Chapter 4

Stakeholder Theory and Its Critics

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

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

This technical preoccupation continued in much of what would become management and organization studies. Though concerned in some measure with creating a “just system” of deriving a “fair” wage,⁹⁷ Frederick Winslow Taylor’s scientific management was predominantly a technical undertaking. Henry Towne’s “The Engineer as Economist” has emerged as a classic piece in the organization studies literature.⁹⁸ Notwithstanding the work of pioneers such as Mary Parker Follett⁹⁹and Chester Barnard¹⁰⁰ on the human dimensions of management, the technical aspects continued to play a prominent role in management and organization studies throughout the latter half of the twentieth century.

This preoccupation with quantitative approaches to management continued even as attention to the social responsibilities of business began to reemerge. Extensive work has been undertaken which attempts to determine what, if any, relationship exists between organizational ethics and other quantitative measures of corporate success. Margolis and Walsh¹⁰¹ recently completed a comprehensive review of the literature (thirty years and ninetyfive empirical studies) on the relationship between corporate social responsibility and profitability. They conclude that “the existing body of work cannot be relied upon for answers.”¹⁰² Further, there should be a reorientation of the research program relating to corporate social performance and corporate social responsibility. They ask and answer, “Would evidence of an empirical link, one way or the other, fundamentally change these [socially responsible] investment decisions? We think not” (p. 25). The following passage from Tetlock¹⁰³ is instructive:

[Disagreements rooted in values should be profoundly resistant to change.… Libertarian conservatives might oppose the (confiscatory) stakeholder model even when confronted by evidence that concessions in this direction have no adverse effect on profitability to shareholders. Expropriation is expropriation, no matter how prettified. And some egalitarians might well endorse the stakeholder model, even if shown compelling evidence that it reduces profits. Academics who rely on evidencebased appeals to change minds when the disagreements are rooted in values may be wasting everyone’s time.¹⁰⁴64

Disagreements founded on values must be adjudicated on this same basis.

Explicit and predominant focus on the moral aspects of organizational relationships with stakeholders has never played a more prominent role than that played in contemporary stakeholder theory.¹⁰⁵ Not only have the past fifteen to twenty years witnessed a marked growth in the literature on stakeholder theory, but, more tellingly, there has been an increase in the rate of growth of stakeholder scholarship in recent years. It is fair to say that the proliferation of research undertaken under the aegis of stakeholder theory has undergone an explosion. Since the last count of “about a dozen books and more than 100 articles with primary emphasis on the stakeholder concept,”¹⁰⁶ a comprehensive bibliography has become nearly impossible. The stakeholder idea has also spread from the realm of scholarly literature to the arena of popular discussion. Stakeholdership is a central theme in the political discourse of the United Kingdom.¹⁰⁷

Rowley’s¹⁰⁸ social network treatment of stakeholder theory, elaborated upon by Frooman,¹⁰⁹ adds depth and richness to our understanding of relationships between and among stakeholders. Other work has been devoted to examining the relationship between stakeholder management and financial success.¹¹⁰

Orts thoroughly discusses treatment of stakeholders (“corporate constituencies”) in the law.¹¹¹ Tracing the theoretical roots of constituency statutes to stakeholder management theory in American business schools, he observes that twenty-nine states have, as of his writing, statutes that “purport to expand the traditional view that directors of corporations have a duty to make business decisions primarily, if not exclusively, to maximize shareholders’ wealth by explicitly permitting consideration of non-shareholder interests.”¹¹² The law review literature concerning issues relating to stakeholder management is large and growing.¹¹³ The role—or non-role—played by the law in the stakeholder theory described herein is discussed later in this chapter.65

This chapter will seek to review and critically assess a small part of the literature on stakeholder theory to date. With full recognition of and appreciation for the fact that many others have discussed relationships between organizations and external constituencies before and that there is a long history of scholarship on ethics in economic contexts, the focus of this chapter will be on that stream of research that is explicitly concerned with stakeholder theory. More specifically I am concerned with that stream of literature that takes Freeman’s 1984 work as the locus classicus.

