Freeman PDF
Freeman PDF
Freeman PDF
R. EDWARD FREEMAN*
The purpose of this paper is to revisit the development of the stakeholder management approach devel-
oped in Strategic Management: A Stakeholder Approach published by Pitman Publishing in
1984. A brief history of the development of this approach is followed by a summary and an assess-
ment of the main arguments. The approach has been used in a number of research streams which are
outlined. The paper ends with some suggestions for promising lines of inquiry.
Keywords: stakeholders; stakeholder management; business ethics; strategic management; corporate
social responsibility.
1. Introduction
The purpose of this paper is to trace the development of the idea of stakeholders or
stakeholder management or managing for stakeholders or stakeholder capita-
lism. Section II is a brief history of how I came to publish Strategic Management: A
Stakeholder Approach in 1984 by building on the work of many others. Section III is a
brief summary of that book and an assessment of its strengths and weaknesses. It also
outlines the revisions I would make to that book if I were writing it today. Section IV
details some of the streams of research on the stakeholder idea during the last 20
years, though it is far from complete, and offers some promising new directions for
the development of stakeholder theory.
2. Early History
After studying philosophy at Washington University I accepted an appointment on
the research staff at The Wharton School, University of Pennsylvania, with a research
group called the Busch Center, and then rapidly moved to a new group called the
Wharton Applied Research Center (WARC). The mission of WARC under the leader-
ship of James R. Emshoff was to serve as Whartons window to the world to con-
nect Wharton faculty with managers who had real problems to solve. We organized
ourselves by project teams, much like a traditional consulting firm (Emshoff had been
with McKinsey and Co.), and by development areas which were conceptual spaces
where we wanted to develop both expertise and new clients to try out our ideas.
________________________
* Prof. R. Edward Freeman PhD, The Darden School, University of Virginia 100 Darden BLVD.
Charlottesville, Virginia, Fax: ++(1) 434 924-6378, Voice: ++(1)434 924-0935, E-Mail:
[email protected].
228
2.1 Original Papers and Teaching
I began to work on the stakeholder concept in conjunction with Emshoff at about the
time that AT&T, then the Bell System, asked us to develop an executive education
program that would help their leaders of the future understand and manage the
external environment. We developed a one week module using the stakeholder idea
that included two papers and several cases, as well as a stakeholder simulation. The
development of these ideas and initial piloting took place over the last half of 1977
and all of 1978. The first paper was a conceptual paper laying out the argument for
why managers needed to think about stakeholders. We defined stakeholder in a
broad strategic sense as any group or individual that can affect or is affected by the
achievement of a corporations purpose. While this definition has been the subject of
much debate in the ensuing years, the basic idea was simple. We were taking the view-
point of senior management and our view was that if a group of individual could af-
fect the firm (or be affected by it, and reciprocate) then managers should worry about
that group in the sense that it needed an explicit strategy for dealing with the stake-
holder. This executive program at AT&T led to a number of projects with the execu-
tives who attended and their teams where we developed the stakeholder approach that
I outlined in Strategic Management: A Stakeholder Approach written in the summer of 1982
and published in 1984. I was especially concerned to show how the stakeholder idea
originated not with me and not at Wharton, but many years earlier at the Stanford
Research Institute. Chapter 2 of that book tries to set out the intellectual history of the
concept. Giles Slinger has redone this history in a much more complete fashion, and
many scholars such as Lee Preston have pointed out the intellectual history of the
concept goes far beyond the use of the word stakeholder. The second paper was a set
of tools and techniques that we believed that managers would find useful. This pa-
per became the basis for the middle chapters of the book that focused on the tech-
niques and applications of the stakeholder idea.
I spent most of my time from 1978 until 1983 teaching executives and working with
them to develop very practical ways of understanding how they could be more effec-
tive in their relationships with key stakeholders. I knew that a concern with purpose,
values, and responsibility were important ideas, but it did not occur to me that one
could meaningfully talk about these ideas outside of the context of the business as a
whole. Therefore, when the main academic audience for my ideas became people who
taught Business and Society or Corporate Social Responsibility or Business Ethics I
was surprised. I had originally thought that the main academic audience would be
strategy professors. After all, the original idea behind Strategic Management: A Stakeholder
Approach was to publish it as a textbook in strategic management.
