“Dialogue: Toward Superior Stakeholder Theory” - D. Thistle

 “Dialogue: Toward Superior Stakeholder Theory”

 

This is a very interesting article that consists of 5 essays with different viewpoints on the current and future states of the “stakeholder perspective”.  The essays were requested of the authors who all spoke at the 2007 “All-Academy”, Academy of Management annual meeting in Philadelphia and were compiled to make the different perspectives represented at the symposium available to a larger audience.

 

The article begins with an introduction by its authors Bradley Angle and Ronald Mitchell.  After providing statistics on the apparent progress of the “stakeholder theory” The authors pose the question of whether stakeholder theory’s “arrival” means “continued dynamism, refinement, relevance or statis”.  Will the stakeholder theory continue to develop, and if so, how? (Agle and Mitchell, 2008).  This question seems to be the impasse that many companies are facing, especially now in our current economic environment.  At the company I work with we were off to a very good start with our “sustainability initiative” progress was measurable and being made.  When the economic downturn hit the construction industry, several of the “key players” with our initiative were let go.  Although our initiative got off to a great start, it now seems to be stagnant.  I have the same questions that Angle and Mitchell pose and find the following five perspectives very compelling and am very curious to see which theories will be followed.

 

The introduction continues with the authors explaining the three “strands” that they found in the essays.  The fist strand concerned the basic debate regarding stakeholder vs. stockholder.  The second strand of essays focused on the “instrumental development of stakeholder approaches” and the final strand encompassed “works that generated new questions in stakeholder theory research”.  The introduction then presents a table of articles written around stakeholder theory which the authors break into the “strands” explained above.  The third “stand” is further categorized into four subcategories that each represents different questions around the theory.  The third category investigates, where do we go next, and how do we get there?”

 

The first essay in the article is by Donna Wood, entitled “Corporate Responsibility and Stakeholder Theory: Challenging the Neoclassical Paradigm”.  Wood starts by pointing out some of the major problems in the world due to unrestricted multinational corporations and the “ascendancy of neoclassical economics into the Anglo-American public policy sphere (Wood, 2007).”  Wood quotes two sources that reinforce her point that we have created separation between the “haves and have nots” and that it is only going to get worse if we do not start to change the trends that we have been following since the 1970s.  Wood believes if we continue on this path our existence would become the “survival of the fittest”.  Wood goes on to list eight “untenable assumptions” derived from a statement by Jensen in 2002 to further her argument.  The assumptions are:

 

1. Rational actors try to maximize their self-interest, which is defined by narrow economic terms.
2. “Maximizing” necessarily involves limited resources that cannot be deployed in multiple directions with out loss.
3. Purposeful behavior is maximizing behavior.
4. Externalities are absent.
5. Monopoly is absent.
6. All goods are priced.
7. Social welfare equals efficiency.
8. A firm’s market value is its total value.

Wood addresses each of the points listed above and shows that this is not the case in any economy.  These 8 points are parameters that are used in neoclassical economics for mathematical modeling and do not prove useful as a whole when taken out of that context.  Wood points out institutions do not exist to “serve their own purposes, but to serve the needs of societies and their peoples”.  In the essay Wood addresses the development of the concept of “Corporate Social Responsibility” and how it was intended to “compliment government, not be a substitute for it”. 

 

In her concluding statement Woods captures all of the points she makes in her article with the following: “Stakeholder theory and corporate responsibility cannot offer a complete solution for addressing the problems of business in society.  They can, however, point to a need for social controls to encourage the beneficial effects of institutional behaviors and to regulate or prevent harmful effects”.   This essay seems to bring out some fundamental questions about stakeholder theory and corporate social responsibility.  By both pointing out that government is inefficient and that oversight is necessary, we are left with the question of who will enforce regulations and should an “ethical” responsibility have to be enforced?  Is the stakeholder theory able to govern itself?

 

The second essay in the article entitled “Ending the So-Called “Friedman-Freeman” Debate by R. Edwin Freeman was a much easier read for me as I like the way the Freeman got right to the point.  After showing his respect for Milton Friedman he gets right to his points and in doing so enlists Friedman as a stakeholder theorist (something I assume that he would disagree with). 

