STAKEHOLDER THEORY
and
AMERICA-EUROPE-ASIA
The stakeholder
theoretical framework
and West-East
contrasts
STAKEHOLDER THEORY

A macro theme which has been
predominant in the recent literature and
discussions of ethics and morality of
business and which has potentially farreaching implications for the conduct of
many businesses is stakeholder theory
STAKEHOLDER THEORY


When discussing Friedman’s approach to the
ethics of business I suggested that businesses
do indeed have some moral responsibilities
which go beyond that of maximising profit for
shareholders.
From the examples we considered there it will
be clear that this more extended moral
responsibility of companies involves various
parties other than shareholders, e.g.
employees, consumers, third parties affected by
pollution etc.
STAKEHOLDER THEORY

This insight is the starting point of
stakeholder theory; the recognition that
there is potentially a whole variety of
people besides managers and
shareholders who may be affected
positively or negatively by the activities
of a business and who therefore may be
said to have an interest or stake therein
STAKEHOLDER THEORY


This idea echoes a somewhat older and closely
analogous concept which has been extensively
used by economists; the notion of
externalities. These refer to impacts from the
activity of any one set of actors in an economy
on other economic actors but in connection
with which no market transaction occurs
Environmental pollution is the classic example
of what economists call externalities
STAKEHOLDER THEORY



We may now give a definition of the
typical meaning of the term stakeholder
as used within ethics of business
A stakeholder is any person or group
who is affected for better or worse by
the activities of a business or
whose rights are affected by the
activities of a business
STAKEHOLDER THEORY


These effects may be positive (people getting
benefits from business activities) or negative
(people being harmed in various ways)
The key insight coming from the obviously
analogous economic concept of externality is
that while people often but by no means always
are made to pay for benefits received from
business activity, where harmful effects occur
they quite often go uncompensated in a market
system
STAKEHOLDER THEORY

Once we have recognised that there may
be a wide range of stakeholders beyond
merely the shareholders in a business
and that companies have a moral
responsibility in principle to consider the
effects of their activities it follows that
companies ought to take into account
the interests of all stakeholder groups
STAKEHOLDER THEORY

This is the central thrust of stakeholder theory
and it will be clear that it is in essence simply
an extension of the key point we made when
criticising Friedman, namely that companies
have moral responsibilities and that these
extend far beyond simply maximising profits for
shareholders; a company rather has a moral
responsibility to consider impacts on and to
seek to meet the interests of all stakeholder
groups.
STAKEHOLDER THEORY

It is to be noted that this may often be
easier said than done since the interests
of stakeholders may often point in very
different directions regarding firm
strategy and operation.
Class exercise: say who are the
stakeholders of the cigarette
manufacturing industry and how their
interests might be simultaneously met.
STAKEHOLDER THEORY


Stakeholder theory has been prominent in the
literature and discussions of business ethics of
recent years; this is not surprising as it offers a
very clearly defined critical tool which can be
used in giving a detailed account of the true
overall impact of business activities.
It is moreover directly in line with the idea that
a business has social responsibilities arising
from an implicit “social contract” and seeks to
list these in a practical way.
STAKEHOLDER THEORY




It allows us to ask:
Who or what groups have been affected
positively or negatively by businesses?
What if anything should a business be doing to
take into account the interests of these
stakeholder groups?
Have businesses already taken any steps to
deal with morally significant stakeholder
interests?
STAKEHOLDER THEORY


A secondary topic which has arisen in
the stakeholder literature is how best to
deal with morally relevant stakeholder
interests
One approach to this is for stakeholder
interests to be directly represented within
the company and to have an input into
any major decisions affecting that group
STAKEHOLDER THEORY


This can be seen for example in the formal
worker participation in key strategic decision
making which has long been the practice in
German business and which is becoming an
EU-wide norm (Mitbestimmung)
It can also be seen in instances when
environmental groups or NGOs are directly
consulted about or involved in key decisions
which will have an environmental effect (e.g.
some decisions on new airport runways)
STAKEHOLDER THEORY


