Thursday, January 5, 2012

Stakeholder Theory of Corporate Management

Stockholder and Stakeholder Theory are theoretical perspectives within the Nexus of Contracts framework. The Stockholder Theory of Corporate Management says that CEOs (leaders) “ought” to manage the nexus in the interest of stockholders. Stakeholder Theory argues that CEOS are agents for all of the stakeholders, and therefore, “ought to” manage the nexus in order to advance the interests of all stakeholders: stockholders, employees, consumers, suppliers, financiers, and the local community.

Stakeholder Theory provides a pretty big tent for a variety of different views. Many argue that corporations are not the private property of stockholders, but “public property” and that the goal role of the CEO is to increase cooperation and not competition. One implication of this emphasis on cooperation is the notion that the various stakeholders ought to be treated equally, and/or that it is wrong to deliberately allow the most advantaged stakeholders (especially stockholders) to exploit the least advantaged stakeholders. So the basic argument is that the various stakeholder groups come to the bargaining table with competitive disadvantages, and that Stockholder Theory often leads to the exploitation of employees, consumers, financiers, suppliers, and/or local communities. In other words Stakeholder Management implies a special moral obligation to advance the interests of the “least advantaged” (or the most vulnerable) stakeholders.    

But the most important difference between the two theories is their respective views on the role that government ought to play in economic matters. If Stockholder Theory targets policy at increasing competition and personal liberty, Stakeholder Theory seeks to empower government to protect the least advantaged stakeholders; usually employees and consumers. Hence Stakeholder theorists tend to support policies such as a social safety net and/or a living wage. However, Stockholder Theorists prefer to address the needs of the "least advantaged" via individual philanthropy and/or voluntary associations rather than government programs. 

Stockholder theorists tend to emphasize private property rights and personal liberty (Locke). On global issues, they embrace the mantra:”When in Rome do as the Romans do.” Stakeholder theorists focus more on public property, economic security of all stakeholders, and follow their manta: “When in Rome do what’s right.” As a general rule, European countries tend to embrace Stakeholder Theory, while the United States defends Stockholder Theory. But don’t jump to the conclusion that business ethics can be reduced to Stockholder Theory v. Stakeholder Theory. Both theories are more subtle than that; and of course, not all business ethicists buy into that whole "social contract" approach to doing ethics. I would argue that Nexus of Contracts Theory, Stockholder Theory and Stakeholder Theory all represent ideals. And that Realists observe that in the “Real World,” there are (in fact) neither “perfectly free markets” (perfect information, perfect freedom, and perfect competition) nor “perfectly functional governments." Ultimately, business ethics cannot avoid the basic issues in ethics: knowing v. doing, facts v. values,  individual v. collective responsibility, legality v. morality, public v. private, and contextualism v. universalism. Don't let anyone tell you that ethics is easy. It's not!        

No comments: