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Stakeholder Management in Small and Medium-Sized Enterprises

The Case of Belgian Micro-Breweries

Master's Thesis 2009 145 Pages

Business economics - Business Management, Corporate Governance

Excerpt

Table of Contents

Acknowledgments

Table of Figures

ABSTRACT

1. INTRODUCTION

2. METHODOLOGY
2.1 Literature Review
2.2 Qualitative Research

3. STAKEHOLDER THEORY
3.1 Background and Related Fields of Study
3.1.1 History of Stakeholder Theory
3.1.2 Alternative Theories
3.1.3 Stakeholder Definitions
3.2 Stockholder-Stakeholder Theory Continuum
3.3 Internal Debate: Foundation and Justification
3.3.1 Descriptive Stakeholder Theory
3.3.2 Instrumental Stakeholder Theory
3.3.3 Normative Stakeholder Theory
3.3.4 Managerial Stakeholder Theory
3.3.5 Convergent Stakeholder Theory
3.3.6 Divergent Stakeholder Theory
3.4 Criticisms of Stakeholder Theory
3.5 Response: An Optimally Viable Version of Stakeholder Theory?
3.6 Stakeholder Identification and Assessment of their Claims
3.6.1 Power/Interest Stakeholder Map
3.6.2 Power/Legitimacy/Urgency Stakeholder Classification
3.7 Conclusion

4. ETHICAL BEHAVIOUR IN ORGANIZATIONS
4.1 Ethical Decision Making
4.1.1 Ethical Decision Making by Individuals in Organizations
4.1.2 Interactionist Model of Ethical Decision Making in Organisations
4.2 Stakeholder Management Model for Ethical Decision Making
4.3 Conclusion

5. SMALL AND MEDIUM-SIZED ENTERPRISES
5.1 SME Characteristics
5.2 Existing Research
5.3 Conclusion

6. STAKEHOLDER MANAGEMENT IN SMEs
6.1 The Model
6.2 Conclusion

7. THE CASE STUDIES
7.1 The Belgian Beer Brewing Industry
7.2 Company Analyses
7.2.1 Case Study I: Brussels Brewery
7.2.2 Case Study II: Flanders Brewery
7.2.3 Case Study III: Wallonia Brewery
7.3 Discussion
7.4 Conclusion

8. CONCLUSION

9. BIBLIOGRAPHY
9.1 Scientific Sources
9.2 Non-Scientific Sources

10. Appendices
10.1 Appendix 1: Interviews with Belgian Micro-Breweries
10.1.1 Appendix 1.1: Interview with the owner-managers of Brussels Brewery
10.1.2 Appendix 1.2: Interview with the owner-managers of Flanders Brewery
10.1.3 Appendix 1.3: Interview with the owner-managers of Wallonia Brewery
10.2 Appendix 2: Model of Stakeholder Management in Small and Medium-Sized Enterprises

Acknowledgments

I would like to sincerely thank all those who offered me their support during the completion of this thesis, be it through their expert knowledge, through inspiring discussions and conversations, or simply by motivating and encouraging me.

First, and foremost, my thanks go to Professor Alain Verbeke and his assistant Paul Brugman (PhD) without whose guidance and expertise I would never have arrived at the analysis of this insightful and fascinating topic.

Further I would like to express my gratefulness to the three breweries whose participation in this study enabled me to make this thesis a valuable addition to the body of research on stakeholder theory, ethical behaviour in organizations, and small and medium-sized enterprises.

I also want to thank Mr Simon Brooks at the University of Glamorgan whose inspiring lectures on 'Business Ethics and Sustainable Development' first aroused my interest in the fields of stakeholder theory and corporate social responsibility.

My gratitude goes also to Ms Andrea Luyckx without whose empathy and understanding I would probably never have enrolled for the International Master in Management Science.

Tief verbunden bin ich ferner meiner Ma und meinem Dad, die mir nicht nur während meines Studiums stets ihre moralische, emotionale und finanzielle Unterstützung entgegenbrachten, sondern mich durch ihre Liebe, ihre Geduld und ihren Wohlwollen zu dem gemacht haben, was ich heute bin.

Ich danke auch meinem Großvater für seine finanzielle Unterstützung und seine Ermutigungen, bei allem was ich tue, stets mein Bestes zu geben.

Und ein großes Danke geht natürlich auch an meine Jungs, ohne die ich wohl nie auf den Geschmack des Gerstensaftes gekommen wäre... (o;

Thank you all very much!

Dank u wel!

Herzlichen Dank!

Jens

Table of Figures

Figure 1: Relationship between perfect/imperfect and general/role-specific duties. Adapted from (Lea, 2004). 21

Figure 2: Power/Interest Stakeholder Map. Adapted from (Johnson et al., 2008)

Figure 3: Power/Interest Stakeholder Map. Adapted from (Johnson et al., 2008).

Figure 4: Power/Legitimacy/Urgency Stakeholder Classification. Adapted from (Mitchell et al., 1997).

Figure 5: Influences on Ethical Decision-Making. Adapted from Jones (1991).

Figure 6: Levels and Stages of Cognitive Moral Development. Adapted from (Kohlberg, 1969 cited in Crane & Matten, p. 142).

Figure 7: Stages in Ethical Decision Making. Based on Jones (1991) and Ford and Richardson (1994).

Figure 8: Interactionist model of ethical decision making in organisations. Adapted from Treviño (1986).

Figure 9: Relationship model between personal ethics, business ethics, and business behaviour. Adapted from Quinn (1997).

Figure 10: Stakeholder Management Model for Ethical Decision Making. Adapted from (de Colle, 2005).

Figure 11: Four Frames of SME Social Perspective. Adapted from (Spence & Rutherfoord, 2000, p. 131).

Figure 12: Model of Stakeholder Management in Small and Medium-sized Enterprises (overview). Process from Personal Ethics through Stakeholder Perception to Stakeholder Management (Hillebrand, 2009).

ABSTRACT

This study derives a model of stakeholder management in small and medium-sized enterprises which describes the process from the owner-managers' personal ethics to the firm's eventual engagement with its stakeholders. Following a thorough review of literature published on stakeholder theory, ethical behaviour in organizations, and small and medium-sized companies, five hypotheses are put forward on which the model is based. The results of three case studies on owner-managed micro-enterprises from the Belgian beer producing industry are used to test the validity of the model and the hypotheses.

Stakeholder theory is chosen as the central body of theory for this study as it tries to deal with an increasingly complex business environment, has the potential to offer alternative ways of looking at companies and seeks to satisfy the interests of a multitude of constituencies instead of merely helping managers to turn out a profit.

The study is directed towards small and medium-sized enterprises (SME) as this type of companies has thus far been widely neglected by management scholars and business ethicists alike, despite accounting for more than 99 percent of companies in both the European Union and the USA. Application of the stakeholder concept to the SME sector adds fresh insights to both stakeholder theory and theory about small and medium-sized businesses. The specific focus on owner-managed SMEs derives from the fact that these have been ascribed certain characteristics that significantly distinguish them from larger companies, such as the identity of owner and manager, close personal relationships, informal organizational cultures and management systems, multi-tasking pressures, capital constraints, etc.

The results of the case studies on Belgian micro-breweries support the major part of the proposed SME stakeholder management model and the hypotheses it is based on. The perception of legitimate stakeholders is based on the personal ethics of the owner-manager. These are determined by the owner-manager's preference for a certain normative core and his stage of cognitive moral development. Perceived stakeholders will possess power over the company and/or have a legitimate moral or legal claim on the firm. Individual and situational moderators exist which can influence the transition from the owner-manager's personal ethic to his perception of important stakeholders. Relevant individual factors are the owner-manager's type and length of education and employment, family background, culture and nationality, as well as his locus of control. Situational influences found to be important are the views of relevant peers, (psychological) sanctions and rewards, moral intensity, and moral framing. The company's actual stakeholder management depends on whom the owner-manager perceives to be legitimate stakeholders. It may be instrumentally driven or normatively and can occur in a cooperative or competitive manner. The transition from stakeholder perception to actual stakeholder management can be affected by internal characteristics of the firm and by external environmental circumstances. Capital constraints and the need for the owner-manager to engage into 'fire-fighting' activities are discovered as influential internal characteristics. External environmental circumstances that exert an influence on the process are the specific characteristics of the brewing industry, power balances between the firms and their stakeholders, and social legislation as part of the PESTEL factors.