 

Freeman dismisses the popularly held “normative foundational justification” and starts with his four main ideas.  According to Freeman, the four main ideas that will get the stakeholder theory off the ground are: (1) the separation thesis – do not separate questions of business and questions of ethics (2) the integrations thesis -  put business and ethics together (3) the responsibility principle – all parties must act responsibly and (4) the open question argument.  The open question argument consists of three questions that should lead the asker to a more ethically responsible answer.  The questions posed by Freeman are (1) if this decision is made, for whom is value created and destroyed? (2) Who’s rights were enabled or not? (3) What kind of person would I be if I made this decision this particular way?  Freeman further states that “we need to find ideas and concepts that help to integrate ethics and business”. 

 

This “open questions argument” reminds me of the “Four Way Test” used by the civic organization The Rotary.  By asking themselves four basic questions in all that they think, say or do Rotarians are able to make better decisions.  The questions of the “Four Way Test” are; Is it the truth? Is it fair to all concerned? Will it build good will and better friendships? And finally, Will it be beneficial to all concerned?

 

As Freeman continues his straight forward case for stakeholder theory he boils down his argument by quoting some of Milton’s work and chalks a lot of the ongoing debate between their two theories is a “failure to communicate”.  Freeman states that he and Friedman are saying the same thing. 

 

The third essay in the article, “Non Rational Behavior, Value Conflicts, Stakeholder Theory, and Firm Behavior” by Michael Jensen he shares his vision of the future corporation and tells us that is should “ behave as to maximize the total long run value of the firm”.  One of the points in Jensen’s article that has me curious about his theory is after warning us to “take care to account for appropriate role of the government” he states that he would like to see the government have and use a “monopoly on the use of physical coercion and the use of violence in society”.  He states that this monopoly should be used to prevent society from using physical violence on each other.  I would definitely like to hear more about this theory, isn’t that how we are set up now?  Jensen confuses me with his theory a little further when he states that government should be the rule maker, as “calling on the corporation or individual to solve those problems would be a losing game.”  The point that he is making is clear and evident in the recent corporate scandals in the news over the past few years.

 

Jensen continues to paint a rather dark picture of the future of corporations but seems to finish all of his points with a slight ray of sunlight for what the corporate environment could become.  Jensen writes that the notion that managers left in the position to “do the right thing by society as a whole” is “naïve”.  He states that not only would managers not know how to benefit society as a whole when there was an idea it would lead to “widespread disagreement”.  Jensen also points out that the managers would be left alone with a lot of power and in his words would be a “disaster”.

 

Jensen addresses several other points in his essay to include that in the system he envisions that there is nothing that would require people to act rational, yet in the widely held  “stakeholder theory it is implicitly assumed that all human beings are rational.”  He suggests that the new system must be design to account for this irrationality and that if this is to be addressed everyone must address this “irrationality” that lies in the structure of all human brains.  Jensen points out several times that we (the people) must implement this system and to date have not gotten it perfect.  He points out several areas of the world where governments in both undeveloped and developed areas have committed “heinous” crimes against humanity.

 

Jensen concludes his essay by stating that he does not think we have come anywhere close to combining the necessary components to create “stakeholder value”.  He talks about how “the differences in normative values are enormously important, both in creating peace and cooperation and in creating conflicts and violence, and destroying value and living standards”.  He puts in a really good plug for his new company, its progress and its new work.  Jensen finishes up by “endorsing the efforts of those in the room” and points out that there are still several disagreements while at the same telling half of his audience that he thinks they are wasting his time. 

 

I am unfamiliar with the writings of Michael Jensen and although I enjoyed trying to follow this essay, for me there was too much crammed into these pages.  I had a very difficult time following Jensen and I get the feeling that is the way he likes it.  Obviously incredibly intelligent, there is a slight feeling that he is very argumentative and talking down to his audience.  It does seem that Jensen is taking a much wider view, attempting to capture “the whole system” which is probably the better way to approach this stakeholder vs. shareholder/stockholder issue in the long run.  This essay is very thought provoking and has inspired me to read more of Jensen.

