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IF FAIRNESS IS THE PROBLEM, IS CONSENT THE SOLUTION? INTEGRATING ISCT AND STAKEHOLDER THEORY Harry J. Van Buren IE Abstract: Work on stakeholder theory has proceeded on a variety of frontSf as Donaldson and Preston (1995) have noted, such work can be parsed into descriptive, instrumental, and normative research streams. In a normative vein, Phillips (1997) has made an argument for a principle of fairness as a means of identifying and adjudicating among stakeholders. In this essay, I propose that a reconstructed principle of fairness can be combined with the idea of consent as outlined in integrative social contract theory (ISCT) to bring about a more normative stakeholder theory that also has ramifications for corporate governance T alking about fairness is an easy way to start a fight. No one wants to be called unfair; everyone wants to couch his or her ideas and ideals in terms of fairness. Fairness is what Stevenson (1944; see also Hare 1952) calls an emotive term; a part of language that has a constant (in the case of fairness, laudatory) meaning that is redefined over time. Ethical discourse relying on emotive analyses focuses on the meanings of such terms;/air is always a laudatory term, but in practical terms is applied to different behaviors and goals. Pronouncing an idea or a policy to be fair, therefore, is a means of seeking (and getting) support for it. The recent debate about affirmative action illustrates the power of fairness as an emotive term: both proponents and opponents of this public policy have claimed that their positions were and are consistent with fairness. There is a limit, of course, to what can be called fair; the term's meaning is elastic, but not infinitely so. A recent paper by Phillips (1997: 57) has proposed a principle of fairness that reads as follows: Whenever persons or groups of persons voluntarily accept the benefits of a mutually beneficial scheme of cooperation requiring sacrifice or contribution on the parts of the participants and there exists the possibility of free riding, obligations of fairness are created among the participants in the cooperative scheme in proportion to the benefits received. • Phillips proposes that this definition provides a coherent justificatory framework for stakeholder theory that adjudicates issues like (1) who a stakeholder is and (2) how competing interests among stakeholders so identified might be reconciled. Certainly it is true that there is a need for a justificatory stakeholder framework that provides an ethical basis for identifying stakeholders and determining ©2001 Business Ethics Quarterly. Volume 11, Issue 3 ISSN 1O52-15OX. pp. 481-499 482 BUSINESS ETHICS QUARTERLY whether they are being treated fairly. My concern about Phillips' definition of stakeholder fairness is based on its utility; I will argue that this definition of fairness does not provide a basis for ameliorating injustices suffered by stakeholders. After summarizing both the literature on stakeholder identification and Phillips' fairness principle, I will propose that a reconstructed principle of fairness can be combined with the idea of consent, as outlined in integrative social contract theory (ISCT), to bring about a more normative stakeholder theory. Theories of Stakeholder Identification Since Freeman's (1984; see also Freeman and Reed 1983) seminal work^ developing the stakeholder concept, hundreds of papers have been written about various aspects of it (Clarkson 1998). A number of questions are central to the development of stakeholder theory, including: Who are stakeholders? What is a stake? How should stakeholders be treated by managers? Do moral claims inhere on the basis of stakeholder status? In the intervening time since the development of the modern stakeholder concept, considerable progress has been made in developing many different theories of stakeholder identification, perhaps best characterized in terms of broad versus narrow views (Mitchell, Agle, and Wood 1997). The choice of a theory of stakeholder identification has both normative and practical implications, as most academics doing work in this area have realized. If one takes a narrow view of stakeholder identification, it is likely that only stakeholders who can directly and immediately affect economic outcomes will be included in managerial analyses—leaving folks whose power or ability to press their claims is lacking excluded from managerial consideration. In con- trast, a broad view of stakeholder identification may include every conceivable group affected by or affecting the organization's activities (which might be seen as good from a normative standpoint), but at the expense of failing to either focus the time and attention of managers or to offer rules to help them adjudicate among differing stakeholder claims. A theory of stakeholder identification implicitly asks and answers the question Who and What Really Counts? (Mitchell, Agle, and Wood 1997) Despite all of the work that has been done in the past fifteen years on the stakeholder concept, the fact remains that the normative aspect of stakeholder theory is not nearly as well developed as the strategic aspect. It should be recalled that Freeman's 1984 work was billed primarily as a work in strategic management that placed the business organization at the center of analysis. If stakeholder theory can be parsed into