"Stakeholder" is a term bandied about by professors, intellectuals, and others who subscribe to the notions that equality of outcome, not equality of opportunity, is the goal; that property rights can be disregarded when the cause is sufficiently noble and the intentions abundantly good; and that a voice in corporate governance need not be accompanied by risk. The popularity of this concept over the past 35 years has created a void in analytical thought. The term "stakeholder" springs up in everything from community meetings and websites to employee meetings and annual reports. It is surprising to see how many CEOs extol the importance of stakeholders, since by subscribing to stakeholder theory as a means of corporate governance, they send the following message to shareholders: "I realize you have an investment in this corporation, but these other folks came along, and, well, they talk a good game, so I am going to be accountable to them."
There are several inherent flaws in the stakeholder theory. I will present those flaws, along with a brief history of the theory's origins and development. The flaws in stakeholder theory are its imprecision in definition and execution, its disregard for property rights, its disincentives in a capitalist economy, and its encouragement of class warfare.
The Origins of Stakeholder Theory
Stakeholder theory had its origins in law. It subsequently moved to strategic management, then back to law. Today it is prevalent in the field of business ethics.
The true origin of the term "stakeholders" is in law, but this history is largely ignored and rarely credited. During the 1930's, Professors Adolf Berle and Merrick Dodd argued with each other in the law reviews about the social responsibility of business. Berle and Dodd debated one of the great legal questions of their time as well as our...