Explain what the simulation offered with suggested correct decisions. Are these suggested decisions that might have been made in the cultures described in the article (i.e., agency, corpor

ETHICAL THEORY AND STAKEHOLDER- RELATED DECISIONS: THE ROLE OF

STAKEHOLDER CULTURE

THOMAS M. JONES WILL FELPS

GREGORY A. BIGLEY University of Washington Business School

We use convergent elements of major ethical theories to create a typology of corporate stakeholder cultures—the aspects of organizational culture consisting of the beliefs, values, and practices that have evolved for solving problems and otherwise manag- ing stakeholder relationships. We describe five stakeholder cultures—agency, corpo- rate egoist, instrumentalist, moralist, and altruist—and explain how these cultures lie on a continuum, ranging from individually self-interested (agency culture) to fully other-regarding (altruist culture). We demonstrate the utility of our framework by showing how it can refine stakeholder salience theory.

Stakeholder theorists view the corporation as a collection of internal and external groups (e.g., shareholders, employees, customers, suppliers, creditors, and neighboring communities)—that is, “stakeholders,” originally defined as those who are affected by and/or can affect the achievement of the firm’s objectives (Freeman, 1984). A major theme of stakeholder theory is the nature of the relationships between the firm (typically represented by its top managers) and stakeholders, whose interests often diverge con- siderably not only from those of the firm but also from each other. Early stakeholder theorizing was marked by some conceptual confusion, but Donaldson and Preston’s (1995) three-part taxon- omy—normative (How should the firm relate to its stakeholders?), instrumental (What happens if the firm relates to its stakeholders in certain ways?), and descriptive (How does the firm re- late to its stakeholders?)— helped focus and clarify much stakeholder thinking. The norma- tive questions are particularly important be- cause they differentiate stakeholder theory from other prominent theories in organization sci- ence, such as resource dependence, managerial cognition, and institutional theories.

Although we do not take a normative stance per se, we do focus on the ways that firms man- age relationships with stakeholders and handle

trade-offs among competing stakeholder claims based on the ethical foundations of their corpo- rate cultures. Further conceptual development regarding how firms manage stakeholder rela- tionships seems warranted for two reasons. First, several distinct ethical frameworks have been advanced as potential foundations for managerial decision making with respect to stakeholder matters (e.g., Burton & Dunn, 1996; Evan & Freeman, 1988; Wicks, Gilbert, & Free- man, 1994), raising questions about how these ethical frameworks might be used jointly to in- form a more general model. Second, whereas the focus of attention in stakeholder theory mainly has been on top managers, understood as relatively autonomous decision makers, these managers are often profoundly influenced by the organizational context in which they are embedded (Daft & Weick, 1984; Katz & Kahn, 1978; March & Simon, 1958). This suggests a need to identify organization-level factors that could help us predict how firms manage stakeholder relationships.

Our paper addresses these two points. We first review the diverse ethical theories that have been applied to business and identify a convergent theme—a concern for the interests of others, as opposed to self-interest. We note that managers often feel tension between these two sentiments when they make stakeholder-related decisions, a tension frequently linked to and emanating from stakeholder attributes: power and legitimacy. Next, we describe an ethically

We gratefully acknowledge constructive comments on earlier versions of this paper by Robert Phillips, Shawn Berman, and three anonymous AMR reviewers.

� Academy of Management Review 2007, Vol. 32, No. 1, 137–155.

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based organization-level construct—stake- holder culture—that, we argue, helps resolve this tension and, more generally, influences managerial thinking and behavior with respect to stakeholder relationships. We then develop a punctuated continuum of five stakeholder cul- tures, ranging from fundamentally amoral cul- tures based on individual self-interest to limited morality cultures based on the advancement of shareholder interests and then to broadly moral cultures based on concern for the interests of all stakeholders. We explain how ethical theory might be linked, conceptually if not semanti- cally, to the ethical frameworks commonly un- derstood by corporate managers and, thus, to stakeholder cultures. Finally, to illustrate the value of the stakeholder culture construct, we show how it would alter the predictions yielded by Mitchell, Agle, and Wood’s (1997) stakeholder salience model.

