6BU004 Corporate Social
Responsibility and Ethics
Session 3:
Stakeholder theory and CSR
William Scarff and Dr Silke Machold
Reader in Governance and Ethics
Session objectives
To understand meaning(s) of ‘stakeholder’
To compare different perspectives on
nature of ‘firm’
To evaluate different categorisations and
prioritisations for stakeholders
To identify different ‘strands’ of
stakeholder theory
To assess implications of stakeholder
theory for CSR
Group activity
In groups of 4, draw up a list of who you
consider to be ‘stakeholders’ in IPW
Metropolia.
Explain why you would consider these
stakeholders.
Definitions of ‘Stakeholders’
“Those groups without whose support the
organization would cease to exist” (Stanford
memo 1963)
“any group or individual who can affect or is
affected by the achievement of the
organization’s objective” (Freeman, 1984: 46)
“bear some form of risk as a result of having
invested some form of capital, human or
financial, something of value, in a firm.”
(Clarkson, 1994:5)
“are or which could impact or be impacted by the
firm/organization” (Brenner, 1995:76)
Definitions cont.
Narrow versus broad definitions:
Narrow definitions focus on direct relevance to firms’
economic objectives, broad definitions recognise that very
wide range of groups and individuals affect or are affected
by firm
Claimants versus influencers:
Some define stakeholders as those that both affect and are
affected by firm, others define it as either/or
Actual versus potential stakeholders:
Limitation of stakeholder dependent on whether actual
relationship exists, issue of involuntary stakeholders
Form of stakeholders:
Human beings (or subset of these) versus non-human
entities
Perspectives on the firm
Stockholder/
Shareholder
perspective
Friedman 1970
Jensen and Meckling 1976
Fama and Jensen 1983
Pound 1993
La Porta et al. 2000
Jensen 2002
Stakeholder
perspective
Freeman 1984
Freeman and Evan 1988
Jones 1994
Donaldson and Preston 1995
Mitchell et al. 1997
Freeman and Phillips 2002
Blair and Stout 1999
Shareholder perspectives on firm
 Primarily based on principal-agent view of firm
(articulated by Jensen and Meckling 1976, Fama
and Jensen 1983)
 Firm is a ‘nexus of contracts’ (Jensen and
Meckling 1976:310) between shareholder
(principals) and managers (agents) – premise of
separation of ownership and control
 Primary responsibility of managers is to maximise
wealth to shareholders, managers have ‘fiduciary’
duty to shareholders
Stakeholder perspectives on firm
 Firm viewed as multilateral contract: managers contract
with multiple stakeholders, not just shareholders
(Freeman and Evan 1988),
 Contracts can take various forms but include social and
psychological contracts, managers are agents of all
stakeholders
 Alternatively, firm viewed as bundle of firm-specific
investments made by participants in team production
(Blair and Stout, 1999)
 Managers have duties and responsibilities to all
stakeholders, fiduciary duties apply not only to
shareholders
 Objective is to balance pursuit of profit with legitimate
interests and ethical rights of stakeholders
Problems with stakeholder perspectives
 Debate over ‘fiduciary’ duties – should
shareholders be privileged over other
stakeholders?
 ‘too many cooks, too many stews’ (Child and
Marcoux, 1999:218):
A/ are there not too many stakeholders to
manage?
B/ in which decisions should you involve
stakeholders
- possibility of decision-making paralysis?
Prioritisation of stakeholders
(stakeholder mapping)
Power
C
Keep
satisfied
D
Key
players
A
Minimal
effort
B
Keep
informed
Level of interest
Source: Johnson, Scholes and Whittington,
2005: 182
Group activity: Using you list of
stakeholders in IPW Metropolia
map their priority to IPW Metropolia
using the Johnson et al.
stakeholder map.
What problems you have
encountered in using the model?
Prioritisation of stakeholders cont.:
Who or what really counts
Power
Legitimacy
Urgency
Source: Mitchell, Agle, Wood, 1997: 872
Mitchell et al. (1997) salience attributes (pp.865ff.)
