Download Freeman Stakeholder Theory

R. Edward Freeman, "A Stakeholder Theory of the Modern Corporation," in T. Beauchamp and
N. Bowie (eds.) Ethical Theory and Business (Prentice Hall, 7th edition).
[9.8.] Stakeholder Theory.
This theory has been defended by a number of different business ethicists. DesJardins discusses
the stakeholder theory as it is defended by William Evan and R. Edward Freeman.[1]
On the two models of corporate social responsibility that we’ve examined so far (viz. the
classical, free market model, and the neo-classical, “moral minimum” model), a corporation’s
owners, including its stockholders, should “be the primary beneficiaries of business
decisions.” (64 / 68) When making important decisions (e.g., about which products to
manufacture and for how much to sell them, about how much to pay employees in salary and
benefits, and about whether to engage in philanthropic activities), executives should make it
their top priority to benefit the company’s owners (without breaking the law, engaging in
fraud or coercion, or—according to the moral minimum model—otherwise causing harm).
From the point of view of Stakeholder Theory, both the Classical Model and the NeoClassical Model make the mistake of assuming that owners/stockholders are the primary
beneficiaries of business activity. Parties other than stockholders can have legitimate moral
claims related to the practice of business and the decisions and activities of managers. Such
parties include...

consumers

employees

suppliers

competitors

members of the community

the environment (not a person, but still a stakeholder!)
All of these parties count as stakeholders in the business decisions of the company, and so
business managers of a given company may have moral obligations to any of them, obligations
that may override the duty to make a profit for the corporation’s owners (stockholders).
There are two conceptions of stakeholders:


On the narrow conception, a stakeholder is “any group [or individual] who [is] vital to
the survival and success of the corporation”;
On the broad conception, a stakeholder is “any group or individual who can affect or be
affected by the corporation.” (quoted at 65 / 69)
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As DesJardins notes, Evan and Freeman employ the narrow conception in their own
work.[2]
Managers are morally obligated to balance the interests of stockholders and other
stakeholders, because their ethical responsibilities toward these other stakeholders are just as
important as the responsibilities they have toward their stockholders.
So the obligation of managers to benefit owners/stockholders by maximizing profit can be
trumped by more than just the obligation to do no harm.
How does this compare to the classical and neo-classical views of corporate responsibility in the
case of Walmart?
classical (free market)
Walmart executives should
“make decisions (as
allowed by law) that benefit
stockholders at the expense
of employees, suppliers,
customers, and local
communities.” (64 / 69)
moral minimum
Walmart executives should
pursue profits within legal
constraints AND ensure that
they cause no harm.
stakeholder
“Walmart’s executives have
ethical responsibilities to
employees, suppliers,
customers, and local
communities that are
ethically equal to their
responsibilities to
shareholders.” (64-65 / 69)
Justifications:

utilitarianism

rights-based
[9.8.1.] Evan and Freeman’s Arguments Against the Classical Model.
1. Taken as a description of how businesses actually operate, the classical model is simply
false. Businesses have been compelled by law for decades to attend to the welfare and rights
of people other than stockholders.

This is an odd criticism, since the classical model requires that businesses pursue profits
without breaking the law. Working within legal constraints is required by the classical
model, and it is hard to see how the law could force businesses to do something more
than working within the law. By definition, anything required by law becomes a
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requirement of the classical model. So if the law requires businesses to protect specific
interests of certain groups (customers, employees, etc.), then the classical model also
requires that businesses do so.
2. Taken as a normative principle, the classical model is unjustified on either utilitarian
or Kantian grounds... and each of those normative views actually supports the
stakeholder theory.


It is unjustified on utilitarian grounds... The classical model claims that the best way to
maximize utility (most often understood as preference satisfaction) is for managers to aim
at maximizing profits. But as we have seen, because of market failures this will not be
the case. Utilitarianism actually supports the stakeholder theory, since it requires that
managers take everyone’s interests into account, not just stockholders. Sometimes this
will lead them to aim at maximized profits, but sometimes it will not. Managers must
judge each decision and policy as to whether it increases utility for any party who can be
affected (at least, this is the case on the broad understanding of who counts as a
stakeholder).
It is unjustified on Kantian grounds... Using employees, suppliers, and other parties to
make profits without respecting their autonomy, etc., is a violation of Kantian ethics.
Kantian considerations actually support the stakeholder theory, since that theory
requires that managers think of all parties (employees, suppliers, even competitors)
as autonomous and rational ends-in-themselves, worthy of respect and equal
consideration.
[9.8.2.] Criticisms of Stakeholder Theory.
DesJardins describes two general sorts of criticism of stakeholder theory.
Criticism 1: The substance of the theory is mistaken. Managers should not view all other
stakeholders as equal to stockholders, and the free market view is right to say that managers
should aim at maximized profits as their top priority.
In making this criticism, a utilitarian would have to argue that overall utility (perhaps
understood in terms of preference satisfaction) will be raised more by a policy of aiming at
maximized profit than by a policy of taking all stakeholders into consideration.
And a deontologist, in making this criticism, would have to argue that private property rights
are more important that other personal rights, including the rights of stakeholders other than
stockholders.
DesJardin’s response to this criticism: as we have already seen, there are serious
challenges to these sorts of utilitarian and rights-based arguments.
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Criticism 2: Stakeholder theory is too vague, in that it does not give enough practical
guidance to managers.
There are two ways in which the stakeholder theory could be criticized for being vague...
A. It gives too little guidance in “identifying stakeholders and their interests” (66 / 71).
The two different conceptions of stakeholder mentioned above are relevant here...

