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If Fairness is the Problem Is Consent the Solution

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IF FAIRNESS IS THE PROBLEM, IS CONSENT THE SOLUTION? INTEGRATING ISCT AND STAKEHOLDER THEORY Harry J. Van Buren IE Abstract: Work on stakeholder theory has proceeded on a variety of frontSf as Donaldson and Preston (1995) have noted, such work can be parsed into descriptive, instrumental, and normative research streams. In a normative vein, Phillips (1997) has made an argument for a principle of fairness as a means of identifying and adjudicating among stakeholders. In this essay, I propose that a reconstructed principle of fairness can be combined with the idea of consent as outlined in integrative social contract theory (ISCT) to bring about a more normative stakeholder theory that also has ramifications for corporate governance T alking about fairness is an easy way to start a fight. No one wants to be called unfair; everyone wants to couch his or her ideas and ideals in terms of fairness. Fairness is what Stevenson (1944; see also Hare 1952) calls an emotive term; a part of language that has a constant (in the case of fairness, laudatory) meaning that is redefined over time. Ethical discourse relying on emotive analyses focuses on the meanings of such terms;/air is always a laudatory term, but in practical terms is applied to different behaviors and goals. Pronouncing an idea or a policy to be fair, therefore, is a means of seeking (and getting) support for it. The recent debate about affirmative action illustrates the power of fairness as an emotive term: both proponents and opponents of this public policy have claimed that their positions were and are consistent with fairness. There is a limit, of course, to what can be called fair; the term's meaning is elastic, but not infinitely so. A recent paper by Phillips (1997: 57) has proposed a principle of fairness that reads as follows: Whenever persons or groups of persons voluntarily accept the benefits of a mutually beneficial scheme of cooperation requiring sacrifice or contribu- tion on the parts of the participants and there exists the possibility of free riding, obligations of fairness are created among the participants in the cooperative scheme in proportion to the benefits received. • Phillips proposes that this definition provides a coherent justificatory framework for stakeholder theory that adjudicates issues like (1) who a stakeholder is and (2) how competing interests among stakeholders so identified might be reconciled. Certainly it is true that there is a need for a justificatory stakeholder frame- work that provides an ethical basis for identifying stakeholders and determining ©2001 Business Ethics Quarterly. Volume 11, Issue 3 ISSN 1O52-15OX. pp. 481-499
Transcript

IF FAIRNESS IS THE PROBLEM, IS CONSENT THE SOLUTION?INTEGRATING ISCT AND STAKEHOLDER THEORY

Harry J. Van Buren IE

Abstract: Work on stakeholder theory has proceeded on a variety offrontSf as Donaldson and Preston (1995) have noted, such work canbe parsed into descriptive, instrumental, and normative researchstreams. In a normative vein, Phillips (1997) has made an argumentfor a principle of fairness as a means of identifying and adjudicatingamong stakeholders. In this essay, I propose that a reconstructedprinciple of fairness can be combined with the idea of consent asoutlined in integrative social contract theory (ISCT) to bring about amore normative stakeholder theory that also has ramifications forcorporate governance

Talking about fairness is an easy way to start a fight. No one wants to becalled unfair; everyone wants to couch his or her ideas and ideals in terms

of fairness. Fairness is what Stevenson (1944; see also Hare 1952) calls an emotiveterm; a part of language that has a constant (in the case of fairness, laudatory)meaning that is redefined over time. Ethical discourse relying on emotive analysesfocuses on the meanings of such terms;/air is always a laudatory term, but inpractical terms is applied to different behaviors and goals. Pronouncing an ideaor a policy to be fair, therefore, is a means of seeking (and getting) support for it.The recent debate about affirmative action illustrates the power of fairness as anemotive term: both proponents and opponents of this public policy have claimedthat their positions were and are consistent with fairness.

There is a limit, of course, to what can be called fair; the term's meaning iselastic, but not infinitely so. A recent paper by Phillips (1997: 57) has proposeda principle of fairness that reads as follows:

Whenever persons or groups of persons voluntarily accept the benefits of amutually beneficial scheme of cooperation requiring sacrifice or contribu-tion on the parts of the participants and there exists the possibility of freeriding, obligations of fairness are created among the participants in thecooperative scheme in proportion to the benefits received. •

Phillips proposes that this definition provides a coherent justificatory frameworkfor stakeholder theory that adjudicates issues like (1) who a stakeholder is and(2) how competing interests among stakeholders so identified might be reconciled.

Certainly it is true that there is a need for a justificatory stakeholder frame-work that provides an ethical basis for identifying stakeholders and determining

©2001 Business Ethics Quarterly. Volume 11, Issue 3 ISSN 1O52-15OX. pp. 481-499

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whether they are being treated fairly. My concern about Phillips' definition ofstakeholder fairness is based on its utility; I will argue that this definition offairness does not provide a basis for ameliorating injustices suffered by stake-holders. After summarizing both the literature on stakeholder identification andPhillips' fairness principle, I will propose that a reconstructed principle of fair-ness can be combined with the idea of consent, as outlined in integrative socialcontract theory (ISCT), to bring about a more normative stakeholder theory.

Theories of Stakeholder Identification

Since Freeman's (1984; see also Freeman and Reed 1983) seminal work^ de-veloping the stakeholder concept, hundreds of papers have been written aboutvarious aspects of it (Clarkson 1998). A number of questions are central to thedevelopment of stakeholder theory, including: Who are stakeholders? What is a stake?How should stakeholders be treated by managers? Do moral claims inhere on thebasis of stakeholder status? In the intervening time since the development of themodern stakeholder concept, considerable progress has been made in developingmany different theories of stakeholder identification, perhaps best characterizedin terms of broad versus narrow views (Mitchell, Agle, and Wood 1997).

