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International Journal of Management Reviews (2010) DOI: 10.1111/j.1468-2370.2009.00279.x

Stakeholder Engagement, Discourse Ethics and Strategic Management ijmr_279

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James Noland and Robert Phillips RSB 310, 28 Westhampton Way, University of Richmond, VA 23173, USA Corresponding author email: [email protected] The aim of this paper is to identify, review and assess two prominent recent trends in the literature on stakeholder engagement. Scholars in the first camp are referred to as Habermasians, owing to their reference and adherence to the work of the German philosopher most famous for elaborating on the concept of moral discourse. To these scholars, moral engagement is marked by specific conditions of communication which ensure that this communication is uncorrupted by power differences and strategic motivations. Others – those called here Ethical Strategists – argue that the engagement of stakeholders must be integral to a firm’s strategy if it is to achieve real success. This camp is characterized by scholars contending that the distinction between strategy and morality is not only unfortunate, but logically unnecessary. They hold that good strategy properly understood must encompass what are typically recognized as moral concerns, because the very purpose of the firm and the capitalist system within which it operates is, when viewed rightly, the creation of value for all stakeholders. While recognizing the important contributions made by the Habermasians to the conversation about stakeholder engagement, it is concluded that, owing to the confluence of conceptual and practical concerns, the Ethical Strategists’ position is the more attractive.

Overview In the 25 years since stakeholder theory began to garner serious attention in the business ethics and management literature, several specific points of contention have featured prominently. For example, scholars have debated just what it means to be a stakeholder, what obligations, if any, firms owe to stakeholders, and whether or not shareholders ought to be granted precedence over other stakeholders. One topic that has not, until recently, received as much attention is the appropriate nature of firms’ engagement with their stakeholders. It seems to have been taken for granted that, for firms to discharge The authors wish to thank Michelle Greenwood, Guido Palazzo and Andreas Scherer for their comments on earlier drafts – though we are confident that none of them agrees entirely with the final product. Thanks also to Adam Lindgreen and Jessica Bailey for their editorial assistance.

their obligations – whatever they might be – to their stakeholders, was sufficient to satisfy the minimum requirements of moral behavior. As Greenwood (2007) writes, ‘Many accounts of stakeholder activities focus on the attributes of the organizations or the attributes of the stakeholders rather than on the attributes of the relationship between organizations and stakeholders’. In the last few years, however, greater attention has been given to thinking about what it means to engage stakeholders (JohnsonCramer et al. 2003). In other words, in addition to thinking about which actions firms must and must not perform in order to meet moral standards, attention is now being paid to the relationships firms must foster with their stakeholders. Recent scandals in the business community have led to wider agreement surrounding the importance of ethics in the commercial world, calls for moral behavior by executives, and training in ethical standards for employees. This has, in turn, led to

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concerns about how firms discern the precise nature of their obligations to stakeholders and about whether or not the power disparity that often obtains between firms and their stakeholders does not unduly influence the manner and outcome of their engagement. It is therefore important that serious thought is applied to questions about how to establish the moral principles and standards that are to guide this behavior and the decision-making surrounding it. It makes sense to be concerned that firms might seek to engage their stakeholders and tout their own moral bona fides for less than moral motives. Thus, the topic of stakeholder engagement becomes more significant and interesting. The impetus behind the use of the term ‘engagement’ in the stakeholder theory and corporate social responsibility (CSR) literatures is the need to emphasize that, for firms merely to interact with stakeholders is no longer sufficient, if, in fact, it ever was. Interaction with stakeholders is a logically necessary activity of business. However, it is possible to trade with another actor without ever engaging him or her as a fellow person; that is, transacting without inquiring as to his or her wants, needs, well-being or capabilities. In light of this, ‘engagement’, is used to recommend a type of interaction that involves, at minimum, recognition and respect of common humanity and the ways in which the actions of each may affect the other. Because of the financial, physical and environmental effects that businesses can have on individuals and communities, it is important that businesses actually identify and communicate with those persons who have some legitimate stake in them. Furthermore, because the public may often see businesses as monolithic entities, it is important that they recognize that individuals make up these businesses, and that these individuals are also important stakeholders. At issue, however, is what proper engagement requires and entails. Our aim in this paper is to identify, review and assess two prominent recent trends in the literature addressing this topic. Specifically, these trends reveal competing ideas about the proper motivation, method and manner of engaging stakeholders. One prominent way of framing the increasingly important role of stakeholder discourse in the management literature draws on the work of moral and political philosopher Jürgen Habermas to argue that engagement of stakeholders must be largely or entirely free of any strategic motivation in order to ensure its moral legitimacy. Scholars in this camp distinguish between two types of stakeholder engagement: strategic and