descriptive/empirical, instrumental, and normative components (Donaldson and Preston 1995), it can be argued that the first two components are much more developed than the third. Recent theoretical work by Mitchell, Agle, and Wood (1997) has laid out the possibilities vis-a-vis the descriptive/empirical and instrumental aspects of stakeholder theory by describing three attributes of relationship to the organization potentially pos- sessed by stakeholders: power, legitimacy, and urgency. Other authors (Atkins INTEGRATING ISCT AND STAKEHOLDER THEORY 483 and Lowe 1994; Atkinson, Waterhouse, and Wells 1997; Burke and Logsdon 1995; Clarkson 1995; Gregory and Keeney 1994) have taken up how stakeholder theory might prove beneficial to strategic planning—a kind of instrumental stakeholder analysis. Stakeholder theory has properly become a useful means of communicating to students and managers the importance of non-stockholder groups to the success of an organization. But the normative aspect of stakeholder theory has not progressed as far as its descriptive and instrumental aspects. In particular, one worrying trend m stakeholder theory has been its focus on entities whose ability to directly and immediately affect the firm s operations through concrete actions makes them salient to managers. This focus on the stakeholder who can do the firm good or ill based on its autonomous actions leaves out one critical group: the dependent stakeholder who possesses the relationship attributes of legitimacy and urgency (Mitchell, Agle, and Wood 1997) but does not possess the power needed to press its claims. Mitchell, Agle, and Wood note that such stakeholders must rely on either the advocacy of other stakeholders who possess power or the internal values of organizational managers to seek consideration of their claims. While this is certainly good advice in terms of describing how such stakeholders actually get heard, it also means that there will be many stakeholders whose urgent and legitimate claims will not be heard. From the standpoint of developing a stakeholder-oriented system of business ethics, it is the powerless stakeholders who have legitimate and/or urgent claims that are of greatest concern. Simply put, stakeholders with power will be heard if they wish and stakeholders without power will not without someone else's help. Do powerless stakeholders exist? Quite obviously—there are lots of groups with legitimate and urgent claims that do not have power. Environmental racism analyses (see Krieg 1995), for example, focus on the powerlessness of minority communities and the concomitant result that dangerous facilities are dispropor- tionately located therein. Employees of contract suppliers (see Van Buren 1995a) that sell to firms in the United States often live in countries where collective bargaining is prohibited; the state exercises its power in ways that ensure the powerlessness of such stakeholders. In the next section, these two examples of dependent stakeholders will be examined. But it is important to note that many stakeholders exist who lack power but present legitimate and/or urgent claims; these stakeholders must necessarily be at the center of any normative stakeholder theory. In the next section, one such theory will be explored. Philllips' Principle of Fairness As I noted previously, the normative aspect of stakeholder theory is not as well developed as its descriptive and normative components. It would be unfair to say that no normative stakeholder work has been done. A number of works have critiqued the notion that the only stakeholders to whom managers owe responsibility are stockholders (Boatright 1994, Goodpaster 1991, Langtry 1994, Starik 1995). Less clear, however, is the theoretical grounding for this kind of claim. 484 BUSINESS ETHICS QUARTERLY One reason that stockholders are traditionally set apart in much of the management and economics literature is the recognition of their status as owners of the firm. Friedman's (1962/1982) analysis of the social responsibilities of cor- porations (often discussed in its truncated 1970 form) is actually an argument about human freedom as expressed through the prerogatives of property rights. In one stylized version of neoclassical economic analysis, property owners have a right, subject to the demands of law and moral custom, to dispose of their property as they see fit. If they decide to use their property in a business enterprise, property owners will need to contract with some groups that provide needed resources (employees, suppliers) that are trying to achieve their own goals and will be constrained by public policy mechanisms that reflect commonly held understandings of the role and responsibilities of the business enterprise. The rights of non-stockholder stakeholders that provide resources to the firm are protected either by the terms of contracts freely reached by both parties ("the firm as 'nexus of contracts' approach," see Coase 1937 and 1960, Williamson and Winter 1991) or by government regulation that sets the rules businesses must follow. The market provides yet another line of defense: if the actions of a firm are seen as socially illegitimate, the firm will suffer in the marketplace as its "stakeholders" will not do business with it. This story is a common one in economic discourse. Further, as Chamberlain (1973) has pointed out, it is consistent with the values of American society— individual