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 contribu-
tion 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 frame-
work 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 stake-
holders. After summarizing both the literature on stakeholder identification and
Phillips' fairness principle, I will propose that a reconstructed principle of fair-
ness 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^ de-
veloping 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 im-
plicitly 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 re-
called 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 theoreti-
cal 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 stake-
holder 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 stake-
holder 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 val-
ues 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 stake-
holder-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 respon-
sibility 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 man-
agement 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 enter-
prise, 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 dis-
cussed 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 (po-
litical, 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 stakehold-
ers 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 stake-
holders 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 stake-
holders; in Phillips' definition, the differentiation between stakeholder and
non-stakeholder has moral import. Stakeholders are owed duties of care and con-
sideration 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 coopera-
tion 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 "prop-
erty" explicitly critiques the shareholder-centered view of managerial
responsibilities, which posits that shareholders alone have property rights; prop-
erly 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 im-
plicitly 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 pro-
pose 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' defi-
nition of faimess provides a means for adjudging their treatment. To the degree
that focal organizations take advantage of the powerlessness of minority com-
munities 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 re-
gard. 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 stake-
holders 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 ben-
efits 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 stake-
holder 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 facili-
ties 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 au-
thors (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 corpora-
tion." 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 contract-
ing). Alternatively, voting membership of the board of directors might be another
means of protecting stakeholder interests, although this might require some safe-
guards 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 ex-
plicitly 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 organiza-
tion. 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 rela-
tionships 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 ex-
press 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 pre-
vious 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 accep-
tance 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 ben-
efits 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
 INTEGRATING ISCT AND STAKEHOLDER THEORY 491

at which issues of consent become connected to whether fairness in stakeholder

relationships exists. Whenever a company voluntarily accepts benefits from a
stakeholder, it incurs obligations of fairness. In the next section, the issue of
consent as mediated through participation in corporate governance processes
will be taken up in the context of corporate governance to develop a reconstructed
principle of fairness.

A Reconstructed Principle of Fairness

In the previous section, I discussed the problem of unfairness as experienced
by some organizational stakeholders, and connected unfair treatment of stake-
holders to their powerlessness, which makes it unlikely that true consent exists.
Recall Phillips' 1997 definition of the principle of fairness:
Whenever persons or groups of persons voluntarily accept the benefits of a
mutually beneficial scheme of cooperation requiring sacrifice or contribu-
tion 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.
Disaggregating Phillips' principle of fairness into its component parts and
applying it to an organizational context, four initial propositions can be derived.
The first proposition relates to the purpose of the organization:
Proposition 1: Organizations are mutually beneficial schemes of coopera-
tion among stakeholders.
The second proposition brings in the element of stakeholder contributions to
this mutually beneficial scheme of cooperation. Stakeholders make sacrifices
for and contributions to the organization. Some of the contributions entail
opportunity costs: the laborer who works an hour for one organization cannot
use that hour for another purpose, and the investor who commits a dollar to the
purchase of stock cannot use the same dollar for consumption. Other contributions
might include the assumption of externalities; the best example is the community
that accepts a plant that emits toxins into the environment. In both cases, the
organization would cease to exist without the contributions and sacrifices of its
stakeholders, as described in proposition 2:
Proposition 2: Mutually beneficial schemes of cooperation require both
sacrifices and contributions on the parts of the participants.
The third proposition addresses the problem of unfairness, which Phillips has
cast in terms of free riding.
Proposition 3: In any mutually beneficial scheme of cooperation, the pos-
sibility of free riding exists
The final proposition relates to the dispersal of benefits created as a result of the
mutually beneficial scheme of cooperation, and is the crux of Phillips' principle
of fairness:
492 BUSINESS ETHICS QUARTERLY