moral. Strategic engagement is undertaken with strategic, though not necessarily intentionally dishonest or malicious, motivations. Moral engagement is marked by specific conditions of communication which ensure that the communication is uncorrupted by power differences and strategic motivations. The aim of this type of engagement is agreement for the sake of agreement. Others have argued that the engagement of stakeholders, and moral behavior generally, must be integral to a firm’s strategy if it is to achieve real success. This camp is characterized by scholars contending that the distinction between strategy and morality is not only unfortunate, but logically unnecessary. They hold that good strategy properly understood must encompass what are typically recognized as moral concerns because the very purpose of the firm and the capitalist system within which it operates is, when viewed rightly, the creation of value for all stakeholders. We outline the arguments for these obliquely competing views and weigh their respective merits. We then make the case for our contention that, though those who argue for a strict separation of morality and strategy raise some important concerns and provide valuable insights, ultimately their argument renders them unable to offer sufficient justification for their demanding normative claims. We conclude that the strict distinction between strategic and moral engagement is logically untenable and that the arguments of the second group are more coherent. We also contend that the specific prescriptions for moral engagement of stakeholders found in this second body of literature are more likely to be found palatable and practicable to the average manager. At the outset we wish to mention two important caveats. First, the style of argumentation and the language used in much of this literature is fairly specialized, technical and discipline-specific; because of its increasing relevance to – and prominence within – managerial scholarship, we have attempted to render the ideas more accessible and have provided explanatory background on ideas, terms and thinkers where necessary. Second, and related, there are places below that may appear to mis-state or under-appreciate distinctions in Habermas’s subtle and nuanced theory. This arises owing to the attempt to finesse certain technical, philosophical points and reduce the need for deep explication of sophisticated terminology. But also, we note some potential disparities between our reading of the original work of Habermas (or at least its

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Stakeholder Engagement English translations) and the work of some scholars cited here working in a ‘Habermasian tradition’.1 That is, to avoid becoming a work of reconciliation between Habermas and ‘Habermasian’ stakeholder theorists, we will speak most directly to the latter and leave it to those more intimately familiar with the literature to dispute the consistency of the interpretations and adaptations with the original.

Identifying the two trends One might expect the primary debate surrounding the topic of stakeholder engagement to revolve around the difficulty of establishing the necessary and sufficient conditions for being a stakeholder. While identifying who qualifies as a stakeholder is certainly an important project, currently there is also a significant discussion in the business ethics literature about the criteria for morally acceptable engagement of stakeholders. Greenwood (2007) offers an explanation of why this should be. After pointing out that stakeholder engagement is usually ‘understood as practices the organization undertakes to involve stakeholders in a positive manner in organizational activities’, she argues that it is more accurate to say that stakeholder engagement, just in itself, is neither necessarily positive nor negative. That is, one can imagine a firm engaging a stakeholder, or set of stakeholders, with ulterior motives or in a deceitful manner, just as easily as one can imagine a firm engaging stakeholders openly and honestly. Greenwood’s observation is well founded but, by itself, perhaps obvious. What is more interesting is the proposal she makes following this observation. She suggests that: ‘Rather than conceive of stakeholders in either a narrow or broad sense, it may be more useful to consider definitions as depicting the stakeholder as either moral or strategic.’ This is interesting, because it requires setting aside the usual, intuitive practice of distinguishing between morally good and morally bad engagement, judged either by the consequences of, or motivation for, the engagement (or some combination thereof). Instead, it becomes important to identify two distinct types of engagement, moral and strategic, on the basis of the goal, manner and method of the engagement. Greenwood is not alone in making this distinction; in the past few years, a significant number of scholars 1

Conversations with Michelle Greenwood, Guido Palazzo and Andreas Scherer have helped us gain greater clarity on this and other points.

41 (e.g. Behnam and Rasche 2008; Foster and Jonker 2005; Palazzo and Scherer 2006; Rasche and Esser 2006; Reed 1999; Reynolds andYuthas 2007; Scherer and Palazzo 2007; Smith 2004; Zakhem 2007) have argued that this is an important distinction with much riding on it. These thinkers rely heavily on the work of the German philosopher Jürgen Habermas and his conceptions of discourse ethics and deliberative democracy to justify the distinction between strategic and moral engagement and to establish the necessary procedural guidelines for participating in moral engagement with stakeholders. Because of their common philosophical foundation, and for want of a more descriptive term, we refer to these thinkers throughout this paper as ‘Habermasians’. Common among these thinkers is the contention that any stakeholder engagement that a firm undertakes as part of their overall strategy is, by definition, amoral. This is not to say that the results of such engagement would necessarily be unwelcome to the stakeholders in question, neither is it to say that it would necessarily be undertaken with the conscious intent to deceive or injure. Rather, the basis for the distinction is that the morality of engagement, or any kind of communication for that matter, is a function of proper procedures which attempt to ensure that the communication is pure – free of any imbalances of power and undertaken for its own sake rather than for any further purpose that might corrupt the proceedings. Running parallel to this trend in the literature is work from a different school of thinkers, contending that ethical engagement of stakeholders not only may be part of a firm’s larger strategy, but that it ought to be part of this larger strategy. The reasons for this are twofold. First, it is argued that unethical practices endanger the success of the firm. Second, as Freeman et al. (2007) say, ‘Business, indeed any business, just is creating value for stakeholders’ (emphasis added). In other words, the purpose of any business truly is and ought to be the creation of value for all those groups and individuals who have a stake in the business. Ethical, that is honest, open and fair engagement of these stakeholders is necessary for a business to function properly. Included among the representatives of this school of thought are Phillips (2003), Freeman et al. (2004), McVea and Freeman (2005), Miles et al. (2006), Maak (2007) and Freeman et al. (2007). For the sake of simplicity, we refer to the group that argues that ethics is an essential component of strategy as the ‘Ethical Strategists’.