Some shortcomings of this study limit the generalizability of the results. Having analyzed only a small and relatively inhomogeneous sample of Belgian micro-breweries, the results are probably not representative for the full diversity of SMEs. Furthermore, while the case study approach is regarded appropriate in general, some of the aspects analyzed with the model are too intricate and complex to be picked-up through this method. Finally, the multitude of connections and relationships established with the SME stakeholder management model allows in some cases for varying interpretations.

These weaknesses require us to take the results of this study with a 'grain of salt'. Whether the relationships established through the model depict the reality in SMEs accurately remains debatable, as does the question whether any such thing like the reality of stakeholder management in SMEs exists. Nevertheless, this study offers a possible description of the stakeholder management process in owner-managed small and medium-sized enterprises which is seen to merit further scholarly attention through in-depth studies on the topic.

Keywords: Stakeholder theory, stakeholder management, small and medium-sized enterprises, SME, ethical behaviour in organizations, SME stakeholder management model, breweries, Belgium.

1. INTRODUCTION

Small and medium sized enterprises (SME) around the world differ in size, management structure, ownership, the sectors they are active in, the regulatory requirements they face, and many further characteristics. Being aware of this heterogeneity amongst SMEs the goal of this study is not to find the most accurate description of a stakeholder management process in this type of companies, but to open up the understanding of the complexity of processes at work in owner-managed small companies. The study intends to derive a model of stakeholder management in owner-managed SMEs which describes a possible process from the owner-managers' personal ethics to the firm's eventual engagement with its stakeholders. Based on a thorough review of literature published on stakeholder theory, ethical behaviour in organizations, and small and medium-sized companies five hypotheses will be put forward on which the SME stakeholder management model will be based. The results of three case studies on owner-managed micro-enterprises from the Belgian beer producing industry will be used to test the validity of the model and the hypotheses.

Stakeholder theory has been chosen as the central theoretical body of this study due to a variety of reasons. Before the advent of stakeholder theory in 1984 existing theories either depicted a firm’s environment very simplistically or claimed firms only existed to make profits and serve the interests of one group. Addressing these shortcomings stakeholder theory with its broad and comprehensive approach has the potential to provide valuable new insights. On the one hand it tries to deal with an increasingly complex business environment and has the potential to offer alternative ways of looking at companies, on the other hand it seeks to satisfy the interests of a multitude of constituencies instead of merely helping managers to turn out a profit. Related theories, such as corporate social responsibility or corporate citizenship, are seen to carry too many deficiencies to qualify as the theoretical foundation of this study. Valuable complementary insights will be derived from theories on ethical behaviour in organizations, however. The transition from personal ethics to ethical or unethical organizational behaviour and the important role of individual and situational influences in this process will help in the development of the SME stakeholder management model.

The study focuses on small and medium-sized enterprises as this kind of companies has thus far widely been neglected by management scholars and business ethicists alike, although they account for more than 99 percent of all companies in the European Union and the USA. Further, the study concentrates specifically on owner-managed SMEs, since owner-managed firms have been ascribed certain characteristics that significantly distinguish them from larger companies, such as informal management systems and close personal relationships between the owner-manager and various constituencies of the company. The small and medium-sized enterprise will be defined using the official definition of the European Commission which regards companies as small and medium-sized when they have fewer than 250 employees, an annual turnover of less than €50 million, and an annual balance sheet total not exceeding €43 million. A sub-category of the Commission's definition describes companies with less than 10 employees and annual revenues below €2 million as micro-enterprises which fits the case of the breweries analyzed in this study.

Based on the insights from stakeholder theory, theory on ethical behaviour in organizations, and research on small and medium-sized enterprises, five hypotheses and a SME stakeholder management model will be proposed. The hypotheses and the model describe the transition from the SME owner-managers' personal ethics through their perception of important stakeholders to the actual engagement in stakeholder management. The perception of legitimate stakeholders is seen to be based on the personal ethics of the owner-manager. Individual as well as situational moderators are believed to exert an influence on the transition from the owner-managers' personal ethics to their perception of important stakeholders. The company's actual stakeholder management is finally seen to depend on whom the owner-managers perceive to be legitimate stakeholders. The transition from stakeholder perception to actual stakeholder management is again regarded as being subject to certain influences, in this case the internal characteristics of the firm and external environmental influences.

Testing the propositions of the model for their validity, the study will conclude with three explanatory case studies on micro-companies from the Belgian brewing sector. The brewing sector was chosen as the object of the case studies, as it not only faces the extensive set of legal and moral obligations that apply to the food sector in general, but also carries additional responsibilities due the alcoholic nature of its product. Furthermore, beer represents an integral part of the Belgian culture and plays a comparably important role for the country's economy. Despite certain drawbacks of the explanatory case study approach, such as limited generalizability of the results or the potential complexity of theory derived from a combination of deductive reasoning and empirical research, a number of key strengths of the case study approach make it a well-suited research technique for the purpose of this study. These strengths comprise the strong empirical validity of the approach, its potential to pick up the subtle differences between individual firms and its proposed suitability to research fields in which little knowledge exists.

The study concludes that four of the presented five hypotheses are largely supported by the findings of the case studies. Evidence for one hypothesis remains ambiguous, however. Despite the predominant support for the model and the hypotheses it is based on, a number of limitations of this study reduce the reliability, generalizability, and validity of its findings. Nevertheless, this study offers a possible description of the stakeholder management process in owner-managed small and medium-sized enterprises which should be investigated through further research based on this study.

2. METHODOLOGY

The study will employ two main techniques in order to elaborate on the topic. First of all, an extensive literature review of works published on stakeholder theory, ethical behaviour in organizations small and medium-sized enterprises. Secondly, case study research on a sample of three small companies from the Belgian beer brewing industry will be undertaken. On basis of the literature review a model of the stakeholder management process in small and medium-sized enterprises will be derived. The model will be based on a number of hypotheses which by means of the case study analyses will be checked for their validity.

2.1 Literature Review

First of all, a thorough literature review will be conducted, comparing and contrasting different points of view on stakeholder theory, ethical behaviour in organizations, small and medium-sized enterprises. Some initial attempts to integrate these fields will be presented. Scientific works based on theoretical argumentation will be used supplemented by studies grounded in empirical research. The major sources comprise leading management and business ethics journals, such as Academy of Management Review, Academy of Management Journal, Business & Society, Business Ethics Quarterly, California Management Journal, Journal of Business Ethics, Journal of Management, Journal of Management Studies, Long Range Planning, Organization Science, and Strategic Management Journal as well as a selection of key textbooks in the fields.

Based on the review on existing literature in the fields of stakeholder theory, ethical behaviour in organizations, and small and medium-sized enterprises a theoretical model will be derived through a process of incremental theory building which in the next step is to be tested for its empirical validity.

2.2 Qualitative Research

As Spence and Rutherfoord (2003, p. 1) note, sociological research has a strong potential to contribute valuable insights to the field of business ethics which to date is overwhelmingly based on deductive theoretical reasoning on normative and moral philosophy. Spence (1999, p. 170) further contends that in the specific context of small and medium-sized business ethics research qualitative rather than quantitative analysis will probably produce more useful results. She reasons that a qualitative approach has the potential to pick up the nuances and subtle differences that exist between individual firms of this size, while a quantitative approach tends to generalize and homogenize the results across a population of companies that can differ quite substantially in their characteristics. The second part of this study therefore takes the form of qualitative empirical research. More specifically, it consists of case studies on three different breweries from throughout Belgium: one from Flanders, one from Wallonia, and the third one from the greater Brussels area. Case study research can be employed for a variety of purposes. It can be used to simply describe certain phenomena (descriptive case study) or, more sophisticatedly, it can aid in the generation of new theory (exploratory case study) (Yin, 1981, p. 110; Yin, 2003, p. 3). In between these two purposes, it can also help to explain why certain outcomes occur by way of testing and validating of a theory's cause-effect relationships (explanatory case study) (Eisenhardt, 1989, p. 535). In this study, case studies will be used in this manner, validating specific causal relationships which are theoretically established beforehand. Although the underlying theoretical concept exhibits a certain degree of complexity, this is not seen as an impediment. As Yin (2003, pp. 20, 22) puts forward, complex theories enable researchers to conduct pattern matching analysis which allows for the identification of multi-variable causal explanations.

Although the case study approach has been contested by some (Selltiz, 1976; Armisted, 1984), several advantages of the methodology have been emphasized by Eisenhardt (1989, pp. 546-547). One lies in the empirical validity of the methodology. As the case study is based on the evaluation of empirical observations it is highly likely, as long as no severe procedural errors occur, that the results will be valid and consistent with reality. In addition the approach can to a large extent be seen as complimentary to incremental theory building from conventional deductive research. While both approaches have their individual strengths and advantages, a combination of the two may be even more likely to produce novel and groundbreaking results. A final - if not the - advantage of case study research for the present study is its suitability to research fields in which only little knowledge exists. Since stakeholder management in SME contexts has only received very limited attention in academic circles thus far, this approach offers a great potential to deliver valuable insights.

