The purpose of this article is to show how the concept of stakeholders in an organization can be used to understand the tasks of the board of directors. The authors argue that a volunteeristic approach to questions of corporate governance which focuses on effective director behavior is preferable to structural change via legislation.
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References
1.
One problem which plagues management theorists is the tendency for the field to become compartmentalized and fragmented. Thus, we have no confidence that any two people who read this article will agree that there is a discipline of management or what that discipline contains. Kuhn'sThomasThe Structure of Scientific Revolutions, 2nd edition (Chicago: University of Chicago Press, 1970) and the resulting literature in philosophy of science—see LakatosI.MusgraveA. (eds.), Criticism and the Growth of Knowledge (Cambridge: Cambridge University Press, 1970) and GuttingG. (ed.), Paradigms and Revolutions (Notre Dame: University of Notre Dame Press, 1980)—are of some help. We prefer the locution “conceptual revolution” to “paradigm shift” to signify that paradigms aren't the tidy little animals they are sometimes believed to be.
2.
BerleA.MeansG., The Modern Corporation and Private Properly (New York: Commerce Clearing House, 1932), pp. 220–221. For a discussion of the implications for corporate governance see EvanW., Organization Theory (New York: John Wiley and Sons, 1976), pp. 89–107.
3.
BerleMeans, op. cit., p. 3.
4.
BarnardC., The Function of the Executive (Cambridge, MA: Harvard University Press, 1938).
5.
For an excellent history see SturdivantF., Business and Society (Homewood, IL: R. D. Irwin, 1977), pp. 1–125.
6.
Throughout our analysis one may substitute “organization” for “corporation,” since other organizational forms have stakeholders as well. Our emphasis is on the business-for-profit organizational sector. For interesting recent discussions of the special problems of nonprofit organizations, see ClarkR., “Does the Nonprofit Form Fit the Hospital Industry,”Harvard Law Review, vol. 93, no. 7 (May 1980), pp. 1417–1489; and HansmannH., “The Role of Nonprofit Enterprise,”The Yale Law Journal, vol. 89, no. 5 (April 1980), pp. 835–901.
7.
We wish to thank an anonymous referee for Applications of Management Science for this point, as well as subsequent correspondence with William Royce, senior management consultant at SRI International. Mr. Royce has been quite helpful in tracking down the development of the concept at SRI where “stakeholder analysis” is a thriving ongoing concern. Stakeholder appears in Webster's as “one who holds the stakes in a gamble.” It does not appear in the Oxford English Dictionary.
8.
SturdivantF., “Executives and Activists: A Test of Stakeholder Management,”California Management Review, vol. 22, no. 1 (Fall 1979), pp. 53–59. The present authors deserve a great deal of the blame for this comment through informal conversations with Sturdivant, having been led astray by a reference in R. L. Ackoff, Redesigning the Future, which though -correct, made the origin of the term “difficult to determine.” For a complete history of the concept, see FreemanR. E., Strategic Management: A Stakeholder Approach (Marshfield, MA: Pitman, 1983), ch. 2.
9.
See AnsoffI., Corporate Strategy (New York: McGraw-Hill, 1965), 33–35.
10.
AbramsF., “Management Responsibilities in a Complex World,” in CarrollT. H. (ed.), Business Education for Competence and Responsibility (Chapel Hill, NC: University of North Carolina Press, 1954); CyertR. M.MarchJ. G., A Behavioral Theory of the Firm (Englewood Cliffs, NJ: Prentice-Hall, 1963).
AckoffR. L., Redesigning the Future (New York: John Wiley and Sons, 1974).
13.
DillW. R., “Public Participation in Corporate Planning: Strategic Management in a Kibitzer's World,”Long Range Planning (1975), pp. 57–63.
14.
See SturdivantF., Business and Society: A Managerial Approach (Homewood, IL: R. D. Irwin, 1977), and KleinT. A., Social Costs and Benefits of Business (Englewood Cliffs, NJ: Prentice-Hall, 1977).
15.
See AckermanR. W., “How Companies Respond to Social Demands,”Harvard Business Review, vol. 51, no. 4 (1973); idem, The Social Challenge to Business (Cambridge, MA: Harvard University Press, 1975); and AckermanR. W.BauerR. A., Corporate Social Performance: The Modern Dilemma (Reston, VA: Reston, 1976) as well as other books and articles.
16.
We do not believe definitions can be constructed and justified in isolation. They should be descriptive of current use, and in emerging theories, prescriptive of linguistic change. While we offer two definitions in order to ease the linguistic change, we are ultimately wedded to the wide inclusive sense of stakeholder. The authors wish to thank Dr. Marvin Olassky of DuPont for the suggestion of different levels of definitions.
17.
The importance of external forces for business strategy is explored in CharanR.FreemanR. E., “Planning for the Business Environment of the 1980s,”The Journal of Business Strategy, vol. 1, no. 2 (Fall 1980), pp. 9–19.
18.
The initial results of the Wharton Stakeholder Project have been described by EmshoffJ. R.FreemanR. E. in “Stakeholder Management,” Working Paper 3–78 (The Wharton Applied Research Center) and have been published as “Who's Butting Into Your Business,”The Wharton Magazine (Fall 1979), and “Stakeholder Management: A Case Study of the U. S. Brewers Association and the Container Issue,” forthcoming in SchultzR. (ed.), Applications of Management Science (Greenwich: JAI Press, 1981). Freeman, op. cit.
19.