230
(1) No matter what you stand for, no matter what your ultimate purpose may be, you
must take into account the effects of your actions on others, as well as their po-
tential effects on you.
(2) Doing so means you have to understand stakeholder behaviors, values, and back-
grounds/contexts including the societal context. To be successful over time it will
be better to have a clear answer to the question what do we stand for.
(3) There are some focal points that can serve as answers to the question what do
we stand for or Enterprise Strategy. (The book laid out a typology which no one
ever took seriously.)
(4) We need to understand how stakeholder relationships work at three levels of
analysis: the Rational or organization as a whole; the Process, or standard oper-
ating procedures; and the Transactional, or day to day bargaining. (These levels
are just the three levels in Graham Allisons Missiles of October.)
(5) We can apply these ideas to think through new structures, processes, and business
functions, and we can especially rethink how the strategic planning process works
to take stakeholders into account.
(6) Stakeholder interests need to be balanced over time.
232
bad writing, mistakes, and bad ideas in the book, but these are at least some of the
major weaknesses from my point of view.
234
voluntarily into cooperative agreements they create an obligation to act fairly. As such,
normal business transactions create a moral obligation for firms to treat stakeholders
fairly and thus to consider their interests when making strategic decisions. Others
(Wicks/Freeman/Gilbert 1994; Burton/Dunn 1996) have tried to justify a stakeholder
approach through the ethics of care. Contrasting the traditional emphasis on an indi-
vidual rights-based approach to business, an ethics of care emphasizes the primacy of
the network of relationships that create the business enterprise. This approach advo-
cates the use of a stakeholder approach because of the need to formulate strategy in
the context of the relationships that surround it, rather than with the firm as a lone
actor. Finally, Donaldson and Dunfee (1999) have developed a justification for a
stakeholder approach that is based on social contract theory.
Recently, Kochan and Rubenstein (2000) have developed a normative stakeholder
theory based on an extensive study of the Saturn automotive manufacturer. In this
study they try and answer the question Why should stakeholder models be given
serious consideration at this moment in history. For Kochan and Rubenstein this is
both a normative and positive inquiry and one that requires research that both expli-
cates the normative issues and poses the theoretical questions in ways that promote
tractable empirical research (2000). They conclude that stakeholder firms will emerge
when the stakeholders hold critical assets, expose these assets to risk and have both
influence and voice. However, stakeholder firms will only be sustainable when leaders
incentives encourage responsiveness to stakeholders and when stakeholder legitimacy
can overcome societys skeptical ideological legacy towards stakeholder management.
238
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1. Introduction
Management theory authors have earned an infamous reputation for working on an
endless output of concepts that progress through a life cycle of introduction, growth,
maturity, decline, and cessation. In the literature about management fads, Business
Reengineering or Lean Management are discussed as potentially on the decline (see
Williams 2004; Collins 2000; Abrahamson/Fairchild 1999). The stakeholder approach,
however, defies this trend and is still alive and kicking, even though it is older than
these theories. Acceptance in academia and corporate practice has grown steadily. The
stakeholder literature has become voluminous, Tony Blair and other politicians pro-
claim the goal of a stakeholder economy, and organisations as diverse as the World
Bank and The Green 9 (nine of the largest European environmental organisa-
tions/networks) are pushing towards (more or less) balanced multi-stakeholder in-
volvements.
It might be argued that the socio-cultural, political, and economic context that ulti-
mately needs and rewards a stakeholder strategy has only fully developed since the
1990s. When Freeman wrote his initial book on the stakeholder approach in 1984, the
Zeitgeist of Reaganomics and Thatcherism favoured more a narrow-minded pur-
suit of profit (see Hansen/Bode 1999: 397f.). Still, in this context, Freeman popular-
ised the idea that companies have a responsibility to their stakeholders and that values
are a fundamental part of daily business. Meanwhile, the structural problems of mor-
ally unsatisfying market results are well known. Power agglomeration, the increasing
complexity of doing business in a risk society (Beck 1986), external effects, and accel-
erating dynamics highlight the importance of a moral and strategic discussion of the
relationship between business and society. At the same time, the public increasingly
expects from companies a contribution to solving economic, social and environmental
conflicts in society. In light of current conditions, the question is not so much why the
stakeholder approach is discussed today but how it could prevail?
