Where does stakeholder theory collide?

The claim that a firm should be managed for the benefit of every group that can affect or is affected by it, its customers, employees, suppliers, financiers, and the communities around it, rather than for its shareholders alone. Freeman set this out in his 1984 book Strategic Management: A Stakeholder Approach, where attending to stakeholder relationships is presented as the practical route to a firm's survival and success in a turbulent environment. On this reading the case for stakeholders is instrumental: a manager who tracks these groups and their stakes makes better strategic decisions and builds a more durable business. Donaldson and Preston later called this the instrumental thesis, the argument that stakeholder management tends to produce the results firms want. The referent here is a way of running a company, judged by whether it works, not a statement about what managers morally owe.[1][2]

Unit

A firm managed by the stakes of the groups tied to it

Recovery means

Not applicable

Measured by

Assessed by strategic outcomes such as survival, performance, and the quality of stakeholder relationships

The claim that stakeholders have interests of intrinsic worth, so that a firm owes them moral consideration for their own sake and not merely because tending to them pays. Evan and Freeman gave this a Kantian form in 1988, arguing that each stakeholder group is an end in itself and has a right not to be treated only as a means to shareholders' returns. Donaldson and Preston named this the normative thesis and held it to be the core of the theory, the moral foundation on which the descriptive and instrumental readings rest. The question here is not whether stakeholder management works but whether it is right, and the two can come apart: a practice could be profitable and still wrong, or moral and still costly. This is the same term, stakeholder theory, carrying a claim of a different kind from the strategic one.[3][2]

Unit

A firm's moral obligations to the groups affected by it

Recovery means

Not applicable

Measured by

Argued from ethical premises rather than measured; assessed by the soundness of the moral reasoning

The competing view that a firm's managers should serve its shareholders, the owners who hire them, and that this is both their duty and the firm's proper objective. Friedman argued in 1970 that a manager spending the owners' money on broad social ends is in effect taxing them without consent, and that the social responsibility of business is to raise its profits within the law and the rules of the game. Jensen restated the economic case in 2002, holding that a firm needs a single objective function to be run coherently, and that trying to serve all stakeholders at once can leave managers unaccountable and the firm directionless. Defenders of the stakeholder view reply that owners are themselves one stakeholder among several, and that long-run value depends on the other relationships anyway. The disagreement is genuine and unsettled: it turns on what a firm is for, and thoughtful people in both management and economics still hold opposite answers.[4][5]

Unit

The firm run for the returns of its owners

Recovery means

Not applicable

Measured by

Assessed by shareholder value and returns; argued on grounds of duty, consent, and accountability