Stakeholders

A firm's stakeholders are the individuals, groups, or other organizations that are affected by and also affect the firm's decisions and actions. Depending on the specific firm, stakeholders may include: governmental agencies, such as the Securities and Exchange Commission; social activist groups, such as Greenpeace; self-regulatory organizations, such as the National Association of Securities Dealers; employees; shareholders; suppliers; distributors; the media; and even the community in which the firm is located, among many others. The following discussion divides the stakeholder perspective into three categorizations, but it is important to realize that firms do not always initially set out to establish one perspective over another. Instead, firms tend to develop their views of stakeholders and stakeholder management over time in reaction to events that unfold throughout the firm's history.

STAKEHOLDER PERSPECTIVE

Although numerous ways of viewing stakeholders exist, categorizing stakeholder perspectives into three broad categories helps elicit the basic underlying themes among these numerous views. These broad categorizations include the separation perspective, the ethical perspective, and the integrated perspective.

The Separation Perspective. The separation perspective suggests that, because managers are agents of the firm's owners (the shareholders), managers should always strive to act in the best interest of the firm's owners. This view does not cause managers to ignore non-owner stakeholders; indeed, taking actions that benefit stakeholders also benefit owners, and the separation perspective would advise managers to do so. One facet that differentiates this perspective from the others, however, is the rationale behind such decisions—the reason managers make decisions and take actions benefiting non-owner stakeholders is ultimately to reward owners. Clearly, problems arise when a given decision would maximize the benefit to non-owners at the expense of owners but would serve the greater good of society in general.

For example, suppose a new but relatively expensive technology was created that lowered pollution from steel mini-mills to well below the level required by the Environmental Protection Agency (EPA). As long as the mini-mills are already in compliance with EPA regulations, there is no legal mandate for the steel mini-mills to purchase and implement the new technology even though doing so would benefit stakeholders such as the community in which the mini-mill had factories. Yet, due to the cost of the new technology, owners' profits would suffer. The separation perspective would direct managers in this situation to dismiss the benefit of lower pollution levels for the community in favor of maximizing owners' profits by meeting EPA requirements, but not by spending funds in excess of what the EPA requires.

The Ethical Perspective. The ethical perspective is that businesses have an obligation to conduct themselves in a way that treats each stakeholder group fairly. This view does not disregard the preferences and claims of shareholders, but takes shareholder interests into consideration only to the extent that their interests coincide with the greater good. Budweiser, for example, has modified its advertising over the years to discourage underage drinking and driving while intoxicated. Social activist groups such as Mothers against Drunk Drivers have pressured Budweiser through their own advertising as well as media attention to maximize responsible alcohol consumption even though this may decrease overall sales for Budweiser. This approach focuses on ethics and suggests that managers have responsibilities apart from profit-oriented activities.

While recognizing the claims shareholders have to profit in exchange for putting their capital at risk, the ethical perspective holds ethics as the preeminent decision rule. Taken to an extreme, this perspective can minimize the right of owners to participate in financial gain in proportion to the risks they bear when doing what is ethically best for non-owner stakeholders runs counter to what is financially best for owners. A possible outcome

in a capitalist society could be that fewer and fewer owners place their capital at risk through firm ownership, a condition that may ultimately decrease the economic good of society in general and thus harm the very groups the ethical perspective intended to protect.

The Integrated Perspective. The third approach, the integrated perspective, suggests that firms cannot function independent of the stakeholder environment in which they operate, making the effects of managerial decisions and actions on non-owner stakeholders part and parcel of decisions and actions made in the interests of owners. This view holds that managerial decisions and actions are intertwined with multiple stakeholder interests in such a way that breaking shareholders apart from non-owner stakeholders is not possible. Managers who, according to this approach, make decisions in isolation of the multitude of stakeholders and focus singly on shareholders overlook important threats to their own well-being as well as opportunities on which they might capitalize.