freedom, an emphasis on equality of opportunity rather than equality of outcome, and anti-statism. Unfortunately for the powerless stakeholders discussed in the previous section, this version of the economic story has its problems. The nexus of contracts approach to imagining the firm's relationships with its stakeholders fails to protect those most in need of protection—those who lack bargaining power. Consider the two groups of powerless stakeholders mentioned in the previous section—minority communities and maquiladora workers. Cer- tainly the latter group would be included as a stakeholder under the narrowest of definitions, and most stakeholder definitions would include communities in which facilities are sited. Yet, stakeholder status in and of itself does relatively little to protect either group. The minority community may be able to resort to judicial means to prevent a hazardous plant from being sited in its midst, but its poverty makes unlikely the possibility that it will be able to marshal the resources (political, legal, economic) needed to wage this kind of battle successfully. The maquiladora workers face not only the poverty that makes it difficult for them to assert their rights (lest they be fired), but also a hostile national government that is a powerful opponent of labor rights. In both cases, a nexus of contracts approach to safeguarding the interests of these stakeholders is likely to lead to injustice. What do both groups lack? In short, what they lack is the relationship at- tribute of power. Such stakeholders (following Mitchell, Agle, and Wood 1997) have legitimate and urgent claims, but unless they (1) are dealing with managers whose personal values do not permit them to take advantage of such stakeholders or (2) are able to find patrons with power over the relevant focal organization. INTEGRATING ISCT AND STAKEHOLDER THEORY 485 It IS likely that they will be exploited stakeholders. It is these stakeholders who are most important for any normative stakeholder theory. Without either some means of assigning weights to the interests of various stakeholders or an ad- equate normative foundation for describing their rights (following the analysis of Donaldson and Preston, 1995), powerless stakeholders will remain so. It is now appropriate to return to Phillips' (1997) definition of fairness. Phillips draws upon the Rawlsian (1971) idea of cooperative ventures as the starting point for his principle of fairness. Rawls proposed that society be thought of as a cooperative venture that must be underpinned by principles of justice that free and rational persons would choose from a position of original equality. Phillips locates his fairness principle at the organizational level, proposing six qualifica- tions that an organization must meet to be considered a true cooperative scheme: mutual benefit, justice, benefits accrue only under conditions of near unanimity of cooperation, cooperation requires sacrifice or restriction of liberty on the part of participants, the possibility of free-riders exists, and voluntary acceptance of the benefits of the cooperative scheme. As do many ways of conceptualizing the stakeholder concept, this definition of fairness limits consideration of which groups count as stakeholders; here to groups that are part of the cooperative scheme (terrorists need not apply). Now that the organization has been understood to be a cooperative scheme for mutual benefit, Phillips is able to draw a tighter distinction between stakeholders and non-stakeholders. There will be many groups—terrorists and competitors to name but a few—that may merit consideration by managers for reasons related to organizational self-interest. But these groups are not stakeholders; in Phillips' definition, the differentiation between stakeholder and non-stakeholder has moral import. Stakeholders are owed duties of care and consideration because they are participants in a cooperative scheme—borrowing from Clarkson (1994), they have something actually at risk. Phillips' theory of fairness thus has both an identification component (stakeholders are those groups that voluntarily accept the benefits of a mutually beneficial scheme of cooperation requiring sacrifice or contribution on the parts of the participants) and a normative component that names distributive justice as the ethical decision rule (obligations of fairness are created among the participants in the cooperative scheme in proportion to the benefits received). Further, the principle of fairness can be combined with the concept of property rights proposed by Donaldson and Preston (1995). They propose that property rights might well be embedded in human rights; such a conceptualization of "property" explicitly critiques the shareholder-centered view of managerial responsibilities, which posits that shareholders alone have property rights; properly pointing out that "the contemporary theoretical concept of private property clearly does not ascribe unlimited rights to owners and hence does not support the popular claim that the responsibility of managers is to act solely as agents for the shareholders" (p. 84). By extension, locating property rights in human rights implicitly critiques the notion that contractual arrangements between the focal 486 BUSINESS ETHICS QUARTERLY organization and stakeholder groups are sufficient to protect the latter's interests (see Jensen and Mechling 1978). Although