ETHICAL FOUNDATIONS

To explore possible elements of convergence in ethical theory, we briefly review the promi- nent perspectives, most of them the work of moral philosophers. We begin with a discussion of egoism, an approach to ethics that is essential to an understanding of ethical theory in general, followed by outlines of the basic tenets of utili- tarianism, Kantian principles, Rawlsian fair- ness, rights, the ethics of care, virtue ethics, and integrated social contracts theory (ISCT). Later, we argue that corporate cultures, although they may not use the precise language of ethical theory, do have core values that roughly match those of these theories. Where available, we present evidence of common language versions of these ethical sentiments among managers and in firms.

A Brief Review of Ethical Theory

Egoism involves acting exclusively in one’s own self-interest. Two forms of egoism are rele- vant to our discussion: psychological egoism and ethical egoism. On the one hand, psycho- logical egoism—a descriptive theory of human behavior—holds that people are innately self- interested and routinely act to advance their interests. Ethical egoism, on the other hand, is a normative perspective that holds that people ought to act exclusively in their self-interest.

This view posits that a person is obligated only to enhance his or her own long-term welfare and that commitments to others are not binding and should be reneged on if they cease to be advan- tageous to the individual (Beauchamp & Bowie, 2004). The welfare of others is relevant to an egoist only if it affects his or her welfare; it has no independent moral standing.

Few moral philosophers endorse ethical ego- ism, and some would deny that it constitutes a normative theory at all (e.g., Barry & Stephens, 1998). As noted below, a great deal of scholar- ship in moral philosophy and applied ethics is devoted to arguing that people (and organiza- tions) ought to take the interests of others into account in their decision-making processes and behavior. Although the foundational principles, the arguments, the conclusions, and the behav- ioral prescriptions vary greatly among these theories, it is not much of an intellectual stretch to say that ethics is about other-regarding, rather than self-regarding, thought and behav- ior. Our focus is on the extent to which an or- ganizational culture adopts self-interest or re- jects it in favor of other-regarding sentiments, as reflected in the following theories.

Utilitarianism, based on the work of Hume (1740/2000), Bentham (1789/1996), and Mill (1863/ 1998), admonishes moral agents to promote over- all human welfare by acting in ways that result in the greatest total beneficial consequences minus harmful consequences. Utilitarian theory applies this “cost-benefit” calculus universally—that is, to all who are affected by the decision, not just an individual (as in egoism) or an organization (as in corporate profit maximization). Utilitarianism takes two forms: act utilitarianism and rule utili- tarianism. Act utilitarianism involves maximizing benefits relative to costs for the discrete decision in question. Rule utilitarianism involves following rules that are established in order to achieve the greatest net positive consequences over time.

Kantian ethics departs significantly from util- itarianism’s focus on consequences; the focus instead is on principles—a deontological ap- proach. Kant argued that human beings should be treated not simply as a means to one’s own ends but also as ends in themselves. This em- phasis on “respect for persons” stems from the view that human beings should be regarded as independent agents, with interests of their own and the judgment to act on them. In other words, they should be accorded the freedom to act au-

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tonomously. Kant gave great importance to mo- tives for acting—making the right decisions for the right reasons being the ultimate goal. Kant was quite explicit regarding appropriate rea- sons for moral actions—that is, moral obliga- tion. An act performed for reasons of personal satisfaction (or the benefit of the firm) carries less moral weight than it would if it were per- formed because of a duty to do so. Kant also argued that the principles ought to be universal- izable; that is, if everyone adopted the principle, it should not be self-defeating. For example, if promise breaking were to become universal law, promises would have no meaning. The idea behind this prescription is that no moral code ought to apply only to oneself. Kant is also cred- ited with the idea that principles ought to be reversible, a notion well-captured by the Golden Rule: “Do unto others as you would have them do unto you.”