For example, the National Association of Securities Dealers (NASD) is a self-regulatory organization that monitors and disciplines members such as insurance companies and brokerages. By incorporating NASD regulations into their management decisions and actions, insurance companies and brokerages, at least to some extent, preempt outside governmental action that may make compliance more restrictive or cumbersome. The NASD, in turn, answers to the governmental agency, the Securities and Exchange Commission (SEC). The SEC reports to the U.S. Department of Justice. Each of these—insurance companies and brokerages, the NASD, SEC, and U.S. Department of Justice—are linked in such a way that insurance companies and brokerages ignoring these stakeholders would quickly be unable to make a profit and thus fail to serve the interests of owners.

EMERGENCE OF THE STAKEHOLDER PERSPECTIVE

The conventional thinking dominating the early management literature with the rise of management as a “profession” separate from the firm's owners was that, as agents representing owners, top managers' responsibility was primarily and ultimately to these owners or shareholders. Increasingly, though, managers have come to view non-owner stakeholders as essential to firms' success, not only in financial terms, but also in societal terms. However, this has not eliminated managerial decisions that are overly concerned with financial performance at the expense of other stakeholder interests. The spate of corporate scandals and financial disasters in the early twenty-first century demonstrates that despite the apparent logic of an integrated perspective of stakeholder management, some managers still hold to the separation perspective. The collapse of Enron and WorldCom—and charges of fraud against firms such as Tyco, Duke Energy, AIG, and Freddie Mac, among many others—illustrates this point quite well.

As shareholders of these and other firms have seen, a sole regard to financial results is not always in the best interests of these shareholders. Those holding Enron and WorldCom stock, even those who knew nothing about illegal activities by the firm's top management, quickly came to realize that excluding non-owner stakeholders is not necessarily consistent with maximizing shareholder wealth. In fact, excluding non-owner stakeholders can inadvertently bring more pressure on managers when non-owner stakeholder interests are not respected. Consider, for instance, additional regulations to which firms must now comply in the wake of many of the corporate scandals of the early 2000s. The Sarbanes-Oxley Act, passed in 2002, created additional reporting requirements in an attempt to prevent accounting abuses in the future. Estimates at the time of passage suggested that compliance would cost an average of $35 million per year for large firms with revenues in excess of $4 billion. According to one economist writing in 2007, firms affected by the Sarbanes-Oxley Act did in fact pay more in auditing fees, reduced their earnings through more conservative discretionary accruals, and experienced significantly lowered risk-adjusted stock returns over a three-year period. Obviously, then, neglecting non-owner stakeholders is not always in the best interest of shareholders even if managers take the separation perspective to stakeholder management. The significant reduction in corporate scandals in the mid and late 2000s, the mortgage crisis notwithstanding, suggests that some combination of new regulatory oversight, along with a shift away from the separation perspective, are having a positive effect on corporate governance.

The separation perspective can be traced at least as far back as 1776 when Adam Smith wrote An Inquiry into the Nature and Causes of the Wealth of Nations. Among Smith's most quoted lines is the work's preface, which states: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” This reference to what has come to be known as laissez faire capitalism positions self-interest as the most prominent feature of national industrial development. Yet, even though he did not specifically use the term, Smith also realized that stake-holders outside the firm have an important part to play in industrialization. By making provision for what he called the “public good,” Smith disseminated the idea of owners' self-interest as a critical variable promoting economic growth, while also realizing that unchecked self-interest must be balanced against the greater good. In this respect, then, the separation perspective and the

integrated perspective, while not fully formed, both have their roots in early industrialism.

The ethical perspective stems at least back to the eighteenth-century writings of philosopher Immanuel Kant. The focus of the ethical perspective is the firm's responsibility to stakeholders from a normative view; that is, the ethically correct action should supersede actions based solely on self-interest, thus making managerial decisions and actions that impact stakeholders based on universal standards of right and wrong the rule that managers should follow. This standpoint, though, suffers from a shortcoming stemming from different standards of right and wrong. When right and wrong are apparent, decisions are easy, but management challenges are rarely so clear. Simply suggesting that managers do the “right thing” ignores conflicts of interest inherent in capitalistic competition, and doing the right thing can result in compromises that are not in the best interests of any of the stakeholders, but rather a way to “satisfy,” or make decisions and take actions that are “good enough,” but not optimal. The ethical view of stakeholders can result in managers overemphasizing the greater good to the point that they ignore the reality of self-interest, particularly as it pertains to maximize shareholder wealth.

