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The Ethical and Environmental Limits of Stakeholder Theory

Published online by Cambridge University Press:  23 January 2015

Eric W. Orts  and
Alan Strudler
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Abstract:

We argue that though stakeholder theory has much to recommend it, particularly as a heuristic for thinking about business firms properly as involving the economic interests of other groups beyond those of the shareholders or other equity owners, the theory is limited by its focus on the interests of human participants in business enterprise. Stakeholder theory runs into intractable philosophical difficulty in providing credible ethical principles for business managers in dealing with some topics, such as the natural environment, that do not directly involve human beings within a business firm or who engage in transactions with a firm. Corporate decision-making must include an appreciation of these ethical values even though they cannot be captured in stakeholder theory.

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Articles
Information
Business Ethics Quarterly , Volume 12 , Issue 2 , April 2002 , pp. 215 - 233
Copyright
Copyright © Society for Business Ethics 2002

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References

Notes

1. For a leading example, see two articles and several responses collected in the April 1999 issue of the Academy of Management Review. Jeff Frooman, “Stakeholder Influence Strategies,” Academy Management Review 24 (1999): 191; Thomas M. Jones and Andrew C. Wicks, “Convergent Stakeholder Theory,” Academy Management Review 24 (1999): 206; Thomas Donaldson, “Making Stakeholder Theory Whole,” Academy Management Review 24 (1999): 237; Dennis A. Gioia, “Practicability, Paradigms, and Problems in Stake holder Theorizing,” Academy Management Review 24 (1999): 228; Linda Klebe Trevino and Gary R. Weaver, “The Stakeholder Research Tradition: Converging Theorists—Not a Converging Tradition,” Academy Management Review 24 (1999): 222. Another example appears in the festschrift for Max Clarkson collected in the March 1999 issue of Business & Society. E.g., Archie B. Carroll, “Corporate Social Performance and Stakeholder Think ing: The Work and Influence of Max B. E. Clarkson,” Business & Society 38 (1999): 15; Thomas M. Jones, “Max Clarkson, the Toronto Conferences, and the Development of Stakeholder Theory,” Business & Society 38 (1999): 19; Robert Phillips, “On Stakeholder Theory Delimitation,” Business & Society 38 (1999): 32; Deborah Vidaver-Cohen, “Tak ing a Risk: Max Clarkson’s Impact on Stakeholder Theory,” Business & Society 38 (1999): 39; Donna J. Wood, “Living Stakeholder Theory: A Tribute to the Life and Works of Max Clarkson,” Business & Society 38 (1999): 6. See also The Corporation and Its Stakehold ers: Classic and Contemporary Readings, Max B. E. Clarkson, ed. (1998).

2. According to a leading survey of the literature, at least a dozen books and more than 100 articles had already been written on the subject by 1995. Thomas Donaldson and Lee E. Preston, “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Impli cations,” Academy Management Review 20 (1995): 65. Another survey counts another 200 articles in the last few years. Kevin Gibson, “The Moral Basis of Stakeholder Theory,” Journal of Business Ethics 26 (2000): 245.

3. Donaldson and Preston, supra note 2, at 66; Jones & Wicks, supra note 1, at 206.

4. See Mark Starik, “Should Trees Have Managerial Standing? Toward Stakeholder Sta tus for Non-Human Nature,” Journal of Business Ethics 14 (1995): 207. For criticism, see Robert A. Phillips and Joel Reichart, “The Environment as Stakeholder? A Fairness-Based Approach,” Journal of Business Ethics 23 (2000): 185. We discuss both of these theories below.

5. For recent philosophical discussions of the importance of the idea of “nature” be yond instrumental human economic interests, see Elliott Sober, “Philosophical Problems for Environmentalism,” in Environmental Ethics, Robert Elliot, ed. (1995); David Wiggins, “Nature, Respect for Nature, and the Human Scale of Values,” Proceedings of the Aristo telian Society 100 (2000): 1.