Rawlsian fairness considerations also entail a regard for others. In A Theory of Justice (1971a), Rawls regards justice for the individual, not ag- gregate welfare, as the “first virtue” of social institutions. In colloquial terms, he is concerned more with how the pie is divided than with how large it is, a utilitarian concern. Although his arguments regarding distributive justice as fair- ness are intended to apply to social institutions (e.g., governmental policies), they may have im- plications for individuals and firms that make decisions regarding the distribution of economic benefits and burdens. Using the “social con- tract” as a heuristic device, Rawls argues that principles of justice ought to be arrived at by individuals making choices behind a “veil of ignorance”—an imaginary situation wherein the parties are ignorant of their own character- istics (advantages and disadvantages), thus rendering improbable the choice of principles that favor their own strengths and discount their weaknesses. The use of this device, intended to mitigate the effects of inequalities of initial cir- cumstances over which people have no control and are, hence, undeserved, leads individuals to prefer a state of basic equality. This state of equality is then used as a point of comparison for alternative (unequal) states to determine their fairness. If everyone prefers an alternative distributive state to one of equality, it is consid- ered just. Rawls’ difference principle reflects his conclusion that inequalities are just only if they

result in benefits for everyone, with particular emphasis on the least advantaged.

Rights theories have to do with securing or preserving certain liberties (negative rights) or benefits (positive rights) for their holders. The possession of a right by one party implies the existence of a corresponding duty or obligation on others’ part. In the case of negative rights, that duty is to allow the party to act freely (not be interfered with) within the domain covered by the right. In the case of positive rights, the obli- gation is to provide the party with a benefit of some kind. Since rights often conflict with one another and there is no widely accepted hierar- chy of rights, some moral philosophers have concluded that rights should be accorded prima facie validity. That is, rights should be re- spected unless there are good moral reasons for violating them; the moral force of a right de- pends on its “strength” in relation to other moral considerations applicable to the context in question.

The ethics of care derives from “feminist eth- ics” in general and the work of Gilligan (1982) in particular. This perspective focuses on personal relationships and the traits of personal charac- ter that create and sustain them—friendship, compassion, sympathy, empathy, faithfulness, and loyalty, for example. The focus on these human traits, which certainly qualify as virtues (as discussed below), deliberately eschews the emphasis on rules and calculations that charac- terize Kantian and utilitarian thought. Also ab- sent are notions of universality and impartiality; the ethics of care regards actual relationships and the social contexts in which they are em- bedded as valid and important elements of eth- ical decision making. An ethical “dilemma” is not seen as an abstract problem with only one ethically “correct” solution that can be agreed on by impartial observers applying universally accepted principles. Instead, solutions can and should emerge from mutually caring relation- ships and the contexts in which the problems are embedded. Particular human beings in par- ticular settings should generate “caring” solu- tions appropriate to unique situations.

Virtue ethics also focuses on human virtues, albeit a much longer list. For example, Pincoffs, giving new life to the ideas of Aristotle, offers a list of over six dozen virtues (1986: 85). He argues that the development of virtuous character should be a primary goal of the human condi-

2007 139Jones, Felps, and Bigley

tion, and he identifies four classes of virtues: aesthetic, ameliorating, instrumental, and moral. Virtue ethics is about conditioning one- self to act morally as a matter of habit.

ISCT is a very recent addition to the normative ethics literature. Unlike other ethical theories that must be adapted to business settings, ISCT is intended to apply directly to them. Its most formal and complete articulation is found in Donaldson and Dunfee’s book entitled Ties That Bind: A Social Contracts Approach to Business Ethics (1999). These authors use a social con- tracts perspective to show how individual com- munities can be allowed to develop their own (local) standards, within a “moral free space,” as long as they (1) meet certain standards involv- ing acceptance by community members and (2) do not violate broad, universal standards, called “hypernorms.” As such, the theory attempts to simultaneously allow for a substantial diversity of adaptation to local conditions without allow- ing these developed norms to violate higher eth- ical standards.

In fact, the theory establishes an elaborate set of standards by which the propriety of these local norms should be judged. In order to be authentic, local norms must (1) have the consent of most members of the community, (2) allow exit from the community, and (3) allow “voice” in order to permit change in the norms, thus assur- ing that most members of the community regard them as binding. In turn, authentic norms are judged legitimate if they do not violate any hy- pernorms. Hypernorms are the result of “a con- vergence of religious, political, and philosophi- cal thought” across a broad number of nations and cultures (Donaldson & Dunfee, 1999: 44).

