Control to the Social Stakeholders? - Corporate Governance and Business Ethics

Shareholders and employees are not the only ones who have major interests in relation to a business and for whom this relationship is a long-term one. Some social stakeholders, too, have a long-term involvement with a business, on the basis of which they can rightly expect their interests to have some form of safeguard. Just consider people living in the area surrounding an international airport who have been battling for years to get the airport to take their interests into account. Is it not high time these stakeholders should have a say in the governance of the airport as well?

According to Swiss business ethicist Peter Ulrich, this step follows logically from the basic ethical principle of a democratic society, i.e., that emancipated citizens try to solve their mutual conflicts of interest and differences in opinion by finding consensus in an open debate in which all stakeholders can participate as equals. This principle is no more than minimal ethics, without which peaceful human coexistence is not possible in the long term. After all, it is not possible to ignore the interests of particular groups for a long time without this having consequences for social peace. According to Ulrich, this basic ethical principle of democratic society should also be applied to corporate governance, for a business and its stakeholders are miniature societies. So, ideally, all conflicts of values and interests in a business should be solved by the participation of all stakeholders in processes of reasonable consensus building.

In stating this, Ulrich advocates an ultimate form of stakeholder governance: a business is governed by all stakeholders. According to Ulrich, this could be laid down by an “open business statute”, which would say in what way stakeholders could gain access to a business’s decision making process. This can be done, e.g., by legal regulation of stakeholders’ rights to consult, oppose, complain, claim damages and participate in decision making (comparable to the way such rights are regulated already for shareholders and employees). The open business statute Ulrich has in mind is a democratically achieved, legally viable, minimal consensus on the institutional organization of a business and the right of all stakeholders to participate in and oppose the strategic decision making process.

Ulrich is the first to admit his ideas might sound a bit unworldly (Ulrich 1993). However, he interprets the open business statute as an ideal to point us in the right direction, an ideal that meets the needs of increasingly emancipated citizens to actively participate in the development of society, also in areas where this development is determined by business policies. The growing interest of NGOs in corporate behavior is indicative of this. They represent the need of large groups of citizens to have greater influence on business policy (especially with regard to social and environmental issues). Businesses, too, are becoming more open to NGO opinions. The relationship between business and NGOs is evolving from a conflict model into a consensus model, in which NGOs are increasingly turned into consultants and co-owners of a business’s social problems. In the long run, there are interesting efficiency advantages to be gained for businesses, Ulrich feels. A business which internalizes the dialogue with its stakeholders by involving them in their policy making might incur extra costs in the short term, but in the long term it will reap the benefits of being better informed of what society expects from it. Furthermore, it can save itself money because it avoids future conflicts with pressure groups.

By asking attention for all stakeholders, Ulrich has broadened and sharpened the debate on corporate governance from a business ethics perspective. When it is reasonable for everyone with a legitimate interest to be allowed to influence the way in which that interest is handled and when this is also true for stakeholders, then some form of stakeholder control of business firms is a logical conclusion.

Yet this does not say much about how stakeholder governance should be interpreted exactly. In what way should stakeholder influence be concretely organized? The question is whether this influence should be endogenous, by means of shared governing responsibilities, or whether it could be organized exogenously, by intervention of a democratically elected government. In this context, it is useful to primarily define social stakeholder interest in terms of safeguards, as Williamson suggests. Social stakeholders have the right to expect their interests in a business to be surrounded with adequate safeguards. Freeman and Evan pointed out that these safeguards can take three forms, of which control over the company is only one possibility. Safeguards can be set up by:

  1. Endogenous, generalized safeguards (social stakeholders participating in controlling the firm, as Ulrich suggest);
  2. Endogenous, contractual safeguards (e.g., agreements between businesses and NGOs in the form of covenants);
  3. Exogenous safeguards (provided by the government and other external supervisors).

The question of which of these safeguards offers social stakeholders the best guarantees is an empirical, public administrative question that cannot be answered a priori here. In any case, we can conclude that Ulrich was jumping the gun in concluding that any stakeholder whose legitimate interests are at stake in a company is also entitled to exercise control over that company in some way.

As a rule, however, one could say that the right of a stakeholder to participate in the control of a firm is a function of the importance of the interests of the stakeholder that are at stake and the lock-in of the stakeholder to the firm. People living outside the fence of an international airport bear the brunt of the airport’s external costs and their lock-in is high, as they will have to move in order to end their stakeholder status, which is costly. Increased noise from the air traffic may have reduced the value of the real estate in the vicinity of the airport, thus locking in the “fence holders” even more strongly. A stakeholder in this position would have a strong case for demanding a stake in the control of the airport, including perhaps even a right to a share in the revenues as a proportional compensation for lost property value, harms, and damages.

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