Power: “a relationship among social actors in which one
social actor, A, can get another social actor, B, to do
something that B would otherwise not have done.” (Dahl,
1981:1), “..to impose its will in the relationship” (Mitchell
et al, 1997:865)
Legitimacy: “a generalised perception or assumption that
the actions of an entity are desirable, proper, or
appropriate within some socially constructed system of
norms, values, beliefs and definitions. (Suchman, 1995:
574)
Urgency: “the degree to which stakeholder claims call for
immediate action. “(Mitchell et al, 1997: 867) –
compelling, driving imperative
LEGITIMACY
POWER
Dominant
stakeholder
Dormant
stakeholder
Discretionary
stakeholder
Definite
stakeholder
Dependent
stakeholder
Dangerous
stakeholder
Non-stakeholder
Demanding
stakeholder
URGENCY
Strands within stakeholder theory
Donaldson and Preston (1995) identify 3
strands:
1. Descriptive stakeholder theory: model
which describes what the organisation is:
constellation or network of cooperative
and competitive interests (Jones 1994,
Donaldson and Preston 1995, Frooman
1999, Agle et al. 1999): least developed
empirically
Strands within stakeholder theory cont.
Instrumental stakeholder theory:
Relationship between practice of stakeholder
management and achievement of corporate
objectives: i.e. certain financial outcomes more
likely if stakeholder management is practiced
(Donaldson & Preston 1995, Jones 1995,
Berman et al. 1999, Orlitzky 2003): much
contested and some conflicting results until meta
analysis by Orlitzky (2003) showed link between
CSR and financial performance
Strands within stakeholder theory cont.
Normative stakeholder theory:
Stakeholders are persons or groups with an
interest in the corporation (regardless of whether
corporation has interest in them!), interests of all
stakeholders therefore should be of intrinsic
value: corporations have moral
responsibility/duty to take account of
stakeholders (Donaldson and Preston 1995,
Phillips 1997): normative means ‘should’ – but
little evidence that this is what organisations do
on practice
Implications of stakeholder perspective for
CSR
 Objective of firm is not simply to maximise value to
shareholders but manage/balance different interests and
rights of stakeholders
 Firms need to identify and prioritise stakeholders (most
commonly accepted are employees, customers,
environment and community – what about others with
power and legitimate interest?)
 Question is how to manage stakeholders – involvement
in decisions?, representation (e.g. boards)?
 Stakeholder theory has three strands (descriptive,
instrumental and normative) – descriptive is least
researched and normative has little empirical support
 Later sessions will look at main stakeholder groups in
more detail
Key reading
Carroll, A.B., Buchholtz, A.K. (2009) Business & Society:
ethics and stakeholder management. 7th edition, Mason,
Ohio: Thomson SouthWestern.
Donaldson, T., Preston, L.E. (1995) “The stakeholder
theory of the corporation: concepts, evidence and
implications”, Academy of Management Review, (20)
1, pp. 65-91.
Mitchell, R.K., Agle, B.R., Wood, D.J. (1997) “Toward a
theory of stakeholder identification and salience: defining
the principle of who and what really counts”, Academy of
Management Review, (22) 4, pp. 853-886.
Additional reading
Jensen, M.C. (2002) “Value maximization, stakeholder theory, and the corporate objective function”,
Business Ethics Quarterly, (12) 2, pp. 235-256.
Freeman, R.E., Evan, W.M. (1990) “Corporate governance: a stakeholder interpretation”, Journal of
Behavioral Economics, (19) 4, pp. 337-359.
Frooman, J. (1999) Stakeholder influence strategies, Academy of Management Review, 24 (2):
191-205.
Goodpaster, K.E. (1991) “Business ethics and stakeholder analysis”, Business Ethics Quarterly, 1, pp.
53-73.
Jensen, M.C., & Meckling, W.H. (1976) Theory of the firm: managerial behaviour, agency costs, and
ownership structure, Journal of Financial Economics, 3(4), pp. 305-360
Jones, T.M. (1995) “Instrumental stakeholder theory: a synthesis of ethics and economics”,
Academy of Management Review, (20) 2, pp. 404-437.
Machold, S., Ahmed, P.K., Farquhar, S. (2008) Corporate Governance and Ethics: A Feminist
Perspective. Journal of Business Ethics, 81(3): 665-678.
Marcoux, A.M. (2003) “A fiduciary argument against stakeholder theory”, Business Ethics Quarterly,
(13) 1, pp. 1-24.
Orlitzky, M., Schmidt, F., Rynes, S. (2003) Corporate social and financial performance: a meta analysis,
Organization Studies, 24 (3): 403-441.
Phillips, R.A. (1997) “Stakeholder theory and a principle of fairness”, Business Ethics Quarterly, (7) 1,
pp. 51-66.
Smith, H.J. (2003) The shareholder vs. stakeholder debate. MIT Sloan Management Review, Summer
2003: 85-90.
Starik, M. (1994) ed. “The Toronto conference: reflections on stakeholder theory”, Business and
Society, 33, pp. 82-131.