The Toronto Conference: Reflections on stakeholder theory

Abstract

Researchers and teachers in business and society have long sought a paradigm or integrating framework to guide research and integrate course offerings in the field. The guiding assumption of the Toronto Conference, held in May 1993, was that if stakeholder theory was examined in depth from several perspectives, in the context of a highly focused mini-conference, its emergence as a widely accepted paradigm for the field might be accelerated substantially. Various essays and comments which constituted the proceedings of the conference from the reflective points of view of the participants are presented. The question "What is a stakeholder?" is discussed and several participants focus on stakeholder theory as theory, including its descriptive/empirical, instrumental, and normative aspects. Also, a group of essays on various implications of stakeholder theory is presented. A perspective on linking stakeholder theory to the measurement of corporate performance is offered and the strengths, weaknesses, opportunities, and threats inherent in stakeholder theory as currently understood are assessed.

Every so often, there is an academic event of sufficient importance that it warrants special coverage in a scholarly journal. In the views of many prominent business and society scholars, the Toronto Conference, held at the University of Toronto in May 1993, sponsored by Max B. E. Clarkson, Director of the Centre for Corporate Social Performance and Ethics and funded by the Social Sciences and Humanities Research Council (Canadian government), was such an event. Researchers and teachers in business and society have long sought a paradigm or integrating framework to guide research and integrate course offerings in the field. The guiding assumption of the Toronto Conference was that if stakeholder theory was examined in depth from several perspectives, in the context of a highly focused mini-conference, its emergence as a widely accepted paradigm for the field might be accelerated substantially. As the responses of several participants indicate, that assumption appears to have been a valid one. The essays and comments included in this section of Business & Society (the Journal of the International Association for Business and Society) constitute the proceedings of the conference from the reflective points of view of the participants.

After an introduction by Max Clarkson, Mark Starik responds to the question: What is a "stakeholder"? Then several participants--Phil Cochran, Tom Jones, Donna Wood, Tom Donaldson and Lee Preston, and Michael Deck--focus on stakeholder theory as theory, including its descriptive/empirical, instrumental, and normative aspects. These contributions are followed by a group of essays on various implications of stakeholder theory provided by Steve Wartick, Len Brooks, Phil Cochran, Denis Collins, and Jim Weber. Jeanne Logsdon then offers a perspective on linking stakeholder theory to the measurement of corporate performance, another important theme in the business and society field. In the final essay, Archie Carroll assesses the strengths, weaknesses, opportunities, and threats inherent in stakeholder theory as currently understood.

Introduction by Max Clarkson

THE IDEA FOR A WORKSHOP ON STAKEHOLDER THEORY

On May 20-21, 1993, the Centre for Corporate Social Performance and Ethics of the Faculty of Management of the University of Toronto hosted an invitational workshop on "The Stakeholder Theory of the Corporation and the Management of Ethics in the Workplace." This workshop was made possible by a grant in 1992 of $15,000 (US$12,000) by the Social Sciences and Humanities Research Council (SSHRC). This is a major Canadian source of external funding for research in the social and administrative sciences and is funded by the Canadian government. Having attended many academic conferences, I have been concerned about the difficulties that we encounter, as scholars, in focusing on important issues. We are presented at these conferences with a smorgasbord of loosely grouped and pressured presentations, which are followed by discussions, a few comments, and questions, before the inexorable pressure of time forces a premature and usually inconclusive end to each session. In applying for this workshop grant my objective was to break out of the conventional trap of academic conferences by removing two basic constraints on focused discussion: travel money coupled with the pressure to present papers.

As Tom Donaldson wrote after the Toronto workshop, For the most part, our conferences tend to be driven by a bureaucratic and financial format: in order to obtain money for travel from the Universities, participants must give a paper. The result is an endless series of ten minute presentations with no time for discussion.

In the budget request for the grant for this invitational workshop, I had included a travel allowance of up to $500 and hotel accommodation for two nights for 16 participants from outside Toronto, together with meal expenses for all participants, rapporteurs, and guests. There was also an allowance for the costs of managing the workshop and disseminating the proceedings.

From the time that I had the idea for this workshop, I planned on using a modification of the search conference process. As moderator, I have used this process for over 20 years in determining strategic directions and action steps for a wide variety of organizations: investor owned, not-for-profit, academic, health, and governmental. For such conferences to be successful, it is important to create a "social island," an environment where convenience and timeliness are unobtrusively present and there is adequate time for informal discussion among the participants.

The ideal size for such a conference or workshop is 15-25 participants. I have used this search conference process successfully with both larger and smaller numbers of participants, but given the maximum of $15,000 that SSHRC sets for the support of such workshops, my budget submission was based on 16 participants from outside Toronto. There was one last-minute cancellation, so 15 attended from out of town.

At the IABS conference in San Diego in March 1993, I had hoped that there would be an opportunity for a major session or symposium on stakeholder theory. This did not occur, and there were the usual unsatisfactory, unfocused, and often uninformed discussions of this complex but important concept. During the last evening of entertainment at the conference, I realized that the time had come to find out whether a small, 2-day workshop on stakeholder theory would appeal to some of the principal scholars in this area. As a significant number were present that evening, I simply went around, testing the idea with several who have been actively involved in the development of this field. The responses were enthusiastic, so I returned to Toronto encouraged to proceed.

PLANNING THE WORKSHOP

Invitations were sent out by e-mail in early April 1993, followed by a brief statement of purpose, the introduction to which read as follows:

Donna Wood, in her Presidential address to SIMS last August, talked about "the two-track SIM annual program: ethics vs. other stuff', the separation between Business & Society issues and Ethics issues in SIMS agendas and conferences. She went on to say "most of these (CSP) ideas and our field suffer from a lack of depth, a lack of theoretical connectedness, and a certain impracticality, or maybe a lack of empirical validity. We like some of them better than others, and for various reasons. 'Stakeholders' for example is a very appealing concept, though we are not yet sure how to turn a 'stakeholder approach' or a 'stakeholder perspective' into a good explanatory theory of the firm in society. . . . "

In my own recent IABS paper on Stakeholder Theory I tried to be explicit about the relationship between implementation of stakeholder theory by the manager and ethical management in the workplace. Tom Donaldson and Lee Preston's recent article (submitted for the Theory Development Forum of AMR), The Stakeholder Theory of the Corporation: Concepts, Evidence, Implications, concludes that the three approaches to the stakeholder theory, descriptive, instrumental, and normative, are mutually supportive, and at the normative base of the theory-- which includes the modem theory of property rights--is fundamental.

I see this Workshop as a prime opportunity to find out, through discussion and debate, whether it is possible (or desirable?) to reach some form of consensus about the meaning and definition of a theory and/or model of Stakeholder Management and the relationship between such a theory or model and the management of ethics in the workplace. I am interested in the possibility of some form of synthesis of our ideas and experience that could provide the basis for a new and improved level of debate in this whole field. We are, I believe, moving towards the creation of a new paradigm, and this workshop could move that process along.

The next memo in early May defined the purpose of the workshop as follows:

We can take as our rubric for this Workshop the opening paragraphs of Donaldson's and Preston's recent article, which Tom Donaldson has circulated to all participants:

"The idea that corporations have 'stakeholders' has now become commonplace in the management literature, both academic and professional. Since the publication of Freeman's landmark book in 1984, about a dozen books and more than 100 articles with primary emphasis on the stakeholder concept have appeared. . . . 'Stakeholder management' is the central theme of at least one important recent business and society text (Carroll, 1989) and a diagram purporting to represent 'the stakeholder model' has become a standard element of 'introduction to management' lectures and writings.

"Unfortunately, anyone looking into this large and evolving literature with a critical eye will observe that the concepts 'stakeholder', 'stakeholder model', 'stakeholder management' and 'stakeholder theory' are explained and used by various authors in very different ways, and supported (or critiqued) with diverse and often contradictory evidence and arguments. Moreover these diversities and their implications are rarely discussed-and possibly not even recognized."

These two days will provide us with the opportunity not only to discuss these diversities but also to find areas of commonality and synthesis, as well as to explore some of the wider implications of Stakeholder Theory in terms of ethics and other elements of management theory and practice.

The workshop program was as follows:

THURSDAY, MAY 20

9:00 Morning Session

Statements of Stakeholder Theory and definitions of the role and purpose of the investor-owned corporation

Presentations by

Tom Donaldson

Ed Freeman

Max Clarkson

Tom Jones

Denis Collins

Archie Carroll

The invitation to present requested inclusion of statements of principles, definitions of terms, and brief summaries of what are perceived as areas of agreement or disagreement with other statements of Stakeholder Theory.

General discussion

A number of topics for debate which might arise from the presentations were suggested:

1. In order to focus discussion and thinking, should we adopt the Donaldson/Preston definitions of the three distinct approaches to Stakeholder Theory: descriptive, instrumental, and normative?

2. In order to place the Stakeholder Theory of the Firm in a context, is it necessary to provide answers to such questions as

3. What have been the various "theories of the firm"?

4. Why is a new theory needed?

5. What are the changes or deficiencies that the new theory addresses?

6. What have been important milestones and key publications along the way to the development of Stakeholder Theory?

12:30 Lunch (served in the meeting room)

1:30 Afternoon Session

The format of the afternoon session was open to the consensus of the participants as to appropriate topics and as to remaining in plenary or breaking into small discussion groups. The following topics for discussion were included in the program as suggestions:

1. What are the implications of moving from the perspective of "stakeholders" as being what a corporation "has" to viewing the corporation as "a system of primary stakeholder groups"?

2. Is a corporation therefore defined by its primary stakeholder groups? Does this perspective make it necessary to re-examine the role of self interest as defined by neo-classical economics?

3. What are the implications of stakeholder theory with reference to our understanding of the meaning and role of corporate ownership, corporate governance, and corporate management?

4. What are appropriate moral reasons for, defenses and criticisms of, Stakeholder Theory at its present stage of development?

5. The subject of "implementation" of Stakeholder Theory in practice.

6. The development of testable hypotheses based on Stakeholder Theory.

4:00 Key conclusions of the day's discussions: areas of agreement and disagreement, prioritizing of topics, and timetable for further discussion on Friday.

5.00 Adjourn

7:00 Informal supper and further discussion at the Clarksons' home, about 10 minutes by taxi from the hotel. Directions in registration folder. The evening included rapporteurs and spouses.

FRIDAY, MAY 21

9:00 Morning Session

Suggested topics for discussion:

Implications/meaning for managers and academics of stakeholders having "intrinsic worth." Implications of stakeholders being treated as "ends" in themselves rather than as "means" to the end of profit maximization. Why is Stakeholder Theory superior to other theories of the firm? The need to understand the new conceptual basis of property rights as a constellation of rights rather than the simplistic neoclassical views of private property. Implications of Stakeholder Theory for governance of corporations. How do we communicate Stakeholder Theory to academics in other disciplines?

12:30 Lunch at Hart House, South Room, with the dean and members of the faculty. Discussion with faculty members on Stakeholder Theory, introduced briefly by Donaldson, Carroll and Freeman.

2:30 Afternoon Session

Next steps. Dissemination and proceedings. Participants generated a list of questions requiring further thought:

1. What is a stakeholder?

2. Is there a theory in Stakeholder Theory?

3. What normative, descriptive and instrumental work needs to be done?

4. What are the major problems/criticisms?

5. S.W.O.T.?

6. Implications for Governance? Management? Functional Areas? Management Education?

7. "Rational choice" model. What are the connections between Stakeholder Theory and ways of thinking about the firm?

8. Why bother?

9. Do property rights form a significant normative ground/basis for Stakeholder Theory?

10. What is a substitute for economic logic?

11 . What is at stake regarding Stakeholder Theory? Why the hostile reaction?