The choice of a theory of stakeholder identification has both normative andpractical implications, as most academics doing work in this area have realized.If one takes a narrow view of stakeholder identification, it is likely that onlystakeholders who can directly and immediately affect economic outcomes willbe included in managerial analyses—leaving folks whose power or ability topress their claims is lacking excluded from managerial consideration. In con-trast, a broad view of stakeholder identification may include every conceivablegroup affected by or affecting the organization's activities (which might be seenas good from a normative standpoint), but at the expense of failing to eitherfocus the time and attention of managers or to offer rules to help them adjudicateamong differing stakeholder claims. A theory of stakeholder identification im-plicitly asks and answers the question Who and What Really Counts? (Mitchell,Agle, and Wood 1997)

Despite all of the work that has been done in the past fifteen years on thestakeholder concept, the fact remains that the normative aspect of stakeholdertheory is not nearly as well developed as the strategic aspect. It should be re-called that Freeman's 1984 work was billed primarily as a work in strategicmanagement that placed the business organization at the center of analysis. Ifstakeholder theory can be parsed into descriptive/empirical, instrumental, andnormative components (Donaldson and Preston 1995), it can be argued that thefirst two components are much more developed than the third. Recent theoreti-cal work by Mitchell, Agle, and Wood (1997) has laid out the possibilities vis-a-visthe descriptive/empirical and instrumental aspects of stakeholder theory bydescribing three attributes of relationship to the organization potentially pos-sessed by stakeholders: power, legitimacy, and urgency. Other authors (Atkins

INTEGRATING ISCT AND STAKEHOLDER THEORY 483

and Lowe 1994; Atkinson, Waterhouse, and Wells 1997; Burke and Logsdon1995; Clarkson 1995; Gregory and Keeney 1994) have taken up how stakeholdertheory might prove beneficial to strategic planning—a kind of instrumental stake-holder analysis. Stakeholder theory has properly become a useful means ofcommunicating to students and managers the importance of non-stockholdergroups to the success of an organization.

But the normative aspect of stakeholder theory has not progressed as far asits descriptive and instrumental aspects. In particular, one worrying trend m stake-holder theory has been its focus on entities whose ability to directly andimmediately affect the firm s operations through concrete actions makes themsalient to managers. This focus on the stakeholder who can do the firm good orill based on its autonomous actions leaves out one critical group: the dependentstakeholder who possesses the relationship attributes of legitimacy and urgency(Mitchell, Agle, and Wood 1997) but does not possess the power needed to pressits claims. Mitchell, Agle, and Wood note that such stakeholders must rely oneither the advocacy of other stakeholders who possess power or the internal val-ues of organizational managers to seek consideration of their claims. While thisis certainly good advice in terms of describing how such stakeholders actuallyget heard, it also means that there will be many stakeholders whose urgent andlegitimate claims will not be heard. From the standpoint of developing a stake-holder-oriented system of business ethics, it is the powerless stakeholders whohave legitimate and/or urgent claims that are of greatest concern. Simply put,stakeholders with power will be heard if they wish and stakeholders withoutpower will not without someone else's help.

Do powerless stakeholders exist? Quite obviously—there are lots of groupswith legitimate and urgent claims that do not have power. Environmental racismanalyses (see Krieg 1995), for example, focus on the powerlessness of minoritycommunities and the concomitant result that dangerous facilities are dispropor-tionately located therein. Employees of contract suppliers (see Van Buren 1995a)that sell to firms in the United States often live in countries where collectivebargaining is prohibited; the state exercises its power in ways that ensure thepowerlessness of such stakeholders. In the next section, these two examples ofdependent stakeholders will be examined. But it is important to note that manystakeholders exist who lack power but present legitimate and/or urgent claims;these stakeholders must necessarily be at the center of any normative stakeholdertheory. In the next section, one such theory will be explored.

Philllips' Principle of Fairness

As I noted previously, the normative aspect of stakeholder theory is not aswell developed as its descriptive and normative components. It would be unfairto say that no normative stakeholder work has been done. A number of workshave critiqued the notion that the only stakeholders to whom managers owe respon-sibility are stockholders (Boatright 1994, Goodpaster 1991, Langtry 1994, Starik1995). Less clear, however, is the theoretical grounding for this kind of claim.

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One reason that stockholders are traditionally set apart in much of the man-agement and economics literature is the recognition of their status as owners ofthe firm. Friedman's (1962/1982) analysis of the social responsibilities of cor-porations (often discussed in its truncated 1970 form) is actually an argumentabout human freedom as expressed through the prerogatives of property rights.In one stylized version of neoclassical economic analysis, property owners havea right, subject to the demands of law and moral custom, to dispose of theirproperty as they see fit. If they decide to use their property in a business enter-prise, property owners will need to contract with some groups that provide neededresources (employees, suppliers) that are trying to achieve their own goals andwill be constrained by public policy mechanisms that reflect commonly heldunderstandings of the role and responsibilities of the business enterprise. Therights of non-stockholder stakeholders that provide resources to the firm areprotected either by the terms of contracts freely reached by both parties ("thefirm as 'nexus of contracts' approach," see Coase 1937 and 1960, Williamsonand Winter 1991) or by government regulation that sets the rules businessesmust follow. The market provides yet another line of defense: if the actions of afirm are seen as socially illegitimate, the firm will suffer in the marketplace asits "stakeholders" will not do business with it.