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Below we explain the philosophical bases for these competing trends, discuss what each involves and entails, and offer our evaluation of the merits of each. We believe this is an important undertaking because the purpose of business ethics scholarship is to assist managers by working through difficult questions about what it means for a business to be ethical, why a business ought to be ethical, and to offer some guidance as to how to practice ethical behavior. Thus, any ethical theory must be both theoretically compelling and practically possible to implement. Our conclusion here is that, while there is much to admire and applaud in the Habermasians’ work, the extent of the obligation these theorists call for ultimately lacks strong conceptual support and is made even more challenging by the practical difficulty of meeting this obligation. Furthermore, we believe that the Ethical Strategists’ argument for the basis of ethical obligation on the part of businesses is stronger and more likely to be amenable to practicing managers. Theoretical foundations of the Habermasian position It is necessary at this stage to delve into some of the philosophical background of the Habermasians’ argument in order to understand it fully. A foundational distinction for these thinkers is Habermas’s distinction between ‘instrumental’ reason and ‘communicative’ reason (Reed 1999). According to these thinkers, the purpose of instrumental reasoning is the completion of some task or the accomplishment of some goal. It is called ‘instrumental’ because the reasoning is considered a means to an end. ‘Communicative’ reason is so called because it is practiced not individually, but in community, and it is not pursued as a means to an end, but is considered an end in itself. That is, engaging in communal or communicative thinking (reasoning) is valuable because it accomplishes ‘intersubjective understanding’. What is understood is not some independent ‘Truth’ about the world; rather, the parties come to understand each others’ views and ideas and achieve agreement about the proper form and function of their interaction. This distinction between the two types of reasoning rests on the contention, foundational to postmodern philosophy, that objective truth is unobtainable. Instead, all truth is subjective. This is important because it helps explain why the Habermasians call

for such demanding and extensive standards for truly moral engagement of stakeholders. To some extent, ‘intersubjective understanding’ is just another way of saying ‘interpersonal understanding’. However, there is also more to it than this. If one were to maintain belief in the existence of objective truth, and the possibility of knowing this truth, interpersonal understanding between two individuals might be achieved through agreement about this objective truth, that is, the truth about something outside themselves, such as whether a given interaction was just. The pursuit of intersubjective agreement, however, proceeds on the assumption that the sought after agreement is purely a function of the intention of both parties (both subjects) to reach some agreement. The significance of this is that, when one denies the possibility of truly objective judgments, it follows that all judgments that are ostensibly statements of facts about the world are exposed as actually telling us something about the person (subject) making the judgment. According to the philosophical tradition within which the Habermasians work, these judgments are alleged necessarily to be influenced by, or to proceed from, the speaker’s own interests. In the context of our discussion of stakeholder engagement, this means that any statement a firm might make in the course of a dialogue with stakeholders about the fairness of some deal, the justice of some outcome or the rightness of some position must be interpreted not as assertions about objective truth, supportable by rational argument and eligible for verification or refutation by other observers, but as expressions of the firm’s own interests and perspective. The Habermasian assumption is that any discussion between a firm and its stakeholders about the firm’s obligations, duties or rights could never rationally be adjudicated, for two reasons. First, there is no accessible objective truth about such obligations, duties or rights that one might discern through clearheaded reasoning and establish by way of argument. Rather, any such arguments and appeals to reason would really be expressions of the various parties’ interests. Second, it follows from this first reason that the relative power of the parties advancing their interests, along with their rhetorical skill, would be determinative of the outcome. This means that any engagement of stakeholders by a firm (unless this engagement meets the conditions we will discuss momentarily), though it might pretend to be a good faith exercise in moral decision-making, could only


Stakeholder Engagement be an exercise of force or coercion. Any outcomes of this engagement would be morally illegitimate, as they would be the necessary products of the power imbalance between firm and stakeholders. Notice this is not to say that the Habermasians accuse all firms and their managers of entering into engagement with stakeholders with the intention of exerting their power to influence the outcome. Instead, their argument is that firms could not help but bias the engagement in their favor through the exercise of power, given the very nature of reason and language in normal conditions. Moral engagement, then, cannot be a matter of arriving at the objective truth about the fairness, justice or rightness of some behavior. On the contrary, moral engagement must be about reaching agreement for the very sake of agreement. Furthermore, for this purpose to be achieved and for the agreement resulting from engagement to remain unspoiled by force masquerading as reason, the firm’s decision to engage must be in no way strategic or instrumental, and conditions must be established for the engagement which ensure that power imbalances are removed from the interaction because, for the Habermasians, if engagement is to count as moral, the parties must communicate solely for the sake of reaching agreement rather than in order to pursue any particular interests. Moral engagement of stakeholders must be distinguished from strategic engagement. Zakhem (2007), for example, refers to Habermas’s concern that strategic actions, precisely because they are strategic2 have a tendency to employ immoral means of communication which amount to manipulation. Similarly, Reynolds and Yuthas (2007) and Foster and Jonker (2005) each observe that the standard frameworks and methods of engaging stakeholders usually do not rise to the level of moral engagement because strategic motives enter into play. As an example of how strategic interests contaminate the engagement process, Rasche and Esser (2006) offer the observation that it is in managers’ best interests to ‘let economic calculations inform their choices’ (emphasis in original). In the event that such strategic motivations are allowed to influence in any way the arguments of the parties – that is, when merely personal or corporate (as opposed to universal) interests are offered or accepted as having justificatory power during the discursive process – the conclusions of the discourse 2

Strategic here, seems – we believe mistakenly – to be understood as inherently self-interested.

43 are rendered invalid. Validity is an important concept in Habermasian thought (Rasche and Esser 2006), and its meaning in this context is similar to the meaning it has in the social sciences. For example, a political scientist conducting a poll must do so within specific guidelines to ensure the validity of the results. To allow bias into the questions, or into the selecting of the sample population, would be to render the results of the poll scientifically invalid. In an analogous way, the Habermasians hold that, in order for the outcomes of a firm’s engagement with its stakeholders to be morally valid, this engagement must be conducted according to strictly observed guidelines. It is worth remembering that saying results of social scientific research have been declared invalid is not equivalent to saying that they have been declared false. It is conceivable, for instance, that a poll might be declared invalid owing to its use of biased questions, and yet the poll results might still turn out to reflect accurately the views of a given population. Similarly, the Habermasians do not go so far as to claim that outcomes of stakeholder engagement that are declared invalid owing to the influence of strategic interests must necessarily be detrimental or unwelcome to all or any stakeholders. The Habermasian’s disinterest in consequences and their concern for procedure and universal acceptability are a function of their Kantian heritage combined with their postmodern rejection of appeals to universal truths accessible to all through the proper exercise of the faculty of reason. A full philosophical exposition and analysis of their position would be unwieldy in this forum (and probably unwelcome); suffice it to say that, for the Habermasians, a necessary feature of any moral behavior is that it be undertaken in a personally disinterested manner and adhere to strict conditions ensuring neutrality. Habermasian engagement in practice Because the aim of moral stakeholder engagement must be (as a form of communicative action) the intersubjective understanding of each party and their agreement about how they ought to order their interaction going forward, all parties who will be part of, or affected by, the future interaction must participate in the conversation. The engagement must be conducted in a purely democratic fashion – there may be no democracy by proxy or representation nor may their be any imbalance or inequality in voice. It is not difficult to imagine the burdens this might place on a


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firm. If we recognize a firm’s customers and any persons directly affected by the firm’s actions as stakeholders, we can, without much effort, envision the magnitude of an attempt to engage these stakeholders collectively and under the necessary constraints of Habermasian morality. Reynolds and Yuthas (2007) discuss some of the steps a firm would probably have to take to achieve moral engagement with a wide range of their stakeholders. There must be ‘careful planning’, to start with and ‘logistical and technical mechanisms’ established to facilitate the engagement. Because stakeholders are spread out geographically and vary in their capacity to travel or use the latest technology, the provision of access to a communication infrastructure would be the responsibility of the firm. In addition to such planning and provision, Reed (1999) notes that firms must also ‘discipline’ themselves and monitor their own manner of engagement to ensure that their own interests do not influence the arrangement or the communication itself. Rasche and Esser follow Reed in acknowledging that firms must ‘voluntarily impose restrictions on their own power’. While many Habermasians are unapologetic about the extent of the demands that their moral theory prescribes for firms (holding that the task of determining morality’s demands is logically prior to determining the limits of the possible), some recent thinkers have taken a slightly different approach. Palazzo and Scherer (2006) and Scherer and Palazzo (2007) draw attention to the fact that even Habermas himself has come to believe that some of his earlier conclusions about the demands of moral interaction are ‘too idealistic’. Together, Scherer and Palazzo observe that Habermas’s later work advances the concept of ‘deliberative democracy’, a mechanism for achieving legitimate political decision-making through ‘public will formation’. This allows for more practical communicative action through the use of representatives who discern the will of those for whom they advocate. It is likely that a version of stakeholder engagement modeled on Habermas’ conception of deliberative democracy rather than his earlier work, which prescribed establishing ‘ideal-speech’ situations as the means to achieve moral communication would more feasible in practice. It nonetheless remains the case that meeting the obligations of such engagement would place a substantial burden on firms by requiring significant amounts of attention, money and labor. While we believe that it would be a mistake to

