An Introduction to "Stakeholder Theory"
The bedrock on which much of this newsletter -- and tech ethics -- rests
To make ethical decisions in a business context, whether or not they work for a tech company, business managers need to understand — and subscribe to — the “stakeholder theory” of business. That is, rather than considering only “shareholders” and financial returns when making business decisions, ethical managers must consider all of a business’s stakeholders: investors, sure, but also employees, suppliers, customers, the environment, and wider society. By systematically considering all the stakeholders that touch their organizations and engaging wider communities in the development of products, tech leaders can mitigate societal harms, deliver benefits beyond financial returns, and, ultimately, return more profit to their companies.
At business schools, stakeholder theory is positioned intellectually against the “shareholder theory” of capitalism advocated by University of Chicago economist Milton Friedman (photo below). As Friedman advocated in his 1962 book, Capitalism and Freedom and later as an advisor to President Ronald Reagan in the 1980s, businesses should seek only to maximize financial return for investors, whose wealth would cascade down to society at large. In other words, any consideration of stakeholders beyond shareholders would effectively tax the growth of society.
The echoes of Friedman’s shareholder capitalism ripple through business thinking and the culture today. Look no further than the 1987 movie classic, Wall Street, whose main character, Gordon Gekko, expounds:
“The point is, ladies and gentlemen, that greed — for lack of a better word — is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms — greed for life, for money, for love, knowledge — has marked the upward surge of mankind. And greed — you mark my words — will not only save Teldar Paper, but that other malfunctioning corporation called the USA.”
Although I would imagine many managers in today’s companies are not explicit as Mr. Gekko and Dr. Friedman, they subscribe to their beliefs either because they genuinely believe them or because they falsely assume it is their legal responsibility to do so.1
The consequences of the shareholder capitalist ideology have been rampant in our society, particularly when it comes to technology and its deployment. Would Facebook have continued operating in Myanmar despite the ethnic cleansing unfolding on WhatsApp if it had considered a wider group of stakeholders before launching in that country?2 Would Instagram operate differently if they considered their internal research regarding teen depression rather than quashing it?3 Netflix’s CEO, Reed Hastings, once said his company’s greatest competitor was sleep. If Netflix had its customers’ well-being in mind, would its leader have positioned their company in such a way?4
Perhaps, if managers in each of these cases, had considered a wider group of stakeholders, they would have come to the same decisions, decisions that have had costs that can be measured in lives (and hours of sleep). But I tend to doubt it.
Thankfully, there is another management framework we can consider to mitigate societal harms: stakeholder capitalism. First articulated by my former professor and current colleague, Ed Freeman (photo below), stakeholder capitalism calls upon managers to consider a broader range of parties beyond investors when making decisions, including suppliers, customers, employees, government, and the environment.
Stakeholder capitalism has grown in popularity in recent years, championed by the likes of Larry Fink, the CEO of BlackRock, one of the largest asset managers in the world, and Business Roundtable, the largest trade group representing CEOs.5 In his 2022 annual letter to shareholders, Fink writes:
“In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders. It is through effective stakeholder capitalism that capital is efficiently allocated, companies achieve durable profitability, and value is created and sustained over the long term.6
Critics of stakeholder capitalism and of Fink accuse proponents of “window dressing” and “greenwashing.” What are companies like BlackRock, some of the wealthiest in the world, actually doing to benefit various shareholders as opposed to only their investors? Some of these critics are on point — some companies certainly use the language of stakeholder capitalism to obscure ethically dubious practices. Moreover, it is the opinion of this author that citizens should not rely on corporations to serve the societal roles governments and nonprofits ought to fill.
Regardless, if companies, when making everyday decisions, consider impacts on various stakeholders they are more likely to understand ethical tradeoffs and make decisions that benefit a wider swath of humanity. For example, if Facebook considered the political environment in Myanmar before launching in that country, they could have deployed its products in specific ways to prevent the communications that ultimately led to genocide-related deaths. Perhaps they would have made less money in the short term, but they would have received less public blowback and fewer Burmese people would have died.
To aid with the execution of stakeholder theory, there is a key tool - namely, the stakeholder analysis - that can help business leaders, product managers, and employees in all fields consider the wider consequences of their decisions, products, and programs. I have included an example here borrowed from the international development field, although a simple Google search will yield many decent ones. The tool compels managers to list out all the potential stakeholders impacted by a given decision and asks them to think about how they might engage these various stakeholders to a) design mutually beneficial solutions; and b) ensure the project is completed successfully. Completing these analyses also help managers measure outcomes vis a vis various stakeholder groups, a challenge that often stands in the way of businesses considering a wider array of stakeholders.
An understanding of stakeholder theory and knowledge of how to conduct a stakeholder analysis are the two primary ingredients when thinking about how to develop ethical products. Although it is impossible for managers at any level to foresee every potential consequence to every possible stakeholder, these ingredients will help frontline managers understand the vast impact of the products they build and consider the ethical tradeoffs inherent to their jobs — not to mention contribute to the long term profitability and success of their companies.
In her book, The Shareholder Value Myth, legal scholar Lynn Stout debunks the idea that corporations are legally obligated to prioritize shareholders. She points out that the oft-cited line from the 1919 case, Dodge v. Ford, is what lawyers call mere dicta, a judicial observation simply made in passing. She also demonstrated that judges have consistently refused to impose legal sanctions on corporate executives for failing to exclusively prioritize shareholders. Lastly, she argued that stakeholder theory is justified under the “business judgment rule,” a corporate legal doctrine that gives directors wide discretion to pursue any initiative when they have no conflict of interests and have made a reasonable effort to be informed.
https://www.amnesty.org/en/latest/news/2022/09/myanmar-facebooks-systems-promoted-violence-against-rohingya-meta-owes-reparations-new-report/
https://www.theverge.com/2021/10/6/22712927/facebook-instagram-teen-mental-health-research
https://www.independent.co.uk/tech/netflix-downloads-sleep-biggest-competition-video-streaming-ceo-reed-hastings-amazon-prime-sky-go-now-tv-a7690561.html#
https://opportunity.businessroundtable.org/ourcommitment/
https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter