it addresses morals and values explicitly as a central feature of managing organizations … attention to the interests and well-being of some non-shareholders is obligatory for more than the prudential and instrumental purposes of wealth maximisation of equity shareholders.” (Phillips, Freeman & Wicks, 2003) See Smith (2003) for a good summary of stakeholder vs. shareholder theory

Or to put it another way … “Executives ignore stakeholders at the peril of the survival of their companies … All of us need to come to see capitalism and business for what it really is: a system of voluntary social cooperation through which we create value for each other.” (Freeman, 2006) Freeman in person: http://www.corporate-ethics.org/masters_seminar_business_ethics.htm - “What is stakeholder theory?”

Pure versions of the rival theories Pure shareholder theory Pure stakeholder theory Multi-fiduciary duties Accountable to all / some stakeholders or to the corporation Single fiduciary duty Accountable to shareholders alone (Note: fiduciary duties are duties of trust and care and are sometimes considered to be owed to the firm as an entity rather than to particular stakeholders. Others argue the firm amounts to the shareholders. There is also the issue of it being unethical to be a fiduciary to more than one party where this might involve conflicts of interest.)

Tinged shareholder theory It has been argued that neither side has the stronger moral claim (see Moore, 1999) Tinged shareholder theory as a way forward? – instrumental approach to stakeholding, but moral and social duties added to legal and implied constraints Directors owe fiduciary duties to shareholders and are accountable to them alone. But take responsibilities to other stakeholders seriously / to the corporation (see also Hampel, 1998)

Locating tinged shareholder theory Single fiduciary duty but responsibilities to other stakeholders / the corporation as a whole, taken seriously Pure stakeholder theory Pure shareholder theory Multi-fiduciary duties Accountable to all / some stakeholders or to the corporation Intrinsic approach Single fiduciary duty Accountable to shareholders alone Instrumental approach Tinged shareholder theory = Enlightened shareholder value

Companies Act 2006 General duties of directors “A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other things) to –

The likely consequences of any decision in the long term, The interests of the company’s employees, The need to foster the company’s business relationships with suppliers, customers and others, The impact of the company’s operations on the community and the environment, The desirability of the company maintaining a reputation for high standards of business conduct, and The need to act fairly as between members of the company.”

Contents of directors’ report: general “In the case of a quoted company the business review must, to the extent necessary for an understanding of the development, performance or position of the company’s business, include – a) The main trends and factors likely to affect the future development, performance and position of the company’s business; and

b) Information about – (i) environmental matters (including the impact of the company’s business on the environment), (ii) the company’s employees, and (iii) social and community issues, including information about any policies of the company in relation to those matters and the effectiveness of those policies …”

References / reading Donaldson, T., and L. Preston (1995), ‘The stakeholder theory of the corporation: concepts, evidence and implications,’ Academy of Management Review, 20 (1), 65-91. Evan, W. & R.E Freeman (1993), A stakeholder theory of the modern corporation: Kantian capitalism, in G. Chryssides & J. Kaler (1993), An introduction to Business Ethics, (London: Chapman & Hall), pp.254-266. Freeman, R.E. (1984), Strategic Management: a stakeholder approach, Boston: Pitman. Freeman, R.E., (2006), ‘The Wal-Mart effect and business, ethics, and society’, Academy of Management Perspectives, 20 (3): 38-40. Freeman, R.E., J. Harrison & A. Wicks (2007), Managing for stakeholders. Survival, reputation and success, New Haven: Yale University Press. Hampel, R. (1998), Committee on Corporate Governance: Final Report, London: Gee & Co. Ltd. Kaler, J. (2009), ‘An optimally viable version of stakeholder theory’, Journal of Business Ethics, 86 (3), 297-312. Mitchell, R., B. Agle & D. Wood (1997), ‘Toward a theory of stakeholder identification and salience: defining the principle of who and what really counts’, Academy of Management Review, 22 (4): 853-886. Moore, G. (1999), ‘Tinged shareholder theory, or, what so special about stakeholders?’, Business ethics, a European Review 8(2), 117-127. Moore, G. (2007), Podcast on DUO. Phillips, R. (2003), ‘Stakeholder legitimacy’, Business Ethics Quarterly, 13(1), 25-41. Phillips, R., R.E. Freeman and A. Wicks (2003), ‘What stakeholder theory is not’, Business Ethics Quarterly, 13(4): 479-502. Smith, J. (2003), ‘The shareholders vs. stakeholders debate’, MIT Sloan Management Review, Summer, 85-90. Stoney C. & D. Winstanley (2001), ‘Stakeholding: confusion or Utopia? Mapping the conceptual terrain’, Journal of Management Studies, 38(5), 603-626.