Donaldson and Preston do not propose that property rights located in human rights should rise to the level of formal property rights, they nevertheless point out that such quasi-property rights give non-shareholder stakeholders a moral interest in the affairs of the corporation. A fuller explication of this idea is beyond the scope of the present paper, but for the purposes of the present discussion it is sufficient to say that locating property rights in human rights provides an additional grounding for a principle of faimess that moves the discussion of stakeholder faimess beyond discussions of contracts. Returning to the powerless stakeholders previously discussed, Phillips' definition of faimess provides a means for adjudging their treatment. To the degree that focal organizations take advantage of the powerlessness of minority communities or maquiladora workers to provide lesser benefits to these stakeholders than obligations of fairness would demand (which will be discussed in a later section), then it can be stated that these stakeholders have been treated unfairly. While Phillips himself allows that the principle of fairness as he has defined it says little about the content of obligations to stakeholders, simply providing a normative justification for including some groups and not others as stakeholders is itself an important step in normative stakeholder theory. This said, stakeholder identification—even based on normative grounds— can only take us so far. Not only does the content of obligations need to be discussed, but means by which stakeholders can press their claims must also be delineated. If we imagine the focal organization and its goals as the center of analysis, the work of Mitchell, Agle, and Wood (1997) is instructive in this regard. One conclusion that can be drawn from this work is that the way in which a stakeholder becomes salient—and thus deserving of immediate attention—is to acquire legitimacy, urgency, and power. But as previously noted, not all of these attributes are of equal importance. Power matters most; if a stakeholder has power alone, it may indeed be a "dormant" stakeholder. But any powerful stakeholder who presents either an urgent or legitimate claim is likely to at least get a hearing from organizational managers—and stakeholders who possess all three relationship attributes will be heard and attended to. It is easy enough to acquire an urgent claim (as a stakeholder itself defines the urgency of its claim), and not too much harder to make a claim that is seen as legitimate. But of the three relationship attributes, power is both the most difficult to get and the most important for stakeholder salience. Shareholders often have actual power by vir- tue of their property rights as recognized by law and custom (but see Berle and Means 1932 and Kaufman, Zacharias, and Karson 1995 for a critique of the actual power of shareholders over organizational managers), but more appropri- ately for the current discussion this stakeholder group is seen as having the most legitimate grounds for influencing managerial activities. The powerlessness of many stakeholders, when analyzed via a principle of fairness, raises important issues about corporate governance and consent. Sim- ply put, if fairness is the problem, is consent the solution? I will take up this INTEGRATING ISCT AND STAKEHOLDER THEORY 487 topic in the next section as an intervening step before proposing a reconstructed principle of fairness. The Problem of Consent and Organizational Governance The principle of fairness defined by Phillips (1997) has been offered as one means of formulating a normative stakeholder theory, and his principle does move the field forward in this regard. But what happens when a relationship between a focal organization and one of its stakeholders is judged (by the stakeholders themselves or by outside observers) to be unfair? At the end of his article, Phillips (1997) proposes that actual discourse with stakeholders is a good means of finding out what stakeholders actually want, providing a more informed base of making decisions that have ethical import (for a good discussion of the benefits of and barriers to such stakeholder discourse, see Calton 1996). The call to engage in stakeholder discourse is all well and good, and is appli- cable whether or not a normative frame for making managerial decisions is sought. But note that in the previous section, I located the problem of unfairness in stakeholder theory squarely in power differentials between stakeholders and a focal organization; stakeholders without power are more likely to be treated unfairly than stakeholders with power. How likely is it that stakeholders without power will be consulted by managers, and even less so that the former's goals will be considered by the latter? Powerlessness is a major reason that hazardous facilities are located in powerless communities, and it is a significant reason that maquiladora workers cannot collectively bargain for higher wages. Determin- ing fairness and ameliorating unfairness are two different tasks. What is needed, therefore, is some way of conceptualizing corporate governance that institutional- izes discourse between organizational managers and their stakeholders—especially the powerless stakeholders whose participation in the collective scheme is neces- sary for the organization's success. It should be recalled that before Freeman's