Notwithstanding these advantages, there are indeed also a number of drawbacks that come with the case study methodology (Eisenhardt, 1989, p. 547). First of all, there is the question in how far certain findings can be used in differing contexts. Typically based on a small number of cases only, the approach lacks quantitative and statistical measures, such as regression results, that would allow an assessment of the generalizability of the results. A potential new theory can thus easily become very "narrow and idiosyncratic" (Eisenhardt, 1989, p. 547) and only be transferable to a limited number of other cases. Again, a combination of deductive reasoning and empirical derivation may show the way forward. Secondly there is the risk that theory to be derived from the empirical findings gets out of hand and becomes bewilderingly complex. This problem is aggravated by a temptation for researchers to develop theory that captures all conceivable aspects and scenarios. Finally, as Curran and Blackburn (1994, p. 67-71 cited in Spence, 1999, p. 170) point out, there is also the procedural problem of identifying appropriate firms. Due to resource constraints experienced by this kind of companies they are for example not as well presented on the Internet as their larger counterparts. Notwithstanding these drawbacks, based on its empirical strength and its suitability for research in unchartered areas the case study approach is seen as strongly supporting the purpose of this study.

The selection of cases to investigate constitutes a crucial and challenging step in the process of performing the research. For instance, the process of screening for appropriate cases should collect sufficient data to be able to decide whether a case meets the selection criteria of a study without digging too deep into the material and performing

what Yin calls "mini case studies" (2003, p. 13). Bearing this in mind the selection and interviewing process in this study took the following form. As a starting point a number of breweries selected from the website of The Union of Belgian Brewers was contacted, some of them from the Wallonia area, some from Flanders, and some in Brussels. In total ten breweries were contacted, four of which expressed their willingness to participate in the study, with the remaining six not wanting to participate for various reasons. Some believed their company was too small and hence not interesting[1], one owner-manager stated he was not capable of giving an interview in English, and others explained they were too busy for the time being. Eventually two of the companies under study had been chosen randomly, while the third was selected based on a recommendation by the owner-manager of the first company being researched. Despite the risk of this leading to a certain bias of the study, it was deemed appropriate since useful for the analysis of specific relationships proposed by the model developed in this study (e.g. the influence of relevant peers on stakeholder perception). After an initial contact by email explaining the purpose of the study, follow-up phone calls were made to arrange face-to-face interviews with the owner-managers of the breweries. For the actual interviews the researcher visited the owner-managers at their companies.

The data collection was undertaken in the form of semi-structured interviews in combination with reviews of secondary sources, such as company brochures, company websites, and other company publications. A prime advantage of such semi-structured interviews is that it allows open discussion between the interviewer and the respondent (Spence, 1999, p. 170). As Yin (1981, p. 110) emphasizes, though, careful attention needs to be paid to the trade-off between granting enough discretion to the researcher and the need to extract comparable information. The interviews were hence undertaken based on a set of prepared questions and topics that were to be addressed, yet that did not have to be posed in a specific order. In this way the individual character of each company could be discerned, while at the same time sufficient information to allow for cross-comparisons between the objects of study could be extracted. To prevent the inclusion of potential misunderstandings in the analysis, a transcript of the interview was sent to the respective brewery to be reviewed by the interviewees. After their review, minor confusions and remaining open questions were clarified in a final phone conversation with each owner-manager.

3. STAKEHOLDER THEORY

3.1 Background and Related Fields of Study

3.1.1 History of Stakeholder Theory

Although the term stakeholder management is widely associated with the name R. Edward Freeman, the concept originated at the Stanford Research Institute in the Sixties. In an internal memorandum stakeholders of a firm were described as "those groups without whose support the organization would cease to exist" (Stanford Research Institute, 1963 cited in Freeman & Reed, 1983, p. 91). It was there where the legitimacy of claims based on aspects other than ownership was first recognized and an obligation of business to take into account the interests of groups such as employees, customers, suppliers or the local community was asserted (Laplume et al., 2008, p. 1156). Additionally, as Crane and Matten (2004) point out, the general idea of managing for a wider array of constituents than merely shareholders already existed in other management concepts, such as Systems Thinking (Ackoff, 1974), Organizational Theory (Goodman & Pennings, 1977), or Corporate Social Responsibility (Jones, 1980).

Nevertheless, Freeman (1984) was first to start with organized thinking about the stakeholder concept and he remains to be seen as the father of contemporary stakeholder thinking (Laplume et al., 2008, p. 1156). In his view a stakeholder is any group or individual that "can affect or is affected by the achievement of the organization's objectives" (Freeman, 1984, p. 46). Freeman identified changes in the business environment, such as increasing ambiguity, velocity and complexity which according to him required different ways of thinking. In the words of Eisenhardt and Sull (2001), once stable and predictable developments were becoming increasingly uncertain and the only thing that seemed certain was that organizations' circumstances will continuously keep changing. Complementing this view, Dent (1999, p. 13) argues that traditional management and strategy theories have failed to advance accordingly and that in an ever more complex world the search for a ‘single right answer’ through narrowly defined models and theories is becoming increasingly inappropriate. In light of these developments, Freeman (1984) argued that stakeholder theory with its broad and comprehensive perspective has the potential to provide valuable new insights. On the one hand it tries to deal with an increasingly complex business environment and has the potential to offer alternative ways of looking at companies. On the other hand it seeks to satisfy the interests of a multitude of constituencies instead of merely helping managers to turn out a profit. Thus he based the stakeholder concept on two fundamental premises. The first one supposing that in order to perform well, managers need to pay attention to a wide array of stakeholders. The second one postulating that managers have obligations to stakeholders which include, but extend beyond shareholders. These two ideas, managing for stakeholders out of enlightened self-interest as opposed to acknowledging their interests based on the assumption of moral duties, have triggered a lively debate among scholars which will be outlined in a later section of this study. What the notion of responsibilities beyond mere profit maximization already illustrates, though, is that Freeman positioned stakeholder theory as an explicit counterpart to the hitherto prevailing orthodoxy of the stockholder approach to management. In fact, he challenged the validity of this approach and went as far as claiming that in light of numerous bankruptcies, scandals, and other corporate failures any rationale for stockholder theory had ceased to exist.

A further of Freeman's suggestions which gave rise to intense discussions between academics from a variety of backgrounds was to introduce legislative changes that would impose fiduciary duties on managers towards all stakeholders of their company. Hence, rather than simply seeking to provide a moral basis for his contentions, he wanted to see stakeholder rights formally and legally acknowledged, for instance through board representation (Evan & Freeman, 1993). Supporting this postulation Crane et al. (2004, p. 113) assert that the Mitbestimmungsgesetz (Codetermination Act) of Germany, for instance, already requires employees to be represented in equal numbers to shareholders on companies' supervisory boards. At the EU-level, the Directive 2002/14/EC of the European Parliament and of the Council establishes a framework for employee consultation in order to ensure their needs are given a fair status vis-à-vis shareholder interests.[2] Other authors, however, decidedly reject the idea of establishing formal rules of stakeholder participation in decision making. Alan Greenspan, former Chairman of the Federal Reserve of the United States, for instance, states in his book The Age of Turbulence that "enlisting representatives of a corporation’s various stakeholders on the board [would be] ill-advised”[3]. Earlier, in 1985, Williamson (cited in Hendry, 2001, p. 169) had already argued that due to the unique exposure of shareholders' investments in a firm and their possession of only a residual claim to the assets their interests could only be properly protected if their claims were given clearly superseding legal status over those of other stakeholders.

Reflecting on the development of stakeholder theory, Laplume et al. (2008, p. 1156) observe that the concept has come a long way since its introduction twenty-five years ago. Viewing its development on a life cycle path, they find that the number of publications on the concept peaked in 1999 and has since reached a maturity phase. Others, however, have contrasted this view with the contention that the concept has seen its days which brings up the question if stakeholder theory has in reality not already reached the decline phase on its trajectory. Hendry (2001, p. 163), for instance, puts forth that from a promising beginning, the concept has arrived at a horrible mess. Going even further, Beaver argues that based on what can be observed in everyday business life, the stakeholder model has to be seen as "dead" (1999, p. 8).

3.1.2 Alternative Theories

Alternative theories dealing with the topic of responsible business practices and the accommodation of the needs of several interest groups are not deemed appropriate in the context of this study due to certain shortcomings of each.