Integrating the broad categorizations of separation and ethics allows room for both self-interest of owners and corporate responsibility to non-owner stakeholders. An integrated perspective of stakeholders positions the self-interests of managers as a key driver of economic growth, but tempers this with social responsibility toward non-owner stakeholders. Maytag, for instance, found that by balancing a plant closure with adequate notice, the reputation of the firm was held intact—a benefit to owners—at the same time that competing stakeholder interests were considered. In this situation, Maytag's Galesburg, Illinois refrigeration assembly plant announced it would be moving operations to a location with less expensive labor and other operational costs, but took the unusual move of giving the firm's one thousand employees, its local suppliers, and the small Galesburg community two years to prepare. Maytag allowed local employment agencies to set up job training within the Maytag plant to prepare its employees for employment after the plant closure. This illustrates how integration of multiple stake-holder interests can move beyond only self-interest or only ethics by integrating both of these.

It is overly simplistic to suggest that managers should just do the right thing in all situations, because the “right thing” to do is not always clear. On the other hand, acting solely in the financial interests of shareholders can result in unintended consequences that ultimately cause shareholders harm. Integrating multiple perspectives allows room for managers to balance the interests of multiple stakeholders. Such stakeholder perspectives allow for competing dimensions, thus providing a framework to help managers harmonize the interests of multiple parties.

SEE ALSO Corporate Governance; Ethics; Shareholders

BIBLIOGRAPHY

Crane, Andrew, Dirk Matten, and Jeremy Moon. “Stakeholders as Citizens? Rethinking Rights, Participation, and Democracy.” Journal of Business Ethics 53, no. 1-2 (2004): 107–123.

David, H., and A. Borrus. “No Escaping Sarbanes-Oxley.” Business Week Online. Available from: www.businessweek.com.

Dubbink, W. “The Fragile Structure of Free Market Society.” Business Ethics Quarterly 14, no. 1 (2004): 23–47.

Heath, J., and W. Norman. “Stakeholder Theory, CorporateGovernance and Public Management: What Can the History of State-Run Enterprises Teach Us in the Post-Enron Era?” Journal of Business Ethics 53, no. 3 (2004): 247–266.

Iliev, Peter. “The Effect of the Sarbanes-Oxley Act (Section404).” Social Science Research Network, 25 December 2007. Available from: http://ssrn.com/abstract=983772.

Keep, W. “Adam Smith's Imperfect Invisible Hand: Motivations to Mislead.” Business Ethics: A European Review 12, no. 4 (2003): 343–354.

Lea, D. “The Imperfect Nature of Corporate SocialResponsibilities to Stakeholders.” Business Ethics Quarterly 14, no. 2 (2004): 201–218.

Molyneaux, D. “Saints and CEOs: An Historical Experience of Altruism, Self-Interest and Compromise.” Business Ethics: A European Review 12, no. 2 (2003): 133–144.

Reynolds, S.J., and N.E. Bowie. “A Kantian Perspective on the Characteristics of Ethics Programs.” Business Ethics Quarterly 14, no. 2 (2004): 275–293.

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Wei-Skillern, J. “The Evolution of Shell's Stakeholder Approach: A Case Study.” Business Ethics Quarterly 14, no. 4 (2004): 713–729.

Whetstone, J. Thomas. “A framework for organizational virtue: the interrelationship of mission, culture and leadership.” Business Ethics: A European Review 14, no. 4 (2005): 367–378.