set aside consideration of a moral theory’s practical requirements when evaluating its claims, this is only one part of our concerns with this theory. Habermasian engagement and the separation thesis (fallacy) The Habermasians’ insistence on the separation of strategy from morality makes it natural to question the justificatory foundation of their moral claims. Because they insist that a firm accept all the burdens associated with this engagement, including the absence of any consideration of the firm’s strategic ends, it is only right to inquire into the basis of this normative claim. One can imagine managers responding to the Habermasians by saying ‘you tell me that I ought to undertake this major project of engaging stakeholders and that I must do so without considering whether it aligns with my strategy – in fact, I ought to do this even though it may be contrary to my strategy – on what grounds do you base these demands?’ By removing self-interest (e.g. the good of the firm) from the list of possible answers to this question, the Habermasians have left themselves with a short list of potential justifications for their imperatives. The challenge for the Habermasians is to explain how it is reasonable (i.e. that one has good reasons) to engage in an activity at significant cost when, by stipulation, this activity must not be undertaken in pursuit of one’s goals and may actually be detrimental to one’s achievement of these goals. This is all the more problematic when these goals themselves have a moral basis in stakeholder obligation (Phillips 1997, 2003). It is important here to appreciate the full significance of the Habermasian position. The position is not simply that a firm has strategic goals and moral obligations and that it ought to consider both in its decision-making process. Neither is it the Habermasians’ position that firms ought to balance these strategic concerns with moral concerns (see Gioia 1999). To balance strategic and moral concerns would necessarily entail subjecting the moral decision-making process to tests of strategic compatibility, which is unacceptable according to the Habermasians cited here. It is entirely fair, then, that the burden of proof falls on the Habermasians to explain the nature of their ‘ought’ claims. While they are certainly right to be worried about duplicitous engagement of stakeholders by ignoble firms seeking to bolster their reputations, such critical concerns are insufficient for


Stakeholder Engagement establishing their own substantive and burdensome normative claims. We share the Habermasians’ desires to ensure serious, honest engagement of stakeholders, and to promote inclusion and voice for stakeholders, many of whom may often be overlooked or ignored. However, we contend that, by arguing for the strict delineation of strategic and moral engagement, these theorists have unwittingly committed themselves to the position which Freeman (1999, and elsewhere) has dubbed the ‘separation thesis’. In Freeman’s words, the separation thesis is the view that it is ‘meaningful to separate the discourse of ethics from the discourse of business’. Those who advance this thesis do so based on the premise that the rightful purpose of a business is to maximize profits (or shareholder value or some other similar value) and that it follows from this premise that all other goals a business may have must be instrumental – and therefore subordinate – to this primary end. According to this view, moral obligations are seen as placing constraints upon the pursuit of this end and, unless these constraints are themselves instrumental in the pursuit of this end (by bettering brand image, for example), it is a mistake to impose them on businesses and, of course, a mistake for a business to impose them upon itself. It is ironic that the Habermasians, while arguing that firms bear greater moral obligations than are often recognized, end up implicitly accepting the case of those who advance the separation thesis and, in so doing, deny that firms have what are identified as purely moral obligations. One way to understand this irony is to recognize that neither those who consciously advance the separation thesis nor the Habermasians, who do so accidentally, consider firms’ ultimate strategic goals themselves to be a subject for moral evaluation. That is, those who advance the separation thesis take for granted that the proper end of a business is financial success and seem to consider moral obligations as either constraints upon their means to this end or as naming some separate and unrelated end that they ought to pursue, whether or not they would prefer to do so. The Habermasians, too, consider a firm’s strategic ends to be, by definition, manifestations of self-interest, and therefore not in themselves subject to moral evaluation. What is noteworthy about these views, from a historical perspective, is that the field of inquiry we now recognize as ethical or moral was in its earliest incarnation first and foremost about identifying ultimate ends or goals and only secondarily about identifying

