The role of stakeholders has been the subject of an impressive amount of research since Freeman (1984) published his work. While he only sought to develop a general approach to strategic decision making, it has subsequently become the basis of a new theory of the firm (Donaldson and Preston, 1995).
This stakeholder theory of the firm was originally proposed by Brenner and Cochran (1991) and was subsequently developed by Brenner (1993), Donaldson and Preston (1995) and Jones (1995). It has provided a framework for research in the business and society field (Carroll, 1989) and taken on the
status of a ‘master theory in its own right’ (Rowley, 1997, p. 889) by describing how organizations operate under certain conditions. It is presented by many as an alternative theory of the firm, one that should replace the traditional Friedmanite economic theory of the firm (Andriof and Waddock, 2002).
However, Key (1999) has suggested that although recognition of identifiable actors in the external environment is a valuable strategic tool, it does not warrant the status of a theory, especially not one that seeks to be regarded as a new theory of the firm. In particular, it does not provide an adequate the- oretical basis for explaining a firm’s behaviour or the behaviour of individual internal or external actors. Key suggests that also missing is a methodology to explain the dynamics that link the firm to identified stakeholders. While the motivations of profit and efficiency may be what Freeman and subse- quent scholars had in mind, these are not made explicit and could easily be replaced by alternatives such as Davis’s ‘iron law of responsibility’
(Davis, 1973) or some normatively based social responsibility (Wood, 1991).
These legitimate theoretical and methodological issues appear to have stalled the development of a more solid stakeholder theory of the firm.
However, rather than continuing to focus on a methodology to link the firm and its stakeholders through dialogue it may be more productive to investigate the way in which the firm is conceptualized through the notion of stake- holders. The rationale for doing this can be better understood when the nature of theory is explored.
Key (1999, p. 317) defines theory as ‘a systematic attempt to understand what is observable in the world. It creates order and logic from observable facts that appear tumultuous and disconnected’. Good theory would
‘identify relevant variables and the connections between them in a way that testable hypotheses can be generated and empirically established’ (ibid.).
The essence of a theory is the demonstration of associations between vari- ables within a conceptual framework. In a similar vein Bacharach (1989, p. 496) defines theory as ‘a statement of relations among concepts within a set of boundary assumptions and constraints’. He suggests that a ‘good’
theory in the social sciences should meet the following criteria: it must be falsifiable, logically coherent, operationalizable, useful and possess sufficient explanatory power in terms of scope and comprehensiveness. Ideally it should have both explanatory value and predictive value. It should also include the underlying logic and values that explain the observable phe- nomenon, and be supported by a plausible or logical explanation of how it happens (Labovitz and Hagedorn, 1971). These are particularly rigorous requirements that are either not met or ignored by many scholars working in the social sciences. Indeed Sayer (2000, p. 147) suggests that theories are ‘few in number, monolithic and distinct’. Yet reference to almost any scholarly journal would provide evidence of a multitude of theories that do not meet these criteria but are still accepted by refereeing committees and devoured by readers.
Llewelyn (2003) has provided a particularly interesting answer to this conundrum that is relevant to the issue being addressed here. She proposes a broader understanding of the term theory and introduces the criterion of utility rather than truth in assessing their value in the social sciences. Given the concept-dependence of the social world, she argues that what she calls
‘grand theory’ is affected by the basic conceptual framing that supports it.
Drawing on the work of Sayer (2000), she argues that ‘there is no perception without conceptual schemes within which to locate perceptions’ (Llewelyn, 2003, p. 666). Given this link between what is often regarded as the only form of theory (grand theory) and the conceptualizations and perceptions of social phenomena involved in that theory, Llewelyn suggests that five levels of theory can be identified (Table 8.1). She argues that all five levels are sig- nificant and that each can be seen as a necessary stage in the ascent to grand theory (level five). This ensures that any grand theory that does ensue is not disconnected from empirical reality.
These ideas are particularly relevant to the development of a stakeholder theory of the firm. Most of the work on this issue has focused on the higher levels of theory without clearly addressing more fundamental issues that would ground that theory on empirical reality. For example, Brenner’s (1993, p. 206) investigation of what constitutes a theory of the firm suggests that a theory should ‘posit either a single decision principle or set of principles which explain a significant aspect of the organisation’s behaviours’. He pro- poses that a theory of the firm should have three components: (1) a world-view, (2) basic propositions and (3) choice process(es) (Brenner and Cochran, 1991). If there is no analysis of more fundamental questions about how a firm is conceptualized in the first place and what metaphors this conceptu- alization is based on, it is rather difficult to take any theoretical endeavour a step further.
Table 8.1 Five levels of theorization
Level Theory Focus
One Metaphor theorizes By image-ing and grounding
experience
Two Differentiation By ‘cutting the pie’ of experience theorizes
Three Concepts theorize By linking agency and structure through practice
Four Theorizing settings Explaining how contexts for practices are organized Five Theorizing structures Explaining impersonal,
large-scale and enduring aspects of social life Source: Llewelyn (2003), p. 667.