Corporate citizenship, to begin with, has been described as dealing with altruistic and philanthropic actions of the firm devoid of any strategic aspect, such as charitable donations (Verbeke, 2007; Carroll, 1998 cited in Wood & Logsdon, 2001, p. 99). Taking the concept a step further other authors suggested that corporate citizenship manifests itself in a company's investments in its social environment, not merely for altruistic reasons but rather out of enlightened self-interest. After all, a stable social and political environment is conducive to profitable business (Warhurst, 2001; Windsor, 2001). Yet, even when including this strategic dimension into the concept, the ultimate goal of a company’s actions remains its success, and surrounding parties and constituencies are seen as mere means to achieve its own ends. In contrast to this, treating all constituencies of a firm as ends in themselves is seen by many as one of the core strengths of stakeholder theory, as will be discussed later on.

A further shortcoming of corporate citizenship can be seen in the fact that the very term citizenship due to being taken from political science causes confusion for some. One approach attempts to establish a link between civil, social and political rights of individuals and corporations (Marsden, 2000, p. 11). This is however heavily contested as many find it hard to comprehend why business should be entitled to the same rights as individual citizens (Matten & Crane, 2003; 2005; Moon et al., 2003).

Taking a different approach to the relation between corporations and citizenship, a number of scholars view corporations as powerful actors which have a responsibility to respect the individual citizen’s rights (Crane et al. 2004; Hertz, 2001; Wood & Logsdon, 2001). For instance, these authors see companies taking over many of the functions and actions previously performed by governments, such as providing training and development opportunities, giving people a feeling of belonging, cultural education, etc. (Hertz, 2001; Lantos, 2001)

A final drawback of the concept is that several authors (Carroll, 1998; Davenport, 2000; Maignan, Ferrell, & Hult, 1999; Marsden, 2000; cited in Matten & Crane, 2003) use the term corporate citizenship simply as a synonym for corporate social responsibility (CSR), thus essentially merely “rebranding” (Matten & Crane, 2003, p. 6) existing ideas about the relationship between business and society. While the marketing of academic ideas to practitioners is certainly an important task, both corporate citizenship and corporate social responsibility are consequently received by many as mere management fads (Matten & Crane, 2003, p. 6).

With the mentioning of corporate social responsibility another possible alternative theory has been introduced. In fact, Kaler (2006, p.252) contends that a "stakeholder approach to running companies and acceptance of CSR [are] more or less synonymous". A first problem with regard to CSR has already been presented, however, namely that increasing numbers of people both from the academic world and in everyday life see the concept more and more as a public relations tool rather that a movement with the genuine intention to make the business world more just and equal. (Lantos, 2001, p. 624).

Furthermore, when focusing on the strategic aspects of the concept, CSR can mean different things to different cultures. According to a report by the France-based organization Observatoire sur la Responsabilité Sociétale des Entreprises[4], in China, for example, corporate socially responsible behaviour is often confused with philanthropic actions by the firm due to the country’s long tradition of charity.

A final, fundamental criticism of CSR comes from R. Edward Freeman himself. According to him, stakeholder theory makes the corporate social responsibility concept redundant because “stakeholders are defined widely and their concerns are integrated into the business processes” (Freeman, 2005, p. 425, cited in Laplume et al., 2008).

Due to the presented shortcomings of alternative theories, stakeholder theory's holistic perspective on the firm's environment and its rejection of the idea that business' single-most important objective is to make a profit, stakeholder theory is seen as the most appropriate theoretical body for this study

3.1.3 Stakeholder Definitions

Van Buren (2001, p. 485) argues that Phillips' (1997) theory of fairness (see 3.3.3) provides an orientation to identify stakeholders as "those groups that voluntarily accept the benefits of a mutually beneficial scheme of cooperation requiring sacrifice or contribution on the parts of the participants" (Phillips, 1997 cited in Van Buren, 2001, p. 485). This being only one typology of how to identify stakeholders, there are numerous other competing or complementary frameworks and theories of stakeholder definition and identification. With the ones by Stanford Research Institute's (1963) and Freeman's (1984), two influential definitions were already presented at the beginning of this chapter. Further important definitions were given by Freeman and Reed (1983), Hill and Jones (1992), and Langtry (1994). Freeman and Reed define stakeholders in terms of their power as those groups "on which the organization is dependent for its continued survival" (1983, p. 91). Hill and Jones emphasize the legitimacy of stakeholders' claims more heavily by seeing them as "constituents who have a legitimate claim on the firm" (1992, p. 133). And Langtry points out the responsibility of the firm towards its stakeholders, stating that "the firm is significantly responsible for their well-being, or they hold a moral or legal claim on the firm" (1994, p. 433).

Most of these varying definitions can be classified according to some combination of the following criteria. Mitchell et al. (1997, p. 854) categorize stakeholder definitions into broad and narrow perspectives. Additionally, the authors suggest varying emphases on power, dependency and reciprocity in firm-stakeholder relationships as a further possibility to distinguish stakeholder identification theories. While Kaler (2002; 2006) distinguishes between claimant and influencer definitions of stakeholders, Starik (1994) as well as Jeurissen and Keijzers (2004) highlight the difference between actual and potential stakeholders. Each of these perspectives emphasises different aspects and characteristics of possible stakeholders. In some cases certain overlaps can be observed as the following outline shows.

Broad vs. Narrow

Mitchell et al. (1997, p. 856) point to the fact that definitions of who has to be seen as a firm's stakeholder differ considerably in scope. In his groundbreaking seminal work Freeman himself, for example, adopts one of the broadest definitions by seeing a stakeholder in an organization as "any group or individual who can affect or is affected by the achievement of the organization's objectives" (Freeman, 1984, p. 46). Despite being widely cited and broadly referred to by stakeholder theorists, this definition is being heavily contested by some of them. Kaler (2002, p. 95), for instance, asserts that due to the fact that his definition allows for unidirectional as well as bidirectional relationships without requiring reciprocity virtually everyone qualifies as a stakeholder. An extreme example of this is given by Sternberg (1997, p. 71) who contends that under broad definitions like this one even groups pursuing entirely illegitimate objectives, such as terrorist or saboteurs, have to be regarded as stakeholders of a firm. Kaler (2006, p. 262) concludes that the vast set of stakeholders such a broad definition produces can easily confront managers, bound to satisfy all the competing interests, with a confusingly cumbersome, if not unmanageable, working environment.

Although advocates of the broad stakeholder view acknowledge these criticisms, they nevertheless defend their definition based on the real-life observation that companies can indeed substantially affect or be substantially affected by an extensive number of entities. They suggest that stakeholder management can provide managers with the tools and techniques necessary to effectively identify and deal with the multitude of claims and expectation towards their companies. This includes the management of so-called "derivative stakeholders" (Kaler, 2004, p. 74) who do not have legitimate claims themselves, yet, by means of their capacity to affect the firm, can have an impact on legitimate stakeholders and hence need to be taken into account (Mitchell et al., 1997, 857).

Narrow definitions, on the contrary, concentrate on issues like stakeholders' exposure to risk or their vital importance to the firm. Clarkson, for instance, emphasises the legitimacy of stakeholder claims as a result of the risk they carry. He contends that "stakeholders bear some form of risk as a result of having invested some form of capital, human or financial [...] in a firm, [or] are placed at risk as a result of a firm's activities" (Clarkson, 1994, p. 5) and therefore have a moral claim on the firm. The Stanford Research Institute, seen by many as the birthplace of stakeholder thinking (Donaldson & Preston, 1995, p. 72; Freeman, 1984, p. 31; Mitchell et al. (1997, p. 856), focuses its definition on a company's ability to survive and defines stakeholders very specifically as "those groups without whose support the organization would cease to exist" (Stanford Research Institute, 1963 cited in Freeman, 1984, p. 31). Similarly Näsi states that stakeholders "interact with the firm and thus make its operation possible" (Näsi, 1995, p. 19 cited Mitchell et al., 1997, p. 858). In fact, as the latter examples suggest, many narrow definitions focus on the stakeholder groups' relevance to a company's economic functioning (Mitchell et al., 1997, p. 857) and therefore put an emphasis on the instrumental aspects of stakeholder theory.

