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Critiquing and contrasting moral stakeholder theory and strategic stakeholder: implications for the board of
directors
Rookmin Maharaj
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Rookmin Maharaj, (2008),"Critiquing and contrasting moral stakeholder theory and strategic stakeholder: implications for the board of
directors", Corporate Governance: The international journal of business in society, Vol. 8 Iss 2 pp. 115 - 127
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Rookmin Maharaj
Rookmin Maharaj is a
graduate student at the
University of Calgary,
Calgary, Alberta, Canada.
Abstract
Purpose This paper aims to critique moral stakeholder theory (MST) and to contrast it to earlier
strategic stakeholder approach (SSA).
Design/methodology/approach Interview data were gathered from top executives at 12 companies
in the energy sector in Canada and an in-depth literature review was conducted on MST and SSA.
Findings Value for shareholder and stakeholder may not be mutually exclusive in some instances.
MST may hold the key to giving the board a more useful, comprehensive framework of the firms utility
and purpose to society.
Practical implications Organizations may be selected on their ethical performance by investors.
Depending on whether ethical criteria are included in the definition of firms value, decisions about
which stakeholder theory to use become an issue of strategic importance to all organizations.
Originality/value The paper illustrates how the board of directors as the governing body of the
organisation may find that continuous assessment of the companys stakeholders is valuable in reducing
risks.
Keywords Stakeholder analysis, Boards of directors, Decision making, Market value
Paper type Research paper
Introduction
In order to critique the moral stakeholder theory (MST) and contrast it to earlier strategic
stakeholder approach (SSA) we need to take a detailed look at what comprise the MST and
the SSA doctrines. Both MST and SSA involve a corporation therefore, it would be worthwhile
to look at the history of the corporation in North America.
The corporation
A corporation is a mechanism established to allow different parties to contribute capital,
expertise, and labor, for the maximum benefit of all of them (Monks and Minow, 2004, p. 9).
The modern corporation traces its roots to the mid-nineteenth century, and specifically, in
North America, to a Supreme Court decision written by Chief Justice John Marshall in 1819
(Colley et al., 2005). At that time, managers and board of directors were essentially the same
people. Therefore, the law expected the owners to be knowledgeable, close to the affairs of
the business, and give direction to management (Drucker, 1981).
Received November 2006
Revised December 2006
Accepted January 2007
DOI 10.1108/14720700810863751
According to Werhane (1985), the courts have since afforded the corporation several
constitutional rights guaranteed to individual persons, for example, legal rights to equal
protection, due process, freedom of the press, freedom from self-incrimination and
VOL. 8 NO. 2 2008, pp. 115-127, Q Emerald Group Publishing Limited, ISSN 1472-0701
CORPORATE GOVERNANCE
PAGE 115
unreasonable search. The proliferation and scope of the corporation has now reached
mammoth proportions. The Institute for Policy Studies (IPS) report 2001-2002 states that
there are over 40,000 corporations in the world, and 200 giant corporations now control over
a quarter of the worlds economic activity. Philip Morris, an American corporation which
operates in 171 countries has annual revenues larger than that of New Zealands economy.
Of the 100 largest economies, in the world, 51 are corporations, only 49 are countries
(Anderson and Cavanagh, 2002, p. 2).
Inherent in the governance role of the BOD, as noted in Zeniseks (1979) model of corporate
social responsibility, is the strategic planning and control system that provides evaluations
and feedback on whether an organization is acting as a good corporate citizen. Zeniseks
model indicates that in order to obtain a more comprehensive and accurate schema of
social responsibility, researchers must look at both [executive] attitudes and organizational
behavior within a framework encompassing societal expectations (Zenisek, 1979, p. 366).
To compare and contrast SSA and MST executives perspective were solicited. Therefore,
interviews were conducted with chairs, BOD, CEOs and upper level management at twelve
firms in the energy sector in Calgary, Alberta. One area of questioning that was pursued was
stakeholder engagement among these organizations. While some companies adhere to a
SSA approach other companies use a MST approach.
something goes wrong, if you do have a problem, then people are going to look very hard at your
processes. And if you have a separate committee that has outside directors and a few people on
it that are knowledgeable then it is a much better defense for directors. A lot of what is happening
today is actually driven by a preparation for defense (pers. comm., 2005).
This executives perspective is akin to the scholarly debate that suggests that the motivating
force for businesses is to make profit for shareholders (Jensen, 2001; Friedman, 1970). This
reasoning is based on economics and is easily measurable:
This measurability lends great significance to the bottom-line accounting philosophy on which
the success or failure of firms are benchmarked. Thus, business enterprises strive to ensure that
the bottom-line looks good at all times even at the expense of other things (Amaeshi and Adi,
2006, p. 8).