STAKEHOLDERS

The stakeholder concept derives from a simple premise: Organizations and technologies exist in constellations of relationships. Organizations operate in a network of market and nonmarket relationships with other organizations, groups, and individuals. Likewise technologies emerge and exist in a network of suppliers, end users, and others who bear the impact of the technology. Generally with reference to both organizations and technologies, these related parties are termed stakeholders, meaning that they hold a stake in the outcomes of the organization or technology.

Stakeholder research has important implications for science, technology, and ethics, as stakeholder thinking concerns itself both with the distribution of benefits among stakeholders and the procedures by which stakeholders work together toward desirable ends. After a brief history of the concept, this entry summarizes the distributive and procedural aspects of stakeholder thinking, particularly as they apply to three areas: corporate decision making, technology assessment, and environmental regulation.

History of the Concept

The stakeholder concept has its origins in the study of corporations and how they make decisions. R. Edward Freeman's Strategic Management: A Stakeholder Approach (1984), is regarded as seminal in the study of stakeholders, though Freeman attributes the term to scholars at the Stanford Research Institute in the 1960s. Farther back still, the premise that organizations must concern themselves with the demands of multiple constituencies traces back to classic management studies by Chester Barnard and Mary Parker Follett.

Contemporary discussions of stakeholders address three main questions. Social scientists have examined two. First, what are the consequences of different approaches to managing stakeholder groups? For example, Thomas Jones (1995) argues that a corporation's ethical treatment of its stakeholders has demonstrable financial implications. Second, why do stakeholder groups behave the way they do? For example, Tim Rowley and Mihnea Moldoveanu (2003) trace collective action by stakeholder groups to both the interests and the collective identity of group members. Put simply, the first question concerns the instrumental value of managing stakeholders effectively; the latter is a descriptive question aimed at helping decision makers to understand the environment in which they operate (Donaldson and Preston 1995).

Philosophers have concentrated on a third and equally important question: How should corporations behave toward stakeholders? This inquiry reflects the essentially normative nature of the concept—the term stakeholder itself serves as a counterpoint to the claim that corporations are responsible only to their stockholders—and has given rise to the search for a so-called normative core for stakeholder theory, a fundamental set of principles governing the ethical treatment of stakeholders (Donaldson and Preston 1995). Drawing on a host of ethical theories, ethicists have developed Kantian, feminist, rights-based, and Rawlsian arguments, among others.

The Distributive Dimension

In practical terms, much stakeholder research (especially in the third, normative, stream) addresses the issue of distribution: how corporations, public policy makers, and technology managers allocate rights and values across multiple stakeholders. Normative stakeholder arguments offer ways to assess the moral quality of these distributive patterns, and these arguments have important implications for ethical issues in the realm of science and technology.

For example, the question of who should benefit from emergent technologies—nanotechnology, pharmaceutical advances, and the human genome, among others—is, at its core, a question of distribution (Singer and Daar 2001) that stakeholder theory helps to resolve. Specifically the principle of stakeholder fairness developed by Robert Phillips (2003) derives from a widely accepted notion of reciprocity and holds that obligations accrue to participants in a cooperative scheme in proportion to contributions by stakeholder groups.

This logic also applies to the less tangible benefits and costs of technology. An emerging issue concerns the steps technology managers take to prevent employees from inappropriately using information technology resources such as e-mail and the Internet. The conflict is not over material resources but rather the tension between the privacy rights of employees, who seek to use these resources for personal reasons without the threat of invasive monitoring, and the property rights of stockholders, who would bear the cost of lawsuits if inappropriate technology use results in hostile work environment lawsuits. An exclusive emphasis on stockholder interests might advocate a total ban on the use of these technologies for nonbusiness purposes, whereas stakeholder theory would suggest a moderate position, allocating rights proportionally and allowing, for example, some personal use of information technology resources along with unobtrusive forms of monitoring to protect stockholder interests.