seminal 1984 work. Freeman and Reed (1983) introduced the contemporary stakeholder concept in an article about corporate governance. Subsequent work by Freeman, alone and with other authors (Freeman 1994, Freeman and Evan 1990), in addition to other work by stakeholder theorists (Alkhafaji 1988, Calton and Lad 1995) and economists (Williamson 1983) has made corporate governance processes a new arena of research for stakeholder theory. Instructive in this area of stakeholder theory is Freeman and Evan (1990. p. 338), who propose that "stakeholders be accorded voting rights with respect to deciding how to manage the affairs of the corporation." This argument is actually proposed to be an extension of earlier changes in public policy—like the Clayton Act and the Foreign Corrupt Practices Act— that limit the ability of managers to exercise autonomy, thus balancing the interests of focal organizations and their stakeholders. But Freeman and Evan propose that the exogenous safeguards provided by public policy mechanisms should not be a preferred means of safeguarding stakeholder interests; their preference is 488 BUSINESS ETHICS QUARTERLY for endogenous safeguards that are built into the contracting process itself (which presumably preserves the freedom of parties to engage in voluntary contracting). Alternatively, voting membership of the board of directors might be another means of protecting stakeholder interests, although this might require some safeguards to protect the residual rights of some stakeholders (like shareholders). What is notable about this approach to stakeholder theory is its emphasis on corporate govemance—either in reforming the process of contracting or by explicitly including non-shareholder stakeholders on the board. Underpinning both proposals for interpreting corporate governance through a stakeholder analysis is the idea of consent of stakeholders to their treatment by the focal organization. Preserving stakeholder interests through endogenous processes is thus proposed to include contracting processes in which consent is made apparent or by participation in governance processes that guide the policies and practice of the organization. The supposed importance of consent in analyzing stakeholder relations is not new, of course. Social contract theory—best applied to business ethics questions in the form of integrative social contract theory (ISCT) makes consent an important element of its analysis of relationships among participants in a collective scheme for mutual benefit (Donaldson 1982; Donaldson and Dunfee 1994, 1999; Dunfee 1991; Dunfee and Donaldson 1995). Like traditional social contract theory (Rawls 1971, Gauthier 1986), ISCT proposes the idea of consent to a hypothetical social contract that governs relationships in society as the starting point for the ethical analysis of social relationships. There are actually two levels of social contract: a macro-social contract that serves as the set of principles that contractors would agree upon to ensure procedural fairness, and myriad extant local social contracts that are con- cerned with how communities actually govern themselves. Parties engaged in private transactions will insist on "moral free space" that allows for the estab- lishment of local micro-social contracts that are consistent with the values of the community. To the degree that local social contracts do not violate hypernorms— "principles so fundamental to hnman existence that they serve as a guide in evaluating lower-level moral norms" (Donaldson and Dunfee 1994, p. 264)— and are consistent with the macro-social contract, they should be followed by contracting parties. To fiirther elaborate on the ISCT framework, a number of con- cepts relevant to the theory have been developed (Donaldson and Dunfee 1994): 1. Local economic communities may specify ethical norms for their mem- bers through micro-social contracts; 2. Norm-specifying micro-social contracts must be grounded in enforced consent buttressed by a right of exit; 3. In order to be obligatory, a micro-social contract must be compatible with hypernorms. ISCT is thus meant to bridge the gap between ethics and organizational studies by making it possible to be simultaneously prescriptive and descriptive in the INTEGRATING ISCT AND STAKEHOLDER THEORY 489 same framework. Further, ISCT offers a methodology for critically analyzing the environments m which firms operate—if a local environment's micro-social contract either violates hypernorms or is inconsistent with the macro- social contract, ethical reflection by managers will be needed to determine if operating there is ethically permissible. As a relatively new framework within the field of business ethics, ISCT still faces a number of unresolved issues. The content of hypernorms is still undeter- mined; further, the hypernorm concept itself is fuzzy. Mayer and Cava (1995) note that gender inequality might itself be a hypernorm as defined in ISCT, given that it is extant is almost every society—yet few people would agree that gender inequality should be a hypernorm. Although this issue is important, it need not be resolved here. More relevant for the purposes of this paper is the concept of consent. It is well established that few contracts are reduced to writing; rather, the terms of most contracts tend to be implicitly understood by each party—which means that there is not necessarily agreement between the