 

The forth essay included in the article is by Thomas Donaldson.  The essay by telling two stories, the first begins a long time ago and explains how the “epicycles of the Ptolemaic system” were developed.  From here the essay takes us through the historic development of the solar system and the “Copernican” revolution.  The point of the story is to show that although the explanations of the solar system developed and evolved, all of it was not disregarded.  The basics remained the same.

 

The second story also takes place long ago but instead of looking to the sky the main character looks out onto the “marketplace wondered how to make sense of it and wondered how to make it work more efficiently of behalf of people in the community”.  From here the essay takes us through the development of modern economics from the early “mercantilism” through Adam Smith’s “vision of individuals in a free market… and a better world, a fairer world in which most people would be better off”.    Donaldson points out two “nagging problems (questions)” with Smith are this point of view.  The first question basically asks: Why should a company risk its existence for the not harming its customers?  The second question asks: Why should companies respect the rights of its employees if it did not help maximize wealth for its owners?  Slowly these questions led the market into the “Normative” revolution.  Donaldson’s essay takes us through the progression of the normative market development and points out “the excellence of a market system to the way it often promotes moral rights”.  Donaldson’s essay lays out a seemingly normal progression that is led the “Normative Revolution” directly into a “stakeholder” based system.  Posing the questions that many companies are asking at this time such as, “Why does the corporation exist?” and “What are these institutions for?” will lead us to explore the first of two “key insights” of the “Normative Revolution” which is that “institutions stand in need of normative justification”.

 

The second “key insight” that Donaldson points out is that “managers must ascribe some intrinsic worth to stakeholders” and goes on further to state that “human beings have value in themselves” and that their “rights stand on their own”.  Donaldson concludes his essay by reminding us all that “people matter more”.

 

The final essay was the most enjoyable for me to read, not because it was the last one, but because it was about something that I have thought about before.  The essay by Ronald Mitchell poses the questions of a future economic environment in which there are joint stakeholder companies.  I have tried to envision this concept several times in the construction field but can only go so far with it.  I think where I get stuck is the notion of the “balance free accounting”. 

 

I try to fit the definition that Mitchell put forth in his essay and cannot seem to get it to work with construction.  Mitchell tells us that “balance free accounting might be defined in terms that substitute in the place of the historically-developed dollar cost balances resident in general ledger accounts, information that accomplishes the comparison objective of financial reporting to past results, to present benchmarks and to future forecasts.”  Wow!  I have always envisioned this balance free environment to be based more on companies “trading” information, goods and services and somehow coming up with a “value” to the receiver that makes it worth while for them to trade but the “trade” would not be for money it would be for goods or services.  I could only get so far with this theory in construction until I finally get to the question of what is the owner contributing?  Construction companies build a college and the men are paid with their families educations?  I now realize that the economy that I was attempting to create was just one without money.  The future “joint stake companies” that Mitchell talks about seems to also to have a serious “accounting” issue when it is played out.  I guess we will see what happens.

 

Angle and Mitchell do a great do a great job in their article and conclusion in pointing out some of the key points made by each of the authors to show that there are many different ways to look at the “stakeholder” view.  They also seem to show that the authors do seem to have the same goal in mind and as Michael Jensen points out are “much closer to a concentrated attack on these (differing) value issues”.  The author’s pose several questions through the article such as “Why does the stakeholder idea continue to gain in popularity among both managers and academics?”  It seems obvious that the reason stakeholder idea is gaining so much in popularity is that it is the right thing to do.  No matter how it is looked at or what economic experts are saying and theorizing about this concept, the bottom line is that we are all stakeholders in the same system.  Sooner or later (hopefully sooner) everyone will come around to realize a new, conscious and mindful way of living.  We all have to live together, on the same planet, sharing the same limited resources.  We might as well figure it out as soon as possible and make it last as long as we can.