Freeman’s study of the early history of the stakeholder concept remains unsurpassed in its comprehensiveness and depth. I would refer the reader to Freeman’s study of this early history. The publication of Freeman’s Strategic Management: A Stakeholder Approach (1984, hereafter SMSA) marks a consolidation of myriad works. He took the ideas of the Stanford Research Institute and the subsequent work in other areas and operationalized them into a coherent set of ideas for the practicing manager. Freeman’s definition, based on “Thompson’s¹¹⁴ claim [that] ‘stakeholder’ should denote ‘those groups which can make a difference,’” states:

A stakeholder in an organization is (by definition) any group or individual who can affect or is affected by the achievement of the organization’s objectives.¹¹⁵

SMSA marked the first explicit attempt to describe the stakeholder idea as an explicitly managerial approach to organizational strategy. “Stakeholder” went from being more than an intuitively appealing description of a firm’s theoretically underrepresented constituencies to “stakeholder management”—a well-elaborated method of decision making in organizations. SMSA took the stakeholder idea to a higher level of theoretical sophistication.66

Stakeholder Distinctions

The most prominent and oft-cited works in stakeholder theory suggest distinctions within the theory designed to make it more useful. In this section, I will discuss the most widely cited of these and assess the authors’ claims.

Mitchell, Agle, and Wood propose a theory of stakeholder salience defined as “the degree to which priority is given to competing stakeholder claims.”¹¹⁶ Stakeholders and their claims are classified based on the relative presence of three characteristics: legitimacy, power, and urgency. Using these three attributes, the authors suggest a theory of stakeholder identification that is “comprehensive and useful” and attempts to bridge the “broad vs. narrow” debate. The theory of stakeholder identification and salience, and in particular the Mitchell et al. notion of stakeholder legitimacy, receives more attention in Chapter 6.

Donaldson and Preston¹¹⁷ attempt to bring greater clarity and rigor to stakeholder theory by arguing for a taxonomy consisting of descriptive, instrumental, and normative varieties of research. Descriptive stakeholder research analyzes stakeholder management as it is found (or not) in actual organizations. This variety of scholarship (purportedly) makes no prescriptive or normative assertions about the desirability of stakeholder management. Instrumental stakeholder theory assesses the extent to which managing stakeholders and stakeholder relationships conduce to the achievement of commonly asserted organizational goals (e.g., profitability, maximization of shareholder or firm value, viability). Instrumental stakeholder research makes prescriptions, but does not question the moral legitimacy of the goals themselves. The purpose of the corporation is taken as self-evident. Normative stakeholder theory addresses directly the moral justification of the organization and the ethics of stakeholder management. Donaldson and Preston conclude that all three are vital to the stakeholder research program, but that the normative variety is foundational to all. They conclude by proposing a theory of property rights as one candidate normative basis for stakeholder theory.67

Jones and Wicks¹¹⁸ argue for a convergent stakeholder theory. They provide an outstanding description of the variety of questions to which stakeholder theory aspires to respond and the disparate standards of evaluation that apply to these questions and their answers. They also propose a plausible amalgamated solution to the perceived disparity between the normative and instrumental streams of research. In a sense, they can be seen as resynthesizing that which Donaldson and Preston analyzed.

In his response to Jones and Wicks, and indirectly in response to Donaldson and Preston, Freeman¹¹⁹ casts doubt upon the descriptive/instrumental/normative taxonomy itself and hence the usefulness of convergent stakeholder theory. He writes:

[I]f we drop the tripartite typology of Donaldson & Preston, then plainly there is no need for anything like convergent stakeholder theory. There is nothing to converge—no separate contributions for philosophers and management theorists. There are just narratives about stakeholders and narratives about these narratives—that is, theory. The overwhelming logic to drop this distinction is pretty simple. By choosing to call groups “stakeholders,” rather than “interest groups,” “constituencies,” or “publics,” we have already mixed up “fact” and “value.” Stakeholder is an obvious literary device meant to call into question the emphasis on “stockholders.” The very idea of a purely descriptive, value-free, or value-neutral stakeholder theory is a contradiction in terms.¹²⁰ 68

Implicit in Jones and Wicks’s convergent solution, then, is the idea that the two research streams—normative ethics and social science—were never as far apart as some scholars would have us believe. Freeman, therefore, has a point. It is unfortunate that such an article as “Convergent Stakeholder Theory” had to be written at all. Moral theory with no reference to our world is empty formalism; value-free science is impossible. These are not, however, universally held ideas; stakeholder theory has provided fodder and a battleground for those who believe in the strict partitioning of knowledge.