Referring to the Donaldson and Preston (1995) tripartite aspects, the benefits of the
stakeholder approach are its descriptive accuracy, its instrumental power, or its norma-
tive validity of doing good. We think the most significant aspect lies in the 4th as-
________________________
* Prof. Dr. Dr. h.c., Hansen, Ursula/Dr. Bode, Matthias/lic. oec. HSG Moosmayer, Dirk, Lehrstuhl
Marketing und Konsum, Universitt Hannover, Knigsworther Platz 1, D-30167 Hannover, Tel.:
0511 762 5613, Fax: 0511 762 5630, E-Mail: [email protected], Forschungsschwer-
punkte: Handels- und Dienstleistungsmarketing, Relationship Marketing, Marketingethik, kologi-
sches Marketing, Verbraucherpolitik.
242
pect, proposed by Freeman (1995: 45) himself: the metaphorical or narrative quali-
ties. He developed a good story in which it was possible to comprise diverse narra-
tive threads about the inseparability of business and ethics. So he prudently does not
talk about THE one stakeholder theory (Freeman 1995: 35), but about a genre of
theories (Freeman 2004: 232). Therefore, criticism of a lack of explicit theoretical
formulations of the theory or the blurred character (Donaldson/Preston 1995: 66)
of the concepts misses the point. Instead, this is Freemans specific accomplishment:
the connectivity of his stakeholder frame with diverse theories and paradigms and the
potential of ethical plurality. This makes his ideas productive and fertile for diverse
theoretical approaches.
The other major advancement was the rejection of the separation thesis (Freeman
1994), that assumes first the potentiality and second the necessity of separating the
business from the ethics discourse. Instead, the stakeholder approach started with the
assumption that doing business always incorporates a moral perspective. A theoretical
analysis that excludes the ethical component is, therefore, not value-free, but ethics
done badly (Wicks/Freeman 1998: 124). So, he positioned his ideas not as a special
case of morally infused business, but as a better, more helpful general managerial ap-
proach.
This approach came with a downside that Freeman acknowledges. His work devel-
oped inductively out of American business cases without focusing too much on scien-
tific criteria of theory development and acceptance. He acknowledges his lack of
methodological concern but dismisses methodological rigor as silly window dressing
(Freeman 2004: 230). Furthermore, he constructs false dichotomies such as useful or
theoretical in an assumingly anti-theoretical manner. What might look like casually
shrugging off scientific standards unnecessarily obscures the viewer from Freemans
thorough philosophical, methodological and meta-theoretical clarifications of his
stakeholder approach. Not without its own dead ends and ruptures, he and his col-
laborators finally arrived at a pragmatist methodological foundation (Wicks/Freeman
1998). While blaming positivism for the marginalisation of ethics in business studies,
he favours anti-positivist approaches in their emphasis on culture and meaning. Then
he criticises anti-positivist approaches in their moral relativism. In his view, only
pragmatism incorporates criticism of the positivist paradigm and allows a certain
moral position. With this paradigmatic framing, he is able to clarify the essential crite-
ria for adopting the stakeholder approach. The formerly ambiguous term of useful-
ness, oscillating between strategic success and prescriptive value, is now defined as
useful in the sense of helping people to better cope with the world or to create better
organisations (Wicks/Freeman 1998: 129). Avoiding prescribing certain fixed values,
he refers the specification of values to the interactions of communities, specifically the
negotiation within the community of stakeholders who constitutes a given corpora-
tion (Wicks/Freeman 1998: 131).
This perspective, resembling the discourse ethics of Habermas (1991) and the trans-
formation into stakeholder-dialogues, has two important implications for the evalua-
tion and further advancement of the stakeholder project.
(1) There is still ambiguity regarding the goal of Freemans stakeholder approach.
Does he want to develop the stakeholder approach into an elaborating theory of
244
ess have their own goals or involvement interests that they may reach only by jointly
building coalitions (Heinen 1978: 24f.). A company can thus be seen as a coalition,
and the coalition partners are the companys members: for example, employees, man-
agement, etc.