BaudeJ. A., Perspectives on Local Measured Service (Kansas City: Telecommunications Industry Workshop Organizing Committee, 1979).
20.
For another stakeholder technique, see LeeH. L.BankerR. L., “Stakeholder Decision Analysis,” Working Paper 20880 (The Wharton Applied Research Center); and FreemanR. E.BankerR. L.LeeH. L., “A Stakeholder Approach to Health Care Planning,” in TilquinC. (ed.) Systems Science in Health Care (Toronto: Pergamon Press, 1981). See Freeman, op. cit.
21.
William Dill first used kibitzer to refer to external groups who try to use the political process to influence the affairs of the corporation. Its use is not meant perjoratively.
22.
Some have argued that markets and politics are inherently connected. We agree. Our distinctions are useful, however, in order to understand how and why they are connected. The analyses of Lindbloom, Politics and Markets (New York: Basic Books, 1977), and Hirschman, Exit, Voice and Loyalty (Cambridge, MA: Harvard University Press, 1970), do not pay adequate attention to the positions of shareholders and directors and hence, to questions of corporate governance. Yet another way of phrasing our distinction is to differentiate between stakeholders who classically exercise voice. Here, the curiosity of shareowners and directors is apparent for, despite the Wall Street Rule, each exercises a mix of exit and voice.
23.
MacMillanI., Strategy Formulation: Political Concepts (St. Paul: West Publishing Company, 1978).
24.
See especially the work of BeckerG., The Economic Approach to Human Behavior (Chicago: University of Chicago Press, 1976).
25.
DavisL.ChernsA. (eds.), The Quality of Working Life, vols. I and II (New York: The Free Press, 1975).
26.
For a sample of the issues see DillW., Running the American Corporation (Englewood Cliffs, NJ: Prentice-Hall, 1978); BradshawandT.VogelD. (eds.), Corporations and Their Critics (New York: McGraw-Hill, 1981); and FerraraR.GoldfusM., Everything You Ever Wanted to Know About the Future of Federal Influence in Corporate Governance (Washington, D.C.: Financial, Government and Public Affairs, 1979).
27.
HayesR.AbernathyW., “Managing Our Way to Economic Decline,”Harvard Business Review, vol. 58., no. 4 (1980).
28.
It is arguable whether responsiveness to nonmarket stakeholders is in the long-term interest of the corporation. We believe that there is no need to appeal to utilitarian notions of greatest social good or altruism or social responsibility. Rather, the corporation fulfills its obligations to shareholders in the long term only through proper stakeholder management. In short, we believe that enlightened self-interest gives both reasons why (personal motivation) and reasons for (social justification) taking stakeholder concerns into account. The development of this argument is, however, beyond our present scope.
29.
For an interesting discussion of this point with respect to dissident stockholders, see VogelD., Lobbying the Corporation (New York: Basic Books, 1978).
30.
For the use of issuance of stock to ESOPs, see Klaus v. Hi-Shear Corp., 528F. 2d 225 (9th Cir. 1975); for the issuance of stock to friendly holders see Care Co. v. Treadway Corp.,___ F. 2d___ (2d Cir. 1980). The other techniques are described below in detail.
31.
The Beatrice Foods story was widely chronicled in the business press. See Wall Street Journal (7 May 1980), p. 22; idem (21 July 1980), p. 1; Business Week (9 April 1979), p. 36; idem (10 September 1979), p. 76; Barrons (14 January 1980), p. 76.
32.
The Bunker-Ramo story is chronicled in the Wall Street Journal (31 March 1980), p. 12; idem (23 April 1980), p. 12; idem (5 May 1980), p. 21; idem (11 June 1980), p. 37.
33.
See Wall Street Journal (24 April 1980), p. 31.
34.
15 U.S.C. § 78 m(d).
35.
The classic case is G. A. F. Corp. v. Milstein, 453 F. 2d 709 (2d Cir. 1973).
36.
A complete history of this struggle would require a paper itself. For useful surveys see BuzzardW., “How the Union Got the Upper Hand on J. P. Stevens,”Fortune (19 June 1978), p. 86; KovachsK., “J. P. Stevens and the Struggle for Union Organization,”Labor Law Journal (May 1978), p. 300. The union's victory is chronicled in Wall Street Journal (20 October 1980), p. 1.
37.
For private firms, the Employee Retirement Investment Security Act (ERISA), 29 U. S. C. §§ 1001-1381 (1976) governs the investment of these funds. See H. R. 14138, 95th Cong. 2d Sess. for a public employee version of ERISA. See also HutchinsonCole, “Legal Standards Governing Investment of Pension Assets for Political Goals,”University of Pennsylvania Law Review, vol. 128(1980), p. 1340, for a detailed discussion of these issues under current law.
38.
See, for example, Withers v. Teachers' Retirement System of New York, 447 F. Supp. 1248 (S.D.N.Y., 1978) aff'd, 575 F. 2d 1210 (2d Cir. 1979) in which the teachers' retirement system investment in New York City's obligation was upheld against a challenge of imprudence.
39.
EC 5-18, Code of Professional Responsibility.
40.
430 F. 2d 1093 (5th Cir. 1970).
41.
See, for example, Maldonado v. Flynn, 413 A. 2d 1251 (Del. Ch. 1980), Maher v. Zapata, F. Supp. (S.D. Tex. 1980). But see Treadway Cos. v. Care Corp., 490 F. Supp. 669 (S.D.N.Y. 1980), Panter v. Marshall Field & Co., 486 F. Supp. 1168 (N.D. Ill. 1980).
