Controllers, Stakeholders, and the Claims of Justice

This is part 5 of a five-part series. For part 1, go here. For part 2, go here. For part 3, go here. For part 4, go here. 

I began this series by distinguishing between an Institution and its Stakeholders, and have made two basic assumptions throughout: (a) that “stakeholder” is a legitimate concept, and (b) that stakeholders can legitimately make moral claims on corporate institutions. Though widely regarded as conventional wisdom, the assumption is in some quarters deeply controversial: a minority of dedicated critics have argued against both (a) and (b). Against (a), it’s argued that “stakeholder” is a vague and rationally unusable concept. Against (b), it’s argued that to the extent that “stakeholder” means anything, it fails to identify anyone who has a legitimate moral claim to make against, say, a corporation.(1) 

On this view, a for-profit corporation is owned by its shareholders, who, along with the management they delegate, own the corporation, and thereby have ultimate decision-making authority over it. The corporation exists to “maximize shareholder value” and exclusively for this purpose. A not-for-profit is not so much owned as guided and controlled by a set of trustees who play a role analogous to that of shareholders in a for-profit corporation. In a partnership or proprietorship, the owner or owners (respectively) play this role.(2) 

In each of these cases, the shareholders/trustees/owner/owners is the decider and only authentic “stakeholder.” The institution (to use a neutral term ranging across all four organizational forms) exists as a vehicle to promote their interests exclusive of anyone else’s, promoting the benefit of non-shareholders or non-trustees or non-management or non-owners only incidentally, if that. These others are of course free to exit the institution if they find themselves dissatisfied with the terms offered by those who legally control it. I’ll refer to the account as a whole as the “pure ownership theory of the institution,” and refer to those who, according to the view, ought legally to be in charge of institutions, “the institutional controllers.” (If it weren’t for the anomaly of non-profit corporations, we could simply call them “owners.”)

The word “stakeholder,” on the now-standard view, was coined to refer to those who, despite not being institutional controllers–i.e., shareholders, trustees, delegated managers, partners, or proprietors–may permissibly make moral claims against an institution. The claim of the pure ownership theory is that (a*) there is no consistent way of identifying this set of claimants, and/or (b*) even if there was, they have no legitimate claims to make.(3)  

There is, it seems to me, a long way and a short way of dealing with the pure ownership theory. The long way is to lay out the argument for the theory, give a comprehensive assessment of its strengths and weaknesses, and then accept or reject it on the basis of this comprehensive assessment. The short way is to identify the single point that’s relevant in the present context, state it, and make any relevant inferences. For present purposes, I’ll take the short way. 

The question at issue is this. An Institution consists of institutional controllers and others. The set of “others” is extremely open-ended. For present purposes, let’s restrict these others to the proper subset of others to whom the Institution, through its controllers, issues either demands or requests. Let’s call the recipients of these demands/requests the “non-controlling members of the Institution.”

For instance, if the Institution is an American-style university, the controllers would consist of a Board of Trustees and a set of executive officers delegated by the Trustees to effect administrative functions (President, Provost, Vice Presidents, Deans, etc.). The proper subset of others whom I’m calling non-controlling members would consist of everyone else who is plausibly a member of the university community. A conservative, uncontroversial enumeration of this subset would include faculty, students, staff, alumni, vendors, and visitors.

To summarize: the institutional controllers legally control the institution. In controlling it, they make demands and requests of the non-controlling members. The non-controlling members are then expected to satisfy these demands and (less stringently) requests, such that failure to satisfy is met with some sanction by the controllers. Granted, in some cases the sanctions may be fairly weak, like an expression of disappointment or disapproval. In other cases, it may amount to a real punishment–a reprimand, a docking of pay, the rejection of a request, or termination. But whether weak or strong, the expectations are there, as are the sanctions.

The question to ask at this point is whether there are any justified claims of justice which the non-controlling members of the Institution can legitimately make of its controllers, and which are not entailed by the maximization of shareholder value.  The answer is either “yes” or “no.”

If “yes,” then the non-controlling members can make these claims of the contollers and expect them to be upheld. In this case, it’s convenient to describe the non-controlling members in a positive way as “stakeholders” and affirm their moral right to this expectation.

If “no,” then the maximization of shareholder value (or its functional equivalent) exhausts the moral claims that may be made of anyone in an institutional context.

It seems to me that a “yes” answer here is obviously true, and that a “no” answer amounts to a reductio. I don’t know how plausible readers will find that judgment, but I’ll have to defer a full argument for that for some other occasion. 

“Every Life a Universe” Vigil, October 8, 2024, Firestone Plaza, Princeton University, organized by the Association of Progressive Jews (photo: Irfan Khawaja)

Though I find the pure ownership theory of the institution objectionable on grounds that go well beyond the present discussion, for present purposes, I would simply say that I’m assuming that human beings qua human have moral claims on one another that transcend any claims entailed by the (supposed) imperative of maximizing shareholder value. One such claim is the moral right and duty to avoid complicity in evil.

If we have a pro tanto duty to avoid complicity in evil, then any business arrangement that demands such complicity of us, whether contractually or otherwise, is unconscionably immoral. If a contract induces non-institutional members to assume complicity without informed consent, the Institution adds a kind of fraud to the original immorality. If the contract or arrangement violates rights on a large scale, then the demands made of the members have to be regarded not merely as unconscionable or fraudulent, but as real acts of aggression. In this context, a demand for divestment is probably the least that stakeholders could legitimately demand. Depending on the nature of the demand and how it’s made, such an institution may well, by attempting to suborn the complicity of others, invite its own destruction.

Though advocates of the pure ownership theory complain that stakeholders are either hard to identify with precision or lacking in standing when they are, I don’t find either objection plausible. Anyone either bound to or requested to become complicit in an unjust scheme is a stakeholder in the relevant sense, and all such agents have standing in virtue of a duty to avoid complicity in injustice. In the example I’ve used throughout this series, the faculty, students, staff, and vendors of a university are contractually bound to become complicit in the workings of a complicit university, whereas alumni are often requested to become complicit. Visitors are a hybrid case in between these two.

All six groups are stakeholders in my sense, and all six have moral standing to complain when a university invests in injustice. When the members are right, the institution has a moral duty to satisfy their demands. In the case I’ve described in this series, the Stakeholders have a moral right to the Institution’s divestment from an evil enterprise. 

One of the oddities of the literature defending the pure ownership theory is its unclarity on the question of complicity (and indeed, justice itself). Defenders of the pure ownership theory begin by insisting that the claims of justice are exhausted by whatever it is that controllers are permitted to demand as owners of the relevant institution. Confronted with obvious counter-examples of claims of justice by non-controlling members that don’t fit this pattern, they respond by offering ad hoc provisos on the original claim. In general, complicity is left undiscussed.

The ad hoc character of the provisos and the omission of complicity strike me as a serious defect of the view. To remedy the view, one would have to integrate the duty to avoid complicity into the structure of the theory. Either this duty is part of maximizing controller value or not. The first move seems as ad hoc as the provisos. The second constitutes an abandonment of the essential claims of the theory. All in all, the theory strikes me as hopelessly muddled and implausible.

Endnotes

1. The classic defense of the corporation as beholden only to its shareholders is Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” reprinted in W. Michael Hoffman et al, Business Ethics: Readings and Cases in Corporate Morality, 5th ed., pp. 180-83 (orig. published New York Times Magazine [Sept. 13, 1970]). For a more contemporary critique of stakeholder theory, see Elaine Sternberg, “The Need for Realism in Business Ethics,” Reason Papers vol. 31: 2 (May 2010), pp. 33-48, along with Sternberg’s Just Business: Business Ethics in Practice (1994), ch. 2. 
2. For a useful primer, see Greg McRay EA, “Who Really Owns a Non-Profit?” Similar (but not identical) issues arise in Islamic law with respect to properties that take the form of a waqf. For an interesting discussion, see Monica Gaudiosi, “The Influence of the Islamic Law of Waqf on the Development of the Trust of England: The Case of Merton College,” University of Pennsylvania Law Review 136 (1988).
3. It’s unfortunate that stakeholder theory as originally formulated said little or nothing about complicity, but theorists of complicity and collective responsibility have said enough about complicity to provide a rationale for seeing the institutional victims of complicity as stakeholders. For an early version of stakeholder theory, see R. Edward Freeman’s Strategic Management: A Stakeholder Approach (1984), and “A Stakeholder Theory of the Modern Corporation,” (2004). Early discussions of collective responsibility/complicity include Joel Feinberg, “Collective Responsibility,” Journal of Philosophy 45 (1968) and Gregory Mellema, “Shared Responsibility and Ethical Dilutionism,” Australasian Journal of Philosophy 63:2 (1985). For a more recent account of the duty to avoid complicity in injustice, see Gregory Mellema, Complicity and Moral Accountability (2016), ch. 7.