Finally, these authors offer a set of priority rules for choosing between/among competing legitimate norms. Legitimate norms that either do not conflict with or have priority over other legitimate norms are considered binding ethical standards. ISCT is quite different from the other theories described here, but, as discussed in the next section, it shares one important perspective with those theories.

Convergent Elements in Ethical Theory

Although the ethical theories reviewed above differ in important ways, they converge on one essential point—their emphasis on concern for others over self-interest. Because the extent of

concern for others can differ as well, particularly in a corporate context, in a later section we develop a continuum of stakeholder cultures ranging from individually self-interested to ex- clusively other-regarding. Although we are the first to propose such a continuum at the organi- zation level, theories of identity, leadership, and cooperation employ similar distinctions at the micro level. Identity theories posit that people can think of themselves as individuals or as part of larger collectives (Ashforth & Mael, 1989), with only one level being active at a time (Lord, Brown, & Freiberg, 1999). Walzer (1994) makes a distinction between “thin selves,” concerned with narrow, short-term interests, and “thick selves,” embedded in larger historical and so- cial developments. In his view, moral reasoning and behavior are facilitated only by “thick” in- terpretations of self.

Similarly, some models of managerial leader- ship also contain references to collective-level versus self-level concepts. Transformational, charismatic, and visionary leaders may achieve success by activating their followers’ sense of self at the collective level through articulation of a compelling moral mission (Shamir, House, & Arthur, 1993). Shamir, Zakay, Breinin, and Pop- per (1998), Paul, Costley, Howell, Dorfman, and Trafimow (2001), and Sparks and Schenk (2001) provide additional support for this view. Models of cooperation also feature a prominent distinc- tion between self-oriented and other-regarding behavior. Under the rubric of “social value ori- entation” (McClintock, 1978; Messick & Mc- Clintock, 1968), cooperation researchers have identified four profiles in situations involving potential cooperation. Competitors try to maxi- mize their outcomes relative to others. Individu- alists seek to maximize their absolute, not rela- tive, outcomes. Cooperators try to maximize joint outcomes without being cheated themselves. And altruists try to maximize the other party’s outcome with less concern for their own.

Clearly, scholars in other fields have found the contrast between narrow self-interest and a concern for others, narrow or broad, useful in explaining human behavior. We develop an analogous concept at the organization level—a continuum of stakeholder cultures based on the extent to which they are other-regarding. We propose that stakeholder culture is a potent or- ganizational factor, profoundly influencing the way in which managers understand, prioritize,

140 JanuaryAcademy of Management Review

and respond to stakeholder issues and, as an example, how they establish stakeholder sa- lience. As an introduction to these arguments, we offer a discussion of the moral tension be- tween self-interest and the interests of stake- holders in managerial decision making.

ETHICS, STAKEHOLDERS, AND MANAGERIAL DECISION MAKING

Decision making with respect to stakeholder relationships can be fraught with tension. Trade-offs between firm interests and stake- holder interests, as well as those between or among the interests of different stakeholders, inherently involve the allocation of benefits and burdens among human beings and, hence, in- volve moral questions. Commonly, the tension that arises in this context is one of deciding whether to act in a self-regarding manner or in an other-regarding manner. Hendry (2004) not only captures this tension quite nicely but also mirrors our points of convergence in ethical the- ory, arguing that managers face two sets of con- flicting prescriptions about how to act: tradi- tional morality (obligation and duty, honesty and respect, fairness and equity, care and assis- tance) or market morality (self-interest).

In relationships with stakeholders, firms’ self- interest is often related to the exercise of power, without regard for moral concerns—a “might makes right” perspective. Power is well-defined for stakeholder relationships, by Willer, Lova- glia, and Markovsky, as “the structurally deter- mined potential for obtaining favored payoffs in relations where interests are opposed” (1997: 573). To increase favorable outcomes for them- selves, self-interested firms with power over their stakeholders will wield it with impunity. When confronted with stakeholder power, which may stem from resources that (1) are concen- trated or tightly controlled, (2) are essential to operational performance, or (3) have no viable substitutes, self-interested firms will be respon- sive.