6. See Jeremy Bentham, An Introduction to the Principles of Morals and Legislation (1823); David Hume, A Treatise of Human Nature (1738); Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776).

7. For general discussions of the relationship between ethics and economics, see Daniel M. Hausman and Michael S. Mcpherson, Economic Analysis and Moral Philosophy (1996); Amartya Sen, “Does Business Ethics Make Economic Sense?” Business Ethics Quarterly 3 (1993): 45. At the same time, it is also true that some economists in recent years have attempted to transform all questions of “value” into terms of monetary “price,” thus ignoring the traditional “distinction between that which did and that which did not lie within the ambit of their discipline.” Wiggins, supra note 5, at 14 n. 15, 16-17.

8. See Ronald K. Mitchell et al., “Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who and What Really Counts?” Academy Manage ment Review 22 (1997): 853, 856. See also Archie B. Carroll, “Corporate Social Responsibility,” Business & Society 38 (1999): 268 (which gives a history of the devel opment of the concept from the 1950s to the present).

9. For discussion and sources, see Eric W. Orts, “A North American Legal Perspective on Stakeholder Management Theory,” in Perspectives on Company Law, Fiona Patfield, ed., 2 (1997): 169-70.

10. See A. A. Berle, Jr., “Corporate Powers as Powers in Trust,” Harvard Law Review 44 (1931): 1049; E. Merrick Dodd, Jr., “For Whom Are Corporate Managers Trustees?” Harvard Law Review 45 (1932): 1145.

11. Mitchell et al., supra note 8, at 855. For a textbook discussion of the interests rel evant to corporate social responsibility that correspond to “stakeholders” in more recent theories, see Richard N. Farmer and W. Dickerson Hogue, Corporate Social Responsibil ity (1985): 75-202.

12. For an explicit recognition of this rhetorical “play” on “shareholder” and “stock holder,” see R. Edward Freeman, “Stakeholder Theory of the Modern Corporation,” in Ethical Issues in Business: A Philosophical Approach, Thomas Donaldson and Patricia H. Werhane, eds. (6th ed., 1999), supra note 7, at 247, 250; Kenneth E. Goodpaster, “Busi ness Ethics and Stakeholder Analysis,” in Ethical Issues in Business, supra at 257, 258.

13. For a theoretical survey of different types of business firms and their participants, see Eric W. Orts, “Shirking and Sharking: A Legal Theory of the Firm,” Yale Law & Policy Review 16 (1995): 265, 298-314.

14. In the United States, the number of sole proprietorships and partnerships greatly exceeds the number of corporations, but corporations account for most business rev enues. According to the most recent census data in 1995, business corporations accounted for over ninety percent of business receipts. Jesse H. Choper et al., Cases and Materials on Corporations (5th ed., 2000), 1 and n. 1. See also Eric W. Orts, “The Future of Enter prise Organization,” Michigan Law Review 96 (1998): 1947, 1962-63 (which reviews statistics on the global dominance of the corporate form of business organization).

15. For a classic expression of this viewpoint, see Milton Friedman, “The Social Responsi bility of Business Is to Increase Its Profits,” New York Times (Magazine), Sept. 13, 1970, §6, at 32. For a more recent and influential argument along similar lines, see Frank H. Easterbrook and Daniel R. Fischel, The Economic Structure of Corporate Law (1991), 1-39.

16. See R. Edward Freeman and Daniel Gilbert, Corporate Strategy and the Search for Ethics (1988); Thomas M. Jones, “Instrumental Stakeholder Theory: A Synthesis of Ethics and Economics,” Academy Management Review 20 (1995): 404.

17. Donaldson and Preston, supra note 2, at 66-67, 70-73.

18. Ibid, at 87-88.

19. David Baron, “Private Politics, Corporate Social Responsibility, and Integrated Strat egy” (unpublished manuscript, August 2000) (presented at a Wharton School conference on Management Strategy and the Business Environment, Sept. 2000).