Claimants vs. Influencers

In order to understand the claim- and influence-based definitions of stakeholders it is useful to introduce the concept of perfect versus imperfect and general versus role-specific duties first (Lea, 2004, p. 206-208). Perfect duties imply that there is a corresponding right to performance on behalf of the person the duty is owed to. They are morally obligatory and in most cases it is unambiguously specified what exactly has to be done, to whom the duty is owed, and how often it has to be carried out. Imperfect duties are duties which exist without a corresponding right. They are morally desirable and hence rather indeterminate, meaning it is not specified when and how often to carry them out and what exactly has to be done. Furthermore, general duties refer to fundamental responsibilities held by every member of a society and owed to people in general. They can either be owed to everyone in which case they are also perfect duties or to no one specific giving them additionally an imperfect character. Role-specific duties in contrast apply only to some members of a society and are always owed to specific others, frequently people in dependency relationships (Kaler, 2003, p. 76; Lea, 2004, p. 206-208). The links between the four categories of duties are depicted in Figure 1.

illustration not visible in this excerpt

Figure 1 : Relationship between perfect/imperfect and general/role-specific duties. Adapted from (Lea, 2004).

A couple of examples can help to clarify and understand these relationships (Kaler, 2003, p. 76; Lea, 2004, p. 206-208). General perfect duties, to begin with, are matched by fundamental liberty right. The duty not to kill, for example, is accompanied by everyone's right to live. On the contrary, the moral duty of being generous and charitable to less advantaged people is owed to everyone in society (at least theoretically), yet the people in need have no right to acts of benevolence or charity. Hence it is a general imperfect duty. An example for a role-specific perfect duty, is the parents' duty to care for their children since it has its counterpart in the children's right to be cared for. Taking this example further, parents do also have the moral duty to remember their children's birthday and make them feel special. Yet, the children have no right to receive a present or have a party organized for them. Thus, here we have an example of a role-specific, yet imperfect duty on behalf of the parents (Kaler, 2003, p. 76; Lea, 2004, p. 206-208).

Based on this concept, Kaler (2002) distinguishes between claimant and influencer definitions and further assesses a potential combination of the two as proposed by Mitchell et al. (1997, p. 859). According to him claimant definitions of stakeholders are based on the possibility of someone being affected by a company and do not require the reverse relationship of them also being able to affect the company. The claim resulting from the possible affectedness has to be morally legitimate though, since stakeholder theory rests on a normative foundation (even if the normative core cannot be unambiguously identified). The moral legitimacy of the claims creates obligations on behalf of the company that can take the form of perfect or imperfect duties. Kaler relates perfect duties to "strong" (Kaler, 2002, p. 94) claims and imperfect duties to claims of a "weak" (Kaler, 2002, p. 94) nature. The duties the claims evoke further need to be role-specific, since otherwise everyone would have to be seen as a stakeholder in every company. Therefore, under a claimant definition, stakeholders of a company "have to be people with a role-specific, strong or weak, morally legitimate claim to have their interests served by that business" (Kaler, 2002, p. 95).

Influencer definitions regard anyone who can influence or be influenced by a firm as a stakeholder. Being thus one form of the broad definitions introduced above, they suffer from similar shortcomings as those. With as well unidirectional as bidirectional relationships, influence-based definitions make again virtually everyone a member of the stakeholder community which renders the management of stakeholders a bewilderingly complex task. Countering this weakness, Mitchell et al. (1997, p. 859) stress the power component in the firm-stakeholder relationship, stating that influencers are those groups and individuals which above all other things have the power to impact a company. They deduce that the influencer perspective is rather concerned with the strategic aspects of stakeholder theory, seeking to establish how a company will be able to achieve its ends while (or by) satisfying the stakeholders expectations. Therefore, they argue for a "combinatory" (Kaler, 2002, p. 95) definition of stakeholders as they see the power to influence on the one hand, and the legitimacy of stakeholders' claims on the other hand, as two distinct yet equally important aspects of stakeholding. Focusing on one and ignoring the other will result in an incomplete set of stakeholders, as in this way either important moral stakes will be ignored or touch to real business life will be lost through the creation of an utopian range of obligations for the company.

Countering their argumentation Kaler (2002, p. 96) claims that calling for a 'combinatory' definition is tantamount to accepting the distinctness and perhaps even contrariness of ethical and business objectives, which would mean a de facto acceptance of what Freeman describes as the 'separation thesis' (1999, p. 234). The 'separation thesis' suggests that by thinking of stakeholder theory in moral terms on the one hand and in a business sense on the other hand, one implicitly assumes that business and morality can exist apart from each other. Since the very idea of stakeholder theory is to reject this distinctiveness and to be a management theory with a normative core, any attempt to explicitly integrate instrumental and normative aspect will only lead to confusion and misconceptions of the stakeholder concept, Kaler (2002) concludes.

Actual vs. Potential

The question of who counts as a stakeholder can also be answered on the basis of whether someone stands in an actual relationship with the company or whether such a relationship will only emerge under certain circumstances. Some authors decisively include such potential stakeholders in their definitions, whereas others contend that without an existing relationship someone cannot have a stake in a company. While Ring (1996), for example, clearly contradicts the view of including anyone with only a potential interest in or influence on the company, Starik explicitly defines stakeholders as those who "are or might be influenced by, or are or potentially are influencers of, some organization" (Starik, 1994, p. 90 cited in Mitchell et al., 1997, p. 859). Consequently Starik (1995, p. 207) advocates that the natural environment be included in a firm's set of potential stakeholders. According to him, humankinds' stewardship of natural resources creates a moral obligation towards the environment. The fact that there is a possibility for a firm to harm or damage its natural environment makes it responsible towards it. A company may not be affecting its environment at a given point in time, yet the mere potential to negatively affect it requires it to regard it as a stakeholder (Starik, 1995, p. 211). Building upon the idea of protecting the environment, Jeurissen & Keijzers (2004, p. 51) argue that future generations, although non-existent today, need to be taken into consideration as stakeholders. They claim that people have a right to something when this is indispensable for them to live humane lives. Since a clean and healthy environment is an essential prerequisite for doing so, they have a right to such. The authors argue that this right applies to future generations, for there it at least a risk that developments such as global warming will complicate their lives.

Power, Dependency and Reciprocity in Relationships

Implicit to the categorizations presented above were the aspects of power and dependency which can also be looked at explicitly and hence offer a fourth and final way of identifying stakeholders (Mitchell, 1997, p. 859). The power-dependency relationship between a stakeholder and a firm can occur in different directions. Stakeholders can be dependent on a firm thereby giving it a certain amount of power, or the stakeholders may be the dominant party possessing a considerable amount of power over the company and hence making it dependent on the stakeholders' goodwill. The definition by the Stanford Research Institute (1963) presented above is a good example for the case of dominant stakeholders. Langtry, on the contrary, places greater emphasis on the firm's dominance stating that "the firm is significantly responsible for the [stakeholders'] well-being" (1994, p. 433). Finally, a stakeholder definition can also emphasize the mutuality of the power-dependency relationship, such as Freeman's (1984, p. 46) classical definition which looks at the ability to affect or potential of being affected by. It has to be noted though, that most firm-stakeholder relationships exhibit an imbalance of power while only very few firms and stakeholders meet each other on an equal footing (Mitchell et al, 1997, p. 862).

3.2 Stockholder-Stakeholder Theory Continuum

One can certainly assert that in small and medium-sized enterprises, especially in owner-managed ones, there exists often no group of shareholders whose interests may take precedence over those of other people. Yet, the underlying idea of being in business to simply turn out a profit versus running a company to serve multiple and perhaps even competing ends persists. Thus, rather than being seen in terms of one group's interests versus those of other constituencies, the concept will be understood as the tension between focusing on mere profit maximization and taking into account or serving wider constituencies' and societal interests. Between these opposed poles a continuum of different perspectives exists ranging from a pure profit-maximizing view claiming that business exists to make a profit to a community service view which holds that philanthropic and altruistic actions also form part of a firm’s obligations (Lantos, 2001).

Pure profit-maximizing view

At the one extreme, exclusively supporting the profit-maximizing responsibility of firms, Carr (1968) does not question that business has to obey the law; however, in terms of morality, he compares it to a game with a lower standard of ethics than that existing in society and argues that the morality of managers’ private life has to be separated from their morality in the business context. Anyone deciding to enter business has to be aware of the “special rules” of the game which comprise making impersonal decisions and excluding personal feelings (Carr, 1968).

Disapproving this admittedly very extreme point of view, several authors argue that it is virtually impossible to separate business and society, since the two are closely interrelated. In other words, participation in business is not a matter of decision, but in many cases involuntary (Johnson, 1990; Lantos, 2001).