Part of the contribution of distinctions like those of Donaldson and Preston and Mitchell, Agle, and Wood is that they facilitate a division of labor among those with myriad scholarly strengths (e.g., quantitative, logical, narrative). An unfortunate side effect of such typologies is that, rather than using them to create an area of common ground among people using different methods, it frequently allows these people to slip back into their cozy and familiar ways of thinking and to continue to speak past one another with merely a new vocabulary. Old wine in new wineskins.

This having been said, these distinctions and typologies have made a contribution. The conversation that motivated “Convergent Stakeholder Theory” had to occur. The divisions were (perhaps continue to be) too deep for stakeholder theory to immediately take root the way Freeman envisioned (and continues to envision). The separation was inevitable due to the prevailing background conditions and training of the parties involved. Creating a language to talk about this separation has prompted a more thorough elaboration and defense of Freeman’s monolith. In at least this way, the analyses of Donaldson and Preston and Mitchell, Agle, and Wood, as well as the synthesis of Jones and Wicks, have done a service to the theory and the field.¹²¹ The discussion of stakeholder legitimacy in Chapter 6 aspires to demonstrate how a distinction can add clarity to a topic—even if that clarity is achieved through a taxonomic critique. As Freeman indicates, the integration was there all along, but history was such that the full significance of this integration required time and thought to proliferate.69

Stakeholders, Agency Theory, and Fiduciary Duties

Another approach to the study of stakeholder theory is comparing it to more traditional theories of economics. Agency defenses and critiques of stakeholder theory have been among the most widely discussed in the literature.^{122, 123} As a corollary to the principle-agent controversy in stakeholder theory, much controversy exists concerning the role of fiduciary duties within stakeholder theory.¹²⁴ According to various authors, either

1. Fiduciary duties extend to all stakeholders in a “multifiduciary” fashion,¹²⁵
2. Multi-fiduciary duties are impossible,¹²⁶ thus creating a “stakeholder paradox,”¹²⁷
3. Fiduciary duties are a public policy expedient,¹²⁸ or
4. Fiduciary duties are irrelevant to the topic of stakeholder theory and practice.¹²⁹

These conclusions and the arguments leading up to them mark one of the central disputes in stakeholder theory.

Goodpaster posits a “stakeholder paradox”:

It seems essential, yet in some ways illegitimate, to orient corporate decisions by ethical values that go beyond strategic stakeholder considerations to multi-fiduciary ones.¹³⁰

Strategic stakeholder considerations are those that concern stakeholders only to the extent that they may have an impact on the firm’s traditionally measured economic performance. Multi-fiduciary considerations, on the other hand, dictate that stakeholders merit consideration in their own right.70

Goodpaster’s article in which the stakeholder paradox is elaborated—bolstered by Marcoux, Maitland, and a response article of his own—sparked an interesting and ongoing debate among theorists regarding the fiduciary status of share owners and stakeholders. Responding to Goodpaster, Boatright argues that there is nothing remarkable about share owners that makes them the preeminent stakeholder group and thus denies the existence of the paradox.¹³¹ He examines the claim that the relationship between a corporation’s officers and directors and its share owners is “ethically different” from the relationship between managers and other constituencies. Morally significant differences between the two types of relationships would tend to bolster the fiduciary argument against stakeholder theory, while the absence of such moral differences would severely damage this argument. Though I use Boatright’s article as a framework for examining the question of fiduciary duties and stakeholder theory, not all of the arguments presented are his.

In asking, “What’s so special about stakeholders?” Boatright examines three possibilities for rendering morally different the relationship between managers and share owners from those of other constituencies: property, contractual relations, and agency. In his discussion of property rights, Boatright looks closely at what he calls “the equity argument,” an argument he attributes to Oliver Williamson. The argument is that a share owner’s investment is different from that which is invested by other constituencies in that “[t]he whole of their investment in the firm is potentially placed at hazard.” That is, “[t]hey are the only voluntary constituency whose relation with the corporation does not come up for periodic renewal.” Therefore, on Williamson’s account, share owners need additional protection of some kind.