12. Where do power, control and autonomy fit in re: Stakeholder Theory and its analysis?

13. What is (are) the appropriate unit(s) of analysis?

4:30 Conclude Workshop

RESPONSES TO THE WORKSHOP

When we started to discuss the subject of dissemination and proceedings on the second afternoon, we concluded that we would try to define some of the key questions raised during our two days of intense discussion and that each participant would undertake to write a brief response to one or more of these questions. The quality of the responses was such that participants were invited to submit edited versions for this special supplement of Business & Society.

Following the conference, we received general responses to the workshop and to the process that we used. The following are extracts from some of the letters that we received:

The conference was wonderful, and it totally changed my thinking on a number of points. I am writing a second stakeholder book, and you and your research center will be duly credited in the preface. (Ed Freeman)

Thank you very much for hosting what probably ranks in my mind as the most productive and creative conference I have attended this year. (Tom Donaldson)

I found the conference to be uniquely suited for the purpose for which it was organized, namely, to explore a new theoretical concept in its emerging phases that may have an important bearing on the development of the field of business-society and ethics. . . . The conference was also noteworthy for the process it used. By bringing together scholars and researchers in the field, the conference provided a forum, otherwise rarely available, whereby cutting-edge ideas could be discussed; views exchanged, debated, and modified; and new lines of enquiry explored in the context of free form discussion.

I earnestly believe that this conference helped to expedite the process of theory building by at least 3-4 years. The result should not be too far in coming in terms of research publications that would refer to the discussions of "the Toronto Conference" and how they influenced the ideas of various authors. On my part, I can say without hesitation that my own thought processes were thoroughly energized from the deliberations of the conference and gave me new insights into my own research approach to "stakeholder" analysis. (Prakash Sethi)

Including my years as a graduate student, I have been in academe for over 20 years and have experienced no period of greater intellectual gratification than your conference. The size of the group was near optimal. The attendees were well chosen for intellectual capability and balance in academic experience. The setting was excellent for both scholarly and social pursuits. (Tom Jones)

The opportunity to discuss an issue of such importance for two entire days and nights with some of North America's leading scholars in the field is a rare opportunity. At most conferences, we tend to spend most of our time convincing other scholars that our areas of interest are meaningful and useful. This workshop, on the other hand, allowed us to debate issues among ourselves that could greatly influence all our future writings. (Denis Collins)

The conference was simply outstanding for many reasons.. . . [It] was a manifestation of an "ideal conference" developed through conversations with my colleagues over the past two years. . . . I appreciated the exposure to an informal, free-flowing wealth of ideas emanating from the "experts". This exposure to the cutting edge research regarding a Stakeholder Theory of the Firm dramatically accelerates my personal research in the field. (Jim Weber)

What a wonderful conference! The interactions were outstanding. I think that we moved the field forward significantly. We had a remarkable exchange of ideas. (Phil Cochran)

Such enthusiasm is unusual and demonstrates that a short, focused invitational meeting can present a worthwhile alternative to the conventional academic conference. There is something important to be learned from this experience about the positive value of a workshop that focuses on the important subject for two days and limits the number of scholars who are invited to attend. The limitation on the number of participants is essential because the process demands that all participants be seated around one table and be able to see each other. Only then is it possible to engage in free-form discussions. At times, to an outside observer, it could appear that the debate is going in too many directions at once, but the good sense of the participants, coupled with their need to make progress in their own thinking and understanding, make it possible for the discussion to move forward.

The responses in this supplement were not originally intended for publication, except in the proceedings that we undertook to prepare. But as these responses came in over the summer, it became clear that they should be made available to those who have an interest in the concept and the implications of stakeholders and of stakeholder theory. I am both pleased and grateful that the editor of Business B Society has created this special supplement, so that a larger audience than could possibly have been invited to the workshop itself now has an opportunity to share some of the results.

Essay by Mark Starik

Definitions of the concept of "stakeholder" abound. Since the Freeman 1984 work, numerous articles and books have employed the term in the areas of Management and Business & Society (see, for example, works by Carroll, MacMillan & Jones, Clarkson, Preston, Wartick, and Wood). This plethora of definitions, however, does have some commonality. Each, for instance, has at least two referent points: the stakeholder and the entity with whom the stakeholder has some connection, such as an organization, an individual, or a society. And, many listings of stakeholders which are intended to serve as examples which are congruent with these definitions include what have been referred to in the pre-1984 era as interest groups or constituencies: consumers, suppliers, stockholders, regulators, competitors, legislators, communities, employees, and others.

This essay uses as a starting point two popular and alternate definitions and concepts usually associated with the term "stakeholder" and moves beyond these to consider a number of evolutionary and revolutionary approaches related to them. I argue that a continuum may exist as to what an acceptable definition of "stakeholder" includes and that consideration of this stakeholder continuum may be appropriate for organizational discourse and decision-making.

The definition of "stakeholder" offered by Freeman in the seminal work on the topic was "any group or individual who can affect or is affected by the achievement of an organization's purpose," (Freeman, 1984, p. 52). Carroll, one of the leading proponents of the closely related concept of corporate social performance, defined "stakeholders" as "individuals or groups with which business interacts who have a 'stake,' or vested interest, in the firm" (Carroll, 1993, p. 22). The two referent points mentioned above can be seen in these definitions, and both are followed by listings of several of the entities mentioned above. However, these definitions seem to differ in scope, with Carroll's focusing on the "stake" notion (also described as a "claim," "interest," or "right"), and Freeman's on the "affect or is affected by" concept, the latter of which might indicate that, even if no "claim" is made, no "interest" expressed, nor any "right" asserted, there might still be some "stakeholding" going on between any two entities, if one somehow "affects" the other.

My point is that there may be numerous levels of specificity as to what the term "stakeholder" means, depending on what the user is referring to. The range appears to be bounded in this case, on the one end, by those entities which can and are making their actual stakes known (sometimes called "voice"), and, on the other end, by those which are or might be influenced by, or are or potentially are influencers of, some organization or another, whether or not this influence is perceived or known. Perhaps these different definitions can be thought of as narrow (or focused) and broad, respectively. This "narrow" and "broad" distinction can be used in sorting out a number of differences among the varying notions of what a stakeholder is or isn't. Note that, in addition to the definition differences regarding the visibility, perception, or information level of the organization-stakeholder linkage, a narrower definition might include only "actual" "stakeholders" (e.g., current customers), whereas a broad definition of the term might include "potential" "stakeholders" (e.g., family and friends of current customers).

Another possible distinction regarding "what a stakeholder is" may be "how important is stakeholder A compared to stakeholder B?" Since prioritizing stakeholders is often a recommended stakeholder management process step, the question of stakeholder quality or characteristics seems an essential one. To prioritize, criteria are often selected, in this case, to measure the relative criticalness of an organization's stakeholders. Freeman (1984, p. 143) forwarded the criteria of cooperativeness and competitiveness as ways to distinguish stakeholders (he also categorized stakeholders into "genetic" and "specific" groupings). Carroll(1993, p. 72) suggested the criteria of "power" and "legitimacy," implying that, if a stakeholder "has" either of these, they need to be managed, and those which have more than others need to receive more managerial attention. Additional criteria which might distinguish stakeholder status include geographic or temporal proximity, strategic utility, and management preferences (see also Carroll's "primary" and "secondary" categories, in Carroll, 1993, p. 62).

One further set of criteria that can be suggested here was borrowed from the issues management and crisis management literature: probability and impact. As in these other two fields, those entities which have the highest probability of interacting with an organization or those which would have the greatest impact on, or greatest impact from, the organization's actions would be more likely to be considered stakeholders and managed accordingly. Entities which score highest on both of these criteria, as in issues or crisis management, would receive the most managerial attention. For instance, a small Northeastern U.S. waste-to-energy recovery (incineration) facility may need to pay more attention to its relationship with a small, ad-hoc local citizens group, possessing little scientific expertise or experience, which is organizing against the plant than it would to a large international environmental group working on global air pollution and energy problems. In this case, while the former group might have much less power and legitimacy (in the sense of representing majority views) than the latter group, the probability and impact of involvement by the local group may be higher than for the international group. Therefore, a wide range of criteria for deciding what a stakeholder is (or is not) may be the most prudent approach in both defining and managing stakeholders.

Another consideration in addressing the question of "what is a stakeholder?" is identifying the possibilities as to what form a "stakeholder" can take, that is who or what can be a stakeholder? Most definitions of the term currently in use, for example, appear to limit the concept to some subset of living human beings, as in Donaldson's and Preston's "persons or groups with legitimate interests in procedural and/or substantive aspects of corporate activity" (Donaldson Preston, 1993). Only a few authors have applied the term to non-human physical entities (see Buchholz, 1993, p. 59; Stead Stead, 1992, p. 114; Starik, 1993). In the latter paper, I contended that at least Earth's atmosphere, hydrosphere, lithosphere, and biosphere can be considered stakeholders of human organizations. Certainly these natural environment entities "affect or are affected by" human organizations, by providing a physical context, raw materials and energy, physical processes, waste sinks, and the biological systems we call human beings, for organizations. Hurricanes, floods, earthquakes, and other naturally occurring events undoubtedly affect agricultural, industrial, and service businesses, while businesses have been major contributors to natural environment problems, such as climate change, resource depletion, and toxic pollution.

Secondly, in that paper, I argued that the stakeholder concept had socioemotional (spiritual), ethical, and legal, in addition to the traditional political-economic, foundations, and that the natural environment fit each of these domains, concerning environmental aesthetics, the land ethic, and environmental protection laws, respectively. My third argument was that those human individuals and groups who were considered proxy stakeholders for the natural environment were well-intentioned, but, given the current degraded state of the natural environment, these human environmental stakeholders appear to need all human organizations to consider the natural environment itself a "stakeholder," so that human-natural environment interactions can be identified, planned for, effectively implemented, and continuously reviewed. As in other areas, such as employee representation, more rather than fewer stakeholders for the same stake, in this case a quality natural environment, were apparently necessary. Finally, I pointed out that environmental audits and impact statements were already two mechanisms which indicate humans can attempt to manage their relationships with the rest of the natural environment using stakeholder management processes. At the end of the paper, I suggested that the stakeholder concept be expanded to include "any naturally occurring entity which affects or is affected by organizational performance" (Starik, 1993, p. 22).

However, even within this definition, there are gradations within which individual users of the term may vary. If the term is broadened to include non-human, natural environment entities, where are the limits? Hominoids? Mammals? Pets? Vertebrates? Animals? Plants? Endangered Species? Sentient Species? Bacteria? Viruses? And, these are just the living natural environment entities. Can we consider non-living natural environment forms, such as rocks, air, and water (or their respective and interacting macro- and micro-systems), as "stakeholders"? Some have argued that the entire sun-Earth system (or Gaia) have an important physical reality and that the cosmos as an entity has some relevant physical and spiritual meaning (Berry, 1988). Once again, a continuum of acceptable definitions of "stakeholder" may be appropriate for users of the term.

There are at least two special cases of natural environment-based non-living entities that might be considered "stakeholders" of organizations. The first set includes both those humans who have already died and those not yet born. Founders of businesses who are no longer alive have often been described as having left "spirits," or legacies, which survive after they are long gone. Indeed, many non-Western cultures have a high reverence for dead ancestors, and, those businesses which have been passed on down through generations of the same family may be said to have awarded "stakeholder" status to previous generations. Future generations, too, can be thought of as "stakeholders" of organizations. For example, a common present-day question often asked is whether or not current organizations will leave those in future decades and centuries available natural resources upon which to build a sustainable economy? (Brown, 1992, p. 8). During the Cold War and its associated continuous threat of nuclear war, questions regarding the survival of the planet and human civilization, present and future, were not unusual (Schell, 1982). So, if we have the potential to "affect" future generations, and, if our realization of this potential "affects" what we do in response, can we not say they are our "stakeholders"?

