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ARTICLE

Stockholders as Stakeholders

Stakeholder Theory Places Corporate Managers in the Impossible Position of Balancing Competing Interests from Multiple Groups

APRIL 01, 1997 by EDWARD YOUNKINS

Dr. Younkins is a professor of accountancy at Wheeling Jesuit University.

The issue of corporate social responsibility first emerged in the early twentieth century, when corporations were criticized for being too large and powerful and for engaging in anti-social and anti-competitive practices. Some business leaders responded by using their private wealth for community and social purposes. A shift from individual philanthropy to corporate philanthropy evolved when community needs seemingly outpaced the resources of even the wealthiest individuals.

Consequently, critics of business cited the stewardship principle in urging managers to view themselves as trustees of the public interest. Managers were encouraged to act in the interest of all those affected by a firm’s actions—not just stockholders, but employees, creditors, customers, suppliers, communities, competitors, government, and society in general. Some companies now not only accept, but promote this view as well.

Stakeholder Theory as a Management Strategy

As a management strategy, stakeholder (or constituency) theory has merit. Effective corporate managers pay attention to those individuals and groups that are vital to the survival and success of the firm—shareholders, employees, suppliers, customers, the local community, and so on. In this context, stakeholder theory merely describes an approach for improving corporate profits; it suggests no other moral responsibility for companies.

That is, a manager should undertake socially responsible actions when he anticipates effects that, in the long run, will benefit his firm. Such an investment should have a direct business purpose and be expected to generate sufficient future net tangible benefits for the enterprise and its shareholders. The question is not whether an activity is in the interest of a firm, but whether it is enough in its interest to justify the expenditure.

Thus, socially responsible actions should be linked to business goals, particularly the company’s need to attract loyal customers, productive employees, and enthusiastic investors. In such a case, socially responsible activities simultaneously serve the interests of the business and the beneficiaries.

For example, corporate advertising and philanthropy can be closely related. Linking charitable contributions to the firm’s products or services may increase sales to customers who hold certain social values. In addition, donations for community improvement can be used to attract skilled workers. Contributions to research or educational programs may promote the firm’s economic interest. Company-sponsored employee volunteer programs not only benefit others, but can help attract good employees, create a sense of teamwork and corporate mission, and improve worker performance.

John M. Hood’s excellent new book, The Heroic Enterprise, provides specific illustrations of how companies can and do serve society through the pursuit of profits. Sponsoring safety and health promotion programs for employees can lower health, accident, and life insurance premiums. Providing child care, family leave, flexible work schedules, job sharing, employee assistance programs (e.g., counseling), and telecommuting opportunities benefits the firm and its workers. When a company humanely and effectively uses outplacement services for employees who are laid off due to strategic rightsizing, the result is not only a savings in severance payments, but also good public relations and maintenance of employee morale and productivity. A firm can make profits while assisting distressed communities, especially if the communities are viewed as underserved markets. By helping to renovate inner cities, making them safer, and training their residents, businesses can serve their own interests as well as those of the urban population. Earning the trust of consumers and community leaders can lead to long-term economic gains.

A Flawed Ethical Theory

As an ethical theory, however, the emphasis on stakeholders is problematic. It erroneously suggests that corporations are possessions and servants of larger society.

The term stakeholder has been defined by Anthony Buono and Laurence Nichols as any identifiable group or individual who can affect or is affected by organizational performance in terms of its products, policies, and work processes. Proponents of stakeholder theory as an ethical theory attempt to base their argument on Immanuel Kant’s principle of respect for persons. For example, according to William Evan and R. Edward Freeman, each stakeholder group has a right to be treated as an end in itself and not as a means to some other end, and therefore must participate in determining the future direction of the firm. In other words, the corporation should be managed for the benefit of its stakeholders. Thus, managers have a duty to represent the stakeholders’ interests.

This theory misinterprets Kant’s principle. What he actually said was that every human being is entitled to be treated not merely as a means but also as an end in himself. To regard persons as ends is to recognize that they are autonomous moral agents, which is the same as respecting their natural rights to pursue their own goals and associate with those of their own choosing. Respecting the autonomy of stakeholders does not imply that they are entitled to influence corporate decisions or that the firm should be operated in their interests. It merely means freely bargaining with them without the use of force or fraud. No stakeholder should be forced to associate with the company without his consent.

Instead, treating all stakeholders as having equally important interests removes management decisions from their emphasis on increasing profit. In this way, stakeholder theory places managers in the impossible situation of balancing competing claims from a wide variety of groups. Without the explicit goal of returning the highest value to stockholders, managers would find themselves in the position of having to make essentially political rather than business decisions.

Stockholders Are the Only True Stakeholders

Stockholder theory assumes a fiduciary obligation by a corporation and its managers to its stockholders. Stakeholder theory implies a multi-fiduciary approach that is inconsistent with free markets, property rights, and the special moral responsibility of management to the stockholders. Since shareholders hire managers to serve their interests, managers should be responsible to the stockholders. It follows that managers have neither the obligation nor right to spend the stockholders’ money in ways that have not been sanctioned by the owners, no matter what social benefits may occur by doing so. Corporations are simply arrangements whereby shareholders advance money to managers to use for specific ends. Managers are limited by their agency relationship to serve the objectives outlined by their stockholder principals. Expenditures for socially beneficial purposes are legitimate only when they have been specifically authorized by the stockholders or when managers reasonably believe they will increase the firm’s long-run profitability.

In the end, one must invest in a corporation to actually have a stake in it. Other so-called stakeholders, with the possible exception of employees, have no claim against a specific corporation as long as it is able to fulfill its freely contracted obligations with such groups. Stockholders are the only true stakeholders.

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April 1997

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