Name-Tushar Chaudhary.
Student ID-251205812.
Course- PHIL 2074F 550 SU22
The Fallacies in Stakeholder Theory
By Tushar Chaudhary
In this essay I argue that Freeman’s view that interest of each of the stakeholders must be
considered by managers while making decisions and not to treat them as mere means of end is not
compelling enough. I begin with an outline of Freeman’s argument that managers bear a fiduciary
relationship to stakeholders (p2). I then elaborate how it leads to limiting growth and success of a
firm. I end by explaining his theory leading to betterment of other stakeholders but causing distrust
among current and potential stockholders towards management and corporation.
Freeman’s thesis states as follows- “to revitalize the concept of managerial capitalism
by replacing the notion that managers have a duty to stockholders with the concept that managers
bear a fiduciary relationship to stakeholders” (p70). Those groups that have a stake in the firm
including suppliers, customers, employees, stockholders, and the local community, as well as
management in its role as agent for these groups are termed as stake. According to his stakeholder
theory, each of these group has the right not to be treated as mere means of production and,
therefore must participate in determining the future direction of the firm in which they have a
stake. He understood that revenue generation is a major goal of any corporation and managers are
employees of the stockholders(owners) of the corporation and are assumed to use the resources to
maximize the goal of profit generation. If their interests aren’t pursued by the management,
stockholders can theoretically sue them for attempting so. But he argues that corporation is a legal
person, existing in contemplation of the law, managers of the corporation are constrained by the
law. In today’s world, law has evolved to effectively constrain the pursuit of the stockholders at
the expense of other claimants of the firm and it requires the claims of the other stakeholders to be
taken into consideration.
Various acts have been introduced in the past at local as well as global level(p71) to
empower the other stakeholders. The concept of Caveat Emptor has somewhat totally diminished
in major parts of the world and being replaced by Caveat Venditor which means let the seller
beware implying the importance and power customers are able to gain in the history and consumer
is equally if not more responsible than the employees for growth of business. The law has also law
has also protected the rights of the interests of local communities. The management has been
constrained from spoiling of commons by introduction of Clean Air Act and Clean Water Act(p71)
by the Law. He argues that result of such changes in the legal system can be viewed as giving
some rights to those groups that have a claim on the firm, for example, customer, suppliers,
employees, local communities, stockholders, and management(p73). As per my understanding,
Freemans assumes that managers have a better and more meaningful obligation to fulfill i.e.,
ensure the survival of the corporation and maintaining a balance among all stakeholders can be a
way to achieve so. My argument is a manager may not be able to create such a function since it’s
been commonly seen that the interest of various stakeholders often collides with each other. The
employees might want less hours of work per day with higher wage, community might demand
eco-friendly products and/or elimination of plastic use in products while the consumers will
probably demand price reduction of goods. All these statements might not reasonable and
justifiable theoretically but aren’t achievable or sustainable in real world situations. Also, if
managers do wish to pursue so, if the shareholders do sue them, I would consider it to be the right
Name-Tushar Chaudhary.
Student ID-251205812.
Course- PHIL 2074F 550 SU22
step because the risk bearers of the corporations don’t pool all of their finances and time in order
to see lower profits as business is For-Profit organisation.
Though this issue can be somewhat resolved by Freeman’s Doctrine
of Fair Contracts(p77) which is informed by three political ideals, i.e., autonomy, solidarity, and
fairness. It states that Fairness is realized when all parties are treated as fundamentally equal,
autonomy is realized when all are granted an opportunity to choose to participate (or not), and
solidarity is realized when all recognize the impact their actions have on other participants. This
not only creates a true balance but allows all of them to be heard as any of them being not treated
properly can cause havoc throughout the business organisation. For instance, a peaceful strike by
doctors say due to insufficient availability of nurse in a private hospital too can put a lot of its
patient at risk of even death which would disrupt the organisation’s image in the community, losing
the potential patients to competitors and can lead to huge loss for the stockholders.
Even though, Freeman’s theory is justifiable but isn’t compelling since it somehow points
in the direction which doesn’t advocate giving huge importance to the stockholders. The placement
of shareholders last on the list of corporate stakeholders is troubling. Shareholders come last in
preference in bankruptcy and are protected by fiduciary duties primarily for that reason, and
placing them last, even if simply symbolic, sends the wrong message. If an equity-holder believes
they are last in line in corporate priorities, they simply will not invest or opt to become a debtholder
instead, which would be a deathblow for starting new, risky, but potentially societally valuable
entities. That was the original logic for shareholder primacy. He as per my understanding was not
able to explain the meaning of shareholders. They aren’t just the owners of capital. They are the
ones who believed in the idea of the business, who are standing at the very front if anything goes
wrong and will be the first to lose. Employees if loose their job can find another, community can
expect citizens and government to work for them too, consumer can shift from one brand to
another, but the stockholders can lose anything and everything which they may not be able to
recover from. I found his way of describing them a bit unjustifiable.
Also, the theory puts a lot of stress on management and
creates too much tension and worry for them. It presumably won’t be efficient if managers would
be forced to not only take into consideration every stakeholder but create balance and disobey the
ones that hired them for a particular reason. It diminishes managers accountability and
performance. If a person is accountable to everything, he is accountable to nothing.
I end by ensuring that I do not reject his theory and do admire it. My criticism for his theory is
just to present the need to not put the stockholders at the end of the list since the meaning of
stockholders is not the same anymore. It’s not just Wall Street titans but majorly the public who
has invested hard-earned salaries in these corporations and they should be prioritized too if the
business wishes to continue. Also, the concept of business would always be majorly profit making
irrespective of time.
Name-Tushar Chaudhary.
Student ID-251205812.
Course- PHIL 2074F 550 SU22
Bibliography
[B. Edward Freeman,1984] The Stakeholders Theory
[Charles M. Elson,2019] Three Problems with the stakeholder theory
https://www.bidenschool.udel.edu/bideninstitute/bcblog/Pages/Three-Problems-With-theStakeholder-Theory.aspx