The second case of non-living entities that might be considered "stakeholders" are human-transformed objects, such as one's house, car, computers, equipment, and the multitude of "personal products" each of us uses, works with, or creates inside and outside of our organizations everyday. Sometimes, we even give these objects human names and/or talk to them as if they were alive. Here, we are approaching what may be one of the central concepts within the "stakeholder" notion--concern. Under this approach, whatever we care about, whatever we value, can be thought to be a stakeholder, an entity which "affects or is affected by" us, because we let it or want it to do this "affect"-ing (or have no choice in the matter). Once again, we see the subjective, value-oriented nature of what is or is not a stakeholder. If one thinks something affects or is affected by (or could potentially affect or be affected by) oneself (or my organization or society), whether it is human or not, alive or not, perhaps even physical or not (as will be discussed immediately below), that something could be said to be a stakeholder to that person (or to his/her organization or society).

A final consideration here regarding "what is a stakeholder" involves the question of whether or not a "stakeholder" needs to have physical (human or non-human) form. Mitroff (1983) argued that "stakeholders of the organization mina' exist and discussed how mental images he called archetypes could dominate ("affect or be affected by") our perceptions of the world. Extending this notion that non-physical images may be considered "stakeholders," one could argue that ideas such as love, honesty, goodness, and community (as well as their opposites and related concepts) might be considered "stakeholders." Such human concepts can be embodied in the physical form of human beings and other physical entities, but may go beyond physical form as mental-emotional constructs. Humans in many cultures in the past deified these ideas, giving them human form and names. Modern day humans still refer to these ideas as discrete entities in aphorisms, such as "In war, truth is the first casualty," ". . . life, liberty, and the pursuit of happiness," and, ". . . nothing to fear but fear itself." Following this argument, could it not be said that acts of dishonesty "affect" the truth, that freedom is "affected by" authoritarianism, and that love can be "affected by" betrayal? Ethics violations in organizations, such as harassment, bribery, or sabotage certainly impair organizational morale. On the positive side, nearly every organization is involved in advancing its idea of success or at ]east in attempting to avoid the perception of failure. So, mental-emotional states, conditions, or elements, such as success and failure, may be considered stakeholders in a broad definition of the term, if those forming such a definition ascribe to them the characteristic of the ability to influence or be influenced by organizations.

In summary, the question of what a stakeholder is may only be determined by the concept user. The term could imply only those which make their stakeholder status known or visible, or to those who have any "affect"-ingness characteristic. It could refer to either or both actual or potential entities, and to those which meet various criteria, such as power, legitimacy, probability, or impact. It could include the non-human natural environment, past or future generations, non-living objects, or nonphysical mental-emotional constructs, or none of these.

This entire discussion may lead to, however, a potential reassessment of the usefulness of the term "stakeholder" itself. At a recent stakeholder conference, session participants seemed to be moving toward a working consensus that the "stakeholder" concept had within it a very powerful idea--relationships, or mutuality. You and I are one another's stakeholders, and my organization and I are one another's stakeholders, because we either or both affect or are affected by the other. The nurturing and understanding (or at least cognizance of) the numerous linkages and interactions between our organizations and the rest of reality may be the key to the "stakeholder" concept and may obviate the need to define this term. Instead of focusing on what is or is not a stakeholder, perhaps we should begin acknowledging and appreciating the many, varied relationships our organizations experience in their own realities.

REFERENCES

Berry, T. (1988). The dream of the earth. San Francisco: Sierra Club Books.

Brown, L. R. (1992). State of the world, 1992. New York: Norton.

Buchholz, R. A. (1993). Principles of environmental management: The greening of business. Englewood Cliffs, NJ: Prentice-Hall.

Carroll, A. B. (1993). Business and society: Ethics and stakeholder management, Cincinnati: South-Western.

Donaldson, T., & Preston, L. E. (1993). "The stakeholder theory of the corporation: Concepts, evidence, implications." Submitted to the Academy of Management Review.

Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston: Pittman.

Mitroff, 1. (1983). Stakeholders of the organization mind. San Francisco: Jossey-Bass.

Schell, J. (1982). Fate of the earth. New York: Alfred A. Knopf.

Starik, M. (1993, March). "Is the environment an organizational stakeholder? Naturally!" Paper presented at the 1993 Fourth Annual Conference of the International Association for Business and Society, San Diego. (A revised version of this article is currently under review)

Stead, W. E., & Stead, J. G. (1992). Management for a small planet. Newbury Park, CA: Sage.

Essay by Phil Cochran (I)

There is a wide range of so-called theories of the firm. These include (but are not limited to) stockholder theory, customer theory, worker theory, stockholder/worker theory, and managerial theory. All such theories purport to describe the "objective function" of the firm. That is, they attempt to outline why the firm exists and what its goals are.

Stockholder theory. Stockholder theory or neoclassical theory is the fundamental ideology that drives much of modem economics. Basically, stockholder theory argues that the firm is (and should be) managed in the interests of the firm's stockholders. The rationale for stockholder theory is that since the stockholders have contributed the firm's capital they therefore "deserve" any and all residual earnings (i.e., funds remaining after all operating expenses have been paid).

Under stockholder theory the only rationale for any firm activity is the maximization of shareholder value. That is, any activity is justified if it increases the value of the firm to its shareholders and is not justified if the value of the firm is reduced. For example, proponents of stockholder theory would argue that additional worker safety expenditures could be justified on the basis of reduced insurance claims, improved employee morale, better corporate image, etc. But in any case, the measurable financial benefits must exceed the measurable financial costs.

Customer theory. A customer theory of the firm is the basic philosophy behind consumer cooperatives. In a consumer cooperative the customers of the firm "own" the firm. Any residual funds at the end of the fiscal year are generally returned to that year's customers in proportion to their purchases. Though not a common form for large firms, there are some large customer owned firms in the United States. One example is Recreational Equipment Incorporated--a producer and retailer of hiking, climbing, and other outdoor recreation equipment.

A customer owned firm has an obvious moral commitment to its customers. Even if the goal of such a firm is simply to maximize the utility of its owners then it must, by definition, maximize the utility of its customers. False or misleading advertising which could conceivably be justified in a stockholder owned firm are simply unacceptable in a customer owned firm. Even if the manufacture or sale of unsafe products (such as faulty climbing ropes) could be justified on a cash flow basis (as it might in a stockholder owned firm) such policies are not morally defensible in a customer owned firm. Product quality and safety must explicitly enter into the objective function of a customer owned firm.

Worker theory. Worker theory of the firm is basically a modified version of Marxist theory. In 1958 Ben Ward published an article entitled "The Firm in Illyria." In this article he looked at the objective functions of worker owned firms, such as those that were emerging in Yugoslavia. He demonstrated that under conditions in which the workers in a given factory actually own that particular factory they will tend to maximize profits per worker and not total profits. That is, in an investor owned factory the investors would want to maximize total profits. In a worker owned factory the workers would choose a lower level of total products (and a higher level of capital expenditures) because their objective function is different.

However, a corollary to that objective function (which Ward did not discuss), would be more emphasis on worker safety and job satisfaction. In a worker owned firm the raison d'etre of the firm would be to maximize the utility of the workers. For example, in a stockholder owned firm the only reason to spend resources on safety improvements would be if that in turn made the stockholders better off. In a worker owned firm job safety must be part of the firm's objective function.

Stockholder/worker theory. A combination of stockholder theory and worker theory of the firm has been proposed by Masahiko Aoki. In his The Co-operative Game Theory of the Firm, Aoki (1984) proposes what he calls the J theory of the firm. ("J" stands for Japanese). Aoki suggests that Japanese firms attempt to maximize a joint utility function of stockholders and of workers. He further implies that this explicit risk and reward sharing between workers and stockholders that Japanese firms have worked out explains, in part, the phenomenal success of Japanese firms over the past several decades.

Managerial theory. The managerial theory of the firm is a descriptive theory of the firm. It purports to describe the actual behavior of managers. The managerial theory of the firm can trace its origins back to E. Merrick Dodd's (1932) classic article "For Whom Are Corporate Managers Trustees?" Managerial theory of the firm suggests that managers control firms in order to maximize the utility of managers, not the return to stockholders. That is, managers attempt to maximize their pecuniary compensation and benefits.

Stakeholder theory. Stakeholder theory of the firm, as proposed by Brenner and Cochran (1991), is an attempt to integrate all of these theories into a single unified theory. Stakeholder theory contends that firms have obligations to a wide range of different constituents including stockholders, customers, workers, managers, and so on. As such, it explicitly recognizes the fact that most, if not all, large firms today have a large and integrated set of stakeholders.

That is, any given individual may be a customer. But he may also be a worker or manager, a stockholder, an environmentalist, and a local community citizen. Such stakeholders have legitimate demands for product safety, workplace non-discrimination, share value, and environmental protection, among many other equally legitimate demands. Firms can no longer manage as if they are purely stockholder owned, worker owned, customer owned, or whatever. They must manage their operations with the interests of all stakeholders in mind.

REFERENCES

Aoki, M. (1984). The co-operative game theory of the firm. New York: Oxford University Press.

Brenner, S. N., 8r Cochran, P/ L. (1991). The stakeholder theory of the firm: Implications for business and society theory and research. Proceeding of the 1991 International Association for Business and Society Annual Meeting, 449-467.

Dodd, E. M. (1932). For whom are corporate managers trustees? Harvard Law Review, 45, 1145-1163.

Ward, B. (1958). The firm in Illyria: Market syndicalism. American Economic Review, 66(4), 373-386.

Essay by Thomas M. Jones

Questions concerning the existence of theory in stakeholder "theory" require answers which are simultaneously simple and complex. The simple answer is: yes, there is theory in stakeholder theory. However, the theory as currently expressed is of at least three types. These types of theory are often intertwined in the literature and are rarely stated formally. Donaldson and Preston (in press), which was used to lend structure to this mini-conference, helps sort out the theories that are implicit in stakeholder theory. Their three-part typology--descriptive/empirical, instrumental, and normative--makes explicit what was implicit in early formulations of stakeholder theory. These early formulations simultaneously suggested that: 1) firms and/or managers actually behave in certain ways (descriptive/empirical); 2) certain outcomes are more likely if firms/managers behave in certain ways (instrumental); and 3) firms/managers should behave in certain ways (normative). Donaldson and Preston also point out (correctly, in my view) that none of the theoretical formulations of stakeholder theory (except, perhaps, the normative variant) is formally stated and fully developed.

Donaldson and Preston conclude that the most promising arena for the development of theory in stakeholder theory is in the normative realm. Indeed, they offer a normative justification for stakeholder theory based on property rights. Other normative justifications include social contract approaches, Kantian capitalism, agent morality, and the normative arguments for corporate social responsibility. Each of these normative positions is legitimate theory because each is "falsifiable," presumably through logic, counter argument, and/or appeal to higher normative principle.

Instrumental stakeholder theory is also possible. At the conference, I presented what I consider to be legitimate instrumental theory. My argument can be briefly summarized as follows.

* Firms, run by their top managers and embedded in markets which provide some discipline for inefficiency, have relationships (called "contracts") with many stakeholders.

* Many contracting relationships can be described using agency theory, transaction costs economics, and/or the theory of team production. Because of the existence of opportunism, these contracts a costly to enforce. Further, markets will reward efficient contracting and penalize inefficient contracting.

* Among the many mechanisms available for reducing contracting costs is the voluntary adoption of behavioral standards which reduce or eliminate opportunism--that is, certain ethical norms. The existence of such standards can easily be shown to increase efficiency in the system.

* While systemic benefits are easy to identify, individual benefits are less so. Frank (1988) has argued that honest, trustworthy, and cooperative people help solve the problem of opportunism and, hence, are desirable partners in contracting relationships. Such people will be offered opportunities that less honest, less trustworthy, less cooperative people will not be offered; the former group will, therefore, have a competitive advantage over the latter, all else being held equal.

* Frank also argues that honesty and trustworthiness are difficult to "fake" because the lack of a "sincere-manner" and the existence of a bad reputation are reasonably accurate means of detecting opportunism. Extending these conclusions to the firm through arguments based on social learning, corporate culture, authority relationships, and adverse selection, leads to the conclusion that firms that establish mutually trusting and cooperative relationships with their stakeholders will have a competitive advantage over those that do not.