The defining factor in SSA suggests that the only stakeholders of importance are those
stakeholders essential to the very existence of the corporation. SSA is based simply on
investors, employees and suppliers contributing inputs to the organization, which in turn
transforms these inputs into benefits to customers:
This is the traditional finance paradigm, [that is] expressed in agency theory (Solomon and
Solomon, 2004, p. 12).
During an interview with a board member, who is also a part of this petroleum companys
management team, when asked if the company anticipates meeting their emissions
projections for 2007, this executive from company Y responded that:
I did not come prepared to talk with you about our emissions projections; emissions projections
has nothing to do with governance (personal communication, 2005).
Clearly, this executive belongs to an organizational culture that has a SSA approach to
governance. Especially for a petroleum company, recognizing the relation among the
petroleum industry, emissions and governance is fundamental. This executives opinion
reflects the companys values with regard to corporate social responsibility (CSR). The
implication of a SSA mentality, like the executives from company X and Y demonstrated, has
a number of organizational ramifications. According to Zenisek (1979) in order to be
accepted as a good corporate citizen organizations must be cognizant about societal
expectations. Citizens are becoming more aware of the negative effects of cumulative
emissions and pollution and are demanding that companies be more attentive by reducing
pollution. Lack of attention to CSR and social performance by organizations is gaining
prominence in the strategy field as there is growing acknowledgment that skilful stakeholder
management contributes to firms value creation process, by enhancing a firms intangible
assets, such as reputation and subsequently its competitive advantage (Clarkson, 1995;
Hillman and Hitt, 1999).
Additionally, there are a growing number of investors who are solely investing in companies
that are recognizing their role as corporate citizens and being socially responsible.
Company X should also be aware that not only are companies meeting regulations, but
leaders in CSR are going beyond compliance and becoming more involved in affecting
legislation. If companies with an SSA approach do not reform their company polices to
include the social, environmental and economic aspects of business and undertake an
impartial evaluation of both their internal and external claimants and implement stringent
policies at minimum to ensure the safety of all stakeholders, these organizations may be
eventually be driven out of business.
terms, they are therefore unable to see how such risks as pollution may in fact pose a threat
to the corporation. The BOD of a corporation with an SSA mentality may therefore restrict
their assessment of the risks of the corporation to a narrow, short-term financial perspective.
As early as 1984, Freeman noted changes in the external environment of business. For
example:
Shifts in traditional relationships with suppliers, customers owners and employees as well as the
emergence and renewed importance of government, foreign competition, environmentalists,
consumer advocates, special interest groups, media and others, mean that a new conceptual
approach is needed (see also Organisation for Economic Cooperation and Development, 2001).
This approach is referred to as moral stakeholder theory (MST).
Contemporary investors are broadening both their definition of value, and their
expectations of corporations. Sustainability, or business commitment to contribute to
sustainable economic development, working with employees, their families, the local
community, and society at large to improve their quality of life (World Business Council for
Sustainable Development, 2006) is now regarded as attractive to investors because it aims
to increase long-term shareholder value. Investors are diversifying their portfolios by
investing in companies that set industry-wide best practices with regard to sustainability,
and since corporate sustainability performance can now be financially quantified, they now
have an investable corporate sustainability concept. A growing number of investors are
convinced that sustainability is a catalyst for enlightened and disciplined management.
Therefore, the actions of these organizations form the criteria that investors base success
and value (Dow Jones Sustainability Index, 2006). What this implies is that investors are
looking to invest in organizations that are more socially responsible.
Contrary to SSA, MST postulates that anyone who affects or is affected by the corporation is
a stakeholder:
Every corporation has complex involvement with other people, groups, and organizations in
society. They are stakeholders, and they are a critical factor in determining the success or failure
of a modern business enterprise (Frederick et al., 1992, pp. 4-5).
MST, therefore, takes a more holistic view of the influence of the corporation and extends its
relevance and importance beyond mere financial considerations. Kenneth Goodpaster
notes that:
Corporations are not solely financial institutions; that fiduciary obligations go beyond short term
profit and are in any case subject to moral criteria in their execution; and that mere compliance
with the law can be unduly limited and even unjust (Goodpaster, 1991, p. 70).
Evan and Freeman (1996) based their thesis on the stakeholder theory of the modern
corporation by comparing MST to Kantain Capitalism[1] each of these stakeholder groups
has a right not to be treated as a means to some end, and therefore must participate in
determining the future direction of the firm in which they have a stake (Evan and Freeman,
1996, p. 311). This is the premise on which MST is based.