This story is a common one in economic discourse. Further, as Chamberlain(1973) has pointed out, it is consistent with the values of American society—individual freedom, an emphasis on equality of opportunity rather than equalityof outcome, and anti-statism. Unfortunately for the powerless stakeholders dis-cussed in the previous section, this version of the economic story has its problems.The nexus of contracts approach to imagining the firm's relationships with itsstakeholders fails to protect those most in need of protection—those who lackbargaining power. Consider the two groups of powerless stakeholders mentionedin the previous section—minority communities and maquiladora workers. Cer-tainly the latter group would be included as a stakeholder under the narrowest ofdefinitions, and most stakeholder definitions would include communities in whichfacilities are sited. Yet, stakeholder status in and of itself does relatively little toprotect either group. The minority community may be able to resort to judicialmeans to prevent a hazardous plant from being sited in its midst, but its povertymakes unlikely the possibility that it will be able to marshal the resources (po-litical, legal, economic) needed to wage this kind of battle successfully. Themaquiladora workers face not only the poverty that makes it difficult for them toassert their rights (lest they be fired), but also a hostile national government that is apowerful opponent of labor rights. In both cases, a nexus of contracts approach tosafeguarding the interests of these stakeholders is likely to lead to injustice.

What do both groups lack? In short, what they lack is the relationship at-tribute of power. Such stakeholders (following Mitchell, Agle, and Wood 1997)have legitimate and urgent claims, but unless they (1) are dealing with managerswhose personal values do not permit them to take advantage of such stakehold-ers or (2) are able to find patrons with power over the relevant focal organization.

INTEGRATING ISCT AND STAKEHOLDER THEORY 485

It IS likely that they will be exploited stakeholders. It is these stakeholders whoare most important for any normative stakeholder theory. Without either somemeans of assigning weights to the interests of various stakeholders or an ad-equate normative foundation for describing their rights (following the analysisof Donaldson and Preston, 1995), powerless stakeholders will remain so.

It is now appropriate to return to Phillips' (1997) definition of fairness. Phillipsdraws upon the Rawlsian (1971) idea of cooperative ventures as the startingpoint for his principle of fairness. Rawls proposed that society be thought of asa cooperative venture that must be underpinned by principles of justice that freeand rational persons would choose from a position of original equality. Phillipslocates his fairness principle at the organizational level, proposing six qualifica-tions that an organization must meet to be considered a true cooperative scheme:mutual benefit, justice, benefits accrue only under conditions of near unanimityof cooperation, cooperation requires sacrifice or restriction of liberty on the partof participants, the possibility of free-riders exists, and voluntary acceptance ofthe benefits of the cooperative scheme. As do many ways of conceptualizing thestakeholder concept, this definition of fairness limits consideration of whichgroups count as stakeholders; here to groups that are part of the cooperativescheme (terrorists need not apply).

Now that the organization has been understood to be a cooperative schemefor mutual benefit, Phillips is able to draw a tighter distinction between stake-holders and non-stakeholders. There will be many groups—terrorists andcompetitors to name but a few—that may merit consideration by managers forreasons related to organizational self-interest. But these groups are not stake-holders; in Phillips' definition, the differentiation between stakeholder andnon-stakeholder has moral import. Stakeholders are owed duties of care and con-sideration because they are participants in a cooperative scheme—borrowingfrom Clarkson (1994), they have something actually at risk. Phillips' theory offairness thus has both an identification component (stakeholders are those groupsthat voluntarily accept the benefits of a mutually beneficial scheme of coopera-tion requiring sacrifice or contribution on the parts of the participants) and anormative component that names distributive justice as the ethical decision rule(obligations of fairness are created among the participants in the cooperativescheme in proportion to the benefits received).

Further, the principle of fairness can be combined with the concept of propertyrights proposed by Donaldson and Preston (1995). They propose that propertyrights might well be embedded in human rights; such a conceptualization of "prop-erty" explicitly critiques the shareholder-centered view of managerialresponsibilities, which posits that shareholders alone have property rights; prop-erly pointing out that "the contemporary theoretical concept of private propertyclearly does not ascribe unlimited rights to owners and hence does not support thepopular claim that the responsibility of managers is to act solely as agents for theshareholders" (p. 84). By extension, locating property rights in human rights im-plicitly critiques the notion that contractual arrangements between the focal

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organization and stakeholder groups are sufficient to protect the latter's interests(see Jensen and Mechling 1978). Although Donaldson and Preston do not pro-pose that property rights located in human rights should rise to the level of formalproperty rights, they nevertheless point out that such quasi-property rights givenon-shareholder stakeholders a moral interest in the affairs of the corporation. Afuller explication of this idea is beyond the scope of the present paper, but forthe purposes of the present discussion it is sufficient to say that locating property rightsin human rights provides an additional grounding for a principle of faimess that movesthe discussion of stakeholder faimess beyond discussions of contracts.

Returning to the powerless stakeholders previously discussed, Phillips' defi-nition of faimess provides a means for adjudging their treatment. To the degreethat focal organizations take advantage of the powerlessness of minority com-munities or maquiladora workers to provide lesser benefits to these stakeholdersthan obligations of fairness would demand (which will be discussed in a latersection), then it can be stated that these stakeholders have been treated unfairly.While Phillips himself allows that the principle of fairness as he has defined itsays little about the content of obligations to stakeholders, simply providing anormative justification for including some groups and not others as stakeholdersis itself an important step in normative stakeholder theory.