It we adopt the broad conception (according to which a stakeholder is anybody who
could be affected by a company’s decisions), then “we seem to place managers under an
impossible burden of determining who might be affected by every decision.” (66 / 71)

But if we adopt the narrow conception (according to which a stakeholder is “any group
[or individual] who [is] vital to the survival and success of the corporation”), then we risk
“ignoring ethically relevant parties.” (66 / 71)
B. It gives too little guidance in “deciding what course of action follows from the
imperative to balance stakeholder interests.” (66 / 71) Even if one can identify who does
and does not count as a stakeholder, it will still be extraordinarily difficult to determine how
to balance all of their interests.
DesJardin’s response to these criticisms is to say that the classical model is just as vague
when it comes to practical advice. Both models “leave[] business managers with significant
latitude in making decisions.” (67 / 71)

The classical model directs managers to maximize profits. But despite the fact that
managers have expertise in this area (which is why they were hired, after all), it is
unlikely—except in the case of very simple decisions—that a manager will know
which possible course of action will in fact maximize profits. “To prove, after the
fact, that any particular decision did maximize profits would require that we prove a
counterfactual: If the manager had made an alternative decision, then profits would
have been lower.” (67 / 71) And according to DesJardins, this is nearly always
impossible to prove.
counterfactual (df.): a conditional (if-then) sentence which runs counter to fact,
i.e., which begins by describing an event E that did not actually happen and then
states a consequence that (according to the sentence) would have followed had E
actually happened (e.g., If George W. Bush had refused to bail out the banks in
2008, then the United States would have gone into an economic depression).
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
The same is true with regard to the stakeholder theory... “It is difficult, if not
impossible, to determine in advance what particular decision would appropriately
balance stakeholder interests.” (67 / 71-72) So this criticism will not count in favor
of the classical model, since that model is in no better position that stakeholder
theory to provide practical advice.
[9.9.] If Not Pursuit of Profit, Then What?
According to DesJardins, the idea “that the purpose of business is to maximize profits
makes sense only when stockholders—the beneficiaries of profit—are given a distinctive
ethical status.” (68 / 75)
But we have seen that there are reasons for being skeptical of the idea that stockholders have
some privileged moral status when compared to other stakeholders.
But if the purpose of business, the very reason that a corporation is formed, is not the pursuit of
profit, then what could it possibly be?
An alternative view of the purpose of a business was suggested in the 1970s by Theodore
Levitt (1925-2006), an American economist who taught for years at Harvard’s college of
business. On Levitt’s view, “The purpose of business is to create and keep a customer.”
(quoted at 68 / 76; see the rest of the long passage from Levitt.)
[9.10.] The Classical Model and UWG.
In 2009, BB&T ( http://www.bbt.com/ ) donated $1 million to UWG’s Richards College of
Business “to establish the Center for Ethics and Free Enterprise and the BB&T Lectures in Free
Enterprise Series.”[3] A spokesperson for BB&T said of this grant,
This program will emphasize our shared interest with the University of West Georgia in giving students a
hands-on perspective on capitalism and free markets, a better understanding of our economy and an
enhanced ability to make meaningful contributions to the world. [4]
The first lecture in the BB&T Lectures in Free Enterprise Series was given by John Allison,
former CEO of BB&T on September 28, 2010.[5] In his speech, Allison said:
Most people realize that capitalism and free markets produce a higher standard of living … But most
people also think that capitalism is a system that’s at best amoral. Many people think it’s immoral. We
don’t think that a system that is immoral could be successful. Capitalism is a moral system.[6]
As a condition of the BB&T gift, a new course, “Ethical Foundations of Capitalism,” is being
taught in the College of Business. An undergraduate section is being taught now (ECON 4485,
fall 2010), and a graduate section will be taught next semester.
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Other schools who have accepted similar gifts from BB&T have been required, as a condition of
accepting the money, that the initiate courses in which Ayn Rand’s[7] Atlas Shrugged is
required reading. (Rand argued for the classical model of CSR based on a sort of virtue ethics,
according to which the virtues are Rationality, Productiveness, and Pride.) Faculty at some
schools have rejected the grants because of this condition.[8]
Stopping point for Monday November 15. For next time, read begin reading DesJardins
ch.6 (pp.113-20).
“A Stakeholder Theory of the Modern Corporation: Kantian Capitalism,” in Contemporary
Issues in Business Ethics, 4th ed., ed. J. DesJardins and J. McCall, Belmont, CA: Wadsworth,
2005. Freeman is professor of business administration at the University of Virginia Darden
School of Business ( http://www.darden.virginia.edu/web/Faculty-Research/Directory/Fulltime/R-Edward-Freeman/ ).
[1]
[2]
This distinction will play a role in one criticism of this theory; see below.
[3] “BB&T Pledges $1 Million to RCOB,” University of West Georgia (press release), November 5, 2009, URL = <
http://www.westga.edu/ucmassets/news/1686.php >, retrieved November 14, 2010.
[4]
Ibid.
[5] “Former BB&T Executive Opens Free Enterprise Lecture Series,” University of West Georgia (press release),
September 29, 2009, URL = < http://www.westga.edu/ucmassets/news/2003.php >, retrieved November 14, 2010.
[6]
Ibid.
Neera K. Badhwar and Roderick T. Long, “Ayn Rand,” The Stanford Encyclopedia of
Philosophy (Winter 2010 Edition), Edward N. Zalta (ed.), forthcoming URL = <
http://plato.stanford.edu/archives/win2010/entries/ayn-rand/ >, retrieved November 14, 2010.
[7]
[8] Gary H. Jones, “Universities, the Major Battleground in the Fight for Reason and Capitalism,” Academe, JulyAugust 2010, URL = < http://www.aaup.org/AAUP/pubsres/academe/2010/JA/feat/jone.htm >, retrieved November
14, 2010.
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