The Procedural Dimension

Stakeholder research also addresses procedural concerns that are central to the application of stakeholder theory to science and technology. Evan and Freeman (1993) draw on a Kantian perspective to spell out principles specifying how corporations should engage with stakeholders. They suggest, in part, that stakeholders have a right to participate in decisions that affect them. This concern for procedural justice extends to decisions in the realm of science and technology, where technologies, development paths, and potential science-related policies must be evaluated in light of stakeholder interests. Consequently one finds frequent reference to the procedural aspects of stakeholder theory in the areas of technology assessment and environmental regulation. Here stakeholder theory maintains that those groups with a vested interest in a technology, action, or organization should have an opportunity to express those interests and, in some cases, to participate in decision making. As some have argued, this participation should take the form of comprehensive dialogue among various stakeholder groups .

As diverse development agencies, corporations, and government regulators (from the United Nations to the World Bank to Motorola Corporation) apply these procedural principles by initiating dialogue with stakeholders concerning new technologies and environmental policies, they discover that the procedural aspect of stakeholder management is not only ethically desirable but highly practical. As stakeholder thinkers have long maintained, sharing information, ongoing dialogue, and meaningful participation in decision making enables better collaboration, reduces conflict, and ensures smoother implementation of policies and technologies (Freeman 1984, Johnson-Cramer, Berman, et al. 2003).

In sum, the value of stakeholder theory in resolving ethical issues in science and technology lies, to date, in offering prescriptions (a) that answer the distributive questions arising from development, utilization, and marketing of new technologies by businesses, and (b) that guide the procedural treatment of stakeholders in diverse areas such as technology assessment and environmental regulation. Ultimately amidst efforts to develop general principles and insights, stakeholder researchers have done little to apply their insights to specific questions about science and technology. The potential is clear, but much work remains to be done to demonstrate the usefulness of stakeholder theory in this domain.

MICHAEL E. JOHNSON-CRAMER ROBERT PHILLIPS

SEE ALSO Georgia Basin Futures Project; Management: Models;Participation;Science Policy.

BIBLIOGRAPHY

Donaldson, Thomas, and Lee Preston (1995). "The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications." Academy of Management Review 20(1): 65–91. A review of the first ten years of stakeholder research, this article identifies three streams of relevant work: descriptive-empirical, instrumental, and normative. The authors also advance a normative argument, rooted in the theory of property, for attending to multiple stakeholders.

Evan, William, and R. Edward Freeman. (1993). "A Stakeholder Theory of the Modern Corporation: Kantian Capitalism." In Ethical Theory and Business, ed. Tom Beauchamp and Norman E. Bowie. Englewood Cliffs, CA, Prentice Hall.

Freeman, R. Edward. (1984). Strategic Management: A Stakeholder Approach. Boston: Pitman. The seminal work in stakeholder research, this book advances the idea that organizations have stakeholders and organizational performance depends on an organization's ability to satisfy its multiple stakeholders.

Johnson-Cramer, Michael; Shawn Berman; et al. (2003). "Reexamining the Concept of Stakeholder Management." Unfolding Stakeholder Thinking, Vol. 2., ed. Jorg Andriof, Sandra Waddock, Sandra Rahman, and Bryan Husted. London: Greenleaf. This chapter offers more specific analysis of what it means to manage stakeholders. It outlines a model based on both procedural concerns (how policies toward stakeholders are formulated) and substantive concerns (the content of those policies).

Jones, Thomas. (1995). "Instrumental Stakeholder Theory: A Synthesis of Ethics and Economics." Academy of Management Review 20(2): 404–437. Jones argues that business firms that are dishonest or opportunistic will incur higher costs in contracting with stakeholders. This logic underlies the instrumental argument that firms that do not satisfy stakeholders perform poorly.

Phillips, Robert. (2003). Stakeholder Theory and Organizational Ethics. San Francisco: Berrett-Koehler. Phillips's book represents the most recent advance in normative stakeholder theory, offering a response to the stakeholder identification problem (that is, who actually count as stakeholders?).

Rowley, Timothy J., and Mihnea Moldoveanu. (2003). "When Do Stakeholders Act? An Interest and Identity-based Model of Stakeholder Mobilization." Academy of Management Review 28(2): 204–219.

