Stakeholder Theory and Organizational Ethics

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Business ethics is a staple in the news today. One of the most difficult ethical questions facing managers is, To whom are they responsible? Organizations can affect and are affected by many different constituencies-these groups are often called stakeholders. But who are these stakeholders? What sort of managerial attention should they receive? Is there a legal duty to attend to stakeholders or is such a duty legally prohibited due to the shareholder wealth maximization imperative? In short, for whose benefit ought a firm be managed? Despite the ever growing importance of these questions, there is no comprehensive, theoretical treatment of the stakeholder framework currently in print. In Stakeholder Theory and Organizational Ethics, Robert Phillips provides an extended defense of stakeholder theory as the preeminent theory of organizational ethics today. Addressing the difficult question of what the moral underpinning of stakeholder theory should be, Phillips elaborates a "principle of stakeholder fairness" based on the ideas of the late John Rawls-the most prominent moral and political philosopher of the twentieth century. Phillips shows how this principle clarifies several long-standing questions in stakeholder theory, including: Who are an organization's legitimate stakeholders? What is the basis for this legitimacy? What, if any, are the limits of stakeholder theory? What is the relationship between stakeholder theory and other moral, political, and business ethical theories? Applying research from many related disciplines, Stakeholder Theory and Organizational Ethics is an overdue response to several long-standing and fundamental points of contention within business ethics and management theory.

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Chapter 1: Stakeholder Theory and Organizational Dogma

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Business organizations are among the most powerful social entities on earth. They are the grand social institutions of our time, perhaps the sole remaining effective social institutions, expected not only to fuel free-market economies, but also to carry burdens once thought the province of government and religion (e.g., health care, child care, protection of privacy, education). Business organizations control vast resources, cross national borders, and affect every human life. Their pervasive impact on human lives rivals that of history’s most powerful czars, kings, and emperors.

Looking at the old cities of Europe gives one an idea of the movement of social power across time. The oldest of the large, elaborate buildings are religious in nature (e.g., churches and cathedrals). The second oldest of the large, elaborate buildings are governmental. The newest of the large, elaborate buildings are corporate headquarters and facilities.a To note this is to note the transfer of power through history. The church and its leaders were arguably the most powerful institution for thousands of years. Then, as the liberal notions of the Enlightenment began to replace church orthodoxy, government began to emerge as, again arguably, the most powerful institution on earth. Today, a case can be made that business firms are beginning to emerge as the most powerful institutions in the world.2

 

Chapter 2: The Limits of Stakeholder Theory

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The term stakeholder is a powerful one due, to a significant degree, to its conceptual breadth. Because the term means many different things to many different people, it evokes praise or scorn from scholars and practitioners of myriad academic disciplines and backgrounds. Such breadth of interpretation, though one of stakeholder theory’s greatest strengths, is also one of its most prominent theoretical liabilities as a topic of reasoned discourse. Much of the power of stakeholder theory is a direct result of the fact that, when used unreflectively, its managerial prescriptions and implications are nearly limitless. When discussed in its “instrumental” variation (i.e., that managers should attend to stakeholders as a means to achieving other organizational goals such as profit or shareholder wealth maximization), stakeholder theory stands virtually unopposed.3

This interpretive breadth has also provided a rich source of fodder for those critics of the theory who remain. The same wide-pattern sieve that has allowed business ethicists and social issues in management scholars to find whatever they were originally seeking from the theory has also admitted of criticisms that either do not or need not apply to stakeholder theory. This has created a situation in which it has been occasionally difficult to figure out who among those writing about the stakeholders are critics and who are advocates. Prominent theorists have criticized stakeholder theory only to later—in the same work—return to advocate some instrumental version of it.414

 

Chapter 3: Why Organizational Ethics?

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The fault of methodological hierarchies is not unlike the fault of political and social ones: they lead to a distortion of vision with a consequent misdirection of effort.

—JOHN RAWLS56

The reasons Aristotle gave for saying that politics is the culmination of ethics are today reasons for saying that business ethics is the culmination of ethics.

—EDWIN HARTMAN57

Organizations need an ethics of their own, distinct from both political theory and moral philosophy.a I am not the first to discern something distinctive about organizations, something that calls for a distinct moral framework.58 However, theories that have propelled organizational ethics to the point of seeing this need are ironically ill suited to address it. The full implications of taking organizations seriously have not been drawn, because the distinctions between organizations and states and between organizations and individuals have not been drawn sharply enough. To move beyond a dawning recognition of these differences, I flesh them out and indicate how they reorient organizational ethics, setting it upon its own footing.41

 