parties in terms of what each thinks it has signed up for. Rousseau (1995) has identified four dimensions of contracts (even written ones): voluntariness, incompleteness, reliance losses, and automatic processes for contract compliance. Most interesting for the present enterprise is the dimension of voluntariness, which corresponds to the idea of consent in ISCT. Suppose we imagine that an organization and a group of its stakeholders is the relevant "community" for ISCT analysis. The organization- as-community is bound by hypernorms and the macro-social contract. The micro-social contract that binds all of the stakeholders together (recall the theory of the firm discussed in Freeman and Evan. 1990) must be grounded in informed consent buttressed by a right of exit, corresponding to the dimension of voluntariness. This analysis leads to a fundamental question: What do we mean by consent? Phillips (1997) focuses on consent as one of the weaknesses in ISCT. If most contracts are unwritten, then finding consent is rather difficult. On this point Dunfee and Donaldson (1995) offer a number of ideas, including surveys and other tests of actual consent to be administered at the local community level. But the utility of means of testing consent that do not rely on establishing express consent is dubious. If organizations manage relationships with stakeholders and not with society (Clarkson 1995), then the appropriate level of analysis for ISCT is organizational, albeit with some discussion to community norms (for example, at the regional or national levels). But express consent is often lacking, and implied consent is offered by ISCT proponents as a substitute. Here the question is whether consent implied in atti- tudes or actions is consent at all. Phillips' discussion of this point is instructive: Acts that "imply consent," on the other hand, are actually no consent at all. Rather, they may be either acts that demonstrate a favorable attitude toward the prospect in question or acts that induce obligations sinular to or identical to those induced by genuine express consent. (1997, p. 60) 490 BUSINESS ETHICS QUARTERLY Trying to measure a favorable attitude (tacit consent) in fact indicates no consent at all exists. Acts that indicate express consent do demonstrate meaningful consent and thus can create binding obligations of fairness. Express consent (and very close proxies therefor) is thus the only kind of consent that should be meaningful to ISCT analysis; in the absence of acts implying express consent (the acts themselves indicating consent, but see the discussion following) or actual express consent, it cannot be said that consent to a micro-social contract exists. Further, exit in many cases as a means of withholding consent or withdrawing from the community may be difficult or even impossible due to the very conditions that make stakeholder groups like maquiladora employees or residents of minority communities powerless. Now let's add a complicating factor. Suppose there is a company that has accepted benefits from a cooperative scheme (to remain consistent with my previous example, let's take two groups, minority communities hosting a hazardous facility and maquiladora workers). Consent might seem obvious in both cases from the company's standpoint:, corporate managers might conclude that acceptance of benefits from stakeholders is exactly the kind of action that indicates express consent. But the consent in both cases is asyjnmetric. For consent to be meaningful, it must be freely given and not coerced. The company that takes advantage of the economic and political powerlessness of a minority community in order to locate a hazardous plant there has not obtained true consent—implied or actual—from that community. Similarly, maquiladora workers who experi- ence both poverty and state hostility toward collective bargaining (as exists in many countries like Mexico) also have not given implied or actual consent. The powerlessness of both groups, combined with the circumstances under which their participation in the company's "cooperative scheme" was obtained, means that neither has consented to their treatment by the company. Powerlessness leads in both cases to asymmetries in consent—the company has incurred obligations of fairness based on its acceptance of benefits from both groups of stakeholders, but neither the minority community nor the maquiladora workers have given their consent freely. In short, the fact that a stakeholder group has accepted benefits does not demonstrate that they have consented to their treatment—or the terms of the deal—by the focal organization. It is true that the company in this case has incurred obligations of fairness irrespective of whether or not consent was obtained (Phillips 1997). However, the absence of consent—especially when mediated by power asymmetries— makes unfairness nearly certain in many organizational-stakeholder relationships. If stakeholders facing a powerful organization were somehow able to participate in the governance of the corporation, then it is possible that freely given consent might be possible. The central point is this: where meaningful consent exists, fairness will likely exist also. For an organization to be a truly cooperative scheme for mutual advantage of all stakeholders, the issue of consent must be taken up as a means of ensuring fairness. The principle of fairness thus takes us to a point