In contrast, traditional (other-regarding) mo- rality may require that firms respond to stake- holders with legitimacy, which many stake- holder scholars consider a fundamentally moral phenomenon. In an integrative review of the legitimacy literature, Suchman (1995) posits the existence of three potential bases of legitimacy: pragmatic (similar to power), cognitive (habit-

ual), and moral (positive normative evaluation). For most authors who address the issue of stake- holder legitimacy, however, the term is morally grounded. Mitchell et al. (1997) found that sev- eral (but not all) authors offered moral bases for stakeholder legitimacy (e.g., Carroll, 1979; Clarkson, 1995; Donaldson & Preston, 1995; Evan & Freeman, 1988; Langtry, 1994). This conclusion is not surprising, since basing legitimacy on power and/or habit would run counter to a cen- tral tenet of stakeholder theory—moral justifica- tions for firm/stakeholder relationships (Donald- son & Preston, 1995; Jones & Wicks, 1999). Indeed, Donaldson and Preston conclude that “the cen- tral core of the [stakeholder] theory is, however, normative” (1995: 183). We highlight the moral foundation of stakeholder legitimacy because, as argued above, not all firms will treat moral claims in the same manner.

Our preferred account of stakeholder legiti- macy is provided by Phillips (2003), whose anal- ysis includes a compelling account of the link between legitimacy and power, a connection that becomes important in our discussion of the impact of stakeholder cultures on stakeholder salience. Phillips bases his notion of normative legitimacy on “stakeholder fairness” (Phillips, 1997), which, in turn, draws on the work of Hart (1955) and Rawls (1964, 1971a,b). In this formula- tion, “obligations of fairness” are created when- ever parties accept benefits of a mutually ben- eficial cooperative arrangement (Phillips, 1997: 57). Phillips (1997) also stipulates that partici- pants make contributions and/or sacrifices to effect the arrangement and that “free riding” by participants is possible. When these conditions are met, stakeholders have normatively legiti- mate claims on the corporation (and vice versa). Although not all stakeholder theorists adopt this particular account of stakeholder legitimacy, al- most all believe that corporations have moral obligations to address, in some way, the norma- tively legitimate claims of stakeholders.

Phillips (2003) also introduces the notion of derivative legitimacy. Derivative legitimacy is generated from a stakeholder group’s power to affect the firm and its normatively legitimate stakeholders, even though that group has no normatively legitimate claims on the firm. Man- agerial attention to derivatively legitimate claims is morally justified by the responsibility managers have to protect the interests of the firm and its normatively legitimate stakehold-

2007 141Jones, Felps, and Bigley

ers. Derivatively legitimate stakeholders—for example, the media, radical activist groups (ter- rorists, in the extreme case), and competitors— can affect the corporation in either beneficial or harmful ways. Indeed, most firms grant substan- tial salience to their competitors, even though they are certainly not normatively legitimate stakeholders. As Phillips puts it, normative le- gitimacy provides an answer to the question “For whose benefit . . . should the firm be man- aged?” (2003: 30) and is a primary form of legit- imacy. From a moral perspective, the claims of derivatively legitimate stakeholders are sec- ondary and should be addressed only when they affect the interests of normatively legitimate stakeholders. Firms concerned about their moral obligations will attend to the claims of both nor- matively and derivatively legitimate stakehold- ers. Moral obligations are central to our stake- holder culture construct, the topic to which we now turn.

STAKEHOLDER CULTURES

We argued above that when managers are faced with ethical decisions, they experience a tension between self-interest, often bolstered by a “market morality” (Hendry, 2004), and other- regarding sentiments, as reflected in traditional moral principles. This tension is particularly in- tense in firm/stakeholder relationships because they are a critical venue for morally significant interactions. How can the tension be resolved? We contend that stakeholder culture, which, we argue, is a central facet of organizational cul- ture, can provide managers with guidance re- garding how this tension should be resolved. Stakeholder culture represents a firm’s collec- tive reconciliation of these contradictory mo- tives in the past and, as such, consists of its shared beliefs, values, and evolved practices regarding the solution of recurring stakeholder- related problems. Often, the “solution,” found in the firm’s stakeholder culture, is a relatively clear set of prescriptions about whether self- regarding or other-regarding norms will prevail, or whether some compromise between the two will hold sway.

