1. Instrumental Stakeholder Theory: A Synthesis of Ethics and Economics
Thomas M. Jones
The Academy of Management Review, Vol. 20, No. 2 (Apr., 1995), pp

2. The Instrumental Approach
Describe what will happen If managers or firms behave in certain ways
Establishes connection between certain practices and certain end states

3. Stakeholder Theory Overview
Jones (1995) develops instrumental stakeholder theory by delving into the reasons why acting ethically should (or at least is likely to) lead to competitive advantage.
His arguments are based on economics literature, which focuses on information imperfections in markets, and in particular on the costs involved in attempts to overcome those imperfections.
Jones proposes that a reputation for acting ethically will, to some degree, overcome consequences of those information imperfection in a much less costly, or even costless manner.
Say that this definition of stakeholder is in layman terms.
Some questions answered in the article:
Who is a stakeholder?
What is at stake?
What types of Shareholders exist?
The theory explains why managers pay certain kinds of attention to certain stakeholders and why they respond to them the way they do

4. Assumptions about firm-stakeholder relationship
Firms have relationships, called contracts, with many stakeholders and can therefore be seen as a “nexus of contracts” or a set of principal-agent relationships, between themselves (as agents), and their stakeholders (as principals);
Firms are run by professional managers who are their contracting agents
Firms exist in markets in which competitive pressures do influence behaviour but do not necessarily penalize moderately inefficient behaviour.
Explain Voluntary and Involuntary shareholders
Explain Influencers and claimants
Influencers: Those who have the power to influence the firm’s behaviour, direction, process and outcomes
Claimants: Those who have a legal, moral or presumed claim on the firm but not the ability to influence its functioning

5. The Basic Instrumental Stakeholder Proposition
If firms….contract (through their managers) with their stakeholders on the basis of mutual trust and cooperation, then these firms will have a competitive advantage over firms that do not (1995:422)
Explain the three categorizations of power (check from booklet)
Explain the three types of legitimacy
Additional points on Power
- A party to a relationship has power to the extent it has or can gain access to coercive, utilitarian or normative means, to impose its will in the relationship
- Power is transitory – it can be acquired as well as lost

6. The rational connection between the “if” and the “then” sides of instrumental proposition is based on costs of solving agency problems, transaction cost problems and team production problems.
These problems arise because markets are not perfect (in particular because information is not freely available) and those imperfection allow economic agents, manager in particular, to behave opportunistically.
Explain the three categorizations of power (check from booklet)
Explain the three types of legitimacy
Additional points on Power
- A party to a relationship has power to the extent it has or can gain access to coercive, utilitarian or normative means, to impose its will in the relationship
- Power is transitory – it can be acquired as well as lost

7. They can misrepresent their activities or efforts
Cost are then incurred either because opportunism succeeds (and returns to the firm and/or to other stakeholders are less, as opportunistic managers reap the benefit of their guile);
or because one or more parties to the relationship spend resources to reduce opportunism.
Explain the three categorizations of power (check from booklet)
Explain the three types of legitimacy
Additional points on Power
- A party to a relationship has power to the extent it has or can gain access to coercive, utilitarian or normative means, to impose its will in the relationship
- Power is transitory – it can be acquired as well as lost

8. An Agency Theory Perspective
The separation of ownership and control can lead to conflicts
Agency theory suggests a way to understand the conflict that often arises between shareholder goals and top managers’goals
Agency relation occurs when one person (the principle, i.e. shareholders) delegates decision- making authority to another (the agent, i.e. managers) 8

9. Agency Problem
Agency problem: a problem in determining managerial accountability that arises when delegating authority to managers
Shareholders are at information disadvantage compared to top managers;
It takes considerable time to see the effectiveness of decisions managers may make;
A moral hazard problem exists when agents have the opportunity and incentive to pursue their own interests;
Very difficult to evaluate how well the agent has performed because the agent possesses an information advantage over the principal. 9

10. Solving the Agency Problem
In agency theory, the central issue is to overcome the agency problem by using governance mechanisms that align the interests of principles and agents
The role of the board of directors:
Monitor and question top managers decisions
Reinforce and develop a code of ethics
Find the right set of incentives to align the interests of managers and shareholders
Governance mechanisms include
Stock-based compensation schemes that are linked to the company’s performance
Promotion tournaments and career paths 10

11. Cost incurred due to opportunism or to reduce it
Agency costs arise due to principals having insufficient information about the quality of managers before the contract is struck (adverse selection) or about they way they perform under contract (moral hazard). Opportunism can be reduced by incurring monitoring and bonding costs.
Urgency - Stakeholder attribute of urgency helps move the model from static to dynamic

12. Cost incurred due to opportunism or to reduce it
Transaction cost arise due to lack of information about the quality of contracting partners and the resources they have to offer. Cost of transacting include costs of:
Searching
Monitoring
Enforcing, and
Insuring and diversifying
Monitoring costs associated with team production arise to counteract the “free rider” problem whereby team members shirk without detection and receive rewards disproportionate t
Urgency - Stakeholder attribute of urgency helps move the model from static to dynamic

13. How can managers of this type be identified?
Jones contends that managers who relate to stakeholders on the basis of mutual TRUST and COOPERATION, as long as they can be identified as such, will be recognized as efficient potential contracting partners.
How can managers of this type be identified?
Sincere Manner or Reputation
Reputation is a good guide for moral sentiments because it is difficult for someone who is merely prudent to maintain reputation for honesty because, on pure self-interest calculations, dishonest action will often be regarded as coming with acceptable risk.

14. “Firm morality, like individual morality, is difficult to fake”
Corporate Morality
Is identifiable, largely through the absence of corporate policies that would indicate lack of moral sentiments such as massive lay-offs to boost profits or no-returns policies on merchandise.
System of incentives and sanctions employed within the firm, the language used, and other internal reflections of top management moral sentiments.
“Firm morality, like individual morality, is difficult to fake”

15. Instrumental Stakeholder Proposition
Emphasizes what companies should NOT do strategically in order to fulfill the conditions of the instrumental proposition, rather than specifying ways in which they should deal with stakeholders to advance corporate objectives.

16. Instrumental Stakeholder Proposition
Mechanisms to deter takeover:
Shark repellents – anti-takeover charter amendments
Poison pills – contingent securities that burden an acquiring firm with various obligation after takeovers
Greenmail – purchases of large blocks of shares from potential takeover raids
High level of executive compensation
Particular supplier relation patterns:
Having many suppliers indicating that some are being kept on line competing for business
Changing suppliers often, thus not building long-term contracts on mutual trust
Contracting out work normally done by employees
Reliance on external rather than internal labour markets
Monitoring employees closely

17. Inefficient production processes, uninspired marketing plans, and obsolete products can outweigh a reputation for trusting relations with stakeholders.
Individual propositions may not be verified empirically because the relationship are not independent.

19. Questions??