20. See, e.g., Jones and Wicks, supra note 1, at 4217-19 (which argues that “norma tive” and “instrumental” versions of stakeholder theory “converge” because ethical stakeholder management strategies yield instrumental economic “competitive advantage” to firms).

21. See R. Edward Freeman, Strategic Management: A Stakeholder Approach (1984). Freeman’s book is often described as a “landmark” in this respect. See, e.g., Max B. E. Clarkson, “A Stakeholder Framework for Analyzing and Evaluating Corporate Social Per formance,” Academy Management Review 20 (1995): 92, 105; Donaldson and Preston, supra note 2, at 65.

22. William Safire, “Stakeholders Naff? I’m Chuffed,” New York Times (Magazine), May 5, 1996, §6, at 26 (which cites business texts written in 1975 and 1965). Lee Preston finds evidence that successful American corporations began to refer to conceptions of stake holder management even earlier, in the late 1940s and early 1950s. Lee E. Preston, “Stakeholder Management and Corporate Performance,” Journal of Behavioral Econom ics 19 (1990): 361, 362.

23. Safire, supra note 22.

24. Ibid. See also The Concise Oxford English Dictionary of Current English (8th ed., 1990), 1186 (which defines “stakeholder” as “an independent party with whom each of those who make a wager, deposits the money, etc. wagered”); Goodpaster, supra note 12, at 258 (which notes that “the term ‘stakeholder’ is associated with a ‘player’ in a game like poker,” and a person with “a ‘stake’ in the game is one who plays and puts some economic value at risk”).

25. See Mitchell et al., supra note 8, at 857 (contrasting “narrow” and “broad views” in competing versions of stakeholder theory).

26. See Max B. E. Clarkson, “A Risk Based Model of Stakeholder Theory” (unpub lished manuscript) (working paper for The Centre for Corporate Social Performance and Ethics, University of Toronto, presented at the Annual Meeting of the Society for Busi ness Ethics, Vancouver, Canada, August 1995). See also Max B. E. Clarkson, “A Stakeholder Framework for Analyzing and Evaluating Corporate Social Performance,” Academy Man agement Review 20 (1995): 92, 105-07 (which describes “primary stakeholders” in these terms and argues that a firm may be understood as “a system of primary stakeholder groups, a complex set of relationships between and among interest groups with different rights, objectives, expectations, and responsibilities”). This concept of “stakeholder” as extending only to parties who “have something at risk” in a corporation is also adopted in Clarkson Centre for Business Ethics, Principles of Stakeholder Management (1999), 2.

27. Freeman, Strategic Management, supra note 21, at 64.

28. See, e.g., Mitchell et al., supra note 8, at 854.

29. William M. Evan and R. Edward Freeman, “A Stakeholder Theory of the Modern Corporation,” in Ethical Issues in Business, supra note 12, at 314.

30. Ibid.

31. R. Edward Freeman, “The Politics of Stakeholder Theory,” Business Ethics Quar terly 4 (1999): 409, 412.

32. Ibid.

33. See Orts, “Shirking and Sharking,” supra note 13, at 270-82, 299. For another ex ample in the legal literature that take accounts of economic stakeholder interests in a theory of the firm, see Margaret M. Blair and Lynn A. Stout, “A Team Production Theory of Corporate Law,” Virginia Law Review 85 (1999): 247.

34. For an earlier argument along these lines, see Orts, “A North American Perspective on Stakeholder Management Theory,” supra note 9, at 174-76.

35. For an overview of the basic legal principles, see Eric W. Orts, “Beyond Sharehold ers: Interpreting Corporate Constituency Statutes,” George Washington Law Review 61 (1992): 14, 41-48.

