1. Sec 3-7
The Stakeholder Model of Corporate
Social Responsibility

2. • Stakeholder model of corporate social responsibility
begins: every business decision affects a wide variety
of people, benefiting some and imposing costs on
others.
• Economists have recognized that every business
decision involves the imposition of costs in the sense
that every decision forgoes other opportunities.
• Any theory of corporate social responsibility must
answer the following question: Who should benefit,
and who should pay the costs, for each business
decision?
– The economic model and the moral minimum:
stockholders have a privileged position in the answer to
this question.

3. • Stakeholder theory rejects privileged position of
stockholders.
– Stockholders: have an ethical claim upon managerial
decisions and a duty
– These ethical claims of stockholders must be balanced
against any comparable ethical claims of anyone else
affected by managerial decisions.
– Managerial decisions should be constrained by
ethically legitimate claims of other
• Stakeholder theory: rejects the conclusion that
only stockholder have ethically legitimate claims
upon managers
– Ethical claims of other parties are comparable to
those advanced by stockholders, then manger have a
duty to these other parties.

4. • Stakeholder theory: stockholders are viewed as
owner instead of investors.
– Investor provide capital which is necessary, but also
labor, supplies, a social infrastructure, or a market.
– Manager’s role: balance competing interest in such a
way that the firm continues to provide value for all
these stakeholders.
• Stakeholder theorist Ed Freeman:
– The basic idea is that businesses, and the executive
who manage them, actually do and should create
value for customer, suppliers, employees,
communities…. The primary responsibility of the
executive is to create as much value for stakeholders
as possible….. P.69

5. • Wal-Mart
– Economic model of corporate social responsibility:
decision that benefit stockholder at the expense
of employees, suppliers, customers, and local
communities
• Ethical rationale: this approach has more beneficial
overall social consequences and that was owners the
stockholders have rights to such benefits.
• Stakeholder perspective: Wal-Mart's executives have
ethical responsibilities to employees, suppliers,
customers, and local communities that are ethically
equal to their responsibilities to shareholders.

6. • William Evan and R. Edward Freeman: defense of
stakeholder model in essay “A Stakeholder
Theory of the Modern Corporation: Kantian
Capitalism”
– A stakeholder includes any group who are vital to the
survival and success of the corporation, any group or
individual who can affect or be affected by the
corporation.
– The economic model fails: ignores over a century of
legal prescient arising from both case laws and
legislative enactments.
• The law now recognizes a wide range of managerial
obligations to such stakeholders as consumers, employees,
competitors, the environment and the disabled.

7. • It is simply false to claim that management can ignore
duties to everyone but stockholders.
• Courts and legislatures consider that corporate
management must limit their fiduciary duty to
stockholders in the name of the rights and interest of
various constituencies affected by corporate decisions-
• Economic considerations diminish the plausibility of the
economic model
– Wide variety of market failures show that there are no
guarantees that they will serve the interest of either
stockholders or the public.
• Most important argument in favor of the
stakeholder theory rests in ethical
considerations

8. • Economic model two ethical norms of
justification: utilitarian considerations of social
well-being and individual rights.
– On each of these normatives due consideration to
all affected parties.
– Utilitarian theory: commitment to balance the
interests of all concerned and to give to each
equal consideration
• The Stakeholder theory: acknowledges this
fact by requiring management to balance the
ethical interests of all affected parties.

9. • Economic model: balancing the ethical interests of all
affected parties will require movement to maximize
stockholder interests. Utilitarianism requires
management to consider the consequences of its
decisions for the well-being of all affected groups.
• Stakeholder model: requires the same
• Stakeholder model: justify economic model, a wider
stakeholder theory of corporate social responsibility is
proven ethical superior
• Evan and Freeman: “the stakeholder theory does to
give primacy to one stakeholder group over another,
though there will be times when one group will benefit
at the expense of others. In general, however,
management must keep the relationship among
stakeholders in balance.”

10. • Two general challenges of stakeholder theory:
– 1. Debate on substantive grounds and argue for the
primacy of stockholder}s interests.
– 2. Argue that the stakeholder theory is so general and
vague that it can offer little practical guidance to
management.
• To defeat the stakeholder theory on substantive
grounds the defender of the economic model must
argue that the responsibilities to stockholders always
override the ethical responsibilities to other affected
parties.
– On utilitarian grounds. The net social consequences of
decisions that constrain profit by consideration of the
interests of others.
– On libertarian/property right grounds, this argument
would have to establish the primacy of property over the
other individual rights.

11. • Practical challenges to the stakeholder theory are
of two types
1. Problems with identifying stakeholders and their
interests
2. problems deciding what course of action follows
from the imperative to balance stakeholder
interests.
– If we interpret the meaning of stakeholder widely as
any affected party, manager are under an impossible
burden of determining who might be affected by
every decision
– Even if we could identify all relevant parties and
their affected interests, the stakeholder theory
seems to offer little in the way of practical advice to
managers

12. • Two general normative principles that derive
from the economic and stakeholder theories
of corporate social responsibility
– Economic model mandate mangers hold maximize
profits while the stakeholder theory requires
manager to balance the competing claims of
stakeholders
• Economic model leaves business managers with
significant latitude in making decisions
– The imperative to maximize profits offers a general
guideline, but it does not offer exact practical guidance.
» Managerial effectiveness at profit maximization is
measure by one thing: Do stockholders choose to keep
their money invested in this firm

13. – Stakeholder theory: difficult to determine in
advance what particular decision would
appropriately balance stakeholder interests.
• Measure this by asking: Do the various stakeholders
choose to continue their relationship with
management?
– Disgruntled employees, disaffected customers, and falling
stock prices: good evidence that management is failing to
balance stakeholder interests.