3S Stakeholder Theory of the Modern Corporation R. Ewanp FReeMan INTRODUCTION Corporations have ceased to be merely legal devices through which the private business transactions of individuals may be carried on. Though still mich used ‘or this purpose, the corporate form has acquired a larger significance, The cor poration has, in fact, beco 10d of property tenure and a means Of organizing economnie li iremendous proportions, there may be said to have evolved a “corporate system"—ishich has attracted to itself a com. bination of attributes and powers, and has attained a degree uf prominence en. titling it to be dealt with as a-major social institution Despite these prophetic words of Berle and Means (1932), scholars and managers alike continue to hold sacred the view that managers bear spe- cial relationship to the stockholders in the firm, Since stockholders own shares in the firm, they have certain rights and privileges, which must be granted to them by management, as well as by others. Sanctions, in the form. of “the law of corporations,” and other protective mechanisms in the form of social custom, accepted management practice, myth, and ritual, are ‘thought to reinforce the assumption of the primacy of the stockholder. The purpose of this article is to pose several challenges to this assump: tion, from within the framework of managerial capitalism, and to suggest the bare bones of an alternative theory, a sakeholder theory of the modern cor. Fatwa Fe inison of the author “Stakeholder Theory uf the Modern Cerporation ” Reprinted by per39 poration, 1 do. not seck the demise of the mace, TTT either poration. 1 do Po face Rather, 1 sek is teansfonnation, In he ore of eurath we shall tempt to “ebuld he s ‘plank by plank while it re rains afloat. Mj is that I can restate the concept of MAMAS! capitalism by replacing the notion that managers have 8, dy stockholders with by replacing the Tanager bear a tduciary relationship (0 sakeholeey the, concep a pmge groupe who have stake in or claim on he Fa Snsfrally | include suppliers, customers, employees stockholders, and Specific cy. ab well at management int le 28 AGEN" 91 ee are pe argue thatthe legal, economic, polital 2nd ‘moral challenges groups 1 argue evceived ancory of the firm, a8 a nexus of Cort to the owners of the factors of production and cuxnicy require us among tne over cpt That, each of these stakeholder §7OUPS OP 0 eae pic rend asa means to some end: and wheres Tr vee ten determining the future divecon of ehe frm 1S ‘which they hhave a stake. cS 6 ny angument is that we must reconceprualize Ne 0 aro ert owing question: For whose benefit and at whose Copa around the foo Ng aged? 1 shall set forth such a reconcepety should the form of a stakholder theory of the frm. shel te tritially Hom i ne er elolder vew and its implication forthe fuse of he

italist system ‘THE ATTACK ON MANAGERIAL CAPITALISM ‘The Legal Argument “The basic idea of managerial capitalism is that in return FoF controlling the frm, management vigorously pursues the interss ‘of stockholders. aa To the managerial view of the firm js the idea hat ‘management can pursue market wansactions with suppliers and custome! in an uncon Strained manner. ae at corporations gives a less clearcut answer t0 the question: In whowe interest and for whose benefit should the moder corporation be governed? While it says that the corporation should be run primarily in the governed? Whe stockiolders in the frm, i ays farther thatthe corporation rater gn contemplation of the law” and has personality 2° “Legal person,” ex ability for its actions, and immorality, since i eSISC A ‘transcends timed jo members. Therefore, directors and other officer of the firm have La ot ry obligation to stockholders in the sense that U6 “affairs of the Corporation” must be conducted in the inierest ‘of the stockholders. And corporates can theoretically bring suit agsnst those dirreers ‘and man- Sigers for doing otherwise, But since the corporaden 1h Tegal person, &% iSing in contemplation of the Taw, managers ‘ofthe corporation are constrained by law. saline fy this was no constraint at all. In this century, HOWE the law han evolved to effectively constrain the pursuit of stockholder interests ven peexpense of other claimants on the firm. Tt has, ‘effect, required that aac seks of customers, suppliers, local communities, ‘and employees be40 Genera Issues wv Business Enucs taken into consideration, though in general they are subordinated to the laims of stockholders, For instance, the doctrine of “privity of contract,” as articulated in Win- lerhotiom v. Wright in 1842, has been eroded by recent developments in prod ucts liability law. Indeed, Greenman 3. Yuba Power gives the manufacturer strict liability for damage caused by its products, even though the seller has exer- cised all possible care in the preparation and sale of the product and the consumer has not bought the product from nor entered into any contractual arrangement with the manufacturer. Caveat emptor has been replaced, in large part, with caveat venditor’ The Consumer Product Safety Commission has the power to enact product recalls, and in 1980 one U.S. automobile company recalled more cars than it built. Some industries are required to provide information to customers about a product's ingredients, whether or not the customers want and are willing to pay for this information.* ‘The same argument is applicable to management's dealings with em- ployees. The National Labor Relations Act gave employees the right to unionize and to bargain in good faith. It set up the National Labor Rela- tions Board to enforce these rights with management. The Equal Pay Act of 1963 and Title VII of the Civil Rights Act of 1964 constrain manage- ment from discrimination in hiring practices; these have been followed with the Age Discrimination in Employment Act of 1967.3 The emergence of a body of administrative case law arising from labor-management dis- putes and the historic settling of discrimination claims with large employ- cers such as AT&T have caused the emergence of a body of practice in the corporation that is consistent with the legal guarantee of the rights of the employees. The law has protected the due process rights of those employ- ces who enter into collective bargaining agreements with management. AS of the present, however, only 30 percent of the labor force are participat- ing in such agreements; this has prompted one labor law scholar to pro- pose a statutory law prohibiting dismissals of the 70 percent of the work force not protected.” ‘The law has also protected the interests of local communities. The Glean Air Act and Clean Water Act have constrained management from “spoiling the commons.” In an historic case, Marsh v Alabama, the Supreme Court ruled that a company-owned town was subject to the provisions of the USS. Constitution, thereby guaranteeing the rights of local citizens and negating the “property rights” of the firm. Some states and municipalities have gone further and passed laws preventing firms from moving plants or limiting when and how plants can be closed. In sum, there is much cur rent legal activity in this area to constrain management's pursuit of stock- holders’ interests at the expense of the local communities in which the firm operates. T have argued that the result of such changes in the legal system can be viewed as giving some rights to those groups that have a claim on the firm, for example, customers, suppliers, employees, local communities, stock: holders, and management. It raises the question, zt the core of a theory of the firm: In whose interest and for whose benefit should the firm be ‘managed? The answer proposed by managerial capitalism is clearly “the stockholders,” but [have argued that the law has been progressively cir- cumseribing this answer.