The integration of the two concepts, interest group and coalition theory, lead to the
description of enterprises as coalitions of stakeholders (using the German equivalent
Anspruchsgruppe). Thus, the only way the coalition can be successful is if each
stakeholder fulfils their respective, goal related duties. This approach assigns manage-
ment the key tasks of balancing different stakeholder interests and actively involving
stakeholders. Dyllick (1984) gives a concise, applicable description of resulting man-
agement tasks in a six-step approach to identifying the relevant stakeholders, analysing
their claims and answering them appropriately.
We have depicted the development of thoughts around the stakeholder ideas in the
German-language strategic management discussion from its debut in the 1960s to
1984, when Freemans Strategic Management was published. To understand the scientific
discussion in Germany thereafter, we conducted an analysis of the three leading jour-
nals of business administration2 published in German from 1984 to the present3. The
results of this analysis may be summarised as follows:
Only 12 articles published between 1994 and 20004 included ideas explicitly de-
scribed as stakeholder ideas. The stakeholder discussion in the journals was rather
subdued.
Only one out of these twelve articles explicitly referred to Freeman (Han-
sen/Hennig-Thurau/Langer 2000). This supports the hypothesis that there had
been a rather independent development of stakeholder approaches in German-
speaking countries.
The discussion started in Die Betriebswirtschaft with articles on stakeholders as
a relevant variable in public relations (Haedrich/Jeschke 1994 and
Haedrich/Jenner/Olavarria/Possekel 1995).
Shareholder discussion precedes stakeholder discussion. For each of the journals,
the first article on stakeholder approaches was published at least two years after
the first contribution to shareholder approaches.
An intense debate on shareholder vs. stakeholder took place from 1997 to 2000
(see Speckbacher 1997, Backes-Gellner/Pull 1999, Wentges 2000), which sup-
________________________
2 The German term Allgemeine Betriebswirtschaftslehre is here translated as business administra-
tion. The regarded journals deal with general issues of business administration from all business areas
and functions.
3 We evaluated the appearance of the terms stakeholder (Stakeholder, Anspruchsgruppe, Interes-
sengruppe) and shareholder (Shareholder) in the titles mentioned in the index of contents and in
the key word index of the three German business administration journals Die Betriebswirtschaft
(DBW), Zeitschrift fr Betriebswirtschaft (ZfB) and Schmalenbachs Zeitschrift fr betrieb-
swirtschaftliche Forschung (ZfbF) including Schmalenbach Business Review from 1984 until
2004 (for 2004 first six months only).
4 The first mentioning in 1989 was a short reply in the different context of information asymmetries.
246
norms should aim to reduce conflict-relevant impacts of the profit principle (Stein-
mann/Oppenrieder 1985: 174). The stakeholder dialogue in this approach is under-
stood as a situational corrective. In case of conflicts, a compromise that is acceptable
for all stakeholders should be jointly developed. This approach clearly separates the
economic and ethical view by taking the latter into account only when the former is
about to fail.
The limitations of this established two-world-view have been addressed in a rational
ethics (Vernunftethik) of business (Ulrich 1997), which joins both concepts - busi-
ness and ethics - in a dialogue aimed at an integrated business ethical view. In this
view, business legitimacy is not achieved by profit generation but through a dialogue
among all stakeholders that constitutes the ethical foundation of business operation.
Ulrich (1987), taking an ethical perspective by explicitly denying a harmonistic ethic
economical view, mentions two concepts answering the question of which stake-
holders should be considered: a strategic concept and a normative-critical concept.
The first defines stakeholders as groups that can affect an organisation, i.e. who have
power to affect or influence the companys financial results. In this context Ulrich
explicitly discusses Freemans approach and identifies, agreeing with Goodpaster
(1991: 59), this perception of stakeholders as narrowed (Ulrich 1997: 444). While
Goodpaster (1991: 59) sticks to the profit maximisation principle, Ulrich (1997: 442)
sees the normative-critical concept as ethical, considering all groups that have legiti-
mate stakes as stakeholders, be their concern contractual rights or general moral
rights.
The theoretical discussion of stakeholder dialogues is strongly shaped by the analysis
of practical cases. The conflict ethical approach was very much enhanced by the cases
of Siemens (Steinmann/Schreygg 1982) and Nestl (Steinmann/Oppenrieder 1985).
A non-conflict based dialogue approach was analysed in the case of Procter & Gam-
ble, who conducted extensive stakeholder dialogue programs in Germany to evaluate
stakeholders relevance in skin and health care, without any immediate issues to re-
solve (see Hansen/Schoenheit 1994). The differentiation of monological and dialogi-
cal approaches was developed in the case of Daimler Chrysler Aerospace Airbus
(Roloff 2002). A theoretical evaluation of dialogue approaches applied in Germany
was presented by Rettberg (1999).
In the German-language business management literature, as in the US, there have
been two quite similar research streams integrating stakeholder ideas. Nevertheless,
three major differences can be identified:
(1) The discussion has altogether been less extensive in the German context than in
the US.
(2) The distance between business and ethics is even larger in Germany.
(3) The discussions in the German context highlight other aspects and make connec-
tions with different research approaches.
To understand better the differences between the development of stakeholder theory
in the German-language literature and the US, and to evaluate which of them could
augment the international stakeholder discussion, we will look at the context in which
the theories developed.
248
Because law requires regulation, the evaluation of dialogues and self-regulation be-
tween business and stakeholders is less emphasised as a management task in business
operations. For a long time, this was also the case for stakeholders such as unions,
consumer organisations and environmental groups in Germany. In their opinion, the
government sets norms in a rather narrow frame. These stakeholders tend to use their
countervailing power (Galbraith 1967) by defending the little remaining action scopes
in hard fights. This results in stakeholder relationships that are more oriented to con-
flict than dialog. In the US, the limited reach of government legislation and the larger
action scope of companies tend to constitute a precondition that supports dialogical
communication between stakeholders and companies. German stakeholder organisa-
tions mainly understood their countervailing function in terms of criticism, opposi-
tion, and prevention rather than in dialogue, compromise and agreement. These or-
ganisations rejected offers of a dialogical communication since this was (not always
erroneously) understood as pure PR without serious societal concern on the com-
pany side. This perspective was supported by scientific research that evaluated the
stakeholder perspective of PR, as found in the above stated journal analysis. The de-
bate on this issue continues. Nevertheless, more and more stakeholder organisations
tend to understand the positive function of stakeholder dialogues. Currently, this turn
is also supported by the current socio-economic situation in Germany. High unem-
ployment rates, the reduction of social services through federal laws as well as the
debate around the worsening competitive position of Germany as business location
not only represent societal conflicts but also reduce the power of most stakeholder
groups (except owners and management) and thereby increase their readiness to enter
into a dialogue. This increases the possibility of constructively integrating stakeholders
into dialogues aiming for peace by consensus as depicted in the conflict ethical ap-
proach.
Differences between the academic systems of the US and Germany represent a sec-
ond stream of arguments that could have relevance for a diverging discussion of
stakeholder approaches in both countries. US researchers tend to have a more prag-
matic approach to analysing problems than their German colleagues, whose academic
culture requires a more rigid theoretical foundation based on a methodologically ap-
proved approach. This seems most evident for the rational ethics approach that does
not try to improve incrementally the current business landscape but rather aims to
redesign the way business operates through a dialogue between all possible stake-
holders.
Despite Freemans criticism of the separation thesis, in Germany the distance in aca-
demic treatment of business and ethics is even larger than in the US, a fact that is
supported by the already described set of underlying values. Although in the 1920s
business administration approaches with a normative foundation were quite promi-
nent in Germany and often included stakeholder interests by proclaiming public wel-
fare as a goal of business administration (e.g. Nicklisch 1933), their easy ideological
utilisation by the Nazi Government deeply discredited normative approaches. There-
fore, Gutenberg, one of the founding fathers of modern business administration in
post-war Germany, became prominent by establishing the value-free conception of
the corporation as an autonomous, profit-oriented entity detached from society. To-
3. Conclusions
The old saying ascribed to Sir Isaac Newton that seeing further by standing on the
shoulders of giants addresses a fundamental principle of scientific progress. It is by
exchanging ideas and by further elaborating already existing ideas that science can be
advanced. Freeman did not start from scratch, and in the German-language literature,
the stakeholder approach also proceeded through connecting ideas to existing con-
cepts. We outlined some of the basic differences, which influenced the integration of
Freemans stakeholder ideas into the German contexts of practice and theory. In
Germany, a stakeholder orientation was primarily adopted by companies due to gov-
ernment regulations, often with a more confrontational tendency. Based on different
historical and religious backgrounds, the stakeholder orientation of US companies
developed more out of the companies themselves, whose ethics were already more
tightly intertwined with the business sphere than in Germany. Both contextual differ-
ences, the main background and the company experiences, also influenced academic
reception in the German-language business administration literature. Freeman initially
criticised the separation of business and ethics in the American context. But this sepa-
ration was (and often still is) much more established in the German context. This
separation was perpetuated largely by the strong meta-theoretical domination of the
so-called positivist paradigm5 in the German context.