In order to move our understanding forward it is worthwhile revisiting the more fundamental question of how we conceptualize and differentiate the complex social phenomenon that we call a ‘firm’ from its social surroundings.
This will shed light on how and why relationships exist and what makes these relationships different enough to require a conceptualization of the firm as a distinct form of social collective. Most scholars embrace the Friedmanite view of the firm as a set of assets owned by shareholders, with managers acting as agents to maximize the returns on those assets. The sup- porting metaphor is that of an organism with individualistic needs and goals and a clear boundary between it and the outside world. This is a classical liberal economic view of organizations, a view that is now recognized as being only one of many. This view is based on a structuralist sociological theory in which the nature or structure of the organization determines the behaviour of those within it (Jones, 1987). The management of stakeholders is, like any other activity in the organization, determined by the need constantly to maximize the returns to shareholders. Depending on one’s perspective, this can be the result of learned behaviour and socialization within the firm (supported by structural consensus theory) or the result of inequality of power and privilege between the shareholders and other stakeholders (supported by structural conflict theory).
It is possible, however, to adopt a totally different perspective based on interpretive sociological theory. Adapting this to the context of organizations, firms or corporations are the end result of social interactions that lead to a dynamic nexus of contracts; they are not the cause of such interactions. By looking at the way in which individuals and groups interact inside the orga- nization and across its boundaries we are able to understand how a firm is created and functions. Adopting this perspective suggests that a firm or busi- ness enterprise can be seen as a social collective in which various interests come together to achieve mutually acceptable goals. As a social collective rather than an organism, the goals are those created forthe collective not of the collective.2 While the goals of shareholders may include profit, this should be seen in relation to the goals of others involved in the achievement of those profits. If those others were not required for goal achievement then the collective would not exist. The owners of capital would operate through the marketplace. Likewise the goals of individuals involved in the collective (even individuals regarded as belonging to the same stakeholder group) are neither all the same nor permanent or unchanging. Where such a collective (that is, a corporation) does exist the focus is on the way in which the collec- tive, with its complex goals and interests, acts to achieve this array of goals.
Human action, in the context of a firm or any other social collective and resulting from a conscious intention to act, is based on a thought process and is aimed at some goal or objective (perceived in various ways by various people). Human action in this context is purposive, meaningful and aimed at achieving certain chosen goals. These goals are derived from individuals’
interpretation of the world in which they exist. This includes an interpretation of the actions of others both within and outside the formal boundaries of the firm, an interpretation that is based on the formal and informal communi- cation that takes place between those involved in the situation. The social order that is created is the result of this interaction, ‘carried on by interpreting meaning-attributing actors who can make sense of the social settings in which they find themselves and who choose courses of action accordingly’
(Jones, 1987, p. 18). The structure does not determine the social order that ensues in the way that structuralists would suggest. Formal or legal require- ments may constrain the actions of those in the social collective called a firm, but they do not determine the human action that ensues in any par- ticular situation. Using stakeholder terminology, this means that a corpora- tion or business enterprise is composed of a nucleus of stakeholders with diverse and sometimes conflicting interests who come together to achieve goals that would not be possible individually (Jonker and Foster, 2002).
Management is the group within this collective that has the role of steering it towards those goals. The way in which management engages or interacts with the stakeholders is therefore crucial in determining whether the goals are achieved. The goals can be of various types (economic, social, deonto- logical and so on) and their alignment is not always assured. Achieving them is part of a transactive process (see below).
Based on this conceptualization, it is argued here that an organization necessarily operates through interactions among participants, resulting in a stream of benefits generated by their collective action. These interactions can range in type from the very informal to the contractual. If the result of cooperation is not mutually beneficial the participants can withdraw their support and involvement. Likewise, the collective action is focused on a par- ticular purpose at a particular point in time. The purpose can change over time as the influence of different stakeholders varies and/or other stakeholders join or leave the temporarily coalition. This view is consistent with other stakeholder conceptualizations of the firm based on a ‘nexus of contracts’
(Key, 1999). However, it more thoroughly explains why these contracts exist without relying on the deontological explanation of formal reciprocal rights and duties. They exist because without them goal attainment would not be possible. Moreover, while the relationships are influenced by identifiable economic incentives, possible explanations of behaviour extend beyond these to the social, emotional, sociopsychological and political. This approach appears to fit more closely with the reality of organizational life.
Unlike the contingency theorists, who are concerned to demonstrate that the external world provides a context within which management decisions should be made, Freeman’s stakeholder theory focuses on a fundamental engagement with that context. It is one thing to point out that a firm exists within a broader social context that needs to be considered. It is quite a dif- ferent thing to draw attention to the need for active engagement with entities
that exist in that context. It is with regard to why such engagement occurs that a theoretical foundation is missing.