Stakeholder Governance Through Identification - Corporate Governance and Business Ethics

In this section, I would like to examine what these definitions mean in terms of the identification and prioritization of stakeholders. The definition of the stakeholder as an owner or possessor of resources or competencies, which he contributes to a team by means of an informal or formal contract, has a number of consequences for the management of this organizational type.

  1. In the context of the economics of governance, the definition of the term “stakeholders” as “interest group” is misleading. What the term and moreover, the German translation, Anspruchsgruppe, which means “claimants” does not take into account is the fact that only those who have previously invested resources in the formation and/or the success of a team can make demands or claims. However, as soon as stakeholders have done so, they are always already members of this team who cannot make demands of this team from the outside. Stakeholders and this is also true for NGO's – are actors who have a business interest; it would be more accurate to say that they represent specific interests rather than call them “claimants”. The idea of stakeholders as claimants probably derives from the generally known definition by Freeman (1984), according to which a stakeholder is somebody “who can affect or is affected by the achievement of an organization’s objectives”, with the claimant only reflecting the passive impact (“affected by”), but not the active contribution of resources (“can effect”). In the first case, the status of the claimant derives from a negative external effect of the organization’s actions. However, only by incorporating this negative effect into the team, a claimant can become a stakeholder who invests interests and resources in a team. In the second case, on the other hand, the status as stakeholder is constituted by an a priori positive internal organizational effect, which is not identical with a mere claim to or demand on the team. It follows from these reflections that the identification and prioritization of stakeholders do not result from (moral or legal) claims they make of a company, but from the kind and extent of the stakeholders’ investment of resources in a team.
  2. The investment of resources constitutes the (organizational) stakeholders, but their status is further qualified by the kind of contractual relationship with the team. In terms of contractual theory, every form of economic organization, be it a company or a stakeholder dialogue initiated or supported by this company, is based on an explicit and/or implicit contract (Williamson 1985.). Explicit, or formal, contracts are characterized by a codified specification of contributions and their enforcement by third parties such as, for example, the legal system. This category includes labor contracts, supply agreements, purchase contracts, etc. However, every formal contractual relationship of a team always also includes an implicit, or psychological, contract (Schein 1965; Brink 2010), consisting of mutual promises and expectations that are binding to a certain extent, even though they are not explicitly stipulated in the formal contract and thus cannot be enforced legally, or only with difficulty. Labor contracts imply career promises, supply agreements imply integrity agreements, and purchase contracts imply guarantees of quality, to name just a few examples. However, NGO's to use the example already mentioned above who are members or stakeholders of a team are members or stakeholders on the basis of an implicit social contract, which I will get to shortly. In the transaction cost theory, the distinction between explicit and implicit contracts corresponds to three contract forms that are all possible foundations for the constitution and transactions of a team. These are the classical, neoclassical, and relational contracts (Williamson 1985), which differ as to the kind and extent of their incompleteness and thus the legal ability to enforce explicit and implicit contracts. In classical contracts, legal claims are clearly specified and fully enforceable. The identity of the contract partners does not count. Neoclassical contracts are characterized by long-term contractual relations and thus by interdependencies between the partners. This bilateral dependence circumscribes the legal enforceability of the contractual relation; in case of contract fulfillment problems, the identity of the contract partners counts. Relational contracts are also characterized by mutual dependence and prohibitive enforcement costs; contractual problems have to be solved internally, because they can rarely be documented to and solved by third parties. While the classical contract is a purely explicit contract, the implicit contract is becoming more and more important for the other two forms of contract. If we use this contract theory distinction for the identification of stakeholders which is what I want to propose then it becomes clear that owners, long-term investors, managers, and employees become stakeholders by means of a relational contract, while short-term investors, customers, suppliers, and creditors are bound to the team either by a classical or a neoclassical contract. Given the primacy of the essential permanence of the collective actor as an “entity of its own”, the relational, neoclassical, and classical forms of contract suggest one aspect of the prioritization of interests, according to which they are prioritized in this particular order.
  3. Communities, governments, and NGO's do not have a classical, neoclassical or relational contractual relationship to a team. However, depending on a specific transaction, they can still be stakeholders of the team, because and to the extent that they contribute their resources and competencies to this team. I would now like to propose that this status is based on a social contract. This is supported by the fundamental assumption of the stakeholder theory that firms and teams, as distinctive collective actors, are members of a given society. This is expressed not least and first and foremost by the fact that communities, i.e., the immediate social environment of a company, are, to use Freeman’s terminology, “primary stakeholders” or “definitional stakeholders”; “they are vital to the continued growth and survival of any business” (Freeman et al. 2004).
  4. If we depict this argument in a matrix highlighting the strategic primacy of the “entity of its own”, i.e., the durability of contractual relations, we get the following result:

Stakeholder-identification-1

Stakeholder-identification-1

Of course, individual buyers, suppliers, etc. can be seen as short-term, transaction specific stakeholders of a team, but they are not constitutional, organizational stakeholders. What short-term investors and some NGO's have in common is the short time span of their involvement in a team. But they differ as to the contractual basis of their involvement. Short-term investors rely on explicit, legally enforceable contracts, while NGO's rely on implicit, politically and morally enforceable social contracts. It follows that short-term oriented investors can be defined as organizational stakeholders, while short-term oriented NGO's are “societal stakeholders”. It follows further that the governance of stakeholder relations depends on different mechanisms of enforcement, which are depicted in the next figure: It is within the mechanisms of enforcement of team-contracts that one can find the definitional characteristics of explicit and implicit contracts, be it in a pure or in a mixed form. Duration and the governance form of enforcement are the main indicators of stakeholder identification.

Stakeholder-identification-2

Stakeholder-identification-2


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