In response, Boatright questions the need for the protection of fiduciary duties in addition to existing share owner rights. In other words, share owners already have rights that will protect them from the larger part of the hazards created by Williamson’s “equity argument.” Examples of such existing rights are the right to elect boards of directors and vote on share owner resolutions. In light of these rights, Boatright finds unnecessary—or at least in need of further justification—the “more stringent fiduciary duty.”¹³²71

One possible criticism of Boatright on this argument regards the basis for these existing share owner rights. To what extent are these rights themselves derived from some property or fiduciary right? The rights to vote for boards of directors and share owner resolutions do not sound like rights that would qualify as foundational moral rights. Rather, they would seem to be derived from some other more basic right. If they are unjustified standing alone, then does Boatright actually have an argument against the need to protect share owners’ rights? Unless Boatright is able to found these rights on something other than the property rights or fiduciary duties against which he is arguing, this particular part of his discussion may do little damage to either Williamson’s or Goodpaster’s arguments. However, Boatright has a second, more convincing, response.

Making similar arguments to those of Freeman and Evan, and Blair,¹³³ Boatright’s second response to Williamson’s “equity argument” is that the existence of a market for shares provides a great deal of security. The share owner is able to, at minimal cost, dispose of a disappointing stock and, hence, perpetually and constantly renegotiate her relationship with the corporation. Additionally, the market makes portfolio diversification possible, thus reducing further the risk to the share owner.

Marcoux responds to this “ready-market-for-shares” argument by suggesting that exclusive reliance on it reduces the applicability of stakeholder theory to only large, publicly traded corporations and that stakeholder theorists must accede fiduciary duties to shareholders in all other instances. He writes: “Sole proprietorships, partnerships, many (though not all) limited partnerships, and closely-held corporations all typically lack a developed and ready market for their equity.”¹³⁴ The ready-market-for-shares argument is resistant to this response for several reasons. Most obviously, Marcoux’s examples of sole proprietorships and partnerships are not subject to agency problems or fiduciary duties to the same extent as the widely or publicly held corporation, even on his own vulnerability-based account. The degree of separation of risk bearing and decision making is far less or nonexistent; nor is the level of vulnerability as high because the residual risk bearers and managers are coextensive.72

The second possible justification for fiduciary duties to share owners discussed by Boatright is that of a contract. At the outset, Boatright establishes that there is no express contract. Rather, the contract is taken as implied as recognized in U.S. law. However, Boatright finds the case for an implied legal contract as “not very promising.” His reasons include the lack of an agreement beyond the prospectus, the attitude of share owners as “investors” rather than “owners,” and “lack of any specific representations by management to individual shareholders.”¹³⁵ The contract may, however, be an implied contract of a nonlegal variety and may in this way justify the fiduciary duties to shareholders. Chapter 5 herein contains a more thorough discussion of implied contracts and tacit consent. It is argued that implied consent provides little or no justification—for either stakeholder theory or fiduciary duties. Thus, the implied contract justification of fiduciary duties is found wanting by both Boatright and myself.

The third of Boatright’s candidates for justifying a moral distinction between share owners and stakeholders is agency. Justification for fiduciary duties is commonly thought to arise due to the agency relationship between share owners and managers.^a Fiduciary duties may, therefore, arise due to the agency relationship between managers and shareholders; however, no such agency relationship exists. Boatright follows Clark, who writes:73

To an experienced corporate lawyer who has studied primary legal materials, the assertion that corporate managers are agents of investors, whether debtholders or stockholders, will seem odd or loose. The lawyer would make the following points: (1) corporate officers like the president and treasurer are agents of the corporation itself; (2) the board of directors is the ultimate decisionmaking body of the corporation (and in a sense is the group most appropriately identified with “the corporation”); (3)directors are not agents of the corporation but are sui generis; (4) neither officers nor directors are agents of the stockholders; but (5) both officers and directors are “fiduciaries” with respect to the corporation and its stockholders.¹³⁶

According to the definition of agency found in the second Restatement of Agency, Section 1(1), the defining characteristics are: “(1) consent to the relation, (2) the power to act on another’s behalf, and (3) element of control.” Though these characteristics may exist between top management/directors and the corporation, they do not exist between managers and shareholders. It then becomes a matter of how one delimits the corporation.¹³⁷