Proposition 4: In any mutually beneficial scheme of cooperation, obliga-

tions of fairness are created among the participants in the
cooperative scheme in proportion to the benefits received.
The task that I want to undertake in reconstructing the principle of fairness is to
make it more useful for imagining how stakeholders might ensure that they receive
their fair share of the benefits created by an organization in which they hold a
stake. For the purposes of this reconstructed definition, propositions 1 and 2
will remain the same. I concur with the judgment that organizations should be
thought of as mutually beneficial schemes of cooperation that require both
sacrifices and contributions on the parts of the participants.
The first change in Phillips' principle of fairness relates to the issue of free
riding. If powerless stakeholders are unable to receive the full value of their
sacrifices and contributions—whether due to power differentials created by the
organization, socioeconomic factors, or state power—they are suffering the ill
effects of free riding. Consider, for example, the case of maquiladora employ-
ees. It is true that explicit coercion—-for example, police power-—is not used to
compel maquiladora employees to work. But as I have previously noted, these
stakeholders tend to be powerless to press any claims for better treatment from
the plant owners. As Williams (1999) has noted, Mexican employees face tre-
mendous difficulties in organizing independent labor unions that might better
protect their rights than Mexican law or the agreements between individual em-
ployees and a maquiladora.
It is not necessary to reach the question of whether companies intend to free
ride or not. A company that, for example, explicitly considers whether a particu-
lar country inhibits independent unions when making siting decisions incurs the
same obligations of fairness as a company that does not. What matters for the
present analysis is whether the distribution of benefits is affected by the effects
of organizational free riding due to asymmetries in power, whatever the latter's
cause. In short, organizations that use power differentials as a means of dispers-
ing fewer benefits to stakeholders than would be owed under a fair valuation of
the latter's contributions to the organization are in effect incurring obligations
of fairness, even as they are free riding. Proposition 3 is modified to reflect the
influence that power has on the probability that stakeholders will suffer the ill
effects of free riding. The new proposition 3, labeled proposition 3', reflects this
concern about the interaction effect of power differentials with the likelihood of
free riding:
Proposition 3': In any mutually beneficial scheme of cooperation, the pos-
sibility of free riding exists; the likelihood that a stakeholder
will be harmed by organizational free riding is inversely
proportional to the stakeholder's power.
Before moving to proposition 4, two additional propositions are needed. Because
I have offered changes in corporate governance as a solution to the problem of
unfair treatment of stakeholders by organizations, it is necessary to step back
 INTEGRATING ISCT AND STAKEHOLDER THEORY 493

and discuss the purpose that corporate governance serves. In theory, boards of
directors and the corporate officers appointed by the board are understood to be
fiduciaries for the true owners of the corporation—owners of common stock
(Goodpaster 1991). This view of board and corporate officer responsibilities is
widely held by economics and finance scholars. But it is important to note that
statutory and common law have increasingly recognized that organizational
fiduciaries may take into account the interests of other stakeholders when making
decisions, even if there is some harm to shareholders (see, for example. Freeman
and Reed 1983). Further, the notion that only common stockholders have property
rights in the corporation has been discussed and critiqued in a variety of literatures
(Coase 1960. Donaldson and Preston 1995).. and it is proposed that such a
definition of property rights is too narrow for the purposes of normative
stakeholder theory building.
In a previous section, I discussed how consent (understood as participation in
the process of corporate governance) might ameliorate the unfair treatment of
powerless stakeholders. Following Freeman's (1994) Principle of Governance—
"the procedure for changing the rules of the game must be agreed upon by
unanimous consent"—and Donaldson's and Preston's (1995) discussion of how
property rights might be embedded in human rights, the reconstructed theory of
fairness takes up the issues of redefining property rights and including all
stakeholders in corporate governance processes to ensure that the interests of each
are taken into consideration. These issues are reflected in propositions 3a and 3b:
Proposition 3a: Every group that participates in a mutually beneficial
scheme of cooperation possesses property rights (whether
quasi- or literal) that must be taken into consideration.
Proposition 3b: All participants in a mutually beneficial scheme of coop-
eration have arightto participate in governance processes
as a means of ensuring that express consent exists.
We are now ready to take up proposition 4 from Phillips' principle of fairness. It
should be apparent that a principle of fairness must not only include mention of
dispersing the results generated by the scheme of cooperation, but must also
make provision for the kinds of corporate governance principles that ensure an
equitable result for all stakeholders. Proposition 4 is therefore rewritten as
follows:
Proposition 4': In any mutually beneficial scheme of cooperation, obligations
of fairness arc created among the participants in the coopera-
nve scheme in proportion to the benefits received, but are
preceded by obligations to include each stakeholder in the
process of corporate govemance in proportion to the sum of
Its contributions to and sacrifices for the collective scheme.
Now all of the pieces are in place to reconstruct the principle of fairness. The
new principle reads as follows:
494 BUSINESS ETHICS QUARTERLY