Singer, Peter, and Abdallah Daar. (2001). "Harnessing Genomics and Biotechnology to Improve Global Health Energy." Science 294: 87–89.

Stakeholders

BIBLIOGRAPHY

Stakeholders are constituencies who are affected, voluntarily or involuntarily, by the actions taken by an organization, such as a corporation. Commonly cited examples of corporate stakeholders are employees, financial intermediaries, shareholders, customers, and suppliers, all of whom are affected by, respectively, a firm’s compensation and hiring decisions, investment choices, dividend and share repurchase policies, product-related issues, and material purchases. The term, however, is often more broadly applied to include local, state, and federal governments because firms pay taxes and use public resources; it can also be extended to include the local community because firms interact with the natural environment and engage in philanthropic activities; and furthermore, because many firms operate on an international scale, it may even include the global community.

Stakeholders may raise issues of concern with corporations and suggest actions that corporations should take. For example, if shareholders are concerned that a corporation is holding too much money, they may argue for increased dividends. Constituents from a local community concerned with air quality may urge a corporation to invest in cleaner technologies. Even though they are not legally required to do so, corporations may consider and implement stakeholders’ ideas because they provide a host of resources to corporations. Lenders and shareholders make financial resources available, employees and suppliers provide physical inputs, governments supply regulatory oversight, and citizens contribute to the social environment in which operations occur. In short, a corporation cannot exist without the support of a diverse set of stakeholders.

A corporation must consider the principles of stakeholder theory or stakeholder management when it decides which stakeholders to acknowledge and how to best respond to their often incompatible requests. The notion of stakeholders originated in the mid-1960s, but it was in the 1980s that, as evidenced by Edward Freeman’s 1984 book Strategic Management, the idea of stakeholder management began to gain ground in the field of economics. Stakeholder theory represents a significant departure from the older principal-agent view of the firm, which effectively recognizes shareholders as the only legitimate constituency by nature of their ownership position. Stakeholder theory, in contrast, understands the corporation in law and in practice as more than an extension of shareholders with narrow, well-defined goals. Rather, the corporation is viewed as its own entity with its own rights and obligations. As the trustees of the firm, usually its board of directors, are responsible for the firm, they can and should serve other constituencies for the benefit of the corporation. Furthermore, in practice, the distinction between shareholders’ and other stakeholders’ concerns may not be so clearly defined: Shareholders themselves are often employees, consumers, and residents in the communities where corporations operate. Consequently, as James Hawley and Andrew Williams argue in their 2000 study The Rise of Fiduciary Capitalism, shareholders may not be best served by the maximization of the share price alone and may be more concerned with a firm’s employment opportunities, quality of goods, and impact on the environment.

It is not clear which stakeholders will most benefit and what changes in corporate activities are likely to result when corporations acknowledge them. The outcomes could range from managerial opportunism, as Michael Jensen notes in his 2000 article “Value Maximization, Stakeholder Theory, and the Corporation Objective Function,” to economic democracy, as Paul Hirst suggests in his 1997 essay “From the Economic to the Political,” and anything in between these extremes. In any case, the concept of stakeholders greatly broadens the theorization of the corporation in terms of its governance, objectives, and conditions of existence.

BIBLIOGRAPHY

Freeman, R. Edward. 1984. Strategic Management: A Stakeholder Approach. Boston: Pitman.

Hawley, James P., and Andrew T. Williams. 2000. The Rise of Fiduciary Capitalism: How Institutional Investors Can Make Corporate America More Democratic. Philadelphia: University of Pennsylvania Press.

Hirst, Paul. 1997. From the Economic to the Political. In Stakeholder Capitalism, eds. Gavin Kelly, Dominic Kelly, and Andrew Gamble, 63–71. Houndmills, Basingstoke, U.K.: Macmillan, and New York: St. Martins.

Jensen, Michael C. 2002. Value Maximization, Stakeholder Theory, and the Corporate Objective Function. Business Ethics Quarterly 12 (2): 235–256.

David M. Brennan