* The key to competitive advantage for firms is, therefore, mutually trusting and cooperative contracts with their stakeholders. Empirical propositions can then be derived from this general statement of the theory.

The argument that firms derive competitive advantage from behavior that is trusting, trustworthy, and cooperative is empirically falsifiable. It could be shown, for example, that firms that contract with their stakeholders on the basis of these behavioral traits do not, in fact, realize competitive advantage. It could be that reputation is an imprecise indicator of honesty and integrity (i.e., that the effect of past transactions is not adequately reflected in corporate reputations) or that variation in reputation among firms is insufficient to make a discernible difference in firm performance. It could also be the case that the number of transactions requiring significant levels of trust is very small; traditional, highly-specified, formal contracting may be possible in the vast majority of cases. Under any of these circumstances, the theory would not be supported. The precise mode of failure of the theory, even if identifiable, is beside the point, however. The point is that a falsifiable theory has been presented; if trusting, trustworthy, and cooperative firms do not outperform firms without these traits (when other factors are controlled for), the theory has failed to receive empirical support and its veracity is in serious doubt.

In the realm of descriptive/empirical stakeholder theory, several possibilities exist. One such statement could be phrased thus:

"Managers behave as if several stakeholder groups, not just stockholders, affect firm performance."

Again, this is an empirically falsifiable claim; that is, evidence could be accumulated to show that managers do not, in fact, behave as if stakeholders mattered in terms of the success of the firm. A semantically similar, but substantively distinct, descriptive statement could read:

"Managers behave as if stakeholders mattered because of the intrinsic justice of their (the stakeholders') claims on the firm."

Empirically, Clarkson and his colleagues have accumulated evidence that does not contradict either of these claims.

Brenner and Cochran(1991) make a theoretically more aggressive but empirically less tractable claim:

The stakeholder theory of the firm posits that the nature of an organization's stakeholders, their values, their relative influence on decisions and the nature of the situation are all relevant information for predicting organizational behavior. (p. 28)

Although Brenner and Cochran argue that "values which are highly weighted should be favored in actual choice situations" (p. 28), they stop short of substantive prediction or description of the mechanism(s) through which the predicted behavior might occur.

Despite these noble (if not Nobel) efforts, what has not yet emerged in terms of descriptive theory is a descriptive "theory of the firm" which might imitate (and perhaps replace) the theories of neoclassical and managerial economics. What such a theory would look like is highly speculative, although a "stakeholder" version of managerial theory might take the form:

"Managers will maximize their personal wealth after satisfying the legitimate claims of the firm's stakeholders."

Unfortunately, this formulation does little to enhance existing theories; formally substituting "stakeholder claims" for "external constraints" is mere semantic legerdemain.

A descriptive stakeholder theory of the firm may not be forthcoming unless some member of the community of business and society scholars is willing to make some heroic assumption(s) about human behavior. The "success" of economic theory is premised on the behavioral assumption of rational self-interest, which Etzioni (1988) and others have thoroughly demolished. Unfortunately, even though these same scholars have also documented a wide variety of human behaviors--some self-interested, some altruistic, some rational, some "irrational"--their models still leave enormous amounts of variation unexplained. Unless human behavior becomes more consistent and more predictable, we may never develop a descriptively useful stakeholder theory of the firm.

In sum then, stakeholder theory is indeed theory and is theory of three distinct types. The type of theory that many of us most cherish, however--a stakeholder theory of the firm--may be beyond our grasp.

REFERENCES

Brenner, S. N., &. Cochran, P. (1991). The stakeholder theory of the firm: Implications for business and society theory and research. In J. E Mahon (Ed.), International Association for Business and Society--1991 Proceedings, 449-467.

Donaldson, T., 8r Preston, L. E. (in press). The stakeholder theory of the corporation: Concepts, evidence, implications. Academy of Management Review.

Etzioni, A. (1988). The moral dimension. New York: Basic Books.

Frank, R. H. (1988). Passions within reason: The strategic role of emotions. New York: Norton.

Essay by Donna J. Wood

If stakeholder theory is ever to become a true theory and go beyond the status of metaphor or useful heuristic, scholars must come to grips with two issues. I will make the case that these two questions are related:

1. What sort of descriptive orientation will the theory take--describing observed realities or describing theoretical relationships?

2. What does stakeholder theory tell us about the existence, distribution, forms, and use of power, authority, and autonomy in the social system under study?

Scholars in business and society are proposing that stakeholder theory must take a descriptive orientation in order to develop as a theory. However, there are two distinct approaches to descriptive science, each very much alive in current thinking about stakeholders. First is the idea of empirical description, that researchers need to describe managerial reality. In this view, a descriptive stakeholder theory would be constructed by watching managers and mapping what they actually do, leading to a theoretical understanding of empirical reality. Second is the idea of theoretical description, that researchers need to describe logical relationships. In this view, a descriptive stakeholder theory would be constructed by building a logical set of relationships among analytical categories of variables, with the ultimate goal being to predict stakeholder behaviors in various situations, the effectiveness of managerial responses, likely outcomes, and so on, leading to an empirical understanding of theoretical reality.

These two views, of course, represent the difference between inductive theory-building (from observation to theory) and deductive theory-building (from theory to observation). There is no credible argument that one mode is "better" than the other at creating theory or orienting research. Both approaches are required to build a stakeholder theory of the firm.

It is vitally important to know empirically how managers view their stakeholder environments, what they do to manage stakeholder relations, how they perceive and evaluate outcomes. It is just as important (and more easily ignored by business researchers) to know empirically how stakeholders view their relationships with managers and companies, how they assess their missions and interests, and so on. It is also important, perhaps even vital, to know a great deal beyond how managers and stakeholders perceive and think about their relationships-we need to know how these relationships develop and change, who makes decisions with respect to them, how information is channeled (or not), how the benefits and burdens of the relationship are distributed, and so on.

It is equally vital to know logically questions such as how companies and stakeholders can be related to each other, how stakeholders relate among themselves, how stakeholder relationships change, and how context influences stakeholder relationships. This means constructing descriptive theory based on variable relationships, typologies, and other formal devices of theory construction. It also means relating logics of variable relationships to normative logics--ideas about how things should be.

Managers may not actually have it right--they may be suffering from "false consciousness" in terms of who their stakeholders are, what issues are important, how to manage these relationships. So, knowing only what managers think, perceive, and do will not give us a stakeholder theory of the firm. Conversely, scholars may not have it right--our logical models may not "touch the ground" in terms of reflecting social realities. A comprehensive stakeholder theory of the firm would help us understand managers, firms, and stakeholders in the context of the vast network of personal, organizational, institutional, and intersocietal relationships that are more realistically descriptive of how social systems operate.

As a case in point, consider the issues of power, authority, and autonomy as they relate to companies and their stakeholders. Descriptively, we could arrive at an understanding of what the situation is for managers, and how they experience their power, authority, and autonomy (or lack thereof), by observing, talking to, and talking about managers as they do their work. We could also logically piece together variable relationships and explanatory ideas that would move us toward descriptive theory. But there would still be something missing: the normative aspect of stakeholder theory, oriented toward statements about how stakeholder relationships should proceed. Once we have the logic sorted out and the descriptive empiricism done, we might go in two directions: toward an organization-centered or a system-centered stakeholder theory. This problem has to do with "where you put your eyes" when constructing theory, which makes a huge: difference in theories having to do with power relationships, as stakeholder theory does (or will, or should).

An organization-centered normative stakeholder theory could focus on a company or a stakeholder group. A firm-centered theory could easily be merely an extension of neoclassical economics, focusing on what the firm wants (economic success) and on strategies and tactics that can be used (legal compliance, ethical programs, etc.) to achieve those ends. The assumption might be that the firm should have a crack at getting what it wants, and the consequences can fall where they may. A firm-centered stakeholder theory might focus, for example, on learning more about who the stakeholders are, what they want, what sort and amount of power they have, and to what incentives they might respond. Issues management, public affairs management, strategic philanthropy, cause-related marketing, corporate political action, and so on are all within the purview of a firm-centered stakeholder theory that emphasizes managing stakeholder relationships.

On the contrary, a system-centered normative stakeholder theory is much more compatible with a Rawlsian view of just distribution than with an egocentric or firm-centric view of wants. The underlying assumption might be that stakeholder relationships should be conducted fairly, according to agreed-upon rules, and should result in a distribution of benefits and burdens that is considered fair by all, if not necessarily desirable. In a system-centered stakeholder theory, we might ask questions like these: Why in the world would any manager voluntarily give up any power, control, or autonomy just because some stakeholder group says s/he ought to? What's the incentive, in the absence of forces external to the manager? Why wouldn't managers attempt to gain more power and autonomy, rather than less? And what implication does this have for voluntaristic concepts such as social responsibility, self-regulation, and even collaborative problem-solving? In the broader social network, how are power and autonomy distributed, what are the rules for their acquisition and use, and what does all this tell managers about "managing stakeholder relationships"? The focus would be on the relationships among stakeholders and companies and the effects of those relationships on the larger social system, rather than on the management of those relationships by one of the partners.

Here's an example of the difference between the two types of descriptive research, and what they have to do with a normative stakeholder theory that incorporates power and autonomy. If asked about their experience of power and autonomy in their jobs, I would guess that most managers would not report feeling very powerful, or very much in control. On the contrary, they would probably talk about the societal, organizational, and legal constraints under which they operate, and the very limited range of decision making they actually have. They would talk about how much power stakeholders have to constrain their decision making--unions, governments, environmental groups, consumer protection groups, neighborhood associations, terrorists. So, if scholars stopped here, with a set of empirical observations about how powerless and constrained managers feel, we might end up with a firm-centered stakeholder theory proposing some avenues by which managers can gain additional power and autonomy in the face of stakeholder demands.

However, many external stakeholders perceive that business has far too much power in society, and the managers have far too much autonomy to act self-interestedly without considering the effects of their actions on others. If external stakeholders were asked about managerial power and autonomy, they would be likely to answer that managers have a great deal of discretion to act as they wish, to serve the firm's interests above those of the community, or even to act in their own self-interest above the interests of the firm. They might claim that laws and ethical rules are not rigorous enough to ensure a fair distribution of society's benefits and burdens. But, if scholars stopped here, we might end up with a stakeholder-centered stakeholder theory proposing some avenues by which stakeholders can gain additional power and autonomy with respect to managers.

It would be empirically possible to study who actually makes which decisions, under what conditions, and with what consequences. This would tell us a great deal about who really has power and autonomy, and how these things are balanced in relationships between companies and their stakeholders. But such studies would be time-consuming and expensive; they would involve much more than the standard "in-depth" (i.e., an hour or two) interview with some managers.

The implications of a system-centered stakeholder theory are enormous. For example, if stakeholder interests have intrinsic value, as Donaldson and Preston argue, then power relationships need to be moderated by principles of fairness so that all intrinsically valuable interests can be taken into account as solutions to problems are achieved. Where do these principles of fairness come from? They can exist at the social system level, or they can be negotiated among relational partners. In the first case, mechanisms of social control must exist in order to enforce the principles. In the second case, partners must be free and equal in order to negotiate rules of fairness. But if partners are unequal, how can rules of fairness be negotiated?

Is stakeholder theory, then, really about the perceptions of and struggles over power and autonomy in society? Is it a theory of who has power, or is it a theory of who should have power? The fact is that business and society scholars have spent very little energy focusing on questions of power and autonomy--who has it, what types, how much, how used, with what consequences, and in what distribution system? We need to remember the reality of power in relationships, including managers' relationships with stakeholders--and the possibility of misperceptions, false consciousness, denial, or deception over the societal distribution of power--when trying to map either the reality or the theory of stakeholders and he firm.

