The nature of stakeholder theory and its fundamental normative prescriptions are the subject of much confusion and academic debate. This article attempts to provide an account of both the fundamental normative implications of stakeholder theory and the theory’s range of application that both stakeholder advocates and critics can agree upon. Using exclusively the language of leading stakeholder theorists, the article identifies the essential prescriptions of the theory and the type of organizations to which stakeholder theory applies in the hope of facilitating effective discussion and evaluation of the normative dimension of stakeholder theory.
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See Part II below. See also (Freeman 1994, p. 418) ("[O]n pragmatist’s [sic] grounds the stakeholder idea is part of a narrative about how we do and could live,…. Seeing the stakeholder idea as replacing some shopworn metaphors of business with new ones… is to give up the role of finding some moral bedrock for business."); and (Freeman 1999, p. 235) ("Suppose we had 100 theories…. These theories, which I prefer to call narratives, would be accounts of the role of such concepts as trust, enactment, sustainability, hierarchy, and so on, and their instrumental relationship to organizational and stakeholder performance. There is no reason to suppose that these narratives would converge or that it would be good if they did.").
Professor Derry traces how the Principle of Who and What Really Counts that Ed Freeman offered as an aspect of the separation thesis that should be rejected was misinterpreted as central to stakeholder theory to the point that
[t]he conviction that the Principle of Who and What Really Counts is what stakeholder theory is really all about, has indeed become all pervasive. Evidenced by the Wikipedia definition, the so-called principle has become a ready synonym for stakeholder theory…. this synonymous usage of stakeholder theory and “really counting” is based on misquotes and fundamental misunderstandings.
The Wikipedia entry for stakeholder theory currently identifies it with the Principle of Who and What Really Counts. See http://en.wikipedia.org/wiki/Stakeholder_theory ("The stakeholder theory is a theory of organizational management and business ethics that addresses morals and values in managing an organization. It… identifies and models the groups which are stakeholders of a corporation, and both describes and recommends methods by which management can give due regard to the interests of those groups. In short, it attempts to address the “Principle of Who or What Really Counts.”(Emphais added)).
The article appeared in the fifth, sixth, and seventh editions of Beauchamp & Bowie's Ethical Theory and Business and in the sixth, seventh, and eighth editions of Donaldson & Werhane's Ethical Issues in Business. An earlier version of the article authored jointly by Freeman and William M. Evan entitled A Stakeholder Theory of the Modern Corporation: Kantian Capitalism appeared in preceding editions of Beauchamp & Bowie dating back to 1988.
Freeman may reasonably feel that his creation is being abused. This appears to be an occupational hazard for pragmatists. After all, Charles Peirce, the creator of pragmatism, felt compelled to rename his theory “pragmaticism” to distinguish it from what he regarded as other philosophers’ improper application of his method.
Theories that require that shareholders’ (or any other particular stakeholders’) interests be given preference to those of other stakeholders do not instruct managers to ignore the interests of the other stakeholders. Even the most extreme versions of the shareholder theory do not instruct managers to violate the firm’s contracts with employees, customers, suppliers, and local communities or to advance corporate ends by criminal activity that harms third parties.
As the authors point out,
the introduction of stakeholder theory is not one view of the firm, but an invitation to a conversation that forces managers and the public to examine together two questions that have both ethics and business thoroughly embedded in them: “what is the purpose of the corporation?” and “to whom are managers responsible?” (Freeman et al. 2010, p. 206).
As noted previously, this article appeared in several editions of both Ethical Theory and Business and Ethical Issues in Business between 1997 and 2008, and in editions dating back to 1988 of the former in its earlier version, A Stakeholder Theory of the Modern Corporation: Kantian Capitalism.
The word “employees” erroneously appears twice in the text. Clearly the second occurrence of the word was intended to be “suppliers.”
Phillips' view is shared by the other leading stakeholder theorists as is evidenced by their ratification of it in Stakeholder Theory: The State of the Art (Freeman et al. 2010, p. 230).
Please note that this illustration is offered for purposes of clarification only, not exegesis. I make no effort to provide a definitive statement of how stakeholder theory applies to labor unions. I am not a stakeholder theorist, and cannot claim the level of expertise necessary to such a task. The most I can and do claim is that my description in this section represents how the non-expert practitioner or theorist would expect stakeholder theory to apply to labor unions given the theory’s essential characteristics.
Robert A. Phillips asserts that the corporate employer’s suppliers would not be normative stakeholders of the union under the second of the three definitions of stakeholders because they have not voluntarily accepted the benefits of a mutually beneficial scheme of cooperation requiring sacrifice or contribution on their part. Although I am not entirely clear on why this is the case, I am happy to bow to his superior expertise on this point.
Derry, R. (2012). Reclaiming marginalized stakeholders. Journal of Business Ethics. doi:10.1007/s10551-012-1205-x.
Donaldson, T. (2011). The inescapability of a minimal version of normative stakeholder theory. In Robert A. Phillips (Ed.), Stakeholder theory: Impact and prospects (p. 130). Northampton: Edward Elgar Publishing, Inc.
Donaldson, T., & Preston, L. E. (1995). The stakeholder theory of the corporation: Concepts, evidence, and implications. Academy of Management Review, 20(1), 65–91.
Dunham, L., et al. (2006). Enhancing stakeholder practice: A particularized exploration of community. Business Ethics Quarterly, 16(1), 23–42.
Freeman, R. E. (1994). The politics of stakeholder theory: Some future directions. Business Ethics Quarterly, 4(4), 409–421.
Freeman, R. E. (1999). Divergent stakeholder theory. Academy of Management Review, 24(2), 233–236.
Freeman, R. E. (2002). Stakeholder theory of the modern corporation. In T. Donaldson, et al. (Eds.), Ethical issues in business (7th ed., p. 44). Prentice Hall: Upper Saddle River, NJ.
Freeman, R. E., et al. (2010). Stakeholder theory: The state of the art. Cambridge: Cambridge University Press.
Hasnas, J. (1998). The normative theories of business ethics: A guide for the perplexed. Business Ethics Quarterly, 8(1), 19–42.
Heath, J. (2009). The uses and abuses of agency theory. Business Ethics Quarterly, 19(4), 497–528.
Maitland, I. (1994). The morality of the corporation: An empirical or normative disagreement? Business Ethics Quarterly, 4(4), 445–458.
Phillips, R. (2003). Stakeholder theory and organizational ethics. San Francisco: Berrett-Koehler Publishers, Inc.
Phillips, R., et al. (2003). What stakeholder theory is not. Business Ethics Quarterly, 13(4), 479–502.
The author wishes to thank Hale Simon, Maki Amada, Michael Cheung, Neha Sagar, Osman Catalcali from the McDonough School of Business’s 2010 Leadership and Business Ethics course for stimulating his thinking on this subject; Amy Sepinwall, Robert A. Phillips, and Thomas Donaldson for their comments on a version of this article presented at the 2011 Society for Business Ethics conference; Ann C. Tunstall for her insightful comments on a draft of this article, and Annette and Ava Hasnas of the Montessori School of Northern Virginia for acquainting him with the absolute necessity of clarifying the terms of one’s normative assertions.
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Hasnas, J. Whither Stakeholder Theory? A Guide for the Perplexed Revisited. J Bus Ethics 112, 47–57 (2013). https://doi.org/10.1007/s10551-012-1231-8
- Stakeholder theory
- Agency theory
- Organizational ethics
- Labor unions