If the stakeholder approach does not function as one grand theory but as an open
frame, connecting different threads into a better story, then the differences can be
________________________
5 The historical philosophical position of positivism has long been abandoned. In the meta-theoretical
debate, the term positivism is therefore often seen as a straw man argument. In the German con-
text it is more appropriate to speak of a critical rationalism based on Karl Popper.
250
transformed through productive cross-fertilisation. In this way, understanding experi-
ences of existing stakeholder relationships in different contexts can further enrich a
stakeholder approach acknowledging different stakeholder groups, different power
relations between companies and stakeholders, and different regulative frames. This
research can contribute to the still underdeveloped dynamic stakeholder behaviour
model and to the depiction of changing stakeholder-company relations over time.
On an academic level, a contextualised approach to a stakeholder frame can acknowl-
edge the different perspectives and traditions without notions of a take over emerg-
ing6. This could possibly be counter-productive, as the European perspective can be
especially valuable when looking at the relationship between Corporate Social Re-
sponsibility (CSR) and the stakeholder approach. This is important because CSR is an
emerging topic in practice, especially since globalisation causes severe problems of
injustice and social disadvantages and raises concern for companies action scope.
CSR implies that companies take responsibility for their actions by considering the
consequences for others who are affected, i.e. for stakeholders. Stakeholder theory is,
therefore, an implicit part of CSR and is reasonably integrated via multi-stakeholder
dialogues (EU commission 2003). Still, CSR has two facets: normative and strategic.
The strategic facet understands CSR as a business case. This is based on the notion
that socially responsible behaviour results in a positive return on investment, at least
in the long-run (Habisch 2003). The second facet, the normative view of CSR, de-
mands responsible behaviour beyond the business case, i.e. also in times of crises and
argues for responsible behaviour even if it is not profitable (Hansen/Schrader 2004).
Freeman claims that stakeholder theory makes the idea of corporate social responsi-
bility [] probably superfluous (2004: 231). We, however, are convinced that the
CSR concept goes beyond the stakeholder approach. Furthermore, we believe that the
US discussion of the stakeholder approach could benefit from considering three of
the most important levels of the European discussion. First, the scope of the CSR and
stakeholder concepts is different. CSR explicitly includes regional aspects as well as
temporal aspects. Thus, topics such as the north-south conflict or responsibility for
future generations become part of the concept. As a result, a new quality is added:
while Freemans stakeholder approach is primarily limited to existing stakeholders
who can express their opinion, the notion of CSR includes societal responsibilities
that are not claimed by any interest group. This especially supports the sustainability
idea as expressed by the World Commission on Environment and Development
(WCED 1987). Second, the CSR concept includes a goal system that provides the so-
called triple bottom line connecting economic success, social justice and ecological
compatibility (Enquete Kommission 1998) as a structure. Goals that are more detailed
are made concrete on the lower levels of the CSR goal system. The triple bottom line
in the CSR concept corresponds with the sustainability approach. In this respect, the
German-language research output can be considered advanced. Third, the level of
________________________
6 Sometimes in the German-speaking community of scholars, who developed similar ideas independ-
ent of Freemans stakeholder approach, a feeling of uneasiness about a possible replacement by the
imported stakeholder approach is articulated (see e.g. Ulrich 1999: 37 or for the Scandinavian context
Nsi 1995).
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