Essay by Thomas Donaldson and Lee E. Preston

(Adapted from Thomas Donaldson and Lee E. Preston's "The Stakeholder Theory of the Corporation: Concepts, Evidence, Implications," in press)

Although there is some irony in the suggestion, we believe that the concept of property offers one possible base for a formal normative justification of stakeholder theory. The traditional view has been that the property rights of shareowners are superior to all other interests in the corporation, and hence that corporations should be managed for their exclusive, or at least paramount, benefit. The moral support for Milton Friedman's (1970) famous dictum that "The social responsibility of business is to increase its profits" derives primarily from this conception.

But the fact that property rights are the critical base for conventional shareowner-dominance views makes it all the more significant that current developments in the philosophy of property create a very different perspective. There is now considerable agreement on the theoretical definition that property is a "bundle" of many rights, some of which may be limited (Becker, 1992a). Pejovich (1990), probably the most conservative economic theorist working in this area, emphasizes that "property rights are relations between individuals," and thus "it is wrong to separate human rights from property rights"; he further notes that "the right of ownership is not an unrestricted right" (pp. 27-28). In a now-classic contribution, Honore (1961) specifically includes the notion of restrictions against harmful uses within the definition of property itself.

The notion that property rights are embedded in human rights, and that restrictions against harmful uses are intrinsic to the property rights concept, clearly brings the interests of the non-owner stakeholders into the picture. Of course, these broad principles alone do not justify managerial concern with any particular group--employees, customers, etc. The specific limitations to be placed on property use, and the specific interests (in addition to those of owners) to be considered, remain to be determined. However, the important point is that the contemporary theoretical concept of private property clearly does not ascribe unlimited rights to owners, and hence does not support the popular claim that the responsibility of managers is to act solely as agents for shareowners.

These comments have to do with the scope of property rights, but say nothing about their source. Where do property rights come from? What principles determine who should be allowed to get and keep what in society? The answers to these questions must be derived from some underlying theory of distributive justice. The main contending theories of distributive justice include Utilitarianism, Libertarianism, and Social Contract theory (Becker, "Property," 1992a, p. 1024). The battle among competing theories of distributive justice is most often a battle over which characteristics highlighted by the theories--such as need, ability, effort, and mutual agreement--are most relevant for determining fair distributions of wealth, income, and so forth.

For example, utilitarianism highlights need as a primary criterion for the distribution of social benefits. A theory of property based on need would place formidable demands on property owners to mitigate their self-interest in favor of enhancing the interests (i.e., meeting the needs) of others. By contrast, all emphasis on ability or effort, as highlighted by libertarianism, would leave property owners freer to use their resources--acquired through ability and effort--as they see fit. Social contract theory places primary emphasis on expressed or implied understandings (i.e., contracts) among individuals and groups as to appropriate distributions and uses of property.

Common sense suggests that each of these approaches has a certain validity, and most respected contemporary analysts of property rights tend to agree. They therefore reject the notion that any one theory of distributive justice is universally applicable. Beginning with Becker's 1978 analysis, the trend is strongly toward theories that are "pluralistic," allowing more than one fundamental principle to play a role (Becker, 1992b; see also Munzer, 1992).

But if a pluralistic theory of property rights is accepted, then the connection between the theory of property and the stakeholder theory becomes explicit. All of the critical characteristics underlying the classic theories of distributive justice are present among the stakeholders of a corporation, as they are conventionally conceived and presented in contemporary stakeholder theory. For example, the "stake" of long-term employees who have worked to build and maintain a successful business operation is essentially based on effort. The "stake" of people living in the surrounding community may be based on their need, say, for clean air or for the maintenance of their civic infrastructure. Customer "stakes" are based on the satisfactions and protections implicitly promised in the market offer, and so on. It is not necessary to contend that such "stakes" constitute formal or legal property rights, although some forceful critics of current corporate governance arrangements appear to hold this view (Nader & Green, 1973). All that is necessary is i show that such characteristics, which are the same as those giving life to fundamental concepts of ownership rights, give various groups a moral interest, commonly referred to as a "stake," in the affairs corporation. Thus, the normative principles that underlie the contemporary pluralistic theory of property rights also provide the foundation for the stakeholder theory as well.

REFERENCES

Becker, L. C. (1978). Property rights. London: Routledge & Kegan Paul.

Becker, L. C. (1992a). Property. In L. D. Becker & C. B. Becker (Eds.), Encyclopedia of ethics, Vol. 2 (pp. 1023-t027). New York: Garland.

Becker, L. C. (1992b). Places for pluralism. Ethics, I02, 707-719.

Friedman, M. (1970, September). The social responsibility is to increase its profits. The New York Times Magazine, pp. 32-33.

Honore, A. M. (1961). Ownership. In A. G. Guest (Ed.), Oxford: essays in jurisprudence. Oxford: Clarendon.

Munzer, S. R. (1992). A theory of property. New York: Cambridge University Press.

Nader, R., & Green, M. J. (Eds.). (1973). Corporate power in America. New York: Grossman.

Pejovich, S. (1990). The economics of property rights: Toward a theory of comparative systems. Dordrecht: Kluwer Academic.

Essay by Michael C. Deck

The economic and social purpose of the corporation is to create wealth and to distribute that wealth to investors. The moral and ethical obligation of the manager, executive, and director is to pursue that purpose by the efficient and effective use of invested capital. "Investor," however, is not synonymous with "shareholder," "wealth" is not adequately defined as increased share price or dividends, and "capital" is not defined in purely financial terms.

Employees, including management, make a direct investment of their time, skill, knowledge, and so forth. The public makes an investment of infrastructure, education, tax incentives and the like. These personal and public assets are not particularly liquid and historically prone to "market failure." The shareholder makes a financial investment, in most cases at arm's length. The financial investor's asset, because of the highly developed market mechanisms for equity and debt, is relatively liquid.

There are, then, different kinds of investors, and each investor has a claim on the wealth created by the application of their capital.

In the economic tradition of Western capitalism, it has been an article of belief that all claims have fair and effective means of being satisfied. The claim of labor is satisfied by as low a wage as will be accepted. The claim of the public is satisfied by a promise of Adam Smith's invisible hand. The claim of the shareholder is, for simplicity, assumed to be insatiable and entitled to what is left. It has been further claimed by neoclassical economics that the moral and ethical obligation of the corporate executive is discharged by a single-minded pursuit of maximum return to the shareholder. This belief has, as the saying goes, every virtue save that of being true.

For example, the worker does not simply exchange labor at the marginal rate of indifference to leisure. This has never been true despite what the microeconomics texts claim. Labor is not a good which is sold but is human life invested, applied as capital, in order to create wealth. The notion that labor is an input to production, which the corporation buys and owns, runs contrary to the principle of inalienable human rights. A life cannot be bought, sold, traded, or exchanged.

It is no wonder that an effective and productive investment of human capital (by the worker) generally relates to a satisfactory return on that investment not only in cash but in kind. The investment of one's life (the only real wealth) seeks a return which can never be reduced to a unit of exchange. Work which is useful, challenging, responsible, and all the other buzzwords of QWL, TQM, and High Performance provides a necessary nonfinanciaI return to the investor of human capital.

We have no difficulty with the idea that management has a fiduciary obligation to the shareholder because we have been taught to believe that the shareholder retains ownership of and property rights to the financial capital invested in the corporation through share purchase. Why is it, then, that we balk at the equally valid notion that workers also retain ownership of and "property rights" to the human capital they invest in the corporation through work and that management's fiduciary obligation to them is no less compelling than to the shareholder?

This line of reasoning extends to the public as investor and to the fiduciary obligation of management with respect to the natural and social capital which the people hold in common.

Despite the assumptions of libertarian economists, "ownership" is not an absolute principle adhering to capital. Rather, what we understand by ownership is a bundle of socially derived rights relating to capital. This set of "property rights" constitutes a society's general agreement on what capital is deemed to be proper to an individual and what uses of that capital are socially acceptable. Being dependent upon social consensus, these rights are subject to change and to challenge.

Ethical issues for managers, executives, and boards of directors generally relate to obligations owed to those who have made an investment in the corporate enterprise. Ethical problems arise when the rights or claims of investors conflict. Ethical governance is characterized by behavior which fulfills the obligations corresponding to the rights of investors. The challenge is not to eliminate conflicting claims (which would be impossible) but to act fairly and responsibly despite the conflict. Success, performance, and merit must be measured in terms of return on all investment.

Despite moral obligations to non-financial investors, it is a fact of business life that it is "the shareholder" who has the most readily enforceable claim on management. Managers, executives, and directors, then, are forced to ask the question, "How does this translate to the bottom line?" Until the development of effective and accepted non-financial measures of performance this question will remain at the top of the executive mind. It may be that the practical value of a well defined "Stakeholder Theory of the Firm" will be to provide a basis for the development of these required measures.

Essay by Steve Wartick

The two-day workshop at the University of Toronto's Centre for Corporate Social Performance and Ethics provided ample opportunity for participants to examine several different aspects of stakeholder theory. One of the more important aspects which wound its way in and out of the discussions was the question of the implications of stakeholder theory for management. Documents, transcripts, and participant comments coming out of the workshop will address many of the details relating to this topic. The purpose of these written remarks is to provide my personal view of where we ended up on the question of the implications of stakeholder theory for management.

STAKEHOLDER THEORY VERSUS STAKEHOLDER MANAGEMENT

It seems clear to me from the discussion at the workshop that stakeholder theory begins by offering a "value-free" conceptualization of the business organization. Rather than a business being viewed only as a vehicle for "maximizing long term shareholder wealth," for "satisfying unmet consumer wants and needs," or for any other such platitude which has dominated management theory and thinking during the 1900s, stakeholder theory posits the idea that the firm is merely an aggregation of stakeholders who are attempting to advance their interests, i.e., self-interests as well as "other-regarding" interests. Whether stakeholders are defined as "those who can affect and are affected by organizational decisions" [Freeman], "persons or groups with legitimate interests in procedural and/or substantive aspects of corporate activity" [Donaldson], or "persons or groups that have, or claim, ownership, rights, or interests (e.g., legal or moral, individual or collective) in a corporation and its activities, past, present and future" [Clarkson], a value-free conceptualization of a business holds as the starting point for stakeholder theory.

However, the key to understanding and appreciating the implications of stakeholder theory for practicing managers rests less with this basic value-free conceptualization of the business organization and more with how the business organization (as a collection of stakeholders) goes about dealing with multiple stakeholder interests. As one of the workshop participants suggested, the key managerial implication of stakeholder theory is in "what you put your eyes on first." Although many would argue with me, I see this concern with the "how?" question as a fundamental test of the value of stakeholder theory.

Some participants in the workshop drew the important distinction between stakeholder theory (the construction, development and testing of explanatory and predictive propositions relating to stakeholder interactions) and stakeholder management (the application or implementation of the understandings which result from stakeholder theory development). For those of us interested in stakeholder management, we should not be asked to "sell" the theory on the basis of abstract and sometimes obscure reasoning, nor should we be asked to pretend like we are ignoring managers in our pursuit of more "lofty" ends. Rather, we should be attempting to focus on the value which stakeholder theory adds to management processes and outcomes.

With this last point in mind and after review of the many stakeholder related topics which were raised, discussed and debated at the workshop, I saw three topics as being the most salient and cogent in terms of the implications of stakeholder theory for management; These three topics are the recognition of normative cores, the reality of power relationships, and the importance of situational factors.

THE RECOGNITION OF NORMATIVE CORES

Freeman argued that stakeholder theory itself has a "normative core" which must be identified, analyzed and contrasted with the normative cores of other theories. The purpose of this exercise is to determine what lies at the heart of stakeholder theory. Just as the platitude, "a business exists in order to maximize long term shareholder wealth" provides one foundation of economic theory, so too must we understand the premises which serve as the foundation of stakeholder theory. These underlying premises must be viewed as the normative/prescriptive core of the theory and not as the positive/descriptive results of the theory. Such ideas as "the purpose of the firm is to create increased wealth for its primary groups by using its resources efficiently" [Clarkson], or "the very purpose of the firm is . . . to serve as a vehicle for coordinating stakeholder interests" [Evan and Freeman] have been offered as starting points in determining the normative core of stakeholder theory.