This said, stakeholder identification—even based on normative grounds—can only take us so far. Not only does the content of obligations need to bediscussed, but means by which stakeholders can press their claims must also bedelineated. If we imagine the focal organization and its goals as the center ofanalysis, the work of Mitchell, Agle, and Wood (1997) is instructive in this re-gard. One conclusion that can be drawn from this work is that the way in whicha stakeholder becomes salient—and thus deserving of immediate attention—isto acquire legitimacy, urgency, and power. But as previously noted, not all ofthese attributes are of equal importance. Power matters most; if a stakeholderhas power alone, it may indeed be a "dormant" stakeholder. But any powerfulstakeholder who presents either an urgent or legitimate claim is likely to at leastget a hearing from organizational managers—and stakeholders who possess allthree relationship attributes will be heard and attended to. It is easy enough toacquire an urgent claim (as a stakeholder itself defines the urgency of its claim),and not too much harder to make a claim that is seen as legitimate. But of thethree relationship attributes, power is both the most difficult to get and the mostimportant for stakeholder salience. Shareholders often have actual power by vir-tue of their property rights as recognized by law and custom (but see Berle andMeans 1932 and Kaufman, Zacharias, and Karson 1995 for a critique of theactual power of shareholders over organizational managers), but more appropri-ately for the current discussion this stakeholder group is seen as having the mostlegitimate grounds for influencing managerial activities.

The powerlessness of many stakeholders, when analyzed via a principle offairness, raises important issues about corporate governance and consent. Sim-ply put, if fairness is the problem, is consent the solution? I will take up this

INTEGRATING ISCT AND STAKEHOLDER THEORY 487

topic in the next section as an intervening step before proposing a reconstructedprinciple of fairness.

The Problem of Consent and Organizational Governance

The principle of fairness defined by Phillips (1997) has been offered as onemeans of formulating a normative stakeholder theory, and his principle doesmove the field forward in this regard. But what happens when a relationshipbetween a focal organization and one of its stakeholders is judged (by the stake-holders themselves or by outside observers) to be unfair? At the end of his article,Phillips (1997) proposes that actual discourse with stakeholders is a good meansof finding out what stakeholders actually want, providing a more informed baseof making decisions that have ethical import (for a good discussion of the ben-efits of and barriers to such stakeholder discourse, see Calton 1996).

The call to engage in stakeholder discourse is all well and good, and is appli-cable whether or not a normative frame for making managerial decisions is sought.But note that in the previous section, I located the problem of unfairness in stake-holder theory squarely in power differentials between stakeholders and a focalorganization; stakeholders without power are more likely to be treated unfairlythan stakeholders with power. How likely is it that stakeholders without powerwill be consulted by managers, and even less so that the former's goals will beconsidered by the latter? Powerlessness is a major reason that hazardous facili-ties are located in powerless communities, and it is a significant reason thatmaquiladora workers cannot collectively bargain for higher wages. Determin-ing fairness and ameliorating unfairness are two different tasks. What is needed,therefore, is some way of conceptualizing corporate governance that institutional-izes discourse between organizational managers and their stakeholders—especiallythe powerless stakeholders whose participation in the collective scheme is neces-sary for the organization's success.

It should be recalled that before Freeman's seminal 1984 work. Freeman andReed (1983) introduced the contemporary stakeholder concept in an article aboutcorporate governance. Subsequent work by Freeman, alone and with other au-thors (Freeman 1994, Freeman and Evan 1990), in addition to other work bystakeholder theorists (Alkhafaji 1988, Calton and Lad 1995) and economists(Williamson 1983) has made corporate governance processes a new arena ofresearch for stakeholder theory. Instructive in this area of stakeholder theory isFreeman and Evan (1990. p. 338), who propose that "stakeholders be accordedvoting rights with respect to deciding how to manage the affairs of the corpora-tion." This argument is actually proposed to be an extension of earlier changesin public policy—like the Clayton Act and the Foreign Corrupt Practices Act—that limit the ability of managers to exercise autonomy, thus balancing the interestsof focal organizations and their stakeholders. But Freeman and Evan proposethat the exogenous safeguards provided by public policy mechanisms should notbe a preferred means of safeguarding stakeholder interests; their preference is

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for endogenous safeguards that are built into the contracting process itself (whichpresumably preserves the freedom of parties to engage in voluntary contract-ing). Alternatively, voting membership of the board of directors might be anothermeans of protecting stakeholder interests, although this might require some safe-guards to protect the residual rights of some stakeholders (like shareholders).

What is notable about this approach to stakeholder theory is its emphasis oncorporate govemance—either in reforming the process of contracting or by ex-plicitly including non-shareholder stakeholders on the board. Underpinning bothproposals for interpreting corporate governance through a stakeholder analysisis the idea of consent of stakeholders to their treatment by the focal organiza-tion. Preserving stakeholder interests through endogenous processes is thusproposed to include contracting processes in which consent is made apparent orby participation in governance processes that guide the policies and practice ofthe organization. The supposed importance of consent in analyzing stakeholderrelations is not new, of course. Social contract theory—best applied to businessethics questions in the form of integrative social contract theory (ISCT) makesconsent an important element of its analysis of relationships among participantsin a collective scheme for mutual benefit (Donaldson 1982; Donaldson andDunfee 1994, 1999; Dunfee 1991; Dunfee and Donaldson 1995).

