Organizations and Markets

Thoughts on Stakeholder Theory

13 August 2006 at 11:50 am Peter G. Klein 1 comment

| Peter Klein |

Yesterday I attended the Academy of Management session “Stakeholders: The Keys to Effective Strategy and Performance Measurement.” Panelists included Joe Mahoney, Russ Coff, Christos Pitelis, Tom Donaldson, Amy Hillman, Sybille Sachs, and Kathryn Pavolovich. I’m pretty much an unreconstructed Friedmanite on this issue so I went to raise my consciousness.

What I learned was interesting, but I still have several questions about stakeholder theory, at least in its normative version.

First, who is a stakeholder? That is, whose interests, besides shareholders’, should managers be taking into account? Consider three possibilities:

1. Anyone whose well-being is affected by the firm. Obviously this is not very operationally useful, because it excludes practically no one, especially when one takes into account the vast web of transactions associated with every production process. If pecuniary externalities count too, then we have to include rivals as well.
2. Anyone who has a direct contractual relationship with the firm. This would include employees, suppliers, customers, alliance partners, and so on but not rivals, people in the community, etc. This seems arbitrary, however. What about the suppliers’ suppliers, the customers’ customers, the employees’ trading partners, and so on? Intel has a direct supplier relationship with Dell, and Dell has a direct supplier relationship with me, but I have only an indirect relationship with Intel. Why shouldn’t Intel take me into account?
3. Anyone with relationship-specific investments with the firm. This criterion, proposed by Margaret Blair and Joe Mahoney and based on incomplete-contract theory, makes more sense to me. But it still contains an element of arbitrariness. If the firm takes my quasi-rents (in the Klein, Crawford, and Alchian sense) I’m clearly worse off. But if the firm pollutes my river, even in the absence of asset specificity, I’m worse off as well. Likewise with purely pecuniary externalities — e.g., if the firm prospers, its rivals may suffer. What is it about those with asset specificity that makes them count more?

Second, the basic premise of normative stakeholder theory is that shareholders — i.e., those who own the firm’s physical assets — should take others’ interests into account. But why doesn’t this apply across the board? Should employees — those who “own” the relevant human assets — also take shareholders’ interests into account when they negotiate their employment contracts? Should suppliers bargain over the terms of trade with shareholders’ and employees’ interests in mind? And so on. The undercurrent in much of the literature seems to be that shareholders should refrain from pursuing their self-interest, but everybody else should be free to pursue theirs.

Third, why do current or actual stakeholders, however defined, count, while future or potential stakeholders do not? Should managers anticipate all possible effects of their decisions, trying to imagine how potential stakeholders might be affected? This is probably more than most managers, even those attracted to the stakeholder concept, care to do.

Update: See also Bainbridge and Teppo.

Update 2: And Teppo again.

Entry filed under: - Klein -, Management Theory, Strategic Management, Theory of the Firm.