Stakeholder Theory, Action & Virtue Ethics
Antonio Argandoña, Professor of Economics and “la Caixa” Chair of Corporate Social Responsibility and Corporate Governance at IESE Business School, Barcelona, discussed the concept of Stakeholder Theory based on the theory of action applied to the firm and extended it to incorporate the virtue ethics approach.
Although Antonio’s initial emphasis was on the economic and psychological results of the human action, his approach then differed from the norm by extending his discussion of stakeholder theory to the moral effects by considering virtue theory applied to the firm. He believed this extension of the theory improved the theory of stakeholder management by converting it to a broad theory of organisational management.
Antonio explained that from the outset when Ed Freeman outlined stakeholder theory in 1984, it was focused on the creation of value which allowed the connection of stakeholder theory and the economic theories of the firm in their different varieties such as neoclassical and institutionalism.
Even as stakeholder theory developed over time, its core remained the same – enlarging the goal of the firm from maximization of value for the shareholder to its maximization for all the stakeholders.
This was compatible with traditional economic theories of the firm – according to neoclassical economics, the social optimization of the economic activity was attained when, under a number of assumptions, every agent maximized his or her own utility and every firm maximized its profits (or, in a dynamic random environment, the discounted present value for the owners of the firm).
The focus of stakeholder theory has always been on the creation and distribution of economic value. Rather than just profit maximisation, managers could concentrate their efforts on contractual relationships with stakeholders (and quasi contractual with tax authorities and regulatory agencies). Antonio, however, believed the concentration on contracts was too limiting.
Although the assumptions for ‘social optimization’ were rather restrictive (perfect competition, full information, absence of externalities and of public goods et al), Argandoña’s own work building on that of Pérez López suggested the objective of value maximization could be made compatible with a social optimum: the maximization of social economic value.
Antonio did observe though that we cannot assume that maximization of value for shareholders also implies maximization of social value. Antonio then discussed the consequences of enlarging the concept of value for the stakeholders. He believed the approach should not only concentrate on the creation of value, but also its distribution, which broadens the challenges and discussion from stakeholder management to issues including power, conflict and cooperation.
If stakeholder theory picked up where traditional economic theory finished, a few key questions arose including what if the assumptions or conditions for social maximization were not accomplished?
He also queried what stakeholders actually “value” when they interact with the firm? While the most obvious are the economic results associated with neoclassical economics and the broader results associated with stakeholder theory, Antonio suggested other personal values which play a role including psychological rewards, social relations, operation learning and satisfaction.
Critically, though, Antonio suggested the inclusion of other not easily commensurable values, such as ethical values and the ability to evaluate the effects of decisions on other people. When stakeholder theory, a theory of ‘good’ management because it incorporates consideration of the needs of a broad range of parties, is broadened to include the acquisition of virtues, it becomes connected to a theory of ethics in the firm.
Integrity as a Social Value for Personal Action – Aranzadi
Javier Aranzadi, Professor at Universidad Autónoma de Madrid, extended the conference topic of ‘Does Integrity Matter?’ by using Aristotelian thinking to pose and answer two further questions: (1) What is the fundamental and constitutive role of integrity as a social value for personal action? What is the role of integrity at firm’s culture level in this system? (2) What is the integrating role played by individual integrity in the firm?
Javier said if a person acts in a socio-cultural context, we need to consider the intimate links between person, society and culture. We also need to ask ourselves about the role of integrity within the Aristotelian ethics of norms, virtues and goods as a system for regulating action.
He used one of the most intricate diagrams of the conference to illustrate that, unlike some modern thinking, this view of integrity does not arise as a psychological state, but as a result of an activity and a process.
The diagram represents the dynamic structure of individual action. Key is its dynamism an isolated act is intelligible only within the process – the activity that generates it.
A further aspect is that all individual action has a cultural and social dimension. Social institutions provide the individual with goods via social norms such as integrity as a cultural value. It is the common good that constitutes integrity and leadership as personal activity.
Diagram: The ethical and socio-cultural framework of human action
(sorry didn’t work on the web!)
He said the central point in the diagram is occupied by the axiom of action according to which in order to act, the person departs from a situation of dissatisfaction and the possibility of changing that situation by deliberating and choosing means in order to achieve the goal of the action.
Javier suggested these characteristics of rational action correspond to voluntary action in accordance with Aristotelian virtues: “On the other hand, if the acts that are in accordance with the virtues have themselves a certain character, it does not follow that they are done justly or temperately…
- In the first place he must have knowledge,
- secondly he must choose the acts and choose them for their own sakes, and
- thirdly, his action must proceed from a firm and unchangeable character” (Aristotle EN, II, 1105a27-32).
Voluntary and virtuous action commands the knowledge of the intended goal and the necessary means; its election by themselves – for the sake that they are good by themselves and the decision to accomplish them.
An ethics of personal virtues demands an ethics of institutions – an ethics which deals with the institutional means of realizing individual ends as personal integrity.
Javier suggested that this approach could be ctiticised and seen as ethereal and lacking realism in the rather materialistic societies in which we live. But humans are social beings. This assertion belongs to the realm of experience, and yet it also has a philosophical significance.
He reiterated the relevance of Aristotle’s assertion that all individuals choose courses of action by deciding what type of life is worth living. According to this view, integrity as virtue (areté) occupies a central position, defining the paradigm that each society with its institutions and norms sets as the model of life to be lived (eudiamonia).
It is in action that all the facets of the dynamic structure of personal reality are manifested.
Each of our actions has two dimensions. A passing, external one of poeisis or facere and an interior one – the strictly ethical one – of praxis or agere.
In the first aspect we focus on the external consequences of our acts. It is our acts that maintain social institutions and culture. But in the second aspect, the interior one, it is our acts, our activities or habits, which progressively delineate our character, our personality and our éthos.