In an ingenious article, Thomas A. Smith argues for a “neotraditional interpretation of fiduciary duty.”¹³⁸ He uses a hypothetical bargaining situation to determine what sort of fiduciary duties would be selected ex ante as contractual “gap-filling principles” to the “standard form contract” of corporate law. He contends that the shareholder wealth maximization imperative is actually inefficient and would not be chosen by rational bargaining parties. Rather, parties bargaining rationally—in this case rationality is determined by consistency with the capital asset pricing model (CAPM)—would have fiduciary duties extend to the firm itself rather than to shareholders alone. Maximization of firm value, defined as the totality of all financial claims against the firm, would supplant shareholder wealth maximization as the objective function of the firm. Smith calls this norm according to which fiduciary duties run to the corporation rather than the shareholders neotraditional because of the following:74

Until well into this century, lawyers and judges conceived of the corporate fiduciary duty as running to “the corporation” itself rather than primarily or exclusively to the shareholders.¹³⁹

Smith’s arguments bear brief recapitulation here.

There is an established exception in corporate law to the shareholder wealth maximization norm. When a corporation is close to insolvency (i.e., “vicinity of insolvency”), managers have an incentive to undertake unusually risky projects to maintain the corporation as a viable, going concern.

In the Credit Lyonnais case, Chancellor William Allen opined that “in the vicinity of insolvency,” the fiduciary duty “shifts” from being owed to shareholders to being owed to creditors.¹⁴⁰,¹⁴¹

When faced with insolvency or taking on final, high-risk effort to save the company, managers have incentives toward the latter. This can be harmful to holders of other financial instruments, such as bonds, if this last-gasp effort fails. The shareholders are little worse off because their investment was in grave danger whether the risky project is undertaken or not. A failure of the risky project may significantly reduce the amount left for other bond holders, however. Maximizing shareholder wealth would dictate undertaking the project without extracontractual (fiduciary) duty to bond holders. Hence, limiting managerial discretion in the “vicinity of insolvency” improves overall efficiency.

Smith suggests, however, that “firms are always in the vicinity of insolvency because all it takes for any firm, no matter how solvent, to become insolvent is to lose a sufficiently risky bet.”¹⁴² A manager motivated by maximizing shareholder wealth, primarily or exclusively, will have incentives to undertake such particularly risky projects. 75

For example, take a very solvent firm ABC, which has assets of $100 million and liabilities of $10 million. By making a highly leveraged bet in, say, the derivative market, it would have, let us suppose, a one in one hundred chance of gaining $10 billion, and a 99 percent chance of losing the firm’s entire value. This bet would have a present value of $10.9 million to shareholders while it would have an expected value to the corporation of only $1 million. The price of this lottery-ticket-like bet is, let us suppose, $10 million. Thus is has a net expected value to the corporation of negative $9 million—obviously a bad bet for the firm.¹⁴³

This is not, however, a bad bet for the shareholders. The implication of this argument is that the vicinity of insolvency is ubiquitous. As such, the “vicinity of insolvency” exception in which fiduciary duties extend to other claimants on the corporation, may be widely or universally applicable.

Smith goes on to argue that economically and financially rational parties, according to the CAPM, will own a “market portfolio” of not only equity shares, but all varieties of financial instruments available. If these rational individuals, each holding the market portfolio of investments, were to negotiate ex ante for gap-filling principles, then one such principle would not be maximizing shareholder wealth. The rational investor would own not only stocks, but also bonds and other forms of debt. They would not want to see the equity investment (i.e., common stock) privileged to the detriment of these other forms of debt unless the increase in the value of the equity were greater than the decrease in the value of the other forms of debt. In other words, rational investors would demand managerial decisions that enhance the net value of the gamut of corporate obligations. Rational investors would want managers to act so as to maximize the value of all claims on the corporation. Thus, like the traditional norm, the neotraditional fiduciary norm that such negotiators would settle upon would be a duty to the corporation rather than equity shareholders. 76

The final prong of Smith’s argument is that the increasing complexity of financial markets and instruments (e.g., derivatives, tracking stock, “letter stocks” of different classes) make it concomitantly more difficult to determine who is the equity shareholder and thus to whom a fiduciary duty is due under a system of shareholder wealth maximization. The practical difficulties with ascertaining the identity of this group will only become greater as financing arrangements become more and more complex. Duties running to shareholders alone are therefore theoretically inferior and less practicable in adjudication.

Notably for the purposes of this book, Smith places limitations on his theory writing, “This does not mean, however, that with no additional theoretical warrant, we can somehow extend the analysis to all providers of input to the firm.”¹⁴⁴ In other words, the neotraditional norm Smith sketches does not automatically extend to nonfinancial stakeholders. (Nor do I make such a claim on Smith’s behalf.) The reasons for elaborating upon his ideas are:

1. To demonstrate the viability of duties running to the corporation. Such duties are not an anachronism of the early twentieth century and before, but the subject of serious and compelling recent scholarship.
2. To contribute further to the dispatching of the mistaken notion of a moral duty running primarily or exclusively to equity shareholders, thus creating space for obligations of stakeholder fairness.

Only under the assumption that the corporation is the same thing as its shareholders are arguments for agency-based fiduciary duties to shareholders viable. Directors and top management indeed have fiduciary duties to the organization on behalf of which they act; but this does not imply a fiduciary duty or agency relationship between managers and shareholders—or between management and any other stakeholder. Even the (wrong) assumption that shareholders own the corporation does not imply coextension. Shareholders own nothing more than the right to a residual cash flow and even in this they enjoy limited liability. “[D]irectors and top managers can neither bind individual shareholders to contracts with third parties or [sic] generate personal liabilities for them through debt or tort. On the other hand, directors (and their agents, high level managers) can legally bind the corporate entity as a whole to either contractual obligations or financial liability.”¹⁴⁵ Managers are not agents of share owners, share owners do not own the corporation, and less still are share owners coextensive with the corporation. The agency defense of fiduciary duties to share owners fails. Indeed, Marens and Wicks conclude that fiduciary duties are irrelevant to managerial decision making and present no obstacle to stakeholder management—the “stakeholder paradox” does not exist.77

None of this necessarily condemns “agency” explanations and analyses in the economics literature as long as one is careful in moving between economic, legal, and moral conceptions. The analysis of “agency costs” is a powerful explanatory tool of economic analysis. The agency theorists’ explanations of residual claims and monitoring costs are all powerful and insightful. None of this necessarily leads to the conclusion that shareholders own the corporation in any meaningful sense, nor that managers are agents of shareholder principals with concomitant fiduciary duties. The problem arises when the moral implications of “agency” are assumed based on this economic analysis rather than carefully considered. Legitimate agency relationships (e.g., in the legal sense adumbrated in Clark’s previous statement) and fiduciary duties imply legal and moral obligations.¹⁴⁶ It is this conceptual leap from residual claimant to owner, facilitated by calling the model “agency” theory and stipulating shareholders as “owners,” that is unjustified.78

Marcoux is among the stakeholder critics careful to elaborate and defend the idea of fiduciary duties to shareholders from a moral perspective. His article, entitled “A Fiduciary Argument Against Stakeholder Theory,” is the most recent installment in the “stakeholder paradox” dispute and bears a brief examination in light of the preceding discussion. An analysis of his arguments should help us to determine the nature of the relationship between stakeholder theory and fiduciary duties. (Recall the possibilities from the beginning of this section: Fiduciary duties extend to all stakeholders, apply only to shareholders, are merely a public policy expedient with no moral depth, or are generally irrelevant to stakeholder theory.)

In his article, Marcoux is primarily concerned with dispelling the idea of multi-fiduciary stakeholder theory (i.e., the idea that managers bear fiduciary duties to all stakeholders and not to shareholders alone) apparently as part of a larger project of dismantling stakeholder theory entirely. He begins by demonstrating the conceptual and practical impossibility of multiple fiduciary duties among potentially competing parties. For the purposes of a particular project, the fiduciary must put the interests of the beneficiary ahead of all others including her own. But it is impossible to put the competing interest of any one beneficiary ahead of all others while putting each of the others ahead of this same beneficiary as well as all others. “In other words, the nature of the fiduciary relation is such that it is impossible for one to act as a fiduciary for multiple parties where the interests of those parties are (or are likely to be) in conflict.”¹⁴⁷ He concludes, therefore, that the obligations of stakeholder theory are necessarily non-fiduciary in nature.