But, if stakeholder theory has a normative core which must be identified, analyzed and contrasted with the normative cores of other theories, it also seems true that each stakeholder itself possesses a normative core which needs to be identified, analyzed and contrasted with the normative cores of other stakeholders. Like the normative core of stakeholder theory, the normative core of stakeholder groups will be derived from societal influences as well as inter-societal influences. One proposition which logically results from stakeholder theory is therefore that differing normative cores of stakeholder groups will help explain and predict variability in stakeholder interactions. The implication for management rests with an increased focus on and analysis of the normative core of all relevant stakeholders including management itself.

In the past, much management thinking seemed to take on an "us versus them" mentality, but when management sees itself as just one of many organizational stakeholder groups which is attempting to realize their interests (self interests or other-regarding interests), then the "us versus them" mentality becomes an "us and them" mentality. The normative cores of the "us" and the "them" become the beginning points for constructing and implementing mutually advantageous interactions. (In economics, mutually beneficial transactions are at the core of market behavior between buyers and sellers; in stakeholder theory, mutually advantageous interactions are at the core of both market and nonmarket behavior between any two or more stakeholders.) More specifically, the ethics and values attendant to stakeholder normative cores become the beginning points for creating and maintaining effective stakeholder relations.

The increased emphasis on normative cores suggested by stakeholder theory prompts management to examine and understand their own normative core as well as the nonnative cores of other stakeholders. For example, suppose that upon closer examination, management determines that its normative core actually centers on job security rather than on the maximization of shareholder wealth and that profit maximization is simply one approach to realizing job security. Does any other stakeholder group share an interest in management's job security? What about current suppliers of the company? What about communities where current operations are located? Can mutually advantageous stakeholder interactions be built around a shared interest in management's job security? These are the types of questions which stakeholder management adherents will be asking.

Another important implication of the recognition of normative cores is that it forces management to view themselves not as the center of the universe nor as the key stakeholder group in the business organization, but rather, as an important stakeholder group for others. The typical stakeholder "map" puts management in the middle of the organization, but what happens when owners or customers are put at the center of an organizational stakeholder map? How would management view itself and its normative core in the stakeholder map of a government regulator? What happens to management's view of an issue when the issue is placed in one of these alternative stakeholder maps?

The increased emphasis on normative cores also prompts management to give more thought to the types of company cultures that predominate in their organizations. Simplistically, company cultures are merely the shared organization values which structure decision making. Stakeholder management would extend this notion to argue that the shared values come from the normative cores of stakeholders. Thus, if management wants to examine, understand and even change the existing company culture, the normative cores of stakeholders must be the beginning. Is it possible, for example, to have a company culture characterized by "team play" when all stakeholders have a "what's in it for me?" mentality as a critical component of their normative core? The search for and analysis of commonalities in the normative cores of stakeholders in order to better understand company culture is another part of effective stakeholder management.

THE REALITY OF POWER RELATIONSHIPS

Stakeholder theory also appears to suggest that how the business organization goes about dealing with multiple stakeholder interests rests with any particular stakeholder's power to influence other stakeholder interests. Part of this power is a function of the type and legitimacy of the claimed stake (e.g., legal and/or moral or, perhaps, social, economic and/or political), and part of this power is the ability of a particular stakeholder to influence others who can affect a stakeholder's interests. So, for example, an organization's consumers are a powerful and important stakeholder group for an organization's employees not just because the consumer stakeholder has a legitimate legal, moral and economic claim to safe products as produced by the employees but also because consumer groups have the ability to influence other stakeholders (e. g., the organization's management, government, the media, activists, etc.) who can also affect employees' interests. Thus another proposition coming out of stakeholder theory is that differing power relationships will help explain and predict variability in stakeholder interactions. The major implication of this proposition for management is that analyzing normative cores may be the starting point for effective stakeholder management, but the engine which drives it is power relationships.

We have already seen the introduction of the "primary" versus "secondary" stakeholder jargon as a matter of market versus non-market stakeholders, respectively. But Clarkson has altered this formulation somewhat by suggesting that primary stakeholders are those without which the organization cannot survive. Thus, employees may be viewed as primary stakeholders whereas media may be viewed as secondary stakeholders. This idea still needs further development, but an encouraging element of this view is that it recognizes power as a critical dimension of stakeholder management and suggests that recognizing and carefully diagnosing and monitoring power relationships seems fundamental to effective stakeholder interactions.

Accepting this assertion, managers may begin to understand why ignoring one stakeholder group in order to placate another is a risky strategy at best. When power is understood as both the direct and indirect ability to influence other stakeholder groups, then the importance of giving "voice" to what appear to be secondary stakeholders becomes another important implication of stakeholder theory for management. For example, many companies have now learned their lesson about the importance of environmentalism not just because environmental activists have had direct influences on management decisions, but also because they have been able to influence other stakeholder groups--the media, owners through "social investing," communities, and now customers through the so-called green revolution in marketing.

Emphasizing the reality of power relationships also raises for managers the question of assessing their performance in different ways. Accepting the notion that the impersonal forces of the market handle power differences in equitable ways makes it easy for managers who choose to ignore the responsibility and accountability of difficult decisions. "Companies which pollute or provide hazardous products or discriminate will be effectively penalized in the market" is a convenient statement for managers who want to dismiss the responsibilities and accountability attendant to power asymmetries and to argue that all assessments of managerial performance get reflected in the "bottom line." Differences in power may in fact be dealt with in the long run by the market, but through effective stakeholder management other avenues (e.g., public policy, social collaboration, etc.) become available for addressing both the positives and negatives of power relationships. The point is simply that effective stakeholder management recognizes the reality of power relationships and implies that there are many ways which stakeholders (including management) may address them. Alternative approaches for assessing managerial performance--approaches which address means as well as ends--may therefore be needed.

THE IMPORTANCE OF SITUATIONAL FACTORS

The situational factor which stakeholder theory brings into the equation rests with actual versus perceived competing expectations and demands of relevant stakeholders. The basic axiom of stakeholder theory seems to be that in any given situation, all stakeholders are not equal but that the importance of any stakeholder must begin by assessing both implicit/explicit agreements and minimal responsibilities (i.e., rights). So, as an example at the extreme, consider terrorists. In the United States, terrorists as stakeholders are generally not considered to be important stakeholders in the vast majority of business situations even though terrorists do have a normative core and the power to become a relevant stakeholder in any business situation. But, what happens once syringes are found in Pepsi cans or a bomb explodes in the World Trade Center? In these situations, terrorists as stakeholders become paramount, and change in how the organization deals with terrorists as stakeholders occurs because the potential of terrorism has become the reality. Change also occurs in terms of how stakeholders other than terrorists deal with each other; trust, for example, as Jones discussed in his work may be shattered and in need of repair within many stakeholder interactions. This point relating to changing stakeholder interactions applies to less extreme situations as well and serves as a foundation for most issues which corporations face. The key, however, is that one more proposition implied by stakeholder theory for stakeholder management is that the characteristics of differing situations will help explain and predict variability in stakeholder interactions. The implication for management is that monitoring and responding to changes in stakeholder demands and expectations is more than just a luxury, it is a managerial necessity.

The world would be a nice, tidy place if everyone agreed on everything and nothing changed. However, it would also be very boring. Fortunately, this pristine world doesn't exist. Disagreement and change are the norms and not the exceptions, and stakeholder theory makes understanding and appreciating disagreement and change more comprehensible. For stakeholder management the major implication of this reality is that to exist as a company in today's business environment means that the company exists in a series of dynamic situations. As the case of IBM illustrates, sometimes you are on top and, seemingly invincible and at other times nothing goes right. Understanding situational factors implicit in stakeholder management helps managers explain and perhaps even anticipate the ups and downs of modern business environments.

If the business environment is defined as the external interests and influences which stakeholders bring to the organization, then Evan and Freeman may be correct when they argue that the essence of the firm is coordinating stakeholder interests. Yet they probably do not go far enough for managers. For management as a stakeholder, the essence of the firm is coordinating changing stakeholder expectations and demands, which represent changing perceived stakeholder interests. With this extension, old axioms of management take on new meaning. Planning, organizing, controlling, staffing and leading no longer relate to what managers do to others, but now relate to what managers do with others. As situations change, so too must management actions change. Few, for example, would be too critical of the way that the World Trade Center's management dealt with terrorists and terrorism before the bombing. Now, however, the situation has changed. . . the stakeholder interactions are changed and the business environment is changed. Managers must recognize that effective stakeholder interactions may rest less with their actions the first time an event happens and more with their actions in preventing a recurrence of the event.

Yet another managerial implication of the importance of situational factors involves successful environmental scanning. From stakeholder theory it seems clear that managers must start from an assumption of change and that focusing on changing stakeholder expectations and demands as subtle as they might be in their earliest stages is simply smart management. Getting to know stakeholders and their interests becomes less a philanthropic or "do gooder" activity and more a productive environmental scanning necessity. Will effective stakeholder management give managers the ability to predict the fall of communism in Eastern Europe or the unification of Germany? Will effective stakeholder management eliminate people who report having syringes in their Pepsis? Undoubtedly not. Yet the promise of stakeholder management is not perfection in any activity such as environmental scanning; it is merely improvement over what exists now.

WHY BOTHER?

Normative cores, power relationships and situational factors are three stakeholder theory concepts which I took away from the workshop as being important for stakeholder management. These are, I believe, three areas where effective management should "put their eyes first." Other participants may disagree with my selection or interpretation of these three topics as keys to the managerial implications of stakeholder theory, but one thing which prompts little disagreement among us is the suggestion that the development of both stakeholder theory and stakeholder management is an important task for those of us interested in Business and Society study.

During the workshop, several descriptive phrases were either offered or implied to suggest why both scholars and managers should be interested in stakeholder management as derived from stakeholder theory. "Stakeholder management is good management," "stakeholder management is better management," "stakeholder management is profitable management," "stakeholder management is realistic management," and "stakeholder management is comprehensive management" were all phrases and ideas used at some time or another during the workshop. To me, these phases answer the question of why we should bother with developing stakeholder theory and management. We all see that there is something seriously amiss with current management theory and practice and we believe that stakeholder theory and stakeholder management have the potential (not yet the actuality) of moving management theory and practice in a different and more productive direction. It will be interesting to see how our optimism and consensus hold up as we move from the tasks of creative conceptualization to the tasks of solid theory building.

Essay by Len Brooks (1)

Management personnel have been agents for shareholders for so long that the perception that the pursuit of profit is all that matters has become quite popular, and conditions all decisions taken on the corporation's behalf. While it is true that some managements are customer-oriented, this is often done in the pursuit of profit and, as such the customer is treated as a means to an end rather than an end in itself. Sadly, this perspective provides a limited aperture for management to develop their plans, manage their resources, and take advantage of opportunities which are apparent to others.

Fortunately, the stakeholder approach provides a much broader perspective of organizational responsiveness and accountability. In contrast to the profit-only or Friedmanite paradigm, it fosters an alternate approach--the new ethical management paradigm--which embodies the need to balance the claims of shareholders with those of other stakeholders. In its most idealistic form, the new paradigm views each stakeholder group as an end rather than as a means to an end.

The implication of respecting stakeholder interests is that management is far less likely to cause an action that offends one or more of the stakeholders--at least without forethought and consideration of the overall impact involved. Obviously, the decision making algorithms used by management will be altered to assess the impacts involved. For farsighted management, increased sensitivity to stakeholder interests will suggest instituting a code of conduct to guide employees, modifying performance measures, integrating these measures into reward structures, and reporting ethical performance both inside and outside the organization.

