All Commentary
Wednesday, July 1, 1992

Corporations at Stake

Professor Den Uyl teaches philosophy at Bellarmine College, Louisville, Kentucky.

In recent years the term “stakeholder” has been introduced into the language of business ethics. It is meant to sound like, and to replace, the traditional term “stockholder” in dealing with questions of corporate responsibility. Corporations now are said to be primarily obligated to their stakeholders, rather than to their stockholders.

Originally corporate managers were seen as primarily accountable to stockholders. Indeed, they were thought of as the stockholders’ fiduciaries. Replacing “stockholder” with “stakeholder” undermines this fiduciary relationship. Thus, the last vestige of private contractual responsibility is also undermined, making obligation a public affair open to “public” control.

According to an article by Anthony F. Buono and Lawrence T Nichols in a popular business ethics text, a corporate stakeholder is “any identifiable group or individual who can affect or is affected by organizational performance in terms of its products, policies, and work processes.”[1] By this rather vague definition, everyone is a stakeholder of virtually every corporation. Thus, once the proponents of the “stakeholder” terminology have made it difficult to think of corporations as private institutions, they try to draw a distinction between primary stakeholders and others.

“Primary stakeholders” are those groups needed for the corporation’s “survival” (e.g., consumers, labor, and management). But this distinction only indicates which groups are being given favored status. There is no nonarbitrary way to discriminate between primary and other sorts of stakeholders, since under the right circumstances any stakeholder group could threaten a corporation’s survival.


The “Stakeholder” and the Marketplace

The central difference between the stockholder theory and the stakeholder theory does not, however, rest on realizing that there will be fewer stockholders than “stakeholders.” It is rather that the stockholder theory is oriented toward markets, while the stakeholder theory is not.

As Buono and Nichols put it, the stockholder approach “assumes that the interactions between business organizations and the different groups affected by their operations (employees, consumers, suppliers) are most effectively structured as marketplace activities.”[2] In one sentence we have the crux of what is at issue here—the private enterprise system versus its socialistic alternatives. For if what is central to the “old” stockholder concept is that business relations should proceed along market lines, then the “new” concept plans to replace the market with something else.

And why should we abandon the market in favor of the stakeholder theory? Buono and Nichols offer four reasons:

1.       The stockholder model has failed to deal adequately with contemporary societal problems and the true complexities of economic transactions and interactions.

2.       It is in the long-term interest of business to take a broader view of its responsibilities. If business does not become accountable for its actions on its own, growing stakeholder pressures will ensure government-imposed accountability.

3.       Understanding and satisfying the needs of stakeholders is important to the well-being of the firm . . . . In today’s highly competitive economic and social environment, no important stakeholder can be ignored.

4.       The stakeholder model is in keeping with our notions of fairness. Employees, consumers, communities, etc., are not just instruments for enriching stockholders.[3]

How good are these reasons? The first is either false or begs the question.

It is false if it claims that businesses don’t pay attention to their social environment, because businesses won’t survive if they ignore what is going on around them. It is also false if it claims that the stockholder view presented itself as a complete theory of the economic or social relations of the firm. The stockholder model was about establishing primary management responsibility and using market processes to allocate resources. It wasn’t designed to list all the interest groups a firm might confront or impact.

The first reason begs the question if it implies that the stockholder view does not easily accommodate nonmarket alternatives or broad public obligations. Of course it doesn’t, but whether it should is precisely what is at issue.

The second reason is equivalent to a threat. If businesses don’t behave, “growing stakeholder pressures” will lead the government to impose “accountability.” A business’s property rights and privacy are to be sacrificed to bullying interest groups.

The second reason also can be read as a prediction of what will happen “if business does not become accountable.” But if that is so, nothing is being justified, and there is no reason to abandon advocacy of the market—any more than there would be to abandon the rights of the accused in the face of a lynch mob just because someone predicted what the mob might do.

The third reason assumes that the stockholder model focuses less on business competitiveness and survival than does the stakeholder model. This is obviously false. If businesses are having trouble being competitive, it probably isn’t because they have failed to consider the groups with whom they interact. It may, however, be that they are not particularly adept at nonmarket strategies, at courting groups who have the ear of regulators, or in appeasing others who oppose the market. (And if a business were good at such things, it is by no means clear why we should want it to be!) Indeed, competitive disadvantages may result from having to cater to groups or forces that contribute nothing to successful market activity.

The fourth reason is the only one appealing to ethics. But it depends on the acceptance of “our notions of fairness.” Even if we accept what is implied about fairness in this fourth reason, it could just as well be used to claim that businesses cannot be used as instruments for some stakeholder’s conception of the social good. Businesses, in other words, could be said to have rights to property and privacy independent of any demands made by stakeholders.

In any case, businesses don’t turn employees, consumers, and communities into “instruments” any more than shoppers turn a businessman into an “instrument” when they buy his product. Mutually beneficial trade hardly qualifies as “instrumentalizing” conduct, unless one has concluded that market transactions are inherently such. But if that were so, we would be back to the problem of begging the question.

Moreover, the stockholder theory doesn’t say that the managers’ only conceivable obligations are to stockholders, but rather that their primary obligation is to them because the stockholders, in effect, have hired the managers to serve their interests. Such a relationship is tangible and direct. Contrast that with the amorphous set of obligations to anyone and everyone the stakeholder theory is likely to generate. The stakeholder theory, as a consequence, will issue in actions according to the views of those who are the most vocal or politically savvy.

In short, there are no compelling reasons to adopt the stakeholder view and plenty of good reasons not to.


No Commitment, No Stake

In the end it must be noted that most groups considered to be “stakeholders” have no stake in corporations at all. With the possible exception of employees, stakeholder groups have no interest in the well-being of any particular corporation. True, they may have an interest in how corporations affect them, but to have a stake in something is to care about its prospects, as one might when investing in a firm. Whether the “good” the stakeholder group wants is provided by this or that corporation (or the state) doesn’t matter to them; whether the “bad” it complains of is alleviated by this or that corporation (or the state) also doesn’t matter. Whether a given corporation is succeeding in the market is of no concern to these groups because they have made no commitment to it. Their perspective is strictly societal.

To actually have a stake by investing in a corporation would be an act of private enterprise and private interest—something stakeholding, by definition, opposes. For it would contradict the spirit of stakeholding to invest in a corporation even as a vehicle for protest, since there would be no grounds in stakeholder theory for the corporation to pay more attention to the stakeholders as stockholders than any other group the stakeholders may claim to represent.

The issue, then, is not semantic, nor is it that the term “stakeholder” carries with it tacit implications. We have seen that the implications, once appreciated, are all out front. The issue is that this new use of language is being pushed by those with an anti-market message.

Business people are especially vulnerable to such verbal manipulations and may therefore fail to see all the implications of the substitution. In an age of competition from a widening variety of sources, expanding markets, and increased diversity in employment populations, businesses may feel they are being hit from all sides. It is easy, therefore, to insert a term like “stakeholder” into the business vocabulary because it seems to capture the feeling of having to concern oneself with multiple points of impact. Yet we shouldn’t let the feeling cloud our judgment. Those speaking loudest about obligations to stakeholders are not innocent purveyors of linguistic aid. For when the term “corporate stakeholder” is correctly used, the only true stakeholders are stockholders.

1.   Anthony F. Buono and Lawrence T. Nichols, “Stockholder and Stakeholder Interpretations of Business’ Social Role,” in Business Ethics, edited by W. Michael Hoffman and Jennifer Mills Moore (New York: McGraw-Hill, 1990), p. 17l.

2.   Ibid.

3.   Ibid., pp. 174-75.