Fiduciary duties are nevertheless morally deep, Marcoux continues. The arguments of “moral depth” of fiduciary duties are in response to Boatright’s contention that the best way to understand fiduciary duties in the context of stakeholder theory is as a public policy issue. Boatright adopts a middle ground in the stakeholder paradox debate by concluding that there is nothing special about shareholders that entitle them to differential treatment by managers, but that fiduciary duties are nevertheless important from a public policy perspective. He writes:79

On questions about the nature and structure of the corporation, with which fiduciary duties are largely concerned, courts and legislatures have held, for reasons of public policy, that the profit-making function of corporations and accountability to shareholders ought to be preserved. On the questions of ordinary business operation, however, public policy dictates that corporations be allowed to take the interests of many constituencies beside the shareholders into account.¹⁴⁸

Marcoux objects to this conclusion by taking seriously the moral aspects of agency theory and fiduciary duties. He argues that the “special vulnerability” of one party to another creates a fiduciary relationship between them. It is wrong for more than legal and public policy reasons for a doctor to act in her own interest at the expense of patient health. There is a morally deep fiduciary relationship that exists between doctor and patient. Marcoux’s argument is sound up to this point.

Central to Marcoux’s argument is that such duties exist not only in the doctor-patient, attorney-client, and guardian-ward relationships, but also in the manager-shareholder relationship. It is not sufficient to merely point out that some fiduciary duties are morally deep and that stakeholder theory is nonfiduciary. The stakeholder theorist may concede these points, and still argue—for the same reasons cited by Boatright, and Marens and Wicks—that there is no special fiduciary duty between shareholders and managers. The general irrelevance argument may still hold.80

Marcoux must therefore claim that not only is there something morally deep about fiduciary duties, but also that such duties exist between managers and shareholders. Here his argument falls victim to the error of coextension as previously described. Managers do indeed bear a fiduciary duty, but it is to the corporation, not to the shareholders; the two are not the same. Fiduciary duties are not entirely irrelevant. For all of the reasons cited by stakeholder critics (e.g., accountability, avoiding managerial opportunism, and selfdealing), fiduciary duties have a role to play in stakeholder theory. The key is in accurately determining the beneficiary. The duty is owed by managers and directors to the organization rather than to the shareholders or any other single stakeholder group. Consider in defense of this claim that a derivative lawsuit is typically brought by a shareholder against an opportunistic manager or director on behalf of the corporation. The standing of the plaintiff is derivative, not direct.^b

This conflation of shareholders with corporation appears throughout Marcoux’s article. For example, in indicating the “special vulnerability” of shareholders to managers, he writes:

Shareholders suffer the special disadvantage of having their assets in the hands of a management team in possession of all of the relevant knowledge, in control of all aspects of their investment, and in control of the flow of information to the shareholders.¹⁴⁹

If care were taken to distinguish shareholder from corporation, we would see that the shareholders, in fact, continue to control the stock that is both their asset and their investment. The assets Marcoux describes as being under the control of management are the assets of the organization, not the shareholders.

Stakeholder Theory and the Place of Fairness

From the introductory chapter and the preceding review of the stakeholder literature, the reader should have a good idea about the aspects of stakeholder theory that are being addressed in this book. However, for the sake of clarity, this section will discuss the shortcomings in stakeholder theory that were the impetus for this and much of the work discussed herein. Among these problems are the lack of a normative, justificatory framework and the problem of stakeholder identity. I shall briefly lay out the problems here.81

Thomas Donaldson has written:

Despite its important insights, the stakeholder model has serious problems. The two most obvious are its inability to provide standards for assigning relative weights to the interests of the various constituencies, and its failure to contain within itself, or make reference to, a normative, justificatory foundation.¹⁵⁰

This criticism and others like it were the motivation for the current project. That is, even if the “Foundation” of stakeholder theory eludes us, there may, nonetheless, be a deeper normative justification for stakeholder obligations than currently exists in the literature. The arguments that follow are intended to provide such a deeper justification.