Another example might be the input of
passenger user groups to decisions on
service features and timetabling by train
operating companies
It is notable that this sort of direct
involvement of stakeholder groups in
business decisions is much more
prevalent and accepted as normal in the
EU than elsewhere in the world
STAKEHOLDER THEORY

Another different and less direct approach to
recognition of the morally relevant interests of
stakeholders has been through state
intervention and regulation of various industries
with a view to ensuring that the interests of all
stakeholders are taken into account. This has
been particularly important for stakeholders
who may not be articulate or particularly well
organised as a lobbying force
STAKEHOLDER THEORY

This second approach can be seen (as
well as the direct approach) in relation to
a variety of environmental issues; the
state sets down acceptable standards for
environmental pollution such as exhaust
emissions which must then be respected
by all firms.
STAKEHOLDER THEORY


It will probably be evident that both the direct
and the indirect approaches to recognition of
the morally relevant interests of stakeholder
groups are significantly more developed in
Europe than in America
This brings us to comment briefly on a topic
discussed in some detail by Crane and Matten
in their work: the contrast between American
and European approaches to the whole area of
ethics and morality of business
AMERICA - EUROPE


Although business ethics first emerged as a
distinct subject of study in America in the
1980s it has since the early 1990s also been
enthusiastically studied in Europe and a
distinctively different European approach to the
subject has emerged
This can be seen both in the detail and in the
philosophical underpinning of the approaches
and ASIA

Today (2012) we should of course have
to add that in very recent times and in
parallel with the rapid economic
development of many East Asian
economies an Asian voice has also begun
to be heard on many of these issues and
this gives us a perspective which is
clearly distinct from either the American
or the European.
and ASIA


In fact I will suggest that we can conceive of
these approaches in many ways as if they were
on a continuous spectrum going from America
through Europe and the Middle East to India
and the Far East.
We will first of all focus on the America-Europe
contrast as it is in these areas that to date
discussion of business ethics has been most
developed
AMERICA - EUROPE

While we shall first focus on the contrast
of the American and European
approaches it should be emphasised
that there are of course huge areas of
common ground between them; for
example the idea of company moral
responsibility, the theme of
sustainability, accounting integrity etc
AMERICA - EUROPE


Taking first the differences in the detail
of approaches we may identify the
following contrasts
1. American business ethics tends to
focus to a much greater extent on the
moral responsibility of individuals within
companies rather than on the collective
moral responsibility of the company as a
whole (Echoes of Friedman)
AMERICA - EUROPE

2. Partly as a result of this difference of
focus European business ethics tends to
give greater prominence to a much wider
net of possible stakeholder interests than
do American approaches which remain
very focussed on shareholder wealth.
This as we saw is also reflected in the
practices of many European companies.
AMERICA - EUROPE

3. Where continental Europeans have seen a
key role for the state in regulating business in
order to achieve the ideals set out in business
ethics, Americans and we may note the British
have looked to the businesses themselves to
provide their own ethical code; they have
preferred self-regulation by businesses to state
regulation. On this point Friedman at least in
his 1970 article remarks on the role of the state
is quite untypical of the usual American
approach.
AMERICA - EUROPE

This Anglo-American preference for selfregulation has however come under severe
attack in the aftermath of the Enron scandal
and more broadly the financial crisis of 2008.
These two events have completly shattered any
faith in the self-regulatory capacities of the
financial sector and have led to the
introduction of a raft of new regulations for the
sector (e.g. Sarbanes-Oxley Act in the US)
AMERICA - EUROPE

4. A final contrast of detail is that where
European thinkers have been prepared to
question and criticise the whole setup of
free market capitalism American thinkers
have tended to take free market
capitalism as beyond ethical questioning
as a socio-economic system.
AMERICA - EUROPE


These differences are not just arbitrary; they
reflect an underlying sharp contrast in
philosophical and religious presuppositions
between America and Europe, especially
continental Europe
You may recall from the first lectures that we
showed how normative business ethics
invariably presupposes some set of broader
moral principles from which the particular
normative conclusions regarding business
activity are deduced; and that these are derived
from moral philosophy or religion or both
AMERICA - EUROPE