In 1995 Donaldson and Preston provided a useful approach to answering why MST may
be a viable option to consider as a guideline for Corporate Governance and addressing
multitude stakeholder issues. They distinguished between descriptive accuracy,
instrumental power, and normative validity approaches to stakeholder theory and suggest
that these three aspects of MST are mutually supportive.
of three relational attributes. These stakeholder attributes are: power to influence the firm;
legitimacy of the stakeholder relationship with the firm; and urgency of the stakeholder
claims. This typology offers critics of MST who perceive virtually everyone, everything, and
everywhere. Terrorists and competitors, vegetation, nameless sea creatures, and generation
yet unborn (Sternberg, 1999, p. 13), a framework that enables stakeholder identification.
Mitchell et al. (1997) conclude by stating that managers must know about entities in their
environment that hold power and have the intent to impose their will upon the firm. Power and
urgency must be attended to if managers are to serve the legal and moral interests of
legitimate stakeholders (p. 882). The executive continued:
If one was perfect, and we had scanned the entire horizon, I do not think the decision would have
been different because you could not have assessed this kind of stakeholder risk. The risks that
were assessed were physical security risks, which was very well understood and assessed and
deemed to be manageable (pers. comm., 2004).
The descriptive approach does not take into account what internal and external constraints
organizations decision-makers have to work with or without therefore, managers need to go
further after identifying stakeholders and they need to connect with them. For example,
company A thought it had accurately identified and assessed the threats from perceived
stakeholders and proceeded to invest in Glen Lake. This assessment was based on their
internal capabilities, strengths and organizational alliances. Company As assessment was
obviously done haphazardly as their main concern was based solely on financial
consideration. As the executive noted:
We knew we could get the product, and get money for our product. That was not of concern. All
the stakeholder risks that we could see were assessed and we were able to mitigate it given the
range of experiences that we had and people at the table had. The stakeholder risk that did hit us
(even if we had seen it I do not think would have changed our minds), there was not sufficient
probability or certainty or ability to be assessed (pers. comm., 2004).
Company A suffered the long-term cost of being forced out of the country after investing
millions of dollars, and failed miserably financially because some of the above ground
stakeholder issues were not addressed. They failed to identify their definitive stakeholders
as a threat to their organizational objectives and goals. Academic research may benefit from
an investigation of attitudes, structures and practices present in organizations that are
successful in moral stakeholder relationships. This investigation will lend insight into the
coping mechanisms that successful organizations use to adopt the moral stakeholder
approach as demonstrated by company As competitor which is addressed later in this
paper.
The BOD cannot stop at simply identifying stakeholders; they must then assess these
stakeholder groups ability to influence organizational decision-making. Goodpaster (1991)
classifies this kind of approach as strategic, since a firm has certain strategic objectives,
and stakeholders need to be considered as they have the potential to help or harm the
corporation in its effort to achieve these objectives. Thus, a strategic BOD will analyze a
course of action by looking at the threat or potential benefit posed by various stakeholder
groups (Savage et al., 1991). The idea of comprehensively identifying stakeholder types,
then, equip[s] the [BOD] with the ability to recognize and respond effectively to a disparate,
yet systematically comprehensible, set of entities who may or may not have legitimate
claims, but who may be able to affect or are affected by the firm nonetheless, and thus affect
the interests of those who do have legitimate claims (Mitchell et al., 1997, p. 857).
According to Gillies (1992) one of the many areas boards has always been responsible for is
identifying the stakeholders of the organization, as stakeholders represent a risk factor to
any organization and the BODs responsibility is to identify and monitor the principal risks of
the business. Therefore, it is the responsibility of the board to bring to the attention of
management the different factions of stakeholders that can affect the companys business.
As identified in the example of company A if the church group was initially identified and
treated equitably they may not have encountered the problem they had. Boards are being
forced to decide what the corporation actually is and for whom and how it should govern.
Boards are not only being held responsible for assuring that the executives are competent to
manage the corporation, and strategies are appropriate but also that shareholder values are
maximized and that the social and ethical responsibilities of the enterprise are fulfilled
(Gillies, 1992).
[The stakeholders in the community] were the experts in this case, because they lived near the
energy plants and were able to observe that our thousand dollar lighting system was useless after
6.00 p.m., so we saved millions of dollars annually on electricity because we listened to our
stakeholders (pers. comm., 2004).
The question arises whether achieving organizational goals precludes the organization
from acting well toward their stakeholders. In this example the organization gained their
stakeholders trust, increased productivity and ultimately increased its bottom line.
The normative stakeholder approach then can be used to evaluate stakeholder engagement
related to all aspects of business practices, and may be used by businesses to influence
public policy.
Company A had all those issues in Glen Lake. We (company B) looked at Glen Lake twice, and
technically Glen Lake would have been a wonderful financial opportunity. However, when we
(company B) looked at the stakeholders and the stakeholder issues above ground we could not
balance those issues and they did not meet our ethical standards. So we did not bid on those
assets.