36. American Law Institute, Principles of Corporate Governance: Analysis and Recom mendations (1994) §2.01(b).

37. For elaboration of this point, see Orts, “Shirking and Sharking,” supra note 13, at 313-14.

38. Exceptions may include state-owned enterprises, such as in China, and public utili ties that are run as businesses but in fact amount to subdivisions of the government. On China, see Minkang Gu and Robert C. Art, “Securitization of State Ownership: Chinese Securities Law,” Michigan Journal of International Law 19 (1996): 115. In addition, “golden shares” are sometimes granted to government entities in large firms in order to ease transition to private ownership or to prevent hostile corporate takeovers, but this kind of government “ownership” interest is probably better conceived as a regulatory mechanism rather than an economic “stake.” See, e.g., John C. Coffee, Jr., “The Rise of Dispersed Ownership: The Roles of Law and the State in the Separation of Ownership and Control,” Yale Law Journal 111 (2001): 1, 21 n. 59 (which describes golden shares re tained by governments in privatizations); Gustavo Visentini, “Compatibility and Competition Between European and American Corporate Governance: Which Model of Capitalism?” Brooklyn Journal of International Law 23 (1998): 833, 848 and n. 59 (which describes golden shares issued to some Italian and British companies when large state- owned industries were privatized).

39. For example, a business firm may commit civil disobedience in response to a law that it deems immoral and pay the legal consequences, just as individual citizens may. We also agree the businesses may make different ethical judgments about following the law (or give following the law less ethical weight) in countries that have illegitimate governments.

40. For a recent collection of essays on moral reasons for respecting law, see The Duty to Obey the Law: Selected Philosophical Readings, William A. Edmundson, ed. (1999). But also see A. John Simmons, Moral Principles and Political Obligations (1979), which argues that there is no general moral obligation to obey the law. For an introduction to the jurisprudential debate, see Kent Greenawalt, Conflicts of Law and Morality (1987).

41. See, e.g., Freeman, “Stakeholder Theory of the Modern Corporation,” supra note 12, at 252.

42. The American Law Institute’s “Principles of Corporate Governance” specifically applies this principle to business corporations. See American Law Institute, supra note 36, §2.01, cmt. g, at 60 (which observes that though cost-benefit economic analysis “may have a place in the state’s determination whether a given type of conduct should be deemed legally wrongful,” “the resulting legal rule normally represents a community decision that the conduct is wrongful as such, so that cost-benefit analysis whether to obey the rule is out of place”).

43. See Joel Feinberg, “The Rights of Humans and Unborn Generations,” in Rights, Justice, and the Bounds of Liberty, Joel Feinberg, ed. (1980), 159; Sober, supra note 5.

44. Dennis Gioia argues that proponents of a normative approach too often amount merely to “shouting from the sidelines that organizational decision-makers should do the right thing.” Gioia, supra note 1, at 228. We share Gioia’s general aversion to shouting. On the other hand, we think that identifying the morally right course of action in business is often not an easy thing to do, and Gioia’s appeal to the social sciences does not offer answers to hard normative questions. There are therefore an abundance of worthwhile topics and activities for non-shouting normative theorists concerned with business ethics.

45. Starik, supra note 4, at 214.

46. Ibid.

47. In this article, we use the words “nature” and “natural environment” interchangeably.

48. See Feinberg, supra note 43, at 165.

49. See Sober, supra note 5, at 227 (“[T]rees, mountains, and salt-marshes do not suffer. They do not experience pleasure and pain, because, evidently, they do not have experi ences at all.”).

50. Ibid, at 239. Sober claims no originality for this argument, which he attributes to Mark Sagoff, “On Preserving the Natural Environment,” Yale Law Journal 84 (1974): 205, 220-24.

51. The normative importance of the continued existence of various endangered spe cies also follows the same logic. Sober, supra note 5, at 239-40. Particular animals or plants may have needs. But the idea of preserving a species of animals or plants cannot be said to be necessary (since evolution is the history of the creation and destruction of species) or to represent interests (other than human interests in using genes, etc. for hu man uses, including possible future uses).