Like traditional social contract theory (Rawls 1971, Gauthier 1986), ISCTproposes the idea of consent to a hypothetical social contract that governs rela-tionships in society as the starting point for the ethical analysis of socialrelationships. There are actually two levels of social contract: a macro-socialcontract that serves as the set of principles that contractors would agree upon toensure procedural fairness, and myriad extant local social contracts that are con-cerned with how communities actually govern themselves. Parties engaged inprivate transactions will insist on "moral free space" that allows for the estab-lishment of local micro-social contracts that are consistent with the values of thecommunity. To the degree that local social contracts do not violate hypernorms—"principles so fundamental to hnman existence that they serve as a guide inevaluating lower-level moral norms" (Donaldson and Dunfee 1994, p. 264)—and are consistent with the macro-social contract, they should be followed bycontracting parties. To fiirther elaborate on the ISCT framework, a number of con-cepts relevant to the theory have been developed (Donaldson and Dunfee 1994):

1. Local economic communities may specify ethical norms for their mem-bers through micro-social contracts;

2. Norm-specifying micro-social contracts must be grounded in enforcedconsent buttressed by a right of exit;

3. In order to be obligatory, a micro-social contract must be compatiblewith hypernorms.

ISCT is thus meant to bridge the gap between ethics and organizational studiesby making it possible to be simultaneously prescriptive and descriptive in the

INTEGRATING ISCT AND STAKEHOLDER THEORY 489

same framework. Further, ISCT offers a methodology for critically analyzingthe environments m which firms operate—if a local environment's micro-socialcontract either violates hypernorms or is inconsistent with the macro- socialcontract, ethical reflection by managers will be needed to determine if operatingthere is ethically permissible.

As a relatively new framework within the field of business ethics, ISCT stillfaces a number of unresolved issues. The content of hypernorms is still undeter-mined; further, the hypernorm concept itself is fuzzy. Mayer and Cava (1995)note that gender inequality might itself be a hypernorm as defined in ISCT, giventhat it is extant is almost every society—yet few people would agree that genderinequality should be a hypernorm. Although this issue is important, it need notbe resolved here.

More relevant for the purposes of this paper is the concept of consent. It iswell established that few contracts are reduced to writing; rather, the terms ofmost contracts tend to be implicitly understood by each party—which meansthat there is not necessarily agreement between the parties in terms of what eachthinks it has signed up for. Rousseau (1995) has identified four dimensions ofcontracts (even written ones): voluntariness, incompleteness, reliance losses, andautomatic processes for contract compliance. Most interesting for the presententerprise is the dimension of voluntariness, which corresponds to the idea ofconsent in ISCT. Suppose we imagine that an organization and a group of itsstakeholders is the relevant "community" for ISCT analysis. The organization-as-community is bound by hypernorms and the macro-social contract. Themicro-social contract that binds all of the stakeholders together (recall the theoryof the firm discussed in Freeman and Evan. 1990) must be grounded in informedconsent buttressed by a right of exit, corresponding to the dimension ofvoluntariness. This analysis leads to a fundamental question: What do we meanby consent?

Phillips (1997) focuses on consent as one of the weaknesses in ISCT. If mostcontracts are unwritten, then finding consent is rather difficult. On this pointDunfee and Donaldson (1995) offer a number of ideas, including surveys andother tests of actual consent to be administered at the local community level.But the utility of means of testing consent that do not rely on establishing ex-press consent is dubious. If organizations manage relationships with stakeholdersand not with society (Clarkson 1995), then the appropriate level of analysis forISCT is organizational, albeit with some discussion to community norms (forexample, at the regional or national levels).

But express consent is often lacking, and implied consent is offered by ISCTproponents as a substitute. Here the question is whether consent implied in atti-tudes or actions is consent at all. Phillips' discussion of this point is instructive:

Acts that "imply consent," on the other hand, are actually no consent at all.Rather, they may be either acts that demonstrate a favorable attitude towardthe prospect in question or acts that induce obligations sinular to or identicalto those induced by genuine express consent. (1997, p. 60)

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Trying to measure a favorable attitude (tacit consent) in fact indicates no consentat all exists. Acts that indicate express consent do demonstrate meaningful consentand thus can create binding obligations of fairness. Express consent (and veryclose proxies therefor) is thus the only kind of consent that should be meaningfulto ISCT analysis; in the absence of acts implying express consent (the actsthemselves indicating consent, but see the discussion following) or actual expressconsent, it cannot be said that consent to a micro-social contract exists. Further,exit in many cases as a means of withholding consent or withdrawing from thecommunity may be difficult or even impossible due to the very conditions thatmake stakeholder groups like maquiladora employees or residents of minoritycommunities powerless.

Now let's add a complicating factor. Suppose there is a company that hasaccepted benefits from a cooperative scheme (to remain consistent with my pre-vious example, let's take two groups, minority communities hosting a hazardousfacility and maquiladora workers). Consent might seem obvious in both casesfrom the company's standpoint:, corporate managers might conclude that accep-tance of benefits from stakeholders is exactly the kind of action that indicatesexpress consent. But the consent in both cases is asyjnmetric. For consent to bemeaningful, it must be freely given and not coerced. The company that takesadvantage of the economic and political powerlessness of a minority communityin order to locate a hazardous plant there has not obtained true consent—impliedor actual—from that community. Similarly, maquiladora workers who experi-ence both poverty and state hostility toward collective bargaining (as exists inmany countries like Mexico) also have not given implied or actual consent. Thepowerlessness of both groups, combined with the circumstances under whichtheir participation in the company's "cooperative scheme" was obtained, meansthat neither has consented to their treatment by the company. Powerlessness leadsin both cases to asymmetries in consent—the company has incurred obligationsof fairness based on its acceptance of benefits from both groups of stakeholders,but neither the minority community nor the maquiladora workers have giventheir consent freely. In short, the fact that a stakeholder group has accepted ben-efits does not demonstrate that they have consented to their treatment—or theterms of the deal—by the focal organization.

It is true that the company in this case has incurred obligations of fairnessirrespective of whether or not consent was obtained (Phillips 1997). However,the absence of consent—especially when mediated by power asymmetries—makes unfairness nearly certain in many organizational-stakeholder relationships.If stakeholders facing a powerful organization were somehow able to participatein the governance of the corporation, then it is possible that freely given consentmight be possible. The central point is this: where meaningful consent exists,fairness will likely exist also. For an organization to be a truly cooperative schemefor mutual advantage of all stakeholders, the issue of consent must be taken upas a means of ensuring fairness. The principle of fairness thus takes us to a point

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at which issues of consent become connected to whether fairness in stakeholderrelationships exists. Whenever a company voluntarily accepts benefits from astakeholder, it incurs obligations of fairness. In the next section, the issue ofconsent as mediated through participation in corporate governance processeswill be taken up in the context of corporate governance to develop a reconstructedprinciple of fairness.

A Reconstructed Principle of Fairness

In the previous section, I discussed the problem of unfairness as experiencedby some organizational stakeholders, and connected unfair treatment of stake-holders to their powerlessness, which makes it unlikely that true consent exists.Recall Phillips' 1997 definition of the principle of fairness:

Whenever persons or groups of persons voluntarily accept the benefits of amutually beneficial scheme of cooperation requiring sacrifice or contribu-tion on the parts of the participants and there exists the possibility of freeriding, obligations of fairness are created among the participants in thecooperative scheme in proportion to the benefits received.

Disaggregating Phillips' principle of fairness into its component parts andapplying it to an organizational context, four initial propositions can be derived.The first proposition relates to the purpose of the organization:

Proposition 1: Organizations are mutually beneficial schemes of coopera-tion among stakeholders.

The second proposition brings in the element of stakeholder contributions tothis mutually beneficial scheme of cooperation. Stakeholders make sacrificesfor and contributions to the organization. Some of the contributions entailopportunity costs: the laborer who works an hour for one organization cannotuse that hour for another purpose, and the investor who commits a dollar to thepurchase of stock cannot use the same dollar for consumption. Other contributionsmight include the assumption of externalities; the best example is the communitythat accepts a plant that emits toxins into the environment. In both cases, theorganization would cease to exist without the contributions and sacrifices of itsstakeholders, as described in proposition 2:

Proposition 2: Mutually beneficial schemes of cooperation require bothsacrifices and contributions on the parts of the participants.

The third proposition addresses the problem of unfairness, which Phillips hascast in terms of free riding.

Proposition 3: In any mutually beneficial scheme of cooperation, the pos-sibility of free riding exists

The final proposition relates to the dispersal of benefits created as a result of themutually beneficial scheme of cooperation, and is the crux of Phillips' principleof fairness:

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Proposition 4: In any mutually beneficial scheme of cooperation, obliga-tions of fairness are created among the participants in thecooperative scheme in proportion to the benefits received.

The task that I want to undertake in reconstructing the principle of fairness is tomake it more useful for imagining how stakeholders might ensure that they receivetheir fair share of the benefits created by an organization in which they hold astake. For the purposes of this reconstructed definition, propositions 1 and 2will remain the same. I concur with the judgment that organizations should bethought of as mutually beneficial schemes of cooperation that require bothsacrifices and contributions on the parts of the participants.

The first change in Phillips' principle of fairness relates to the issue of freeriding. If powerless stakeholders are unable to receive the full value of theirsacrifices and contributions—whether due to power differentials created by theorganization, socioeconomic factors, or state power—they are suffering the illeffects of free riding. Consider, for example, the case of maquiladora employ-ees. It is true that explicit coercion—-for example, police power-—is not used tocompel maquiladora employees to work. But as I have previously noted, thesestakeholders tend to be powerless to press any claims for better treatment fromthe plant owners. As Williams (1999) has noted, Mexican employees face tre-mendous difficulties in organizing independent labor unions that might betterprotect their rights than Mexican law or the agreements between individual em-ployees and a maquiladora.

It is not necessary to reach the question of whether companies intend to freeride or not. A company that, for example, explicitly considers whether a particu-lar country inhibits independent unions when making siting decisions incurs thesame obligations of fairness as a company that does not. What matters for thepresent analysis is whether the distribution of benefits is affected by the effectsof organizational free riding due to asymmetries in power, whatever the latter'scause. In short, organizations that use power differentials as a means of dispers-ing fewer benefits to stakeholders than would be owed under a fair valuation ofthe latter's contributions to the organization are in effect incurring obligationsof fairness, even as they are free riding. Proposition 3 is modified to reflect theinfluence that power has on the probability that stakeholders will suffer the illeffects of free riding. The new proposition 3, labeled proposition 3', reflects thisconcern about the interaction effect of power differentials with the likelihood offree riding:

Proposition 3': In any mutually beneficial scheme of cooperation, the pos-sibility of free riding exists; the likelihood that a stakeholderwill be harmed by organizational free riding is inverselyproportional to the stakeholder's power.