Freeman defines a stakeholder as “any group or individual who can affect or is affected by the achievement of the firm’s objectives.”¹⁵¹ He effectively demonstrates why persons or groups of the former type (i.e., those who can affect the firm) demand attention. The arguments are straightforwardly prudential in nature and seem to view stakeholders instrumentally. This much seems clear; to the extent that there are persons or groups who can affect the accomplishment of one’s goals, one would be prudentially remiss if she failed to include the possible effects of these groups in her calculations. More troublesome for Freeman’s prudential treatment is accounting for those who are affected by, but do not significantly affect, a firm’s operations. Freeman explains:

[I]t is less obvious why “those groups who are affected by the corporation” are stakeholders as well, for not all groups who can affect the corporation are themselves affected by the firm. I make the definition symmetric because of the changes which the firm has undergone in the past few years. Groups which 20 years ago had no effect on the actions of the firm, can affect it today, largely because of the actions of the firm which ignored the actions of these groups. Thus, by calling those affected groups “stakeholders,” the ensuing strategic management model will be sensitive to future change…¹⁵²82

Freeman thus tries to reduce all stakeholder interest into prudential interest by claiming that those whom the corporation affects may some day come to affect the firm’s operations. Insofar as this “prudential stakeholder model” relies only on considerations of organizational well-being,¹⁵³ it may be perfectly consistent with the claim that a manager’s only obligation is to increase profits. Such a model is insufficient as a basis of normative organizational ethics study. This book suggests that a principle of fairness provides a normative basis for stakeholder claims aside from prudential interests.

Secondly, stakeholder theory as currently discussed has no means of determining who are and who are not stakeholders in the moral sense. This is the problem of stakeholder identity. It has been suggested that groups as disparate as activists, competitors,¹⁵⁴ and the natural environment¹⁵⁵ be considered stakeholders. In fact, it would seem that current theory is unable to rule out any group from stakeholder status. If the fact that a group may some day come to affect the achievement of an organization’s objectives qualifies that group as a stakeholder, who or what fails to qualify? Inability to properly discern stakeholders from non-stakeholders threatens the meaningfulness of the term. If everyone is a stakeholder of everyone else, what value is added through use of the term stakeholder? The principle of stakeholder fairness more clearly defines the concept of stakeholder in such a way as to distinguish which groups are and which are not stakeholders in the sense of having additional moral obligations over and above those one is presumed to have to human beings in general. 83

This brings up a final important point that should be made explicit and will be repeated throughout. Stakeholder status as here conceived indicates the presence of an additional obligation over and above that due others simply by virtue of being human. When it is indicated that a particular group is not a stakeholder group, it would be a mistake to take this to mean that the organization has no moral relationship with that group. Simply because a person or group does not merit the additional moral consideration conferred by stakeholder status does not mean that they may be morally disregarded. One still may not break promises without sufficient cause, torture for fun, or otherwise act immorally toward nonstakeholders. However, no additional moral consideration is due non-stakeholders group in managerial decision making. It is a group’s engagement in and acceptance of the benefits of a cooperative scheme that creates the extra obligation owed to such groups by managers. Considering a group a stakeholder, on this conception, is to consider that group as meriting extra consideration due to the presence of an additional obligation. To deny that a group merits stakeholder status is not to take anything away from that group, but rather to deny the existence of such an additional obligation.

Conclusion

This chapter has examined a portion of the extant stakeholder literature. A critical assessment of some particularly relevant literature to current purposes reveals a number of conceptual shortcomings. Donaldson has suggested that the failure of stakeholder theory to make reference to a normative grounding is among the greatest problems for stakeholder theory; and Donaldson and Preston argue that the normative category of stakeholder literature is the most basic of the three categories in their taxonomy. The absence of a rigorous normative underpinning represents not only a gap in the theory in itself, but also leads to other theoretical ambiguities such as the problem of stakeholder identification.84

I have attempted to show how these conceptual gaps can be problematic for stakeholder theory as well as how a principle of stakeholder fairness may serve to fill these gaps in a way that compares favorably with extant stakeholder writings. However, this comparison to other theories may seem premature inasmuch as the reader has to this point been provided with only a skeletal elaboration and justification of the principle itself from the introductory chapter. The next chapter will attempt to provide a more thorough discussion of and arguments for the principle of stakeholder fairness. I implore the skeptical reader to reconsider the comparisons made in this chapter with other stakeholder writings after having explored the principle in greater detail.

^aOr sometimes vice versa with fiduciary duties creating agency relationships.

^bIt would be interesting, though outside the scope of this chapter, to consider the implications of granting legal standing to stakeholders in derivative lawsuits as a way of ensuring accountability. If this legal right were extended (possibly one at a time beginning with employees) to other stakeholders, managerial accountability would be maintained, as would the agency relationship between managers (agents) and the corporation (principal) within a stakeholder legal regime.