On the philosophical front it is hardly
exaggerating to say that America essentially
has only a very limited philosophical tradition
and that it has been besides largely antiphilosophical.
It has been dominated by first Pragmatism (19th
C) and later by Positivism and Relativism. There
have been some exceptions to this antiphilosophical tendency such as the moral
philosophy of John Rawls or the political
philosophy of Robert Nozick.
AMERICA - EUROPE

In general though Positivist and
Relativist approaches have predominated
and these have in common a general
disdain for abstract philosophical
discussion seeing it as at best a
pointless waste of time and at worst (in
the case of Positivism) as simply
meaningless.
AMERICA - EUROPE

Instead American business ethics tends to take
for granted an implicit set of moral principles
which are embodied in (American) conventional
morality and ethical codes. It just does not
occur to them very often that there might be
other sets of moral principles or ethical codes
outside their own home grown code(s) which
might be relevant to business ethics
discussions.
AMERICA - EUROPE


This conventional American morality actually
has its roots very clearly in a variant of
Protestant Christianity known as Calvinism or
Puritanism which was imported to the US at
the time of the Pilgrim fathers who were fleeing
religious persecution in Europe.
In puritanism each person’s destiny is seen as
preordained (predestination) and material
success in this life is seen as the sign of being
ultimately destined for Paradise.
AMERICA - EUROPE
In Calvinism great stress is laid on the
responsibility of each individual for their own
salvation and this is to be gained through hard
work, frugality, the amassing of wealth and
refraining from excessive pleasure and
gratification in this life. The emphasis is very
much on the individual’s relationship with God
with only a minor role for the manner in which
the individual relates to others or for social
institutions such as church or state
AMERICA - EUROPE

Although this Calvinist background is rarely
made explicit (it is simply taken for granted
much of the time) it will be clear how it has
influenced the American approach: the
unrestrained pursuit of material wealth, the
emphasis on the individual, the lower weight
given to stakeholder interests etc as well of
course as the ridiculous obsession with the
sexual peccadillos of powerful people
AMERICA - EUROPE

Europe has by contrast a highly developed
tradition of philosophical reflection and of
discussion of moral philosophical issues. As we
shall soon be seeing it has produced some
highly influential moral philosophies which in
turn have informed the discussion of business
ethics: Natural Law, Natural Rights
Utilitarianism, Kantian Categorical Imperative,
etc
AMERICA - EUROPE

As a result there has been a much
greater awareness in European
discussions of the underlying moral
philosophies and the controversies
surrounding them; hence an awareness
that there may be more than just one
(conventional) approach or answer to the
issues raised in the ethics and morality
of business.
AMERICA - EUROPE

This contrast in philosophical depth can
be clearly seen in the fact that European
business ethics has been much more
willing to question certain aspects of the
underlying socio-economic system of free
market capitalism rather than take it for
granted.
AMERICA - EUROPE

There is also some contrast in the
religious background. Continental
European thinking on ethical issues has
long been influenced both by
Catholicism throughout and in Germany
and Skandinavia by variants of Lutheran
Protestantism
AMERICA - EUROPE


In these approaches and especially Catholicism
there is much less focus on the individual’s
relationship with God; instead the emphasis is
on Love both of God and of one’s fellow human
beings and hence of a peaceful and harmonious
life in community for all mankind
There is no question of people just cutting
themselves off from others and concentrating
on their own salvation; salvation will depend on
one’s attitude and behaviour to all other human
beings.
AMERICA - EUROPE


Within this more community-oriented outlook a
greater role for a variety of social institutions is
acknowledged, e.g. the state, international
organisations and the church itself as a world
entity (catholic=universal)
With the emphasis on love and harmony there
also usually goes a much more relaxed attitude
to earthly pleasures; in contrast to the
asceticism of the puritanical approach there is
“joie de vivre” and the good life is seen as “la
dolce vita”.
Other Leading Approaches


