It is hard to overstate the esteem in which business ethicists hold Tom Donaldson and Lee Preston’s “The Stakeholder Theory of the Corporation: oncepts, Evidence, and Implications” (1995). Business ethicists moved by stakeholder theory credit Donaldson and Preston with articulating, better than anyone else has done, their world view. Perhaps no aspect of their paper commands greater acclaim than the explication of stakeholder theory as a triad of theses – one normative, one instrumental, one descriptive the elements of which are both “interrelated” and “mutually supportive” (Donaldson and Preston 1995), with the normative thesis as “the critical underpinning for the theory in all its forms”, and “the core of the theory” ibid. So understood, Donaldson and Preston’s stakeholder theory emerges as an omnibus theory of the firm, capturing it both as it is (descriptive thesis) and as it ought to be (normative thesis), as well as affording managers useful guidance about how to run it (instrumental thesis). The three theses, corresponding to the three uses, senses, or kinds of stakeholder thinking, are this omnibus theory’s main, interlocking components.
Although Donaldson and Preston’s contribution meets with overwhelming approval and has become a standard citation in the stakeholder-theoretic business ethics literature, I will argue that their triadic interpretation is conceptually confused and its normative thesis, advertised as the conceptual heart of their omnibus stakeholder theory, is morally trivial. If correct, this conclusion’s importance extends beyond the merits of Donaldson and Preston’s paper. It has significant implications for the corporate governance debate in business ethics.
In the business ethics literature, the corporate governance debate is typically cast as a shareholder-stakeholder debate, i.e., a debate between those who hold that all firms ought to be managed in the interests of their shareholders and those who hold that all firms ought to be managed in the interests of their stakeholders. This characterization is unfortunate because it fails to capture the diversity of views, both actual (particularly outside the business ethics literature) and potential, that can be held on the governance of firms. It also commits contestants on both sides to some unduly stringent views (e.g., that consumer, producer, and worker cooperatives are impermissible). The debate is better characterized as one over the moral permissibility of the investor-owned firm with fiduciary duties to shareholders alone the firm managed with the aim of maximizing its residuum for its equity investors, with that aim secured by imposing fiduciary duties on managers to act on behalf of the equity investors’ interest in that residuum. This is so because one may argue for (or against) this firm’s moral permissibility on a variety of grounds, not all of which are compatible.
Some proponents of the moral permissibility of the investor-owned firm may argue that this organizational form is necessitated by the peculiar moral status of the shareholder-manager relation (e.g., Marcoux 2003; Goodpaster 1991). Other proponents may argue that there is nothing intrinsically valuable about the shareholder-manager relation, but there are nonetheless strong consequentialist grounds for forming the type of firm in which it features prominently. Still others may argue that any organizational form that results from the free contracting of persons is a permissible form, and the investor-owned firm is one such form (e.g., Macey 1999; Sollars 2002).Similarly, some opponents of the moral permissibility of the investor-owned firm may argue that there exists a particular normative theory of the firm the stakeholder theory the correctness of which implies that the investor-owned firm is morally impermissible. Other opponents may argue that the investor-owned firm is morally impermissible not on the basis of a particular theory of the firm (e.g., the stakeholder theory), but instead on the basis of the correctness of a particular moral or normative political theory (McCall 2001). This or something like it is the preferred tack in the progressive corporate law literature (e.g., several contributions in Mitchell 1995). In short, several positions exist on the moral permissibility of the investor-owned firm, only two of which are represented in the shareholder-take holder debate (with one shareholder theory as it is portrayed by stakeholder theorists being largely a straw person). Engaging the larger, richer, more sophisticated debate requires identifying correctly its central point of contention.
Donaldson and Preston’s triadic interpretation merits close treatment because the mutual support they claim to find among the theses has important implications. The usual motivation for claiming that multiple theses are interrelated or mutually supporting is to facilitate arguments in which evidence for one thesis is also evidence for another. Indeed, it is hard to imagine why mutual support among multiple theses would be worth arguing for unless it is for that purpose. The triadic interpretation both reflects and informs an argumentative strategy, usually implicit, in the stakeholder-theoretic business ethics literature. This argumentative strategy has two elements, a positive claim and a negative claim, composing the two sides of a single conceptual coin.
The positive claim is this:
If the practices or policies commended by normative stakeholder theory are shown to have instrumental merits (e.g., they promote profitability, stability, or growth), then this showing bolsters the veracity of both the normative claim and the normative theory generating it. If the three aspects of Donaldson and Preston’s omnibus stakeholder theory are interrelated and mutually supporting, and if the normative aspect under girds the other two, then this constitutes a strong justification for the positive claim. For if the instrumental thesis depends upon the normative thesis and the instrumental virtues can be demonstrated, then the normative virtues follow: if I depend upon N and I am true, then N must be true also.
The negative claim is this:
If the practices or policies commended morally under the guise of normative stakeholder theory are shown to have instrumental merits, then this fact undermines the investor-owned firm with fiduciary duties to shareholders alone the firm whose officers and directors are duty-bound to find and adopt those practices and policies that redound to the benefit of shareholders by promoting profitability, stability, or growth.
This is so, presumably, because extending fiduciary care to shareholders alone entails overlooking, and hence failing to implement, practices or policies redounding to the benefit of shareholders. Call this the myopia argument.
The myopia argument expresses the negative corollary of the view that identifying and implementing practices and policies enhancing firm performance is linked inextricably to acting on the prescriptions of a preferred normative ethical theory normative stakeholder theory. Those who do not heed it are blind to practices and policies enhancing firm performance, even and especially when enhancing that performance is their explicit aim. Again, if true, the triadic interpretation underwrites this negative claim. For if the instrumental thesis is dependent upon the normative thesis, then the right normative commitments are a necessary prologue to instrumental success: if I depends upon N and I is true, then N must be true also.
Consequently, a great deal rides on the triadic interpretation, in general, and on the conceptual primacy of the normative thesis, in particular. In addition to expressing the world view of many business ethicists identifying with normative stakeholder theory, it underwrites both a normative argumentative strategy and a research program that sees the instrumental merits of practices and policies commended by normative stakeholder theory as evidence of its moral superiority.
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