Particularly because of our (company B) international focus, we have to be very conscious about
social responsibility. We have a role to play in society because we affect people wherever we
work, we work pretty hard to make sure that is part of the ethics and values of our company. We
(company B) usually hire a consultant who knows our ethical values to advise us on corporate
governance and help us evaluate stakeholder issues. Our company (company B) believes [our
efforts] are not a cost, they are an investment. So in the country we are now working, for instance,
we are now spending time in local communities, hiring nationals, investing in water projects, a
power project, health care and education. Yes, it has some costs but the cost is not significant.
What happens is that the locals would enhance the quality of their lives and their opportunities.
So, instead of being a foreign company exploiting resources at their expense we are investing in
their futures and they are better off because we are there. So we deal with things like security
safety and those sorts of things. We (company B) have been in that country since 1987 and we
have never had a kidnapping, we have never had any significant damage to our facilities, we
never had any of those major problems that other oil companies have had (personal
communication, 2005).
The steps taken by company B to integrate stakeholders embody the principles of MST.
This example demonstrates that the board was not performing their oversight duty to either
management, the company, stakeholders or stockholders. In contrast to this approach the
BOD might want an exhaustive list of all stakeholders in order to participate in a fair
balancing of various claims and interests within the firms social system and implement
stringent policies at minimum to ensure the safety of all stakeholders. Both the former public
affairs approach and the latter social responsibility approach require broad knowledge of
actual and potential actors and claimants in the firms environment (Mitchell et al., 1997,
p. 857). Therefore, moral stakeholder theory may hold the key to giving BOD a more useful,
comprehensive framework of the firms utility and purpose to society.
Since the introduction of Sarbanes-Oxley Act of 2002 (SOX), the BOD is expected to make
governance a high priority. Evaluating board/moral stakeholder relationships may be a
productive strategy to include on the boards agenda. As companies move to more risky
areas of the world, the BOD may want to expand who and what comprise stakeholders.
Mitchell et al.s (1997) model of stakeholders serve as a guide to identify stakeholders but
may soon become outmoded as businesses are dynamic and ever-changing:
The boards major function for effectiveness is [to serve] as a buffer group between
[management] and the [community] (Price, 1963).
The BOD as the governing body of the organization may find continuous assessment of the
companys stakeholders a valuable endeavor in reducing risks.
In today environment boards have little choice:
Changes in the environment within which business operates are forcing them to meet their
obligation as directors in fact as well as in law. Failure to do so is not acceptable by shareholders,
other stakeholders, governments or society in general (Gillies, 1992, p. 54).
Therefore, directors are no longer expected to be decorative, but are expected to exercise
more influence and power and become more engaged with management, other board
members and all stakeholders of the organization.
In the example of company C, the board was completely negligent in their oversight duty.
This incident would not occur if there were policies and procedures in place regarding
safety. The BOD should have the experience, knowledge, and technical experience. These
attributes that are the basis of their contribution as board members, can also be their
downfall. The social prestige that these board members are accorded comes with a price,
that price is that they continually demonstrate commitment to the communities by keeping
abreast of how policies and procedures are implemented throughout the organizations that
they serve. If there are no policies or procedures then their duty is to ensure that polices are
put in place by management, so that the boards buffer function to ensure effectiveness is
continuous:
If governing boards do not govern (and if they do not formulate policy, they are not governing),
then the question arises as to their impact on the performance of the organization (Price, 1963).
Conclusion
The focus on corporations success or value in the past has been relegated to the
satisfaction and creation of wealth for only one stakeholder, the stockholder/shareholder. In
the examples offered in this paper, it has been demonstrated that value for shareholder
and stakeholder may not be mutually exclusive in some instances. Additionally, in our global
society, shareholder and stockholder may be represented by the same people (in some
instances investors can be community members, employees, suppliers). Increased
education, technology and interest in social welfare, are influencing investors to invest in
companies that are committed to MST. This shift has huge implications, on how
organizations, governments and economic theorists define value. First, a more holistic
typology of value to shareholder may be useful for academic researchers and the BOD to
investigate in order to make more informed decisions. Secondly, because there is a moral
undertone to MST, organizations may have to include moral principles in their
decision-making process. This implies that the organization may be selected on their
ethical performance by ethical investors in the medium and long term. If and when these
holistic typology criteria are included in the definition of firms value the management of
ethics and ethics programs will then become an issue of strategic importance to all not some
organizations.
Note
1. Kant believed that ethical reasoning should concern activities that are rationally motivated and
should utilize precepts that apply universally to all human actions . . . actions of the free will freely
motivated for the right reasons. Other goods such as wealth, beauty . . . are certainly valuable, but
they are not good without qualification because they have the potential to create good and bad
effects . . . or when used for selfish ends (Donaldson and Werhane, 1996, pp. 6-7).
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