As noted earlier while American and
European discussions have
predominated in the subject,
increasingly today we hear voices from
the East which are bringing interesting
new but in fact ancient perspectives to
bear on business ethics discussions.
We now look at some of the most
important of these in brief summary
MIDDLE EASTERN: ISLAM


As already suggested the perspectives on business ethics
can be seen as a kind of continuous spectrum going from
West to East and so I turn first to the Middle Eastern
contribution.
Of course much of the European approach and even the
American to the extent that they are heavily influenced
by Christianity can trace their roots to the Middle East
insofar as that is where Judaeo-Christianity had its
roots. But when we speak today of a distinctive Middle
Eastern approach to Ethics what we have in mind is of
course Islam, the Middle East being its heartland.
MIDDLE EASTERN: ISLAM

Islam is a religion rather than a moral
philosophy but it nonetheless puts
forward a wide array of detailed
normative injunctions to guide practical
action in the world including for the
business world; i.e. an ethical code.
MIDDLE EASTERN: ISLAM


The most famous ethical injunction of Islamic
business ethics is of course the prohibition of
the charging of interest on loans (riba).
But there are a variety of other injunctions
such as the prohibition of speculation (gharar);
and more broadly of any activity which the
mainstream economists would classify as the
earning of « economic rents ».
MIDDLE EASTERN: ISLAM


Also a good living Muslim is expected to
give at least one tenth of his income to
those less fortunate than himself.
It is intreresting to note that in Catholic
social thought right up to the 16th
century at least, the taking of interest
was also seen as immoral (sin of usury)
and to this day charging of excessive
interest is still seen as usury).
MIDDLE EASTERN: ISLAM

Furthermore the sense of social
solidarity and of fairness in the
distribution of wealth that is implicit in
the giving of 10% of one’s income to
those less well off is reproduced in an
institutionalised manner in the
European welfare states.
MIDDLE EASTERN: ISLAM


Hence in concrete terms Islamic business
ethics are not too far removed from those that
characterise Europe and this is not surprising
given their shared roots.
Moreover in the Islamic approach for all the
high profile contrasts with more Western
approaches, the individual with his rights and
duties to God and to his fellowman remains the
fulcrum as in Europe.
ASIAN APPROACHES

It is this individualistic fulcrum which
begins to evaporate when we immerse
ourselves in the philosophies that come
from further East: from India, China,
Japan…
INDIA – The GITA

In Indian thought which is in effect
heavily influenced by Hinduism we do
not find what we could call a moral
philosophy derived through reasoning,
still less any kind of detailed business
ethics. Indian thinking on moral matters
derives from the semi-mystical Bhagavad
Gita, the leading religious text of
Hinduism.
INDIA – The GITA

The Gita is a text over 5000 years old
and much of it is taken up with the
advice given to a Prince (Arjuna) before
entry to battle by his charioteer where
the charioteer is in fact a god in human
form (Krishna). Hence qua divine advice
it takes on moral force.
INDIA – The GITA


But because of the age of the text and
the military setting throughout, its moral
advice in relation to the contemporary
business setting remains at a very
general level.
There are general injunctions about the
qualities of good leadership etc which
may be relevant to the position of a
manager in a business setting.
INDIA – The GITA

For example the dangers of excessive
personal greed in a leader are clearly
stated and a leader is rather expected to
put the interests of his « people » before
any personal interest. There is a clear
suggestion that to put the common good
before any private gain or interest is
morally noble…a clear contrast for
example with Friedman’s approach.
INDIA – The GITA

It should be noted however that apart
from such general advice against
excessive presonal greed etc there is not
much else that is directly relevant to
business ethics in the Gita: and in
general Indian thought and culture has
been very positive towards the activities
of commerce, trade and business.
FAR EASTERN PERSPECTIVES