Community service view

At the other extreme of the profit-maximization community-service spectrum, some authors postulate that business must take on a variety of responsibilities towards society and engage itself in philanthropic actions that promote the social good. Such activities comprise for example not only donating a certain amount of a firm’s profits to social causes, but also using the company’s resources and competences to promote social welfare. Examples of such behaviour could be a pharmaceutical company making drugs available at or below production costs in countries with high disease prevalence or an oil company using its drilling expertise to build wells in exceptionally dry regions with little drinking water. As Carroll (1991, 2001) points out, these kinds of philanthropic behaviour lie at the heart of contemporary discourses about the responsibilities of corporations, since they are not expected, but rather desired by society. An important question in this regard is whether companies should only engage in philanthropic actions when they are aligned with its strategic goals­, or if purely altruistic behaviour may also be justifiable (Lantos, 2001).

Constrained profit-maximizing view

Although agreeing in principle with Carr’s (1968) contention that business’ primary objective is to make a profit, Friedman (1970) takes a more modest stance, adding that corporations also need to conform to “the basic rules of society, both those embodied in law and those embodied in ethical customs” (Friedman, 1970, p. 138). Hence, Friedman does not distinguish between two different sets of moralities (one for social, one for business life), but agrees that ethical aspects have to form an integral part of business. Nevertheless, he is convinced that only human beings, never corporations, can assume ethical responsibilities. Thus, it is the individual employees of a company, not the organisation as an artificial person, who personally have to take on responsibility for their actions. Any activity beyond an employee's individual moral responsibility, such as the attempt to address social ills, will lie beyond the competence of managers and be tantamount to stealing shareholders' money. Investment on social concerns thus have to be guided by and directed towards the contribution to superior long-term financial performance of the firm.

Socially aware view (Stakeholder Theory)

This leads on to a so-called socially aware view which lies somewhere between Friedman’s (1970) and Carroll’s (2001) perspectives. Rather than heavily emphasizing one group of stakeholders or another, proponents of this school stress the importance of balancing the needs and interests of all of them. In that sense this perspective is linked to stakeholder theory.

When following the goal of superior financial performance, it is important not to become obsessed with short-term profit-maximisation, for instance. As Rappaport (2005) points out, not only is maximization of long-term cash flows the most effective way of managing businesses and creating shareholder value, but doing the opposite involves in fact serious dangers for the corporation and its shareholders. Thus, profit-maximization needs to be undertaken holistically and in an ethically responsible manner (Rappaport, 2005).

Further strategic rationale for the acceptance of broader responsibilities by corporations is related to the nature of legislation. One of the characteristics of law is that it tends to lag behind the latest ethical thinking of societies due to the convoluted political manoeuvring processes of legislators. A corporation that early embraces ethical responsibilities can therefore develop preparedness for societal changes and thus anticipate threads like for example costly litigation cases (Carroll, 1991; Carroll, 1998; Davis, 2005).

3.3 Internal Debate: Foundation and Justification

In 1995, Donaldson and Preston identified three different aspects of stakeholder theory, a descriptive, an instrumental, and a normative one. According to the authors, stakeholder theory is descriptive in that it helps define what a corporation actually is and what managers actually do. The instrumental and normative sides both have a prescriptive element adherent to them. Instrumental stakeholder theory tells managers how to manage the various stakeholders of the company strategically in order to achieve the organisation’s goals. Normative stakeholder theory which is based on duty and obligations describes the legitimate interests of a multitude of stakeholders and uses these as basis for determining how managers ought to behave from a moral point of view. Hence, as both instrumental and normative stakeholder theory aim at shaping and directing the behaviours of managers in a specific and systematic way - be it from a strategic or an ethical point of view - they can be seen as managerial. The recommendation of attitudes, structures, and practices is what essentially constitutes stakeholder managemen t.

As Hendry (2001, p. 163) points out, each of the three aspects seeks to answer a different type of question which makes distinguishing between them useful to sort one's thinking about the stakeholder concept. Nonetheless, the aspects are in many ways interrelated and not as clearly separable as the terminology might suggest. Further still, within each category itself there are numerous theoretical branches which makes them far from coherent. Within the descriptive strand of stakeholder theory one can, for example, focus on the legal and institutional context of a society, analyze the attitudes of managers, or describe how managers actually behave. On the normative side an extensive variety of moral foundations to stakeholder theory exists, such as libertarianism, the principle of fairness, consequentialist, deontological, or feminist ethics, and several others which will be presented in greater detail further on in this study.

The following sections will present the distinguishing characteristics of the aspects in greater detail and highlight the value the perspectives offer to the body of stakeholder theory, how they justify further research into the field, but also significant shortcomings of them.

3.3.1 Descriptive Stakeholder Theory

As indicated above, the descriptive angle of stakeholder theory is concerned with questions about what a corporation actually is, how it operates, and how one may be able to predict its behaviour (Donaldson & Preston, 1995, p. 69). Its value lies, therefore, in its potential ability to describe and explain organizational structures and operations of firms. In fact, several authors have come up with their own views on a "stakeholder theory of the firm" contrasting them to existing other theories of the firm, such as transaction cost or agency theory (Asher et al., 2005, p. 5; Brenner & Cochran, 1991, p. 452; Key, 1999, p. 317; Kochan & Rubinstein, 2000, p. 367). An alternative perspective on the descriptive strand focuses on the stakeholders, describing what they do and how they try to achieve their interests (Steurer, 2006, p. 62).

No matter where the focus rests upon - the firm or the stakeholders - the fact that it builds upon empirical observations and that the embedded concepts depict reality provides the core justification for stakeholder management from the descriptive angle. For example, as Freeman et al. (2007, p. 11) point out, a great number of practitioners today see themselves involved in stakeholder management rather than simply trying to maximize profits. Furthermore, many companies nowadays formally include the interests of multiple constituencies in their official statutes (Bondy et al. 2004; Collingsworth, 2006, p. 250; van Tulder & Kolk, 2001, p. 267). On top of that, as mentioned earlier, several states have explicitly adopted legislation granting companies the freedom to and sometimes even obliging them to serve the interests of a greater set of stakeholders than merely its shareholders (Crane et al., 2004, p. 113; Donaldson & Preston, p. 76). Despite these unequivocal manifestations of stakeholder management in practice, Donaldson & Preston (1995, p. 77) defend their position that neither empirical observations nor legal developments suffice as a basis to entirely justify the practice of stakeholder management.

3.3.2 Instrumental Stakeholder Theory

In contrast to descriptive stakeholder theory, the instrumental side is predominantly prescriptive in nature. It carries a descriptive element in that it intends to outline the link between stakeholder management and firm performance, yet at its core it remains prescriptive, telling managers what principles and practices to adopt in order to achieve their desired results (Donaldson & Preston, 1995, p. 72).

The usefulness of the instrumental strand, hence, derives from its ability to strategically guide the structure and operations of a firm. In fact, several authors have provided examples of how to manage a company for stakeholders and thereby achieve successful financial results (Clarkson, 1995; Godfrey, 2005; Hillman & Keim, 2001; Waddock & Graves, 1997). Some scholars have even gone as far as claiming that the stakeholder approach is clearly superior to rival approaches in achieving corporate financial objectives (Kotter & Heskett, 1992). A problem with their studies is, however, that most of them contain merely anecdotal evidence and only little factual, empirical evidence for the claims being made. As Donaldson and Preston (1995, p. 78) point out, this is partly due to the difficulty to find independent variables which reliably indicate the practice of stakeholder management.

In contrast to these empirical arguments, other scholars attempt to justify instrumental stakeholder management on an analytical basis. Other than academics from the descriptive strand, they try to build on and expand existing theories rather than replace them. Hill and Jones suggested a "stakeholder-agency theory" (1992, p. 131), for example, extending principal-agent theory to all manager-stakeholder relationships and the contracts that exist explicitly and implicitly between them. Similarly, Freeman and Evan (1990) depart from firm-as-contract theory and analyze firm-stakeholder relationships from a transaction cost perspective. They suggest to understand the firm as a nexus or "set of multilateral contracts" (Freeman and Evan, 1990, p. 352) that can best be managed through application of the stakeholder approach. Jones (1995, p. 430), too, looks at firm-stakeholder relationships in terms of transaction costs. Contrary to Freeman and Evan (1990), he bases his argument not on contracts, though, but states that the underlying moral tenets of stakeholder theory, such as trust, cooperation, etc., can help to lower transaction costs and boost efficiency. Unambiguous establishment of a link between stakeholder management and superior financial performance would provide a strong instrumental justification of stakeholder theory. Yet, while numerous researchers see the two inextricably interconnected, the connection cannot be drawn with certainty. As a matter of fact, there are numerous studies which do not see any link (Berman et al. 1999; Bird et al. 2007) or even come to the conclusion that the relationship is negative (Meznar et al., 1994).