Organizations are mutually beneficial schemes of cooperation that require

both sacrifices and contributions on the parts of the participants; but the
possibility of free riding (especially by the organization) exists. Because
(1) the likelihood that a stakeholder will be harmed by organizational free
riding is inversely proportional to the stakeholder's power, (2) every group
that participates in a mutually beneficial scheme of cooperation possesses
property rights that must be taken into consideration, and (3) all partici-
pants in a mutually beneficial scheme of cooperation have a right to
participate in governance processes, obligations of fairness are created
among the participants in the cooperative scheme in proportion to the ben-
efits received. Such obligations are preceded and safeguarded by obligations
to include stakeholders in the process of corporate governance as a means
of obtaining their express consent in proportion to the sum of their contri-
butions to and sacrifices for the collective scheme.
In the next section, I will discuss the implications of this reconstructed principle
of fairness.

Implications of the Reconstructed Principle of Fairness

In this paper, I have offered consent—as reflected in participation in corpo-
rate governance processes—as a means of ensuring fairness in organizations.
Building on a definition of justice as fairness, I have undertaken an analysis of
stakeholder attributes, proposed that stakeholder power is likely to prevent free
riding and unjust treatment of stakeholders by the focal organization, and then
integrated concerns about governance and consent into a new definition of fair-
ness. My goal has been to find endogenous ways of ensuring fair treatment of all
stakeholders—especially powerless stakeholders who present legitimate and ur-
gent claims. Quite obviously, more work needs to be done in specifying the form
of such new governance mechanisms. This said, three implications of the recon-
structed principle of fairness merit brief discussion.
Analyses of power matter in considering stakeholder relations
Mitchell, Agle, and Wood (1997) have done an admirable job of describing
relationship attributes that might affect stakeholder salience. In normative terms,
their analysis can be extended to include issues of organizational dominance
over stakeholders. A normative stakeholder theory must necessarily ask ques-
tions related to power—who has it and how it is being used. The reconstructed
principle of fairness places power at the center of analyses of unfair treatment of
stakeholders by organizations.
Nozick's (1969) discussion of coercion is quite helpful with regard to this
point. Although a longer discussion of coercion and stakeholder relationships is
beyond the scope of this paper, one of Nozick's examples is relevant to the present
analysis. He uses the example (pp. 453-455) of a factory owner facing a union
election in a factory that he owns; the owner announces that if the union wins
the election, he will close the factory and go out of business. Nozick takes up
two questions:
 INTEGRATING ISCT AND STAKEHOLDER THEORY 495

1. Has the factory owner threatened or merely warned the employees?

2. If the union would have won the election m the absence of the announce-
ment, were the employees coerced by the employer into rejecting the
union?
Nozick's analysis turns in significant part to the differentiation between threats
and warnings, but this example also illustrates the relationship between consent
and fairness. Suppose that the employees hear this statement by the employer
and decide not to vote for the union out of a belief that doing so will lead to the
closing of the plant, and further suppose that the reason that the employees were
attracted to the union was because they were dissatisfied with the terms of the
employment relationship and believed that union membership would improve
their lot. Now, does the continued acceptance of benefits (i.e., paychecks) mean
that the employees have consented to the terms of employment offered by the
employer? The reconstructed principle of fairness delineated herein would
conclude that true consent does not exist because the employer used his ability
(as the capital owner) to close the plant and thus to prevent the workers from
exercising voice in the employment relationship, which would have made consent
possible in this particular case. Here, the threat to close the plant creates a contract
of adhesion that eliminates the possibility of express consent (via unionization
and collective bargaining) due to asymmetries in power between the plant owner
and the employees.
There is, in short, a strong relationship among asymmetries in power, ab-
sence of consent, and unfairness in stakeholder-organizational relationships.
Further work in this area can help to establish boundary conditions for unfair-
ness and coercion in the stakeholder context.^
Corporate governance is critically important in business ethics
In this paper, I have built on work that has placed corporate governance at the
heart of the ethical conduct of organizations. We are a long way off from imag-
ining—much less actually creating—alternative means of governance that
recognize the property interests of non-stockholder stakeholders. If organiza-
tions are to become more just, greater attention must be paid to issues of corporate
governance. Recent work in corporate democracy (Blair 1995) and employee
participation in corporate governance (Roe and Blair 1999) has started to ad-
dress this point.
Discourse with stakeholders needs to become part of managerial responsibilities
Recreating mechanisms for corporate governance means taking stake-
holder discourse seriously (see Calton 1996, Calton and Payne 1999). As a
field, business ethics has properly been concerned with theorizing. But now we
need to start the hard work of engaging in discourse with stakeholders and en-
couraging managers to do the same.
496 BUSINESS ETHICS QUARTERLY