45 the appropriate means for pursuing such ends. Aristotle’s (1986) Nicomachean Ethics, for example, takes as its task the project of determining what the proper goal in life should be for a person, and this was considered to be the outcome of an empirical investigation of the nature of human flourishing.3 The relevance of this historical perspective is that it suggests a resource for building a moral framework for stakeholder engagement which allows for this engagement to be an instrumental part of a firm’s strategy without thereby entailing that the engagement is suspect or illegitimate. Freeman (1999) argues that normative claims must be supported with ‘some kind of instrumental claim’. This is not to say that a firm must only engage in what is recognized as morally praiseworthy behavior in order to better their bottom line. Though such behavior might often actually further this end, it does not hold true universally. The Habermasians are correct to argue against making the case for moral behavior on such grounds. Rather, what Freeman and others (see Freeman et al. 2007; Freeman et al. 2004; Maak 2007; McVea and Freeman 2005; Miles et al. 2006) argue is for a reconception of the purpose of business, from which it follows that what we would recognize as moral stakeholder engagement is also instrumental to good strategy. The Ethical Strategists: reconceiving the purpose of business It may help to begin this section by discussing some points that the Ethical Strategists do not defend rather than starting with those that they do. This is because of some unfortunate, though not entirely unfounded, conclusions to which many often leap when they see ethics described as an important component of strategy. The first position we anticipate may be mistakenly attributed to the Ethical Strategists is that moral concerns are important, but should be subordinated to financial goals. Such a position might entail calculating the financial benefit of the increase in goodwill 3

MacIntyre (1984) explains, ‘In Latin, as in ancient Greek, there is no word correctly translated by our word “moral”; or rather there is no such word until our word “moral” is translated back into Latin. Certainly “moral” is the etymological descendant of moralis. But moralis, like its Greek predecessor ethikos . . . means “pertaining to character” where a man’s character is nothing other than his set dispositions to behave systematically in one way rather than another, to lead one particular kind of life.’


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expected to accrue from some charitable donation or sponsorship, and deciding to proceed with this move only if the benefits outweigh the costs. A second and related position would be that firms ought to, in addition to performing what might be recognized as traditional business activities, also regularly choose some ‘good works’ project to provide an outlet for employees to ‘give back’ or satisfy their felt need for their work to provide meaning, or perhaps to assuage their collective guilt over spending so much of their time pursuing profit. The strategic role of such projects would have more to do with employee morale than financial success per se, but ethics would nonetheless be part of strategy. One problem with such proposals is that they do not provide any mechanism for preventing firms who incorporate ethics into their strategies in these ways from falling into the same scandalous behavior that has received so much attention in the past decade. Firms could make ethics a part of their strategies in these ways and yet still fail to respect stakeholders, disrupt communities and damage the environment. Stakeholder engagement is not the same as CSR or philanthropy (Phillips et al. 2003). What is called for is a basis for incorporating ethics into every aspect of a firm’s decision-making, strategic and otherwise. To the extent that this is the Habermasians’ project, we offer our support. Including stakeholders in corporate decision-making in such a way as to ensure their ability to speak freely and openly and to be heard by the firm and other stakeholders, all while working to prevent the firm’s strategic goals from biasing these conversations or their outcomes, is certainly a good idea, and one that seems manageable, at least in some fashion. As we have explained, our objection to the Habermasians’ proposal is that, by demanding that a firm’s decision to engage stakeholders in this fashion must not itself be influenced or informed by the firm’s strategy, they are demanding that firms act without considering their interests. This is tantamount to saying that firms ought to act in a non-rational – if not irrational – manner. As we understand it, the common idea shared by those scholars whom we are calling the Ethical Strategists is not so much to argue that businesses and business people ought to have other goals than maximizing shareholder wealth or profit, but rather that, if they examine their own goals and behavior, and the goals and behavior of those businesses and business people who are widely admired as successful, they

will recognize that they already do value something other (and over) shareholder wealth or profit. Importantly, this is not at all to say that the Ethical Strategists take some naïve view that businesses and the people who run them are all truly good at heart, and that all one must do to prevent further scandals is, like Polonius, remind them to be true to themselves. Their position seems to be more Aristotelian in nature; or perhaps their project and method is more Aristotelian, even if their specific views are not necessarily so. To explain what we mean by this characterization, we must revisit, briefly, the question of the separation thesis. Above, we referred parenthetically to the separation thesis as a fallacy. The specific fallacy that the separation thesis exemplifies is that of begging the question. The separation thesis, insofar as it decrees that questions of morality have nothing to do with questions of business, begs the question by presuming exactly that for which it is offered as proof. Recognizing the historical irony of the separation thesis is helpful here, because it reminds us that questions of morality have to do with the evaluation of ends before they have to do with the evaluation of means. Those who advance the separation thesis commit the fallacy of begging the question by presuming that the ends (purposes or goals) of business are settled and not subject to moral evaluation. We suggest that the Ethical Strategists are Aristotelian in style if not in precise substance just to the extent that they challenge the dogma that the proper (ultimate) ends of business are profit or shareholder wealth. Another reason for describing the Ethical Strategists as Aristotelian in style is that their approach is empirical; they call our attention to observations which each of us can verify on our own, and which, in fact, tend to ring true because we are already aware of them, even if we have failed to appreciate their significance. One such observation, fundamental to each of these thinkers, is that individual businesses – firms, corporations, small businesses – are artifacts of human invention; they are human institutions that exist only within and because of a broader human institution, namely free market capitalism. And capitalism itself only exists within a larger society which recognizes, shapes and aims to provide for, the values and goals of its members. Freeman et al. 2004 write: ‘Capitalism . . . is primarily a cooperative system of innovation, value creation and exchange.’ More precisely, we might say that capitalism is a system whose purpose is to create and distribute products and services which meet


Stakeholder Engagement needs and wants (i.e. are valuable), and one way in which it does so is by fostering competition, which in turn fosters innovation and exchange. Another way of saying all of this is just to say that neither business nor capitalism is an end in itself. Those things that are ends but not ends in themselves are, by definition, instrumental ends (also known as means). Even the most devout free marketeers do not argue that capitalism should truly be unfettered; laws against fraud and theft and so forth are essential for the proper functioning of the markets. The obviousness of this point belies its significance: if constraints are rightly applied to something, it follows that this something is not of ultimate importance; instead, something is constrained when failure to do so would cause damage to something else of greater importance. With the understanding that the ends of business are subordinate to some (higher) ends, it becomes clear that it is entirely appropriate, in fact necessary, to question the ends of business in order to determine whether they are the best available means of achieving the (logically prior) ends of society and its members. This is the project which Solomon (1993) champions, arguing that we should ‘conceive of business as an essential part of the good life . . . We talk about “making a living” but the truth is that the living we make has as much to do with life as it does with paying the rent.’ Our reading of the Habermasians suggests that the key to understanding why many have not seen fit to consider the ends of business as subject to moral evaluation can be found in one of their fundamental premises. This mistaken premise identifies the firm as relevantly analogous to a single, solitary individual or ego rather than as being similar to a person whose identity is unintelligible apart from his many relationships and roles in various communities. For example, Foster and Jonker (2005) explain ‘strategic action’ as ‘the egoistic achievement of specific outcomes’. The problem with equating firms with individuals in this way is twofold. First, as Solomon rightly observes: ‘For the properly constituted social self, the distinction between self-interest and socialmindedness is all but unintelligible, and what we call selfishness is guaranteed to be self-destructive as well.’ Second, this distinction is, if possible, even less intelligible when applied to the firm because, in the case of the firm, not only does it only exist in relationship with other firms and individuals (i.e. stakeholders) in the community that is the market, each and every one of its own employees is a ‘social self’ with vast webs of relationships that shape their

47 identities and provide purposes over, above and beyond those of the firm. When persons or firms are viewed as fully autonomous, distinct individuals, the tendency is to conclude that the ultimate ends (or ‘the good’) for these individuals are entirely a function of each individual’s free choice, and, as such, not subject to evaluation by others. It therefore becomes the task of morality not to evaluate these ends, but to impose some constraints upon the pursuit of these ends to ensure either the smooth functioning of the society in which they operate or the equal opportunity of other individuals to pursue their ends. From this follows the presumed opposition of self-interest and social mindedness, or altruism, which Solomon disputes. Viewed in this context, we can more fully appreciate the significance of the fact that, as Wicks et al. (1994) say, ‘the corporation is constituted by the network of relationships which it is involved in with the employees, customers, suppliers, communities, businesses, and other groups who interact with and give meaning and definition to the corporation’. In other words, the corporation is constituted by its stakeholders. Moreover, these stakeholders participate in many other relationship networks such as families, clubs, churches, and so on. Wicks (1996) amplifies this point when he reminds us that each and every one of a corporation’s managers, employees and shareholders, ‘exist as fully human persons capable of pursuing a wide array of purposes and meanings within the corporation’. To remember that stakeholders ‘exist as fully human persons’ is not to adopt some obscure existentialist stance or commit oneself to some metaphysical position with unwanted implications; remembering that stakeholders are ‘fully human’ is just to do what McVea and Freeman (2005) call on us to do, which is to ‘see stakeholders as individuals with names and faces’. They contend that, when we do this, we will ‘have a better chance of putting business and ethics together’. This is not because to do so will render us ‘softies’, unconcerned about money (people with names and faces need money too); it will help us put business and ethics together because it will help us remember that each and every board member, manager, employee and customer has a life and goals and that the business that is not instrumental in the pursuit of these stakeholder goals is not a successful business. In fact, seeing stakeholders as individuals with names and faces might be among the best and most concise ways of characterizing the essence of stake-