Before moving to proposition 4, two additional propositions are needed. BecauseI have offered changes in corporate governance as a solution to the problem ofunfair treatment of stakeholders by organizations, it is necessary to step back

INTEGRATING ISCT AND STAKEHOLDER THEORY 493

and discuss the purpose that corporate governance serves. In theory, boards ofdirectors and the corporate officers appointed by the board are understood to befiduciaries for the true owners of the corporation—owners of common stock(Goodpaster 1991). This view of board and corporate officer responsibilities iswidely held by economics and finance scholars. But it is important to note thatstatutory and common law have increasingly recognized that organizationalfiduciaries may take into account the interests of other stakeholders when makingdecisions, even if there is some harm to shareholders (see, for example. Freemanand Reed 1983). Further, the notion that only common stockholders have propertyrights in the corporation has been discussed and critiqued in a variety of literatures(Coase 1960. Donaldson and Preston 1995).. and it is proposed that such adefinition of property rights is too narrow for the purposes of normativestakeholder theory building.

In a previous section, I discussed how consent (understood as participation inthe process of corporate governance) might ameliorate the unfair treatment ofpowerless stakeholders. Following Freeman's (1994) Principle of Governance—"the procedure for changing the rules of the game must be agreed upon byunanimous consent"—and Donaldson's and Preston's (1995) discussion of howproperty rights might be embedded in human rights, the reconstructed theory offairness takes up the issues of redefining property rights and including allstakeholders in corporate governance processes to ensure that the interests of eachare taken into consideration. These issues are reflected in propositions 3a and 3b:

Proposition 3a: Every group that participates in a mutually beneficialscheme of cooperation possesses property rights (whetherquasi- or literal) that must be taken into consideration.

Proposition 3b: All participants in a mutually beneficial scheme of coop-eration have a right to participate in governance processesas a means of ensuring that express consent exists.

We are now ready to take up proposition 4 from Phillips' principle of fairness. Itshould be apparent that a principle of fairness must not only include mention ofdispersing the results generated by the scheme of cooperation, but must alsomake provision for the kinds of corporate governance principles that ensure anequitable result for all stakeholders. Proposition 4 is therefore rewritten asfollows:

Proposition 4': In any mutually beneficial scheme of cooperation, obligationsof fairness arc created among the participants in the coopera-nve scheme in proportion to the benefits received, but arepreceded by obligations to include each stakeholder in theprocess of corporate govemance in proportion to the sum ofIts contributions to and sacrifices for the collective scheme.

Now all of the pieces are in place to reconstruct the principle of fairness. Thenew principle reads as follows:

494 BUSINESS ETHICS QUARTERLY

Organizations are mutually beneficial schemes of cooperation that requireboth sacrifices and contributions on the parts of the participants; but thepossibility of free riding (especially by the organization) exists. Because(1) the likelihood that a stakeholder will be harmed by organizational freeriding is inversely proportional to the stakeholder's power, (2) every groupthat participates in a mutually beneficial scheme of cooperation possessesproperty rights that must be taken into consideration, and (3) all partici-pants in a mutually beneficial scheme of cooperation have a right toparticipate in governance processes, obligations of fairness are createdamong the participants in the cooperative scheme in proportion to the ben-efits received. Such obligations are preceded and safeguarded by obligationsto include stakeholders in the process of corporate governance as a meansof obtaining their express consent in proportion to the sum of their contri-butions to and sacrifices for the collective scheme.

In the next section, I will discuss the implications of this reconstructed principleof fairness.

Implications of the Reconstructed Principle of Fairness

In this paper, I have offered consent—as reflected in participation in corpo-rate governance processes—as a means of ensuring fairness in organizations.Building on a definition of justice as fairness, I have undertaken an analysis ofstakeholder attributes, proposed that stakeholder power is likely to prevent freeriding and unjust treatment of stakeholders by the focal organization, and thenintegrated concerns about governance and consent into a new definition of fair-ness. My goal has been to find endogenous ways of ensuring fair treatment of allstakeholders—especially powerless stakeholders who present legitimate and ur-gent claims. Quite obviously, more work needs to be done in specifying the formof such new governance mechanisms. This said, three implications of the recon-structed principle of fairness merit brief discussion.

Analyses of power matter in considering stakeholder relations

Mitchell, Agle, and Wood (1997) have done an admirable job of describingrelationship attributes that might affect stakeholder salience. In normative terms,their analysis can be extended to include issues of organizational dominanceover stakeholders. A normative stakeholder theory must necessarily ask ques-tions related to power—who has it and how it is being used. The reconstructedprinciple of fairness places power at the center of analyses of unfair treatment ofstakeholders by organizations.

Nozick's (1969) discussion of coercion is quite helpful with regard to thispoint. Although a longer discussion of coercion and stakeholder relationships isbeyond the scope of this paper, one of Nozick's examples is relevant to the presentanalysis. He uses the example (pp. 453-455) of a factory owner facing a unionelection in a factory that he owns; the owner announces that if the union winsthe election, he will close the factory and go out of business. Nozick takes uptwo questions:

INTEGRATING ISCT AND STAKEHOLDER THEORY 495

1. Has the factory owner threatened or merely warned the employees?

2. If the union would have won the election m the absence of the announce-ment, were the employees coerced by the employer into rejecting theunion?