There are increasing numbers of cooperative efforts that bring together man-
agers and stakeholders that illustrate the value of discourse between managers
and stakeholders. The CERES (Coalition for Environmentally Responsible Econo-
mies) Principles for Public Environmental Accountability, for example, were
developed by a working group of corporate managers and environmental group
representatives. In addition to developing the principles themselves, CERES
provides for standardized reporting on environmental performance; such report-
ing is developed and shaped by discussions between the corporations that have
endorsed the principles and the non-corporate members of CERES (CERES re-
port standardform, 1998). In a similar way, the social responsibility in investment
movement has begun to embrace dialogue with corporations about issues related
to corporate social performance (Van Buren 1995b); in many cases, these dialogues
take place over several years and lead to significant policy changes. These and other
examples illustrate that discourse between managers and stakeholders is not only
possible, but also beneficial to corporations and their constituents alike.
The principle of fairness proposed in this paper connects concerns about fair-
ness with the need to find alternate means of corporate governance. Certainly
American business is a long way off from including labor or community mem-
bers on their boards of directors. But Phillips' principle of fairness points us in
the right direction—the organization is a cooperative means through which stake-
holders seek to achieve desired ends, as opposed to the private property of one
group of stakeholders (namely shareholders). Managers might well act more
justly, however, if obtaining express consent from the governed—stakeholders—
is an ethical minimum.

Conclusion
The proposal offered in this paper is simple: if fairness is the problem, then
consent is the solution. A reconstructed principle of fairness in stakeholder theory
places stakeholder consent at the heart of reforming the ways in which corpora-
tions are governed. The earliest insights from stakeholder theory reflect an
emphasis on corporate governance as a means of ensuring consideration of non-
stockholder stakeholder interests. The work in this paper, building on and
extending previous work in business ethics and stakeholder theory, provides a
basis for thinking about alternative means of governance that might serve to
enhance justice.
Stakeholder theory has come a long way in the past fifteen years; the idea
that managers have obligations to stakeholders others than stockholders has be-
come part of both academic and practitioner discourse. Business students have
received training m stakeholder analysis and management; the managerial as-
pects of stakeholder theory are well discussed in the literature, although more
work needs to be done here. The next step in stakeholder theory is building up
Its normative base. This paper is offered as one step on that journey.
 INTEGRATING ISCT AND STAKEHOLDER THEORY 497

Notes
An earlier version of this paper was presented during the 1999 Academy of Management
(Social Issues in Management division) and published m abbreviated form in the 1999 Acad-
emy of Management Best Paper Proceedings. This paper has benefited from the comments of
Robert Phillips, Donna Wood, and various anonymous reviewers.
•In a later paper, Phillips (1999) notes that there are some stakeholder groups—like
competitors and terrorists—who are not normative stakeholders in that they make contri-
butions to and sacrifices for the cooperative scheme, but who should be considered
instrumental stakeholders that can affect the achievement of the firm's objectives (follow-
ing Freeman 1984)
^Although the popularity of the term stakeholder is of recent origin, the term can be
found in management literature as early as the 1960s (Stanford memo, 1963) The notion
that organizations can affect or be affected by the actions of internal and external groups
can be located even earlier in management thought, as in discussions of managerial stew-
ardship in the 1920s (see Heald 1970)
31t is possible—although highly unlikely—that faimess and coercion can exist (think
of the idea of the benevolent dictator). I submit, however, that this is not an equilibrium
condition; coercion is likely to yield in the long run to unfairness. I am grateful to Robert
Phillips (private communication) for this point. The broader issue of the relationship of
coercion and unfairness m stakeholder relationships has not been analyzed to the extent
that is merited; Nozick's (1969) work e.Kplormg the relationship between coercion and
liberty is helpful on this point

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