52. This is perhaps part of the intuition informing Leopold’s recommendation of a “land ethic”: “A thing is right when it tends to preserve the integrity, stability, and beauty of the biotic community. It is wrong when it tends otherwise.” Aldo Leopold, A Sand County Almanac (1966), 262. The problem is that humanity itself and human environments also count as part of “the biotic community.”

53. For an elaboration of the moral and aesthetic argument in favor of the preservation of species as a “whole,” see Sober, supra note 5, at 240-47. Of course, human beings (including stakeholders of various firms) also have an interest in preserving the natural environment for their own health and survival (and that of future generations). But our argument here is that the moral obligation to respect the natural environment is not lim ited to human interests.

54. Phillips and Reichart, supra note 4, at 193.

55. Ibid, at 191.

56. Ibid, at 191-94.

57. Ibid.

58. See Alan Strudler, “Valuing Nature: Assessing Damages for Oil Spills,” Report from the Institute for Philosophy and Public Policy (1995): 6-9. For a useful account of the ensuing litigation and its consequences, see Deborah S. Bardwick, Note, “The American Tort System’s Response to Environmental Disaster: The Exxon Valdez Oil Spill as a Case Study,” Stanford Environmental Law Journal 19 (2000): 259. For an economic analysis, see Victor P. Goldberg, “Recovery for Economic Loss Following the Exxon Valdez Spill,” Journal of Legal Studies 23 (1994): 1.

59. Phillips and Reichart, supra note 4, at 190.

60. See Elizabeth Anderson, Value in Ethics and Economics (1993), 190-216.

61. See Richard T. DeGeorge, “Ethical Responsibilities in Large Organizations: The Pinto Case,” Business & Professional Ethics Journal 1 (1981): 1.

62. Against our view, one might say that the problem with Ford was not that it engaged in cost-benefit analysis, but that it did not set a high enough price on the environment in its cost-benefit analysis. For a recent response to this variety of argument, see Anderson, supra note 60, at 190-216. Anderson argues that it is morally repugnant to make certain choices in terms of price, and that this aversion inheres in the very idea of using price as a standard of decision-making, rather than the price chosen. It is easy to see the sense in her analysis when one thinks about a personal decision, such as the choice of spouse: Anybody who chooses a spouse based on the expected financial advantages is morally strange in unattractive ways. We agree with Anderson that an anti-pricing or anti- commodification argument is plausibly applied to environmental cases. Of course, Anderson is not the first person to make broad arguments against using cost-benefit economic analysis alone to inform decision-making. For important predecessors, see Michael Walzer, Spheres of Justice (1984) (which argues that qualitatively different choice criteria are relevant in different normative realms); Mark Sagoff, The Economy of the Earth (1988) (which argues that cost-benefit analysis cannot suffice to answer environmental questions that have important moral and aesthetic dimensions). These authors do not argue that economic considerations are irrelevant to environmental decision-making. Instead they argue simply that not all considerations relevant to decisions about the environment can be translated into economic terms. We agree.

63. As David Wiggins argues, human values are necessarily developed on “a human scale,” but they are not necessarily “human centred.” Wiggins, supra note 5, at 7-8. For a classic work on the idea that the natural environment is morally and aesthetically valuable independent of human interests, see Leopold, supra note 52. Leopold’s arguments are embraced and developed in Sagoff, The Economy of the Earth, supra note 62. For an excellent anthology discussing related issues, see Environmental Ethics, supra note 5. For a philosophical discussion that more closely resembles Starik’s position, see Holmes Rolston, III, Environmental Ethics: Duties to and Values in the Natural World (1988).

64. Mitchell et al., supra note 8, at 853. These scholars attempt to clarify stakeholder theory through the following “attributes” for identification: (1) the “power” of an interest group to influence a business firm’s behavior, (2) the “legitimacy” of an interest group’s relationship to the firm, and (3) the “urgency” of a interest group’s claim on the firm. Ibid, at 854. We fail to see, however, how these attributes provide a solution to the iden tification problem. If anything, these attributes seem to illustrate the conceptual problems of broad versions of stakeholder theory.