48


holder engagement. Once we understand this, we also understand that engaging stakeholders is a necessary part of strategy, because for a firm to determine its strategy without having first engaged its stakeholders would be, literally, to disengage its mission and vision from its identity. By recognizing the interconnectedness, even dependence, of firms and the multi-dimensional persons who constitute them, that is, by adopting what Wicks et al. call the ‘stakeholder interpretation of the firm’, we establish the legitimacy of evaluating both the ends of business and business’s role in the greater pursuits of society and its members. Moreover, once we reconceive the identity of the firm, the firm’s place in society and its role in the pursuit of the good life by its stakeholders, some of the language the Ethical Strategists use reads a little differently. When Freeman et al. (2004) state that ‘The best deal for all is if managers try to create as much value for stakeholders as possible’, or when Maak (2007) advocates honesty and building ‘trustful relationships’ in the pursuit of ‘social capital’ and ‘the common good’, it can seem as if they are idealistically prescribing altruism in the hope that its appeal will be self-evident. However, when we remember that the firm’s goals are logically subordinate to those of the stakeholders who constitute it and to those of the system in which it operates, these prescriptions have a more solid foundation. Still, none of the foregoing should be taken as suggesting that all businesses or business people do or will appreciate this. Instead, this should be understood as providing a basis for making the argument to firms and their managers that ethical behavior, and specifically the engagement of stakeholders, ought to be part of firms’ strategies, because it is necessarily, and not accidentally or intermittently, in their selfinterest. Convincing businesses of this truth is not a matter of instrumentalizing ethics and prescribing disingenuous honesty or affecting engagement for the sake of public relations, for example, but about making the case for re-examining strategy in light of a reconceived identity and purpose of the firm. We want to emphasize that the argument for the ‘stakeholder interpretation of the firm’ and for the importance of including stakeholder engagement in strategy should not be understood as entailing the radical democratization of the firm as called for by Habermasians such as Reed and Reynolds and Yuthas. Not everyone is a stakeholder in every firm. Neither is it the case that each of a firm’s stakeholders has an equal stake in the firm or is entitled to

equal influence. The reasons why democracy is appropriate for states do not obtain to business. Businesses are distinct from states in many significant ways, not least of which is that membership or participation in them is voluntary (Phillips 2003). Furthermore, the specific goals and purposes (their place in the overall pursuit of the good life notwithstanding) are appropriately within the purview of those who choose to participate and invest in them. Our argument is simply that, because businesses are constituted by their stakeholders, each of whom pursues ends to which their participation in the business is a means, and because businesses themselves choose to pursue their specific projects within the constraints of the marketplace, it follows that engaging (e.g. consulting with, listening to, showing respect for, etc.) stakeholders is essential for the formation and execution of strategy. Miles et al. (2006) express the point this way, ‘for effective strategy to occur, there should be a channel for honest, unfiltered information to flow from the BSEs [boundary spanning employees] who directly interact with stakeholders and technology and strategy making top executives’. Facilitating this honest, unfiltered flow of information between stakeholders (in short, stakeholder engagement) is key to effective strategy; it is also key to ethical decision-making and firm behavior. This overlap is not a felicitous coincidence, but follows from the necessary relationship between strategy and ethics. To separate the two pursuits – albeit because of understandable concerns about an excessive emphasis on self-interest – is to handicap the former and remove the rationale for the latter.

Conclusion The topic of stakeholder engagement has, for good reasons, received greater attention in recent years. It makes sense to say that firms ought to initiate and facilitate respectful, honest and productive multilateral communication with their stakeholders. This makes sense because stakeholders make up these firms, and the relationship networks to which these stakeholders belong make up the communities and markets within which these firms do business. Those theorists whom we have called ‘Habermasian’ make a valuable contribution to the literature on stakeholder engagement by warning us of the ways in which firms can (unintentionally or otherwise) vitiate their overtures to stakeholders by allowing their power or purposes to bias their judgment or deter


Stakeholder Engagement honest and full participation. Furthermore, some of the means of mitigating these concerns such as guidelines borrowed from Habermas’ discourse ethics may prove adaptable to business. However, their insistence on a strict separation of strategic and moral decision-making has the effect of undermining the justification for their demanding standards for moral engagement. By arguing for the re-evaluation of businesses’ ends in addition to their means, the Ethical Strategists offer a much needed theoretical basis for including honest, open, respectful engagement of stakeholders as a vital part a firm’s strategy. They do this by calling our attention to the stakeholders who constitute the firm as people with ‘names and faces’ and reminding us of business’s role in society’s pursuit of the good life. Reconceiving the purpose of business and the nature of the firm is no miracle remedy for financial injustice or environmental irresponsibility, but it provides a starting point and a framework within which to proceed.

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