For some members of management, the stakeholder approach is hard to swallow: for others it formalizes what they have been thinking about for a long time. The debate over the existence of stakeholder rights and claims is, however, virtually over. For both groups, the challenge now is to decide how to balance the claims of shareholders with those of other stakeholders.

Essay by Phil Cochran (2)

In his 1984 book Freeman suggested that one implication of a stakeholder orientation would be to put stakeholder representatives on the Board of Directors of firms. I would like to heartily disagree. There is no evidence that such action will increase the sensitivity of the board to stakeholder interests. And there is evidence that outside directors are, in general, less effective than are inside directors.

If outside directors representing various stakeholder constituencies were appointed to boards the net result would probably be some sort of political gridlock. A customer director or an environmental director would have a mandate to represent her constituency and would receive little to no benefit from representing the interests of other constituencies.

No, the job of a member of the Board of Directors of a major firm should be to represent all the constituencies. The director must see her job as that of a steward. On one hand, she has a major obligation to the firm's stockholders. Goodpaster (1991) is correct when he states that

The relationship between management and stockholders is ethically different in kind from the relationship between management and other parties (like employees, suppliers, customers, etc.), a fact that seems to go unnoticed by the multi-fiduciary approach. If it were not, the corporation would cease to be a private sector institution--and what is now called business ethics would become a more radical critique of our economic system than is typically thought. On this point, Milton Friedman must be given a fair and serious hearing. (p. 69)

Without a positive cash flow the firm cannot continue to operate. In most cases firms cannot pursue social agendas that drain the firm's treasury. In order to pursue social ends the firm must be profitable. The board's fiduciary responsibility is its principal responsibility.

On the other hand, Freeman and other proponents of stakeholder theory are correct. Firms do have obligations to a wide range of constituencies. The tradeoffs between the claims of various stakeholders are complex and can involve the use of reasoning processes that are considerably more complex than net present value. One can even imagine cases in which responsibilities to non-stockholder stakeholders can take precedence over firm survival.

For example, assume that a firm has "bet the bank" on a new product. If that product fails to sell then the firm will certainly go bankrupt. Further, assume that once the product has been developed that a research engineer discovers an inherent design defect that will inevitably lead to customer deaths and injuries. There is no way to design around this flaw--it is inherent in the product. Under this scenario the firm is morally obligated not to sell the product. The survival of the firm and the retention of stockholders' investment is less important than the safety of the firm's customers.

However, the implications of stakeholder theory on corporate governance is not to add directors who represent stakeholders to corporate boards. Instead, a more useful solution would be to sensitize management and directors to the demands of the various stakeholder groups. One mechanism for so sensitizing senior management and the board would be the use of advisory committees.

If senior management and boards were regularly and rigorously exposed to the perspectives of stakeholders they would undoubtedly come to better appreciate these points of view. Though not precisely the same procedure, Demb and Neubauer (1992) discuss the importance of holding board meetings at different geographic locations in order to give members a better sense of the international issues. A key reason for having such advisory boards would be to provide board members and senior managers with unfiltered information.

REFERENCES

Demb, A., & Neubauer, E-E (1992). The corporate board: Confronting the paradoxes. Oxford: Oxford University Press.

Freeman, R. E. (1984). Strategic management: A stakeholder approach. Marshfield, MA: Pitman.

Goodpaster, K. E. (1991). Business ethics and stakeholder analysis. Business Ethics Quarterly, 1, 53-73.

Essay by Len Brooks (2)

The new ethical management paradigm, which embodies the need to balance the claims of shareholders with those of other stakeholders, builds upon the notion of stakeholders to introduce a new framework for organizational accountability. Accountants, who are the chief architects and mechanics in the traditional mode of organizational accountability, will increasingly be affected.

Interestingly, accountants are under growing pressure to reflect an organization's impacts on the environment in an appropriate form of disclosure if not within the traditional accounts, and in the analyses of major activities. Because of their traditional and determined view of the world as agent of the shareholder, it has been very difficult for accountants to envision any other construct. Many still adhere to the Friedmanite view that only profits count and that accounting should be confined to the measurement of profit. However, with the rising recognition that polluting air and water can generate significant costs in the future, there is a growing awareness that the old-fashioned measure of profits is lacking and deficient and focused unduly in the short term. Efforts are under way to redress these deficiencies, but they are presently largely concentrated on sharpening up generally accepted accounting principles in ways which still primarily serve shareholders rather than stakeholders.

The stakeholder concept offers a way of thinking about organizational accountability which supplements the traditional profit-oriented disclosure. It is probable, given the strictures of our legal and taxation system and of the accounting model itself, that corporate accountability will be broadened to feature either reports to each significant stakeholder group or combinations of them, or a report on significant impacts on stakeholder interests as a whole. Hopefully, when this occurs, accountants will bring to bear their cherished principles of comprehensiveness and objectivity, even if the mode of disclosure is descriptive or involves cost-benefit analyses.

Essay by Denis Collins

A prominent attribute of stakeholder theory is the need for decision makers to take into consideration multiple, and sometimes conflicting, interests. In most management textbooks, stakeholder analysis is presented. as a decision-making tool that managers perform in the privacy of their offices. This recommended environmental scanning method of gathering essential information, though an improvement on management decisions that neglect stakeholder interests, mistakenly places the manager in a position similar to that of a philosopher-king, someone who miraculously knows everyone's interests and reaches a policy decision that satisfies each of those interests.

The political theory that dominates Western tradition, namely, democracy, argues that this is an impossible task for any manager, be the manager a political sovereign or an organizational sovereign. In this sense, a manager is in a similar position to a monarch. The philosophers who developed democratic principles for Western civilization maintained that monarchs, due to their experiential limitations, could never know what each citizen's interest was. Even if a monarch was well-intentioned and possessed great wisdom, that wisdom was likely to be self-biased when what was in the best interests of society and each citizen had a direct, immediate and negative impact on the ruling monarch.

Applying Rawlsian terminology, monarchs making decisions behind a veil of ignorance is a worthy, but unattainable goal, because a monarch could never sincerely believe that s/he would ever be anything but a monarch. A monarch was one who either surveyed each citizen directly (one person one vote) or indirectly (citizens voted for representatives who, in turn, voted on key issues). Democratic theorists went one step further and requested a particular class of citizens to vote on who should be the political sovereign.

Whereas monarchs could never understand reality the same way peasants did, and vice versa, managers can never understand reality the same way environmentalists, nonmanagement employees, community leaders, government officials, public interest groups, and other stakeholders do, and vice versa. Thus it is arrogant of any manager to claim that s/he appropriately uses stakeholder management methods without formally discussing policy options with individual stakeholders or stakeholder representatives.

So what is to be done? Managers must establish stakeholder committees and democratize their decision-making processes. The most obvious, and longest used, stakeholder committee is an organization's Board of Directors. As originally conceptualized, Boards of Directors consist of several prominent stakeholders, namely bankers, lawyers and other business leaders. Unfortunately, this list of stakeholders is artificially short. Thus Boards of Directors should also include people representing the interests of nonmanagement employees, environmentalists, government services and other stakeholders.

Gainsharing teams and management/labor committees represent one type of stakeholder mechanism for managing the daily internal affairs of an organization. Under these systems of management, both management and nonmanagement employees decide how to design a company's work flow or production process. In addition, they also decide the best method for distributing the financial gains associated with production improvements. When managed appropriately, these types of teams have proven to be successful both within and among functional departments. All sincere forms of participatory management fall under stakeholder management.

Skeptics of participatory management often wrongly predict that these meetings will degenerate into a Hobbesian war-of-all-against-a11 where each stakeholder strives to fulfill its self-interests at the expense of other-regarding sentiments. This simply is not empirically true. Rawls, Adam Smith, and just about every social philosopher, assumes that people are both self-interested and other-regarding. When managed appropriately, what typically occurs at these meetings is that each party initially presents his or her self-interests much better than anyone else could, and then other-regarding sentiments are displayed in a sincere search for common ground among the participants to improve the well-being of the whole. Thus these participatory management mechanisms establish a forum where both self-interested and other-regarding sentiments are displayed and relied on.

On the other hand, advocates of participatory management mechanisms often wrongly predict that these meetings will usher in a new age of harmonious workplace relationships. This simply is not empirically true. Similar to the experience of political democracies, all those affected will tend to be more satisfied with the group's decisions than if the decision had been derived in a dictatorial, be it benevolent or tyrannical, manner. But also similar to the experience of political democracies, each participant may feel as though some personal interest has been left unfulfilled. Thus although these participatory mechanisms are essential for any manager implementing stakeholder theory, we are still on the other side of paradise.

Unfortunately, most managers have not been trained to manage stakeholder mechanisms appropriately. As noted above, a good manager would have the same skills as a well-intentioned politician or judge. These skills include how to set up committees or mechanisms where affected parties can truthfully discuss their (occasionally conflicting) interests and reach agreement on what decision would be most fair for all stakeholders under these conditions.

Learning these skills would entail a radical transformation of most business school curriculums and the manner in which most business school classes are taught. In terms of curriculum, in addition to learning how to be good judges and politicians, business students should also learn how to be good therapists and social workers. In terms of classroom teaching methodologies, self-reflection, societal implications and experiential exercises should be adopted for all functional classes. When appropriately taught and used, stakeholder management demands a great deal of all stakeholders.

Essay by Jim Weber

The Conference identified various advancements in the field and the need for continued work regarding the normative, instrumental, and descriptive aspects of a Stakeholder Theory of the Firm (STF). Within each of the dimensions of the STF, implications for management education emerge.

NORMATIVE IMPLICATIONS

Recent work introduces value-based principles as guides for managers seeking to address stakeholders' demands and balance to property rights as a guide, while others emphasize other normative value cores in the reliance upon the pursuit of justice and fairness, communitarianism, feminist theory, or an ecological societal view of managerial responsibility. The underlying goal is how to live better. This is a critical shift away from merely perceiving stakeholders as a means to corporate profits, toward recognizing stakeholders as an ends with legitimate claims on the organization.

INSTRUMENTAL IMPLICATIONS

STF has been extensively used as a managerial tool to aid managers attempting to manage multiple stakeholder interests in a dynamic and complex business environment. The goal has been: successful corporate performance. The conference expanded my understanding of this notion to consider the utilization of firm-stakeholder relationships as a system of contracts, relying upon mutual trust to achieve a competitive advantage (primarily articulated by Tom Jones). This is a much deeper and richer understanding of firm-stakeholder relations which requires more efficient and effective environmental scanning by the firm an enhanced communications with the firm's stakeholders.

DESCRIPTIVE IMPLICATIONS

Clarkson and Deck's database investigating corporate social performance possesses significant descriptive power for STF research. In order to better assist management in their relationships with stakeholders, substantial research is needed to increase the magnitude of the database regarding corporate information. The development STF's normative and instrumental implications must be accompanied by validated and comprehensive instruments for the measurement of the firm's stakeholder management. The database begun by the Centre is an excellent foundation and model.

ESSAY BY JEANNE M. LOGSDON

Before considering the specific question about what instrumental work on stakeholder theory needs to be done, I want to underscore two of the most valuable fundamental ideas from the conference. The first relates to the contributions of stakeholder theory in grounding and expanding the business and society field. As Mark Starik stated so aptly in the first session, the value added to the stakeholder concept compared to the older notion of corporate social responsibility (CSR) springs from three contributions:

1. Greater potential for personalization of relationships

2. Greater potential for particularization of interests

3. Greater awareness of the obvious political nature of relationships, decisions, and processes.

We should be clear in acknowledging that, while stakeholder theory adds substantially to the CSR concept, it does not replace CSR as a basic concept for our field.

The second fundamental idea from the conference is the critical importance of the organization's normative core as essential to give substance to the stakeholder theory, and recognition that a number of normative cores are possible and even desirable. I believe this to be Ed Freeman's major point. This acceptance of diverse stakeholder orientations also adds substance to the older notion of CSR by giving guidance to the basic "to whom" and "for what" questions. And in turn, these two fundamental ideas create problems and opportunities for measuring corporate performance.

The specific area that I volunteered to consider involves the instrumental work to be done. The instrumental question is characterized by the following statement:

The stakeholder theory is, at least secondarily, instrumental. In its instrumental form, the theory holds that corporations practicing stakeholder management will, other things being equal, be relatively successful in conventional performance terms. (Donaldson & Preston, 1993, p. 4)

In other words, how well does stakeholder theory work to achieve the goals of the firm?

Before the conference, I would have accepted Donaldson and Preston's statement and answered the question about instrumental work to be done in the conventional social scientific way, such as the following:

1. Construct a series of hypotheses about the possible relationships between stakeholders and conventional performance measures. For example, a general hypothesis is that "the more effective the level of stakeholder management, the higher long-term financial performance." A specific hypothesis might be constructed as "the more effective that employee stakeholders are managed, the higher the return on sales."

2. Select a set of unambiguous and mutually exclusive indicators of "effective" and "ineffective" stakeholder management as the independent variables.

3. Create a data se of performance measures on these independent variables and the conventional financial measures as dependent variables.

4. Test for the nature of the relationship between the independent and dependent variables, using statistical techniques.

Much of the literature on the relationship between corporate social responsibility and financial performance conforms to this methodological approach (e.g., Cochran & Wood, 1984; Aupperle, Carroll, & Hatfield, 1985; McGuire, Sundgren, & Schmeeweis, 1988; Preston & Sapeinza, 1990). Having written a dissertation that focused on items 2 and 3 of the conventional approach, I can personally attest to the challenges of research design and variable measurement. Starik and Carroll (1990) identify many of the theoretical and methodological challenges of this approach.

After participating in the Stakeholder Theory and Management of Ethics Workshop, I believe that the instrumental challenges are even more profound. The issues that dominated the conference were more normative in nature, rather than instrumental. This by itself is a step forward, because I believe that Donaldson and Preston are correct in their contention that scholars often combine the normative, instrumental, and description into a "three-in-one" theory. The importance of clarity at the normative level Cannot be underestimated. If we are not clear about what the nature and goals of the firm are or should be, we will not be very clear in analyzing whether or how effectively the firm has achieved its objectives.

The ideal deductive approach in pursuing the instrumental question would require that we determine the normative core first and then proceed through the conventional steps above, slightly modified to take into account our knowledge about the firm's normative core. Thus, one might argue that it is impossible to pursue the instrumental linkages without analyzing the normative core first. The problem here, of course, is in determining in advance just what the normative core is. And according to which parties.

By like token, one might argue that what is selected for measurement and analysis at the descriptive level also has normative roots.

So we cannot even prepare a thorough description of firm behaviors without understanding the firm's normative core--or at least clearly disclosing our own normative basis for judgment. So all three--the descriptive, the instrumental, and the normative--are intimately related. and this may account for the tendency to combine them in a "three-in-one" theory.

One way to deal with these interconnections in order to look at instrumental questions is to reformulate the methodological approach to account far the normative and descriptive connections. This reformulation might proceed as follows:

1 . Assemble a discrete batch of possible normative cores. For example, three of the possibilities relate to the stockholder-oriented firm, the employee-oriented firm, and the ecology-oriented firm.

2. Use these normative categories to guide selection of indicators for each type and appropriate performance outcomes for each type. For example, what characteristics or evidence would differentiate the stockholder-oriented firm from the employee-oriented or ecology-oriented firm? These indicators should be as unambiguous and mutually exclusive as possible.

3. Gather data on the indicators for a sample of firms.

4. Categorize firms in the sample into normative types, based upon how well firms fit the characteristics. Quickly we see that firms are not likely to be one dimensional, so some method of creating hybrid types would have to be devised.

5. Then analyze the instrumental questions. First, one would like to check on the prima facie correlations between normative type and related performance outcomes, such as whether employee-oriented firms actually do have higher employee satisfaction or whether ecology-oriented firms have lower pollution levels. Later, one might investigate the more interesting possibilities, such as whether ecology-oriented firms might not only have lower pollution levels but also have higher financial returns.

This more complex approach to the instrumental work to be done makes two contributions. It permits consideration of the diversity of normative cores, for Donaldson and Preston's formulation of the instrumental question falls into the same trap as virtually all other work in this area: It assumes that the "conventional performance terms" are the only raison d'etre for the firm, or at least the only one worth testing. The conventional measures of higher rates of return on assets and sales or changes in stock prices are biased toward the conventional stakeholder, the stockholder. If one really accepts that there can be different normative cores. one has to have appropriate performance measures linked to those normative cores. Why would we or should we judge Revlon and The Body Shop on the same outcome criteria?

The second and related contribution is that this more complex methodology permits a more unbiased approach to the categories of responsiveness, about which there has been some debate (Clarkson, 1991; Carroll, 1991). These patterns of response have sometimes been conceptualized as a continuum (from resisting to defensive to accommodative to proactive), and that has led many to judge the resisting and defensive as always inadequate or unsatisfactory, while the categories on the right side of the continuum are obviously the right ones, as in appropriate or satisfactory. If we accept the legitimacy of diverse normative cores, then it is appropriate to resist some stakeholder requests and demands, while accepting those of other stakeholder groups.

In conclusion, I believe that the stakeholder concept enhances the development of the field, but it requires that we grapple with the range of normative cores before we can determine how well stakeholder management contributes to the goals of the firm. The Workshop has given the participants the opportunity to grapple with these issues together. It has been a great success.

REFERENCES

Aupperle, K. E., Carroll, A. B., & Hatfield, J. D. (1985). An empirical examination of the relationship between corporate social responsibility and profitability. Academy of Management Journal, 28(2), 446-463.

Carroll, A. B. (1991). Corporate social performance measurement: A commentary on methods for evaluating an elusive construct. In J. E. Post (Ed.), Research in corporate social performance and policy (Vol. 12, pp. 38J-401). Greenwich, CT: JAI.

Clarkson, M.B.E. (1991). Defining, evaluating and managing corporate social performance: The stakeholder management model. In J. E. Post (Ed.), Research in corporate social performance and policy (Vol. 12). Greenwich, CT: JAI.

Cochran, P. L., & Wood, R. A. (1984). Corporate social responsibility and financial performance. Academy of Management Journal, 27(1), 42-56.

Donaldson, T., & Preston, L. E. (1993). The stakeholder theory of the corporation: Concepts, evidence, implications. Working paper.

McGuire, J. B., Sundgren, A., & Schmeeweis, T. (1988). Corporate social responsibility and firm financial performance. Academy of Management Journal, 31(4), 854-872.

Preston, L. E., & Sapeinza, H. J. (1990). Stakeholder management and corporate performance. Journal of Behavioral Economics, 19(4), 361-375.

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Essay by Archie B. Carroll

In the strategic management field, SWOT is an acronym for a company's strengths, weaknesses, opportunities and threats. If we take liberties with this notion, it can also be applied toward the analysis of a concept rather than a company. In this discussion, the concept is that of stakeholder theory. A SWOT analysis of stakeholder theory, then, becomes an analysis of the strengths, weaknesses, opportunities and threats of or to the concept. A next question is what exactly comprises stakeholder theory? In this discussion, stakeholder theory is defined as that total body of knowledge that exists or has been postulated regarding the use of the stakeholder concept and its attendant propositions regarding the management of organizations using the notion of stakeholders as the centerpiece of the discussion.

SWOT analysis is an easy-to-use tool to get a quick overview of a firm's strategic situation. It is grounded on the principle that strategy must produce a strong fit between a company's internal capability (that is, its strengths and weaknesses) and its external situation (that is, those potential opportunities and threats it faces in its external environment) (A. A. Thompson & A. J. Strickland, Strategic Management, 1990, p. 90).

If we adapt SWOT analysis to the evaluation of a concept, it seems reasonable to assume that the strengths and weaknesses might apply to the inherent properties of the concept itself while the opportunities and threats might comprise those possible environmental exigencies the concept faces as it is attempted to be applied in the world of practice. The world of practice in the current situation might be the world of management theory from the perspective of academics and the world of actual usefulness in organizations from the perspective of practicing managers. It is with this perspective in mind that we venture into a brief evaluation of stakeholder theory using SWOT analysis as the approach. In this discussion, we will be considering stakeholder theory from the perspective of its contributions to the business and society and business ethics fields.

Strengths. One of the major strengths of stakeholder theory is the fact that it enables one to more comprehensively and systematically identify those individuals and groups with whom the organization must effectively interact if it is to be successful. Earlier views of management focused on the importance of stockholders primarily, but stakeholder theory provides an approach which can take into consideration an unlimited number of individuals and groups. Thus, the theory has great range. The notion of a stake allows the manager to think in very specific terms as to the precise nature of the stakeholder's claims or expectations of the organization. Thus, it facilitates an analysis of the legitimacy of the stakeholders' expectations.

On another dimension, the stakeholder's power can also be assessed. By analyzing legitimacy and power managers might have a better grasp of the importance of specific stakeholder groups to the life of the firm and the priority of the groups in the eyes of management. Management can, therefore, prioritize stakeholders into groups and develop strategies for dealing with the various groups.

The concept of stakeholders also permits managements to treat these individuals and groups more ethically because it provides a framework for thinking about stakeholder management and stakeholder needs. An approach to stakeholder management might be to ask key questions such as the following: Who are our stakeholders? What are their stakes? What opportunities and/or challenges do our stakeholders pose? What responsibilities do we have toward our stakeholders? Such questions provide management with a framework for effective, efficient and ethical management.

Weaknesses. The major weaknesses or pitfalls of stakeholder theory were effectively summarized by Ed Freeman in Strategic Management: A Stakeholder Approach (1984), the book which has been the driving force behind the popularization of stakeholder theory during the past decade. Freeman cites five pitfalls. First, the stakeholder approach assumes management wants to surface difficult issues through an open system. Some managers may see the openness of the system as a negative attribute. Second, the stakeholder approach requires involvement of top management and the absence of such support represents a potential weakness. Third, lower levels of management must be involved if the stakeholder approach is to be successful and often their support is not present in the implementation of such efforts. Fourth, stakeholder theory lends itself to extensive analysis and such analysis can degenerate into "analysis paralysis." It is so easy to get captivated by aesthetic stakeholder maps, with multicolored circles and arrows, that nothing gets done. Finally, Freeman mentions the snail darter fallacy. As organizations narrow down their list of stakeholders, they must leave those who are too small and too insignificant to others to worry about. Ignoring such snail darter stakeholders, however, can sometimes be a mistake because these groups at times hold the balance of power.

Opportunities. There are many opportunities for stakeholder theory in the academic and practitioner environments. Stakeholder theory may be beneficial to organizational functions and decisions beyond those discussed thus far. Stakeholder theory may also come to serve additional academic audiences in business. Such audiences might include the functional areas: marketing, production, finance, MIS, and human resource management, just to name a few. Advocates of alternative management theories may become complacent thus allowing stakeholder theory additional opportunities to become the accepted framework in the field. In the business and society/social issues in management fields, theorists are already advocating stakeholder theory as part of emerging paradigms.

Threats. It is difficult in a SWOT analysis discussion to think in terms of threats in the environment to stakeholder theory. Obviously, there are other competitive frameworks and theories to the. stakeholder approach. Substitute theories or concepts may come available which grab the attention of academics and practitioners alike. Changing needs of potential users could slow the acceptance and growth of stakeholder theory. Use of the theory could become vulnerable to economic times and the culture. Stakeholder theory is quite useful so long as the social and political environments assume a crucial role in the environment of business. It may well be, however, that economic and technological issues might come to dominate the business landscape and that stakeholder theory might be less useful when these subenvironments are driving business decision making.

Summary. There are strengths, weaknesses, opportunities, and threats which must be taken into consideration when thinking about stakeholder theory. The above discussion provides a brief overview of some of these.