Nozick's analysis turns in significant part to the differentiation between threatsand warnings, but this example also illustrates the relationship between consentand fairness. Suppose that the employees hear this statement by the employerand decide not to vote for the union out of a belief that doing so will lead to theclosing of the plant, and further suppose that the reason that the employees wereattracted to the union was because they were dissatisfied with the terms of theemployment relationship and believed that union membership would improvetheir lot. Now, does the continued acceptance of benefits (i.e., paychecks) meanthat the employees have consented to the terms of employment offered by theemployer? The reconstructed principle of fairness delineated herein wouldconclude that true consent does not exist because the employer used his ability(as the capital owner) to close the plant and thus to prevent the workers fromexercising voice in the employment relationship, which would have made consentpossible in this particular case. Here, the threat to close the plant creates a contractof adhesion that eliminates the possibility of express consent (via unionizationand collective bargaining) due to asymmetries in power between the plant ownerand the employees.

There is, in short, a strong relationship among asymmetries in power, ab-sence of consent, and unfairness in stakeholder-organizational relationships.Further work in this area can help to establish boundary conditions for unfair-ness and coercion in the stakeholder context.^

Corporate governance is critically important in business ethics

In this paper, I have built on work that has placed corporate governance at theheart of the ethical conduct of organizations. We are a long way off from imag-ining—much less actually creating—alternative means of governance thatrecognize the property interests of non-stockholder stakeholders. If organiza-tions are to become more just, greater attention must be paid to issues of corporategovernance. Recent work in corporate democracy (Blair 1995) and employeeparticipation in corporate governance (Roe and Blair 1999) has started to ad-dress this point.

Discourse with stakeholders needs to become part of managerial responsibilities

Recreating mechanisms for corporate governance means taking stake-holder discourse seriously (see Calton 1996, Calton and Payne 1999). As afield, business ethics has properly been concerned with theorizing. But now weneed to start the hard work of engaging in discourse with stakeholders and en-couraging managers to do the same.

496 BUSINESS ETHICS QUARTERLY

There are increasing numbers of cooperative efforts that bring together man-agers and stakeholders that illustrate the value of discourse between managersand stakeholders. The CERES (Coalition for Environmentally Responsible Econo-mies) Principles for Public Environmental Accountability, for example, weredeveloped by a working group of corporate managers and environmental grouprepresentatives. In addition to developing the principles themselves, CERESprovides for standardized reporting on environmental performance; such report-ing is developed and shaped by discussions between the corporations that haveendorsed the principles and the non-corporate members of CERES (CERES re-port standardform, 1998). In a similar way, the social responsibility in investmentmovement has begun to embrace dialogue with corporations about issues relatedto corporate social performance (Van Buren 1995b); in many cases, these dialoguestake place over several years and lead to significant policy changes. These and otherexamples illustrate that discourse between managers and stakeholders is not onlypossible, but also beneficial to corporations and their constituents alike.

The principle of fairness proposed in this paper connects concerns about fair-ness with the need to find alternate means of corporate governance. CertainlyAmerican business is a long way off from including labor or community mem-bers on their boards of directors. But Phillips' principle of fairness points us inthe right direction—the organization is a cooperative means through which stake-holders seek to achieve desired ends, as opposed to the private property of onegroup of stakeholders (namely shareholders). Managers might well act morejustly, however, if obtaining express consent from the governed—stakeholders—is an ethical minimum.

Conclusion

The proposal offered in this paper is simple: if fairness is the problem, thenconsent is the solution. A reconstructed principle of fairness in stakeholder theoryplaces stakeholder consent at the heart of reforming the ways in which corpora-tions are governed. The earliest insights from stakeholder theory reflect anemphasis on corporate governance as a means of ensuring consideration of non-stockholder stakeholder interests. The work in this paper, building on andextending previous work in business ethics and stakeholder theory, provides abasis for thinking about alternative means of governance that might serve toenhance justice.

Stakeholder theory has come a long way in the past fifteen years; the ideathat managers have obligations to stakeholders others than stockholders has be-come part of both academic and practitioner discourse. Business students havereceived training m stakeholder analysis and management; the managerial as-pects of stakeholder theory are well discussed in the literature, although morework needs to be done here. The next step in stakeholder theory is building upIts normative base. This paper is offered as one step on that journey.

INTEGRATING ISCT AND STAKEHOLDER THEORY 497

Notes

An earlier version of this paper was presented during the 1999 Academy of Management(Social Issues in Management division) and published m abbreviated form in the 1999 Acad-emy of Management Best Paper Proceedings. This paper has benefited from the comments ofRobert Phillips, Donna Wood, and various anonymous reviewers.

•In a later paper, Phillips (1999) notes that there are some stakeholder groups—likecompetitors and terrorists—who are not normative stakeholders in that they make contri-butions to and sacrifices for the cooperative scheme, but who should be consideredinstrumental stakeholders that can affect the achievement of the firm's objectives (follow-ing Freeman 1984)

^Although the popularity of the term stakeholder is of recent origin, the term can befound in management literature as early as the 1960s (Stanford memo, 1963) The notionthat organizations can affect or be affected by the actions of internal and external groupscan be located even earlier in management thought, as in discussions of managerial stew-ardship in the 1920s (see Heald 1970)

31t is possible—although highly unlikely—that faimess and coercion can exist (thinkof the idea of the benevolent dictator). I submit, however, that this is not an equilibriumcondition; coercion is likely to yield in the long run to unfairness. I am grateful to RobertPhillips (private communication) for this point. The broader issue of the relationship ofcoercion and unfairness m stakeholder relationships has not been analyzed to the extentthat is merited; Nozick's (1969) work e.Kplormg the relationship between coercion andliberty is helpful on this point

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