Mid-Level Focus on the Firm and Its Stakeholders
What is a business or firm, and what is its aim or purpose? What does it mean to
own a firm, and what rights ought owners have to control the firm or to claim its
residual earnings (profits)? To whom do the leaders of a firm (its board members
or its senior executives) owe obligations, and when do those obligations extend
above and beyond what is required by laws and regulations? Mid-level conceptual
and ethical questions like these have generated the liveliest and most voluminous
debates among business ethics scholars over the past quarter century. And in the
broader political culture, they are at the heart of discussions about corporate
social responsibility, property rights, and human rights (especially in international business). They are also the issues raised after some of the biggest business
scandals, and in debates about how to regulate or deregulate business to avoid
such scandals in the future.
To answer most of these very abstract questions, business ethicists have generally turned first not to traditional theories of individual virtue or obligation, but
rather to so-called “theories of the firm” developed by economists and lawyers in
the last decades of the twentieth century (e.g., Coase 1937; Alchian and Demsetz
1972; Hansmann 1996; Jensen 2000). And without doubt the most prominent
debate in the field of business ethics, from the late 1980s through the first decade of the twenty-first century, was between so-called “stakeholder” and “stockholder” theories of the modern corporation. This debate is treated at length in a separate essay (see stakeholder theory). Each of these two theories combines
conceptual, descriptive, and normative elements to provide answers to most of
the mid-level questions in the previous paragraph. They make claims about what
a firm is, and what its purpose is, and then draw implications about the
fundamental duties of corporate leaders and the rights of various stakeholders.
The concept “stakeholder” has sometimes been defined broadly to include “any
group or individual who can affect or is affected by the achievement of the
organization’s purpose” (Freeman 1984: 53). But for most purposes stakeholder
theorists tend to focus on the major constituencies that have a direct stake in the
firm, such as employees, investors, customers, creditors, suppliers, and local
communities. Stakeholder theory was developed originally by the philosophically
trained management theorist Edward Freeman in the mid 1980s as a direct
response to what he perceived to be the prevailing view in business schools at the
time.
He called that view “stockholder theory” and found its clearest expression
in the work of the economist Milton Friedman (1962; 1970): that the firm is
owned by its investors; that its purpose is to serve the owners’ interests; and that
the managers of the firm are obligated, primarily or solely, to advance the interests of the owners in whatever ways are permitted by law. In contrast, stakeholder theorists think of the firm as a vehicle to advance the interests of all
stakeholder groups, with investors or shareholders being but one of many such
groups, and having no inherent priority over the others. According to stakeholder theory, senior managers have a duty to balance the interests of all
stakeholders, even if this requires reducing shareholder value in order to address
the legitimate interests of some other group of stakeholders. The most radical
versions of stakeholder theory argue for senior managers having a fiduciary duty
to all major stakeholders (where prevailing theories involve a fiduciary duty only
to shareholders, or to the corporation itself), and for the right of all major stakeholder groups to representation on the board of directors. Freeman himself, in a
famous article he co-wrote with William Evan (1988), thought of this as a kind
of “Kantian capitalism” that treated all stakeholders as ends in themselves and
not merely as means to enriching shareholders.
Over the course of three decades of debate, leading stakeholder theorists have
now dropped the most radical proposals from the theory, and stress instead its
convergence with best management practices in value-creating and profit-maximizing firms (see, e.g., Freeman et al. 2010: 9–11). Few stakeholder theorists
actually developed or defended specific normative principles or decision procedures that could be used to justify a particular decision to, say, sacrifice shareholders’ interests in favor of those of workers or the local community. (See
Phillips 2003 for an attempt to flesh out stakeholder decision procedures; and for
important critiques of the theory, see, e.g., Marcoux 2003; Boatright 2006; Heath
2006; Orts and Strudler 2010.) In short, stakeholder theory has not come to
incorporate the kind of normative ethical theorizing that moral philosophers
would want in order to ground claims about the specific rights of stakeholders or
the obligations of corporate leaders. And by shying away from radical institutional proposals – such as changing corporate law to require multi-stakeholder
boards, or to protect “stakeholder-friendly” executives from having their firm
taken over by new “stockholder-friendly” owners (see Heath and Norman 2004) – some
of the latest versions of stakeholder theory no longer seem distinctive as principles
for institutional design. To the extent that such criticisms stand up against the
most prominent trends in stakeholder theory, then, we might conclude that more
heat than light was generated by almost three decades of the so-called “stockholder–stakeholder” debate – at least from the point of view of those trying to
cast light on normative theorizing in business ethics. Freeman himself concedes
as much in a candid article entitled “Ending the So-called ‘Friedman–Freeman’
Debate,” where he expresses some embarrassment about a debate that he helped
to launch and which he now thinks doesn’t “do much to create value” (2008: 162–
3).
Yet even if the “stakeholder theory” movement has not dislodged the prevailing
theories of the firm or of governance, it has nevertheless succeeded in getting
business ethicists to see the critical importance for mid-level ethical issues of these
legal and economic models of the firm. The stakeholder debates have shown how
much it matters which ownership and governance structures are in place, how they
are justified, and what constraints or demands they place on individuals occupying
various roles. A utilitarian business ethicist, for example, cannot simply advise a
CEO to try to maximize utility – that is, the utility of everyone in the world, including
future generations and sentient animals – with each decision she makes. Such a
directive could well require her to allocate a much higher proportion of the firm’s
earnings to charity or to raising the wages of the lowest paid workers well above
market levels. And under anything like the current system of governance, she would
soon be fired for not, in effect, being biased in favor of the interests of shareholders.
A sophisticated utilitarian business ethicist would not be able to advise or evaluate a
CEO’s decisions without first considering what role and discretion a CEO should
have within a legally structured system of governance, corporate law, and business
regulation. She might think of the whole system as aiming to maximize utility, and
that the CEO’s indirect utilitarian duties would be dictated in large part by the duties
charged to that role within the system – which will surely involve not weighing the
utility gains or losses of all those affected by the decision equally. The utilitarian
might well end up advising a CEO to, roughly, work to increase shareholder value –
and to do this by paying careful attention to the legitimate claims and interests of
other important stakeholders.
It is important to signal that a broad range of “mid-level” topics in business ethics have not come into view in this survey, which has concentrated on the “big
debate” over shareholder and stakeholder primacy. Several of these topics are covered in specific essays within this Encyclopedia (see bribery and extortion;
lying and deceit; trade secrets; and ethical investment; to name but a
few). Most of these concern company policies or attempts by firms’ leaders to control the activities of the firm and its employees. A few other rather philosophical
topics include: the question of how to establish who is responsible or accountable
(see collective responsibility) in a large hierarchical organization for unethical
or risky activities carried out by lower-level employees (French 1984); the question
of the justification and limits on managerial authority over employees (McMahon
1994); and the question of when it is appropriate to use conceptions of justice to
11
evaluate contractual and other arrangements within the firm (Moriarty 2005).
Almost all of these mid-level normative issues are bound up with the institutional
setting of firms in competitive markets. This setting taxes our everyday ethical
toolkit, which, by and large, ties ethical behavior to cooperation, benevolence, and
altruism.