Business should go back to moral basics

In recent years, stakeholder theory has established itself as orthodoxy within much corporate management practice. Reflecting an unsubtle play on the word ‘shareholder’, some regard stakeholderism as the future for corporate governance.

In reality, however, stakeholderism represents an approach that may greatly damage the moral ecology of business.

The term ‘stakeholder’ first appeared with reference to business in a 1963 internal memorandum at the Stanford Research Institute. It described ‘those groups without whose support the organisation would cease to exist’.

But since 1963, the conceptual use of ‘stakeholder’ has changed significantly. Management theorist Edward Freeman claims that ‘[a] stakeholder in an organization is . . . any group or individual who can affect or is affected by the achievement of the organisation’s objectives’.

This expands the coverage of ‘stakeholders’ to anyone recognised as having an ‘interest’ or ‘stake’ in a corporation. Given the increasing global activity of corporations, those affected by any one transnational include potentially infinite numbers of people.

 But what does it mean to take account of stakeholders’ interests? Some suggest that it means that businesses should ‘calculate’ an action’s impact on stakeholders, and then figure this impact into the overall calculation of a business decision.

 Cursory reflection upon such thinking soon indicates that stakeholderism is characterised by profound problems of logic. A group may, for instance, be interested in the activity of corporations per se. It is difficult, however, to extrapolate this general interest into a specific interest in a particular business.

 Unreflective use of the stakeholder concept within corporations can also lead them to believe that they have moral responsibilities to many non-shareholder parties, simply because the latter have taken an interest in the corporation.

Yet an ‘interest’, even if legitimate, is not necessarily a stake. Even people affected by a corporation’s activities do not necessarily have a stake in them. Simply being offended by a practice is not sufficient for a group to qualify as a stakeholder.

Part of the problem is that when it comes to stakeholders, there is no ordering principle equivalent to the price mechanism used by directors when determining which decisions best realise shareholder value.
 
At this point, stakeholderism’s essential ethical incoherence becomes apparent. How can any one person or board of directors assess what is the right thing to do if they are obliged to think about the consequences of certain actions for, potentially, everyone?

Stakeholder theory’s inability to provide non-arbitrary answers to such questions reflects its reliance upon the ethical premises of what is known as ‘consequentialism’.

‘Consequentialism’ refers to a moral outlook that evaluates actions according to their consequences. It directs people to act in ways that are ‘most likely’ to produce the best net proportion of good to bad consequences, overall and in the long run.

Our actions do have consequences, and it would be morally negligent not to think about their effects. But the ‘weighing’ of the foreseeable goods and evils proceeding from an action is inadequate for determining its morality.

The problem is that the consequentialist injunction to ‘maximise’ good is senseless. It presumes that the realisations of human good (and evil) are commensurable in a way that makes possible an intelligent weighing of value. Consequentialism thus assumes that we can measure moral good according to some single well-defined goal.

We know, however, that when people act, they do not have a single common factor in mind. There is therefore no measuring basis against which we can somehow ‘weigh’ the significance of various goods.

Once we recognise stakeholderism’s reliance upon consequentialism, we understand why corporations that embrace stakeholderism find themselves attempting the intellectually impossible task of weighing all of an act’s certain and possible effects upon a potentially infinite number of stakeholders. How, we must ask, could there be an absolute obligation for corporate directors to act upon any choice resulting from such debatable calculations?

When it comes to developing a sound moral ecology within business, there is no substitute for enhancing understanding of basic rules of moral reasoning within corporations. While this is a somewhat humbler—and far less politicised—path that many stakeholder propositions, it is a way that takes the moral life in business seriously, precisely because it focuses upon the only earthly moral agent there is: the human person. 
 
About the Author:
Samuel Gregg is an Adjunct Scholar at The Centre for Independent Studies, and author of the recently released The Art of Corporate Governance: A Return to First Principles