The Trouble with Stakeholder Theory

Edward Freeman, father of Stakeholder Theory, has put forth an interesting and elegant set of ideas. But like a lot of theories, the trouble comes not so much from the theory itself, but from those who would appropriate its vocabulary or use the theory's inherent vagueness for dubious purposes.

Just think of the term "stakeholder" and how it's used today. It's been taken up readily by those I'd call "petty fascists" to engage in all manner of utopia-building at the municipal level (for example). What used to be called special interests are now referred to as stakeholders. And they are nothing more than groups gathering divide the spoils of rent seeking.

Consider light rail projects in major cities. These are almost universally subsidized with taxpayer dollars for riders who pay only about 1/15th or 1/20th of the cost of a ticket. The average light rail line in the U.S. takes half of a city's transportation budget, but carries less than 1 percent of the population. These unprofitable and non-cost-effective, eh hem, "ventures" are contrived almost entirely by stakeholders and politicians -- acting in unholy collusion. 

Of course, among the stakeholders are people supposedly committed to "sustainability". Sustainability acts as a vague moralistic catch-all that helps to rationalize all the brave new projects Mancur Olsen predicted -- namely those carried out by concentrating benefits on stakeholders and dispersing costs over everyone else.

A more robust stakeholder theory will take public choice theory into account. I think Ed Freeman probably understands this. Indeed, I bet he shudders when he looks around and sees how his theory has been adulterated by rent-seekers and perverted by activists entangled in Bootleggers and Baptists coalitions.

But then again, maybe Freeman takes heart when he observes someone like John Mackey of Whole Foods who embodies Stakeholder Theory as closely, perhaps, as any human being could. Indeed, one can see Mackey's philosophy laid out very well here as "Conscious Capitalism," as well as in Michael Strong's book Be The Solution. Who knows whether the few successes of applied stakeholder theory outweigh the costs of those who have perverted it. I looks to me like, in the fight for a better capitalism against the special interest state, the crapitalists are winning.

Comments

[Tibor R. Machan]

Stakeholder theory is normative but you don't spell this out. The idea is that a business ought to serve stakeholders. Of course, a business keeps a lot of folks in mind as it is managed. But the main duty is to serve the owners, investors et al. In the course of fulfilling this duty a business will, of course, serve many interests. But the normative point is who calls the shots.

[Max]

Excellent point. I did understate this. I think as a normative theory, it probably confuses the "ought" of ethics with the pragmatism of running a better business. Indeed, if the normative aspects ever conflict with the goal of profitability and shareholder returns, they are no good to anyone -- including the so-called "stakeholders."

[Tibor R. Machan]

What concerns me a lot is that many champions of stakeholder theory (or CSR) would just as soon have laws enacted that force businesses to follow their ideas. So it isn't just what they ought to but what they must do, which is insidious for any free men and women, in or outside of business. (For more, see Tibor Machan, The Morality of Business [Springer, 2009].)