In general, culture is a property of an organi- zation constituted by (1) its members’ taken-for- granted beliefs regarding the nature of reality, called assumptions; (2) a set of normative, moral, and functional guidelines or criteria for

making decisions, called values; and (3) the practices or ways of working together that fol- low from the aforementioned assumptions and values, called artifacts (e.g., Geertz, 1973; Hatch, 1993; Pettigrew, 1979; Schein, 1985, 1990; Trice & Beyer, 1984). Organizational culture reflects a sort of negotiated order (Fine, 1984) that arises and evolves as members work together, express- ing preferences, exhibiting more-or-less effec- tive problem-solving styles (Swidler, 1986), and managing, at least satisfactorily, external de- mands and internal needs for coordination and integration (Schein, 1990). Common experience in this regard can lead people, over time, to form shared and deeply ingrained (Denison, 1996) un- derstandings about the way the organizational world works and the practices and standards that are appropriate and effective within that reality. In effect, culture represents an aspect of the organizational environment that helps mem- bers make sense of their own and others’ behav- ior (Golden, 1992).

Corporate cultures are certainly made up of more than one cultural dimension; formalism, adaptability, and time horizon are prominent examples. However, a firm’s stakeholders are the source of its most critical contingencies (Freeman, 1984). Indeed, Barney links successful corporate cultures to strong core values “about how to treat employees, customers, suppliers, and others”—that is, stakeholders (1986: 656). In addition, although it departs from our model somewhat by omitting employees, “external ori- entation” shows up as a central feature of most typologies of corporate cultures (Denison & Mishra, 1995; Detert, Schroeder, & Mauriel, 2000; Schein, 1990; VandenBerg & Wilderom, 2004). Furthermore, the very inclusive inventory of stakeholders advanced by most stakeholder the- orists—for example, Barney’s (1986) list, plus shareholders and neighboring communities— indicates that stakeholder relationships lie at the core of corporate operations. Consequently, solving stakeholder-related problems will be an important element of a company’s overall cul- ture.

In this paper, our focus is on what we call “stakeholder culture,” which we define as the beliefs, values, and practices that have evolved for solving stakeholder-related problems and otherwise managing relationships with stake- holders. Although the extent to which organiza- tional values and assumptions are widely

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shared and deeply held by organization mem- bers—that is, culture strength—can vary (e.g., Schein, 1985), the following arguments should gain force in proportion to culture strength. In addition, subcultures often exist within organi- zations (e.g., Martin, 2002). However, we focus on the organization-level variable and leave exam- ination of stakeholder subcultures, and possible differential treatment of stakeholders across firm subunits, to future research.

Stakeholder culture is grounded in ethics and is based on a continuum of concern for others that runs from self-regarding to other-regarding. We argue that firms vary with respect to the extent and nature of their moral concern for their stakeholders and that this variation will often be linked, conceptually if not semantically, to the different moral philosophies. Importantly, we do not argue that corporate managers know- ingly subscribe to, for example, utilitarian or Kantian ethical theories. However, many man- agers are aware of and subscribe to common language understandings of these ethical theo- ries—understandings drawn from the norms of society at large and revealed in the ethical log- ics of organizations (e.g., Victor & Cullen, 1988). Hence, these theories may become important sensemaking and sensegiving conduits through which stakeholder culture is communicated. Furthermore, as with cultures in general, stake- holder cultures are simultaneously the products of employee sentiments and reified “social facts” that have an independent effect on man- agerial decision making (e.g., Hatch, 1993).

Stakeholder culture is likely to affect how company employees assess and respond to stakeholder issues in two related ways: (1) by constituting a common interpretive frame on the basis of which information about stakeholder attributes and issues is collected, screened, and evaluated and (2) by motivating behaviors and practices—and, by extension, organizational routines—that preserve, enhance, or otherwise support the organization’s culture. To

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