While the previously mentioned studies have in common the analysis of a link between stakeholder management and corporate financial performance, a different group of authors has argued for the strategic benefits of the stakeholder approach by redefining the ultimate objective of the company and looking at stakeholder theory's instrumental usefulness towards corporate social performance. According to Laplume (2008, p. 1168), however, no empirical studies analysing the link between stakeholder management and corporate social performance have been published thus far. In addition to the difficulty to find indicators of stakeholder management, a further issue in this regard is the question of how to measure social performance. A widely used measure is the KLD Social Performance Index which comprises measures of community relations, workplace diversity, labour relations, environmental performance, and product safety (Hillman & Keim, 2001, p. 130; Waddock & Graves, 1997, p. 307). Use of this index remains heavily contested, though, since it regards all variables as equally valid, for example, and ignores potential trade-offs between them (Barnett, 2007 cited in Laplume et al., 2008, p. 1168).

For Donaldson and Preston (1995, p. 80) the ambiguity concerning the link between stakeholder management and company performance constitutes the major weakness of the instrumental perspective and means that the ultimate justification for stakeholder theory has to be derived from a normative ground.

3.3.3 Normative Stakeholder Theory

Like the instrumental stakeholder strand, the normative one too prescribes managers specific behaviour. It does so, not on a strategic basis however, but a moral one. It states that stakeholders have legitimate interests in a company and that these interests have intrinsic value. This implies that each stakeholder group merits consideration for its own sake, not only because of its ability to influence the interests of another group. Thus, normative stakeholder theory tries to answer the question what is the right thing to do for a company and its managers. It is exactly this provision of an ethical foundation to the management of a business what many see as the core strengths of the normative perspective (Donaldson & Preston, 1995, p. 85). What this also illustrates, though, is that the ultimate justification of stakeholder theory rests on the premise that one accepts that firms exist to achieve ends other than merely making profits. As indicated with the introduction of corporate social performance in the previous paragraph, the answer to the question which ends this comprises exactly is far from clear cut and opinions on this vary substantially. In fact, the answer to the question about the ultimate objective of a company to a large extend depends on the normative basis which is used to justify theory (Jones & Wicks, 1999, p. 211). The following gives an overview of the main moral bases which have been identified.

Normative Grounds

In his recent review of stakeholder research, Laplume (2008, p. 1170) presents a variety of ethical foundations which are seen to provide a normative core to stakeholder theory. These foundations range from pragmatic to spiritual and from deontological to consequential perspectives.

Property Rights Theory

In their landmark article "The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications" which helped stakeholder theorists structure their thinking about the concept into descriptive, instrumental, and normative strands, Donaldson & Preston (1995, p. 82) also provide a moral foundation on which to base theory. In their view property rights theory can provide such a basis since several authors from the field see the rights of private property extend beyond the rights of owners. For example, Honore (1961 cited in Donaldson & Preston, 1995, p. 83) pointed at restrictions concerning the harmful use of one's property and Pejovich (1990 cited in Donaldson & Preston, 1995, p. 83) added that property rights only exist in the confines of human rights. The fact that modern property rights theory does hence not just attribute unlimited rights to owners makes clear that attention has to be paid towards non-shareholders too. The fact that property rights theory has traditionally been used to defend the superiority of shareholder interests, so the authors, makes it ever more appealing as a normative grounding for stakeholder theory. While they do not specify which uses of property are acceptable and which groups and individuals qualify as stakeholders, they suggest that such a specification could be done based on "distributive justice" (p. 83). Distributive justice in turn has its roots in social contract theory, utilitarianism, or libertarianism. Especially the latter two are seen by many as strong normative cores for stakeholder theory.

Libertarianism

Libertarianism assumes that freedom is a basic right for everyone where freedom is defined in terms of human rights (e.g. freedom of the person, right to hold personal property, freedom from arbitrary arrest and seizure, etc.) (Rawls, 1971, p. 61 cited in Freeman & Phillips, 2002, p. 335). Most fundamentally, libertarianism relies on negative rights, meaning that no one's freedom may be harmed by the exercising of someone else's freedoms. Additionally it states that positive rights may be created through voluntary agreements, such as contracts. From this follows that voluntary acts among consenting parties can be seen ethical, given that they do not interfere with the rights of any third party. Finally, libertarianism assumes that people are responsible for the effects of their actions on others. Should they inflict harm on someone, they are responsible for offering or making an attempt at indemnification. (Freeman & Phillips, 2002, pp. 334-336).

Implications for stakeholder theory exist both with regard to negative and positive rights. On the negative side, managers have to pay attention to the interest of all the firm's stakeholders, if they are to avoid the risk of harming them and violating their right to freedom. On the positive side, the firm can be seen as a "nexus of contracts or the centrepiece of an ongoing multilateral agreement based on voluntary consent" (Freeman and Phillips, 2002, p. 338). Thus, managers have to take into account the wants and needs of all participants to this agreement or nexus, i.e. all stakeholders. Important to note in this regard is that, while libertarianism holds that managers are responsible to all stakeholders, it does not assert that they have to treat them equally.

Utilitarianism

One utilitarian account for a normative core of stakeholder theory is given by Argandoña (1998). He argues that the concept of common good can provide a normative foundation to stakeholder theory. At a very basic level, the common good is "everything that is good to more than one person, that perfects more than one person, [and] that is common to all" (Argandoña, 1998, p. 1095). Other than that it is a rather intricate concept. The common good belongs equally to all humans, i.e. it is owned by everyone. It comprises elements such as law and order, civic education, or public goods but is more than simply "the sum of these partial goods" (Argandoña, 1998, p. 1095). Neither is the common good "sum of [individual] interests" (Argandoña, 1998, p. 1095). Additionally, the concept of the common good includes the sharing by all society members of the benefits (i.e. the good) they create through cooperation. Thus everyone contributes as well as receives a share of it. This sharing by all members of society is what distinguishes it from the "collective good" (Argandoña, 1998, p. 1096) which is also owned, yet not shared, by all members of society.

With regard to stakeholder theory, Argandoña (1998, pp. 1098-1100) sees an obligation for all members of a company to contribute to the achievement of the company's goal. Thus, it is their duty to help to facilitate the development of the common good of the company and enable the distribution of the shares to the members based on some kind of merit. Yet, Argandoña argues further that the common good goes beyond the boundaries of the company and that virtually every relationship between a company and society entails an element of common good. This means that a firm is obliged to contribute to the common good of a wider set of stakeholders, such as the local community, the country, and in principle all mankind including future generations. In this the author sees a "solid foundation" (Argandoña, 1998, p. 1096) for stakeholder theory. He admits though that it cannot serve for building the entire theory, such as a comprehensive list of a company's duties towards its stakeholders, since these can only be established on a case-by-case basis accounting for special circumstances and the type and quality of company-stakeholder relationships. In each case a varying form of "society" (Argandoña, 1998, p. 1099) will exist and thus also a different common good.

Complementing Argandoña's (1998) view, Palmer (1999, p. 702) asserts that there are two central tenets to utilitarianism. The first one stating that happiness which results from people's actions is the ultimate measure of the rightness of these behaviours. The second one claiming that no one's happiness has higher status in this respect, but that everyone counts equally. Based on his observation of two demands made by stakeholder theory, the author concludes that utilitarianism provides it with a strong foundation. Firstly, stakeholder theory requires managers to take into account the well-being of all individuals that can be affected by the company's operations, and secondly, it postulates that no one's well-being or happiness should be regarded as intrinsically more important.

What emerges from this outline of libertarianism and utilitarianism as foundations for normative stakeholder theory, is that the latter lets individuals' rights to be constraint for the benefit of the society, whereas the former allows society's well-being being subordinated to the rights of individuals (Hampton, 1997 cited in Freeman & Phillips, 2002, p. 336). Individuals' rights, dominant in libertarianism, also form an essential element in the next normative positions towards stakeholder theory, the deontological and Kantian ethics one.

Deontological Ethics

As opposed to utilitarian or consequentialist ethics which are predominantly concerned with the outcome of certain situations or actions, deontological ethics deal with the motivations and principles behind actions. They are closely linked to Kant's categorical imperative which requires human beings always to be treated as ends in themselves and never as means (Evan & Freeman, 1988, p. 258; Gibson, 2000, p. 248; Lea, 2004, p. 213).