Chapter 4: Stakeholder Theory and Its Critics

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Ethics has long been a part of the study of economics and commercial interaction. Adam Smith and John Stuart Mill (to name but two of the better known) are as well known for their thinking on matters of moral philosophy as they are of their work on political economy. As the study of economics proceeded, however, it became an ever more technical discipline with the concomitant deemphasis of that which could not be measured, including concern over morals. In On Ethics and Economics, Nobel laureate Amartya Sen comments unfavorably on the schism that has evolved between the two intimately connected disciplines. Sen writes:

[T]he subject of ethics was for a long time seen as something like a branch of economics. … In fact, in the 1930’s when Lionel Robbins in his influential book An Essay on the Nature and Significance of Economic Science, argued that “it does not seem logically possible to associate the two studies [economics and ethics] in any form but mere juxtaposition,”95 he was taking a position that was quite unfashionable then, though extremely fashionable now.96 63

 

Chapter 5: A Principle of Stakeholder Fairness

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To this point I have argued that the ethical issues that arise at the organizational level of abstraction are sufficiently different from the problems addressed by standard moral and political philosophy to justify an explicitly organizational-level moral theory.156 I have further suggested—but have yet to argue—that stakeholder theory provides a strong candidate for just such an organizational-level moral theory. In the preceding chapter I pointed out some conceptual shortcomings in need of remedy if stakeholder theory is to adequately serve as a framework for organizational ethics.

In the present chapter I turn to an explication and defense of a principle that fills the conceptual gaps noted in the previous chapter. I argue for a principle of stakeholder fairness based on Rawls’s principle of fair play as a moral foundation of stakeholder theory.

While H.L.A. Hart is most often credited with the first explicit, contemporary discussion of the idea in 1955,157 obligations and duties similar to those based on fair play were discussed by John Stuart Mill in 1859.86

 

Chapter 6: Stakeholder Legitimacy

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Stakeholder theory should not be used to weave a basket big enough to hold the world’s misery.

—MAX CLARKSON197

It was argued at the beginning of this project that one of the theoretical shortcomings of previous stakeholder scholarship is the problem of stakeholder identity.198 For reasons to be adduced in this chapter, this problem may be attributed to a poor understanding of the concept of legitimacy in stakeholder theory. In this and the following chapter I will elaborate on how the problem of stakeholder legitimacy may be remedied using the principle of stakeholder fairness. Rather than merely stakeholders and nonstakeholders, the category of stakeholder should be further subdivided into normative stakeholders and derivative stakeholders (following the Donaldson and Preston taxonomy) with only the former being entitled to fairness-based stakeholder consideration.120

Stakeholder legitimacy has been a central concern at least since Freeman’s groundbreaking discussion. Though concerned with questions of legitimacy, Freeman chose to “put aside” such matters.

 

Chapter 7: Stakeholder Identity

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The meaning of this term is so porous that there is little interpretation it seems able to resist.…

—ISAIAH BERLIN212

Lack of clarity on the issue of stakeholder legitimacy has created ambiguity on the question of stakeholder identity.213 That is, who are the organization’s stakeholders? In Chapter 5 I argued that obligations of stakeholder fairness create direct moral (normative) obligations. Stakeholders are those groups from whom the organization has voluntarily accepted benefits and to whom there arises a moral obligation. In Chapter 6 I argued that stakeholder status may also be derived from the power to affect the organization and its normative stakeholders. This provides one answer to the problem of stakeholder identity. This chapter will examine how the preceding arguments resolve the stakeholder status of specific, long-contested candidates for stakeholder identity: the natural environment and activists.136

An example of theoretical uncertainty caused by the problem of stakeholder legitimacy is the status of the natural environment within a stakeholder framework. Is the natural environment a stakeholder? Mark Starik has argued for the affirmative.214 On a fairness-based approach, it is less clear that such a case can be made. In this and the next two sections I will describe Starik’s work on the stakeholder status of the natural environment, argue for why the natural environment is not and cannot be a normative stakeholder, and demonstrate how the natural environment may, nonetheless, be accounted for from within a fairness-based stakeholder approach.

 

Chapter 8: Stakeholder Theory in Practice

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This book contains some rather dense prose and detailed arguments that are necessary for adding rigor to the theory. The theory does not, however, pass the “so what?” test unless it is—or can be made—useful to managers and administrators. In this concluding chapter, I will summarize the preceding arguments and encapsulate a few of the more practical managerial implications of the preceding discussion. These implications can be found throughout the book, but because they are easily lost when buried among the rest of the arguments, there is value in recapitulating some of the more prominent practical ideas in one place. I will do this by addressing some of the most common questions and challenges from students and business people. The questions often take the form of a progressive series.

This chapter will explicitly and concisely address these questions using the theory elaborated herein. Following this is a short list of books that the reader may wish to consult for assistance with the nuts and bolts of managing for stakeholders. The chapter will conclude with a brief discussion of some remaining challenges to stakeholder theory.

 

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