Models of Corporate Social Responsibility Part 2: The Stakeholder Model

This is the second post in a four part series on Models of CSR.

Proponents of the Stakeholder Model argue that the company should be driven by the interests of their stakeholders, rather than the interests of the stockholders alone (as argued in the Classical Model). In order to distinguish this model from the following two models I will discuss in coming blogs, I’ll follow Brummer in using a more narrow definition of stakeholder: those who have entered in a contractual or contract-like agreement with the company and those who are directly affected by corporate decision-making. Stakeholders include:

• stockholders
• workers
• consumers
• suppliers
• creditors
• competitors
• members of government agencies overseeing the firm (in cases of legal jurisdiction and the functioning of government agents)
• professional groups representing individuals within the company
• residents of local communities in which the facilities or plants are located (Brummer, 146)

The terms “directly affected” may seem a bit vague so perhaps an example would suffice. If I were laid off from a company, I would be directly affected. My family and friends may also be impacted but only secondarily, so they would not be considered stakeholders.

Whereas the Classical Model argues that the ethical responsibility of a corporation is to earn a profit and to obey the law, the Stakeholder Model has a more complex approach. In addition to earning a profit, this model includes consideration of the impact upon major stakeholders when making a decision.

The arguments in favor of this model provide some examples of the broader ethical framework. On the one hand, many theorists make consequentialist arguments (i.e. arguments based on consequences or outcomes). For example, Freeman argues that managers who respond to stakeholders concerns make their firms more powerful and resilient to attack from outside groups.¹ For example, BP would have been far better off if management had listened to and addressed the safety concerns raised by the key stakeholders. Others argue that the stakeholder model results in a superior level of long-term performance for specific firms and for society as a whole. For example, Manning and Maslow argue that those who respect and invest in their employees experience higher productivity.

Other theorists make deontological arguments (i.e. arguments that describe duty). For example, a contract obligates a firm and its suppliers to fulfill certain agreements as an act of duty. The argument for human rights lies within this concept of duty. Werhane argues that workers have rights to fair treatment and respect, such as fair pay or access to sufficient information and resources to perform their work.² Thus, the firm has a duty to respect the rights of their stakeholders. For example, in the late 1980s when the technology for building engine parts was dramatically improved, Boeing made the decision to transfer factory production of engine parts to Japan rather than retrain U.S. workers.³ In this case, Boeing did not operate out of an obligation to one of their major stakeholder, their workers. Stakeholder theorists claim that companies have a duty to uphold the rights of major stakeholders.

Proponents of this model argue for its viability based upon superior long-term outcomes and ethical appeals to duty yet the very strengths of this model also expose certain weaknesses. First, employing the stakeholder model will not necessarily result in long-term profitability. Certainly, David Batstone points to a company like Johnson and Johnson as an example of a corporation who practices the stakeholder model and has maintained a strong brand and remained profitable. Yet there are other companies that have failed, despite of or because of their commitment to their stakeholders. In a study, “Are Socially Responsible Corporations Good Investment Risks?,” S. Vance found a negative correlation between stock value performance and social responsibility ranking.⁴ When Vance’s research is balanced by the greater body of research on this topic, the outcomes seem to indicate that the stakeholder model will not harm long-term profitability.⁵ Yet simply utilizing a stakeholder model will not necessarily result in greater resilience or stronger performance.

A second weakness is the problem of colliding stakeholder rights. There are often times when the interests of stockholders and employees do not align. How does one make management decisions when rights collide? Johnson and Johnson offers one solution to this problem by listing the stakeholders who are to be honored in business decisions: (1) customers; (2) coworkers; (3) management; (4) local communities; (5) shareholders. Yet the difficulty of making decisions based upon duty to stakeholders can be difficult to discern and standardize in a major corporation.

I personally favor this model over the Classical Model because I do believe that decision-making within corporations should be guided by an ethical framework that surpasses legal obligations. I believe that corporations who employ such a model make a positive social contribution by honoring the communities that support their work. The challenge for these corporations is to articulate and internalize such a framework in a manner that builds long-term profitability.

1Freeman, Edward. Strategic Management. (Mass.: Pitman Books: 1984), 52-55. Brummer, 150.

2Werhane, Patricia. Persons, Rights and Corporations. (Englewood Cliffs, NJ: Prentice-Hall, 1985), 102. Brummer, 154.

3Batstone, David. Saving the Corporate Soul. (San Francisco: Jossey-Bass, 2003), 139-140.

4Vance, S.C. Management Review, vol. 64, no. 8, pp. 18-24.

5Brummer, 128-132.