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Philosophy 2074F/G
Michael Herbert

WHAT’S WRONG AND RIGHT WITH STAKEHOLDER MANAGEMENT – BOATRIGHT  A concern for the interests of all stakeholder groups has become a widely recognized feature, if not the defining feature of ethical management  Advocates of stakeholder management get one point right: the modern for-profit corporation should serve the interests of all stakeholder groups  These benefits can also be obtained by groups interacting with a corporation in other ways, most notably through the market. Insofar as the market is able to provide the desire benefits to the various stakeholder groups  Stakeholder management goes wrong by failing to appreciate the extent to which the prevailing system of corporate governance, marked by shareholder primacy, serves the interests of all stakeholders and assuming that all stakeholder interests are best served by making this the task of management rather than using other means  The main point of difference is whether stakeholder management is incompatible with and an alternative to the prevailing form of corporate governance, or whether it is a managerial guide that can be followed within corporations as they are currently legally structured  And any successful corporation must manage its relations with all stakeholder groups, if for no other reason than to benefit the shareholders  Managers also have obligations to treat each stakeholder group in accordance with accepted ethical standards  Freeman and his colleagues contend that in making key decisions, managers ought to consider all interests of those shareholders and non-shareholders alike-and balance them in some way  Stockholder management and this form of stakeholder management constitutes two competing models of how corporations ought to be governed  The prevailing stockholder model of corporate governance is founded on an economic approach that conceives a firm as a nexus of contracts between a legal entity called the firm and its various constituencies which include employees customers, suppliers, investors and other groups  Individuals will frequently realize a greater economic return by cooperating with others in productive activity than by participating in a market alone  Markets and hierarchies constitute two fundamentally different means for conducting productive activity  The transaction costs of organizing productive activity entirely in a market can be reduced by bringing some of this activity into a hierarchical organization and this reduction in costs will enable each participant to realize a greater return on the assets that are contributed to joint production  Customers benefit by being able to purchase abundant, low prices goods and society as a whole is enriched by the wealth creation firms make possible  A market is a device that enables everyone to advance their interests by making mutually advantageous trades  Although market outcomes benefit everyone, no one has the task of ensuring these outcomes  A firm requires many inputs, also recognize the need for managerial expertise to coordinate these inputs  This security can be obtained by contracts or legal rules that obligate a firm to provide the return due to each corporate constituency  Every asset contributed to joint production will be accompanied by a governance structure of some kind  Benefits may be different from those protecting suppliers and similarly for other input providers  The greatest problems of governance occur for firm specific assets, when assets are firm specific the providers become locked in  Developing governance structures to protect input providers is also more complicated when contracts and legal rules cannot be developed easily due to complexity and uncertainty  Governance structures for the assets of each input provider are relatively easy to provide for each stakeholder group except one, namely shareholders, the providers of equity capital  Control is the most suitable protection for their firm specific asset  That equity capital provides control is in the best interests of the other shareholder groups  Shareholders are willing to assume this risk – in return for some compensation of course – because they are better able to diversify their risks among a large number of companies  Mutual insurance companies are owned by the policy holders  It is only under certain economic conditions that they would be preferred by the corporate constituencies involved  Usually, non-shareholder groups are better served by safeguards other than control, which is left to shareholders  The economic approach to the firm expresses this purpose in terms of realizing the full benefits of engaging in joint production  Wealth must be created before it can be distributed  The distribution of the benefits or wealth that firms create is largely determined by the market  Stakeholder management advocates might content that even if the market return due to each group is adequately protected by other means  Management decision making is a weaker form of protection than legally enforceable contracts or legal rules  Fiduciary duty should be viewed, accordingly not as a special privilege that shareholders enjoy but as an imperfect substitute when more effective means for protecting group’s interests are not available  The benefits of a single objective would be compromised if other groups sought, like shareholders, to protect themselves with claims on management’s attention  Non-shareholder interests are usually better protected or served by various contractual agreements and legal rules rather than a reliance on management decision making  Stakeholder management advocates might contend that more of the wealth created by firms ought to flow to other groups  It is morally required that any economic system ensure basic fairness and where necessary, make a morally defensible trade-off between fairness or equity and efficiency  There is no reason to believe th
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