Stakeholder Interests Imply Control Rights In A Firm Introduction - Corporate Governance and Business Ethics

Ethics requires us to take the justified interests of all those into account who can be affected by our actions. We have ethical duties not to harm people, to protect people from harm by others, and even to do good to them (Frankena 1973). Business firms are under this same basic system of ethical duties (Jeurissen 2006). Those who can be affected by the actions of a business are called “stakeholders” (Freeman 1984). Businesses are under an ethical obligation to take the justified interests of their stakeholders into account (Freeman et al. 2007). In this paper, I will examine the question of to what extent the legitimate interests of stakeholders towards a firm also imply the need, or even the right, to exercise control over that firm’s decisions.

By “control” over a firm, I mean a formalized, statutory right to influence its decisions. Control is a form of influence, but not all influence implies control. Competitors who force each other to sell at the lowest price have each other firmly in their grips and in common parlance could be said to “control” each other’s behavior. In the technical vocabulary of this paper, this would still not be control, but influence. Control, as I will use the term here, implies a form of influence that has a formal statutory basis. Control comes mostly in the form of a right that a specific category of stakeholders has: voting rights, the veto right, rights to nominate or appoint, rights to enquire, etc. An important characteristic of the rights that constitute “control” over a firm is their generalized nature. Companies conclude many legally binding contracts every day, related to buying and selling for example, and each of these contracts puts the company under the influence of the contracting party. Sellers and buyers can take each other to court over juridical disputes and influence each other’s conduct and outcomes that way. Again, this type of contractually related and limited influence is outside the realm of “control” as I will use the term here. Control refers to a role and status of a stakeholder to permanently exercise influence over a company’s decisions, based on some generalized right to do so.

The thesis that stakeholders should have control rights over a firm is advanced by several authors, whose work can be brought together under the heading of “stakeholder democracy”, “stakeholder governance”, or “stakeholder capitalism” (Freeman 1996). They develop their point mostly in opposition to the “shareholder” model, where the ultimate control right in a firm is reserved for the shareholders. Robert Freeman is an important spokesperson of stakeholder capitalism. In several papers, he has argued why the primacy of the shareholder is an erroneous and socially disruptive account of how businesses should be governed. It is based on false assumptions of egoistic and competitive human motivation, it crowds out ethical motives from business decisions, it arbitrarily promotes the interests of a dominant group (the shareholders) over others, and it necessitates the development of a big juridical system to protect the society from the consequences of the egoistic and amoral behavior of the business world (Freeman et al. 2007).

The new story is called “stakeholder capitalism”. It is based on the fundamental assumption that a company is not anyone’s specific business and that its achievements are rather the result of the joint effort and mutual trust of many parties. “Stakeholder capitalism focuses on individuals voluntarily working together to create sustainable relationships in the pursuit of value creation” (Freeman et al. 2007). Stakeholder capitalism is “based on freedom, rights, and the creation by consent of positive obligation” (ibid).

In this paper, I will explore whether and how the notion of stakeholder capitalism involves the extension of decision rights in a company to other stakeholders than the shareholders only. I will firstly make a distinction between economic and social stakeholders and argue that control rights are most plausible for the economic stakeholders of a firm, less so for social stakeholders. Next, I will put this conclusion into perspective by pointing to the increased prominence and prevalence of the open-systems and values-chain approaches to stakeholder management, which tend to decentralize the role of the firm in relation to its stakeholders. The resource based view of the firm helps understand why the question of which stakeholder controls the firm is increasingly superseded by the question of which stakeholder owns which resource that is critical to the achievement of the common goals of the networked partners in the values chain.

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