While Palmer (1999, p. 702), as seen above, agrees that utilitarianism strongly supports stakeholder theory, he further contends that deontological ethics too favour stakeholder theory over stockholder theory. He admits that managers' role to act as an agent for company owners puts a deontological constraint on them. That is, as formulated by Hasnas (1998, p. 23), managers have to use the money they accept from shareholders in accordance with the goals of these investments. Spending it, for instance, on social purposes not authorized by the investors would amount to spending other people's money without their consent which, from a deontological point of view, is unethical. Palmer (1999, p. 702) continues, however, that there can be other deontological obligations that have the potential to mitigate a manager's obligations towards stockholders. The author bases his argumentation on Ross's concept of competing "prima facie obligations" (Ross & Stratton-Lake, 2002, pp. 19, 20, emphasis in the original). Ross argued that the mere existence of a prima facie obligation does not imply that this is someone's actual obligation, since in certain contexts there may be other more important prima facie obligations. Palmer sees this "Ross-style pluralism" (Palmer, 1999, p. 704) in clear support of stakeholder theory. He admits that ethical managers have prima facie obligations towards shareholders, yet, he continues that they have further moral obligations which from time to time will be more significant. He concludes that it is therefore a manager's duty to acknowledge and weigh the oftentimes competing moral stakes of various constituencies of a company, a proposition consistent with the central axiom of stakeholder theory.

Adding to this, Freeman (1997 cited in Gibson, 2000, p. 249) presents a deontological framework based on the work of John Rawls (1971). This suggests that a possible way to establish what is right and wrong is to take a decision accounting for all facts concerning a given situation except for one's own role in it. Without knowing which outcome will be allotted to oneself, people are most likely to assure the equality of opportunities and the fair distribution of benefits. Thus the framework essentially posits that one should act like one would want others to do, and behave as if one could find oneself in the position of every party involved in the situation. Already in 1988 Evan and Freeman had drawn on this maxim for stakeholder theory in stating that "pursuing the interests of the stakeholders is the true purpose of the business organization and that the decision makers should act as if they did not know which stake is theirs" (Evan & Freeman, 1988 cited in Wijnberg, 2000, p. 337).

Kantian Ethics

In their call for "Kantian Capitalism" (Evan & Freeman, 1993, p. 254) the authors take that idea one step further, putting forth that property rights do not entitle anyone to override the Kantian principle of showing respect for other people. Any management theory consistent with Kant's moral foundations has to accept this non-absoluteness of property rights and acknowledge that eventually everyone has the right to be treated as an end in itself, not as a means to some company objective. Employees or consumers hence have the right to be regarded as more than mere tools for profit-maximization (Gibson, 2000, p. 248). Evan & Freeman (1993, p. 259) argue, that managers may not breach these legitimate rights in pursuit of their companies' benefits. Moreover, the authors claim that a theory in support of the modern corporation rooted in capitalistic structures has to honour the fact that managers have moral responsibility for their actions and the effects these have on others. Since stakeholder theory rests upon these two notions of "rights and effects" (Evan & Freeman, 1993, p. 258) towards the multiplicity of constituents of a firm, Kantian ethics provides a viable normative foundation to the concept.

Lea (2004, pp. 204) takes a slightly different perspective on a Kantian justification for the stakeholder approach. As a starting point he argues that the sort of rights granted to stakeholders by authors like Evan and Freeman (1993) are oftentimes not simply negative, but rather positive in nature. Companies not only have to abstain from inflicting harm on stakeholders, such as violating their liberty rights, but are also expected to actively contribute to their well-being. In Lea's (2004, p. 206) opinion, the attribution of positive rights is flawed, however, which is why he argues that obligations or duties, rather than rights, ought to provide the central basis for the stakeholder theory. Basing his argumentation on the concept of perfect versus imperfect and general versus role-specific duties (see 3.3.1), Lea (2004, p. 206) concludes that companies have duties or obligations towards non-shareholder stakeholders which arise from the fact that these are directly affected by the companies' activities. These duties are role-specific and imperfect, since a company may pursue within reasonable boundaries the welfare of certain stakeholders, yet no group of stakeholders has the right to claim this goodwill and the specific forms of the benefits being provided remain unspecified. The author argues that stakeholder interests should remain in this state of role-specific imperfect duties rather than being institutionalized or codified through law. This implies however that in order to ensure that companies cannot easily escape their responsibility to contribute to the well-being of its stakeholders, it is necessary that stakeholder claims are regarded from an obligation rather than a rights point of view.

Aristotelian Ethics

Analogous to Greek philosopher Aristotle's argument that the polis (city-state) existed to allow its citizens to live a "complete and good life" (Wijnberg, 2000, p. 338), one can argue that companies exist to allow its members achieve this end. Aristotle argued that a man of practical wisdom needs moral dilemmas to deliberate on in order to become a man of virtue and live a complete and good life. On the contrary, he claimed that someone who is not in the position to make any decisions which will have an impact on other people's lives will not be able to attain such completeness. From this Wijnberg (2000, p. 338) infers that companies' decision makers have to be faced with conflicting interests regarding other people's lives on which to apply their practical wisdom in order to become virtuous men and live complete lives. Furthermore, Aristotle asserted that being faced with moral dilemmas merely reflecting on them does not make someone a righteous person, but that it is people's acts and choices that help them achieve this. Given these assertions, Wijnberg (2000, p. 339) concludes that a stakeholder approach to management is not only desirable, but even necessary to help managers become virtuous people living complete lives.

Feminist Ethics

Several authors have suggested a reinterpretation of the stakeholder concept from a feminist ethical perspective (Burton & Dunn, 1996; Lampe, 2001; Wicks, 1996; Wicks, Gilbert, & Freeman, 1994). As Burton and Dunn (1996, pp. 134-136) point out this involves an emphasis on the notion of caring for others and viewing relationships as inherent to our lives. People who ignore their relationships with others and do not take them into account in their decision-making are behaving immorally. "You become responsible forever, for what you have tamed" a quote from Antoine de Saint-Exupery's The Little Prince[5] depicts very well the essence of the feminist ethical strand. As soon as one has built a relationship with someone else, one is responsible to take this into account regarding future decisions.

In the view of Wicks et al. (1994) this has a number of implications for firms. First of all, firms ought to be seen in terms of the network of relationships they form with their stakeholders. In an increasingly interconnected world people and organizations can no longer be seen as isolated entities but have to be looked upon in terms of their multiple relationships to others (Gray, 1989, p. 269 cited in Wicks et al., 1994, p. 484). A second implication is the assumption of a collaborative rather than mainly adversarial view on competition. While conflict-based approaches to stakeholder management can lead to feelings of exclusion, involving stakeholders and their interest in the decision-making processes can further their willingness to accept compromises (Wicks et al., 1994, p. 487). In line with this Lampe (2001, p. 172) suggest that potential conflicts between different stakeholder groups may be resolved using a mediation approach. In his view mediation as a non-adversarial, collaborative technique to conflict resolution, based on mutual understanding and the drive to preserve relationships also under difficult circumstances, can form a useful contribution to the stakeholder approach. Thirdly, Wicks et al. (1994, p. 488), argue that under a stakeholder approach strategy should be seen in the light of solidarity. Rather than basing strategic decisions on assumed objective data and numbers, viewing them as the path to the firm's success, they should be made in consideration of the firm's relationship with its stakeholders and their needs and interests. A stakeholder approach to management requires firms also to rely more on decentralization and employee empowerment rather than focusing simply on a traditional hierarchical organizational structure, since this ensures a greater consideration of the interests of the various constituencies of the firm (Wicks et al., 1994, p. 491).

[...]


[1] Even after repeated explanations that the study was in fact on small companies, they insisted their company was too small to offer any valuable insights.

[2] EU (2002, March 11). Directive 2002/14/EC of the European Parliament and of the Council. European Parliament & European Council. Retrieved April 22, 2009, from http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2002:080:0029:0033:EN:PDF

[3] Greenspan, A. (2007, p. 432). Age of turbulence. New York, USA: Penguin.

[4] ORSE (2006). Corporate Social Responsibility in China. Observatoire sur la Responsabilité Sociétale des Entreprises. Retrieved April 14, 2008, from http://www.impactus.org/PDF/documents/...

[5] De Saint-Exupery, A. (1943; 1995). The Little Prince. London, UK: Wordsworth Editions.

Details

Pages
145
Year
2009
ISBN (eBook)
9783640615759
ISBN (Book)
9783640615742
File size
2.4 MB
Language
English
Catalog Number
v143634
Institution / College
Solvay Brussels School of Economics and Management
Grade
17/20 (1,3)
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Stakeholder theory Stakeholder management Small and medium-sized enterprises SME Ethical behaviour in organizations SME stakeholder management model breweries Belgium

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Title: Stakeholder Management in Small and Medium-Sized Enterprises