what’s wrong with stakeholder theory?

Brayden

Despite its seeming rise in popularity, many smart scholars have problems with a stakeholder theory of the corporation. Some (e.g. Key 1999) argue that stakeholder theory lacks specificity and, thus, cannot be operationalized in a way that allows scientific inspection. Others, like a commenter to my first post at Conglomerate, feel that stakeholder theory offers no decision-making criteria that would adequately guide corporate governance. Most critics, like Teppo, feel that stakeholder theory is vacuous and offers an unrealistic view of how organizations operate. I agree with all of the critics. It’s true that some stakeholder theories do each of these things, BUT the real problem is that there are so many versions of stakeholder theory that it’s difficult to know where even to begin to offer critiques.

Let me try to group the various perspectives into two camps. Once I’ve created this dichotomy, I’ll tell you why they’re both wrong. Then I’ll offer an alternative view that I believe is superior. By the way, this outline of an argument could be applied to pretty much any theoretical problem and is probably a somewhat sneaky way to make your point. I don’t mind doing it here.

The first set of perspectives are what I’d call the blank-slate view of stakeholder theory. In this view, the organization is a shell that can be written upon freely by the various groups that lay claim to the corporation. The firm has very few innate interests. Its interests, in fact, are almost entirely determined by its relations to primary and secondary stakeholders. Change those relations, and the interests of the firm change accordingly. In some ways, this view is an extreme version of Granovetter’s embeddedness thesis. Interests aren’t innate at all; rather, they are merely reflective of the meaningful ties that one has. The article that Teppo cites would fit in this perspective. Most of the Donaldson and Freeman literature also fits in this camp.

The second set of perspectives fall into the adversarial stakeholder camp. In this view, the firm has its own economic interests, and so do the stakeholders. The firm’s primary purpose is to be a profit-making machine. The stakeholders’ interests are to redistribute the wealth created by the firm to other constituencies, possibly to themselves. The struggle, then, involves a set of negotiations between the parties, as they try to define who deserves more or less of the firm’s resources. In this camp are some in the more instrumental crowd, like Coff (1999) – the disputed classic. ;) In this camp you’d also find scholarship like that done by David Baron (in his “private politics” model), who argues that stakeholders, use the threat of state intervention to convince firms that it is in their best interest to redistribute resources voluntarily.

The two camps represent extremes, of course. In between are those touting a resource dependence perspective (like Frooman or Clarkson). They postulate that stakeholders’ influence over firm decision-making is a function of the firm’s dependence on them for critical resources. In this intermediate view, the firm may be constituted by stakeholder interests, but only inasmuch as they help it achieve its own predetermined ends.

My problem with the two camps are that neither represent a realistic view of what goes on in the firm. The first perspective seems to ignore the institutional requirements of the modern corporation. The corporation as a legal fiction created to maximize market value is absent. Managerial incentive is nowhere to be seen. And discretion, forget about it! In short, this camp tends to reduce the firm to a social construction that can easily change its interests to meet the demands of crying stakeholders.

The second view, however, moves too much in the other direction. Firms are always seen as value maximizing and they have sufficient information to weigh the costs and benefits of negotiating with secondary stakeholders. In this view, there is no room for a firm that might actually prefer to forego some profit for the benefit of a collective good. The corporation (and the stakeholders) are unidimensional actors. Another problem results when these scholars try to build altruism into their model. It’s never apparent why a firm should act altruistically in the first place.

What’s to be done with stakeholder theory? What is needed is a way to think about the firm as a social actor that allows for heterogeneity of interests without simply seeing the firm as a blank-slate willing to be written upon. We need a mediating mechanism (always the key!). I suggest an alternative – the organizational identity perspective.

In this perspective (based on the organizational identity scholarship of Dave Whetten), each organization has its own unique identity that distinguishes it from its competitors while at the same time establishing it in a particular legitimacy-lending social category. The identity fills the organization’s needs for inclusion and distinctiveness. Identity also conditions the firm’s interaction with potential stakeholders. It is the DNA, you might say, that produces the firm’s disposition and interests. When the firm’s identity matches up with that of a particular stakeholder group (as Timberland’s identity matched with the environmental movement), the firm tries to perform in a way that benefits both its survival and the stakeholder’s interests.

There are two key underlying assumptions about this alternative view that I think make it work. The first is recognizing that there is heterogeneity in corporate interests and that the interests are not necessarily mutually exclusive. The shareholder value maximization interest is not always incompatible with the goal to promote environment-friendly policies, for example. The second key assumption is that the identity is established in the formative years of the company and tends to be stable over time. The second assumption is based in the ideas of structural inertia (see population ecology) and imprinting (see Stinchcombe). Thus, the founding effects of a firm on its identity largely determine how willing it will be to engage in conversation with certain stakeholder groups in the future.