It is in Far Eastern thought that we find
perhaps the biggest departure from and
challenge to the Western approaches.
It is interesting also that when we draw on
Confucianism, Taoism, Buddhism etc these are
not really religions but rather philosophies of
life wherein religious elements are in effect
blended seemlessly into an essentially
philosophical standpoint.
FAR EASTERN PERSPECTIVES


What concerns us here is the implications
which these approaches generate for business
ethics and here there is a rich harvest.
Where so much of the Western and even Middle
Eastern approach to ethical and political
questions is centred on the individual and his
rights, in Far Eastern thinking the individual is
submerged in a community and the focus is on
duties to the community rather than on
individual rights.
FAR EASTERN PERSPECTIVES


Here we are worlds away from the self-seeking
self-aggrandising individuals of Friedman’s
ruggedly American perspective or from social
contract theory with its compendium of
individual rights and strict delimitation of the
state.
To a far Eastern eye these approaches seem
absurd as human beings live irretrievably in
relationships with others from the day they are
born to the day they die.
FAR EASTERN PERSPECTIVES


Hence for a fulfilled human existence it
is essential that these relationships are
not only paramount over individual
rights and should condition them but
also that relationships should be
carefully nurtured, developed, protected.
Trust and the creation of trust as a
basis for a lasting relationship thus
become predominant moral values.
FAR EASTERN PERSPECTIVES

These fundamental presuppositions of
Eastern philosophy are rich in
implications for the business world. Far
from acting as atomic units which get on
with pursuing their self-interest in a
narrow manner every business (and
individual) is expected through their
activity to contribute first and foremost
to the common good.
FAR EASTERN PERSPECTIVES


There is nothing in Far Eastern thought to
suggest however that this service to the
community is incompatible with making profits
and of course Japan first and now China, India
and most of the ASEAN states (Malaysia,
Singapore, Thailand, Vietnam etc) have
demonstrated great business prowess and
profitability.
It is not that Eastern thought is anti-business
at all: but the ultimate goal and purpose of
business is seen differently.
FAR EASTERN PERSPECTIVES

A second key implication of the eastern
approach is the emphasis on trust and the
building of relationship as a foundation for
good business. This is something which many
western businesses have often had some
difficulty in grasping and it may often seem to
unreconstructed Westerners that Eastern
business processes and negotiations are
interminably lugubrious and slow.
FAR EASTERN PERSPECTIVES


To the Eastern eye however the building
of a solid relationship of trust and even
friendship is an essential prerequisite to
doing any kind of serious business.
We may revisit this point when we come
to deal with issues of Corruption in
international business
FAR EASTERN PERSPECTIVES

There are of course big points for
discussion in these contrasts. For
example while the Eastern emphasis on
submerging the individual within the
greater whole may sound noble in
principle, if carried too far it may involve
an intolerable tyranny of the majority
over certain minorities: for who defines
in the end the common good??
FAR EASTERN PERSPECTIVES


These fascinating debates are not our direct
concern here since we only wanted to develop
an awareness of the breadth of perspectives
which can be brought to bear on business
ethics issues
They do mean however that in certain cases we
may face some difficult issues requiring the
comparison and evaluation of different moral
approaches when seeking to resolve the
questions of international busines ethics.
LEVELS of CRITIQUE


This leads towards a methodological
discussion of the different levels of
critique which we can encounter in
business ethics:
Level 1: the critique of the actions of an
individual within a company leading to
normative recommendations for those
individuals; (tends to be the main focus
of American business ethics).
LEVELS of CRITIQUE

Level 2: the critique of the actions of a company
in relation to their impact on the wider societies
in which they are located and operate;
(predominates in European and in Asian
approaches). This level of critique fits directly
into and is indeed a key manifestation of
Critical Social Theory as developed in the latter
part of the 20th century by Habermas and the
Frankfurt school.
LEVELS of CRITIQUE


Level 3: in particular when problems of
international business are examined the
necessity to compare different moral
codes with a view to deciding which it is
best to apply, which we ought to apply;
This is of course the « critical morality of
moralities » or metaethics which is the
the ultimate concern of advanced moral
philosophy.