Sec 3-7The Stakeholder Model of Corporate Social Responsibility
• Stakeholder model of corporate social responsibility begins: every business decision affects a wide variety of people, benefiting some and imposing costs on others.• Economists have recognized that every business decision involves the imposition of costs in the sense that every decision forgoes other opportunities.• Any theory of corporate social responsibility must answer the following question: Who should benefit, and who should pay the costs, for each business decision? – The economic model and the moral minimum: stockholders have a privileged position in the answer to this question.
• Stakeholder theory rejects privileged position of stockholders. – Stockholders: have an ethical claim upon managerial decisions and a duty – These ethical claims of stockholders must be balanced against any comparable ethical claims of anyone else affected by managerial decisions. – Managerial decisions should be constrained by ethically legitimate claims of other• Stakeholder theory: rejects the conclusion that only stockholder have ethically legitimate claims upon managers – Ethical claims of other parties are comparable to those advanced by stockholders, then manger have a duty to these other parties.
• Stakeholder theory: stockholders are viewed as owner instead of investors. – Investor provide capital which is necessary, but also labor, supplies, a social infrastructure, or a market. – Manager’s role: balance competing interest in such a way that the firm continues to provide value for all these stakeholders.• Stakeholder theorist Ed Freeman: – The basic idea is that businesses, and the executive who manage them, actually do and should create value for customer, suppliers, employees, communities…. The primary responsibility of the executive is to create as much value for stakeholders as possible….. P.69
• Wal-Mart – Economic model of corporate social responsibility: decision that benefit stockholder at the expense of employees, suppliers, customers, and local communities • Ethical rationale: this approach has more beneficial overall social consequences and that was owners the stockholders have rights to such benefits. • Stakeholder perspective: Wal-Marts executives have ethical responsibilities to employees, suppliers, customers, and local communities that are ethically equal to their responsibilities to shareholders.
• William Evan and R. Edward Freeman: defense of stakeholder model in essay “A Stakeholder Theory of the Modern Corporation: Kantian Capitalism” – A stakeholder includes any group who are vital to the survival and success of the corporation, any group or individual who can affect or be affected by the corporation. – The economic model fails: ignores over a century of legal prescient arising from both case laws and legislative enactments. • The law now recognizes a wide range of managerial obligations to such stakeholders as consumers, employees, competitors, the environment and the disabled.
• It is simply false to claim that management can ignore duties to everyone but stockholders. • Courts and legislatures consider that corporate management must limit their fiduciary duty to stockholders in the name of the rights and interest of various constituencies affected by corporate decisions- • Economic considerations diminish the plausibility of the economic model – Wide variety of market failures show that there are no guarantees that they will serve the interest of either stockholders or the public.• Most important argument in favor of the stakeholder theory rests in ethical considerations
• Economic model two ethical norms of justification: utilitarian considerations of social well-being and individual rights. – On each of these normatives due consideration to all affected parties. – Utilitarian theory: commitment to balance the interests of all concerned and to give to each equal consideration• The Stakeholder theory: acknowledges this fact by requiring management to balance the ethical interests of all affected parties.
• Economic model: balancing the ethical interests of all affected parties will require movement to maximize stockholder interests. Utilitarianism requires management to consider the consequences of its decisions for the well-being of all affected groups.• Stakeholder model: requires the same• Stakeholder model: justify economic model, a wider stakeholder theory of corporate social responsibility is proven ethical superior• Evan and Freeman: “the stakeholder theory does to give primacy to one stakeholder group over another, though there will be times when one group will benefit at the expense of others. In general, however, management must keep the relationship among stakeholders in balance.”
• Two general challenges of stakeholder theory: – 1. Debate on substantive grounds and argue for the primacy of stockholder}s interests. – 2. Argue that the stakeholder theory is so general and vague that it can offer little practical guidance to management.• To defeat the stakeholder theory on substantive grounds the defender of the economic model must argue that the responsibilities to stockholders always override the ethical responsibilities to other affected parties. – On utilitarian grounds. The net social consequences of decisions that constrain profit by consideration of the interests of others. – On libertarian/property right grounds, this argument would have to establish the primacy of property over the other individual rights.
• Practical challenges to the stakeholder theory are of two types 1. Problems with identifying stakeholders and their interests 2. problems deciding what course of action follows from the imperative to balance stakeholder interests. – If we interpret the meaning of stakeholder widely as any affected party, manager are under an impossible burden of determining who might be affected by every decision – Even if we could identify all relevant parties and their affected interests, the stakeholder theory seems to offer little in the way of practical advice to managers
• Two general normative principles that derive from the economic and stakeholder theories of corporate social responsibility – Economic model mandate mangers hold maximize profits while the stakeholder theory requires manager to balance the competing claims of stakeholders • Economic model leaves business managers with significant latitude in making decisions – The imperative to maximize profits offers a general guideline, but it does not offer exact practical guidance. » Managerial effectiveness at profit maximization is measure by one thing: Do stockholders choose to keep their money invested in this firm
– Stakeholder theory: difficult to determine in advance what particular decision would appropriately balance stakeholder interests. • Measure this by asking: Do the various stakeholders choose to continue their relationship with management? – Disgruntled employees, disaffected customers, and falling stock prices: good evidence that management is failing to balance stakeholder interests.