Notes on Corporate Social Responsibility: Evan and Freeman's Stuff

Notes: Evan and Freeman’s “A Stakeholder Theory of the Modern Corporation: Kantian Capitalism”

Main Idea: Managerial capitalism (“stockholder” theory) is now seen to be inadequate on legal and economic grounds. We must now develop and implement a Stakeholder theory of the contemporary corporation.

Thesis: “We can revitalize the concept of managerial capitalism by replacing the notion that managers have a duty to stockholders with the concept that managers bear a fiduciary relationship to stakeholders.” (p. 77)


The article has two main parts: (i) a critique of managerial capitalism (to be explained below), and (ii) a positive development of an alternative view: Stakeholder theory (to be explained below).

But first, we should get clear on some key terms and concepts of the article.

Key terms and concepts:

-Stockholder: A person or group who own a portion of a corporation, usually for the purpose of making a profit.

-Stakeholder: Groups that have a stake or claim in the firm (quote, p. 77). That is, groups and individuals who benefit from or are harmed by, and whose rights are violated or respected by, corporate actions (quote, p. 80)
-Wide sense: Any group or individual who can affect or is affected by a corporation (quote, p. 80)
-Narrow sense: Those groups who are vital to the survival of the survival and success of a corporation (management, owners, employees, suppliers, customers, local community) (quote, p. 80)

-Managerial capitalism: In return for controlling the firm, management vigorously pursues the interests of the stockholders. Includes the idea that management can pursue market transactions with suppliers and customers in an unconstrained manner.(Quote, pp. 77-78) Corporations are primarily responsible to their stockholders, and therefore should be run solely in the interests of the stockholders in the firm. The concerns of other groups of people are marginal at best, and should play no important role in the decisions of a corporate manager.



Main Sections of the paper:

I. The Critique of Managerial Capitalism: pp. 77-79.

A. The Legal Argument

The “Anti-Managerial Capitalism” Part of the Argument
The corporation is a legal person. But if so, then the laws that apply to persons also apply to corporations. And if this is so, then to the extent that such laws limit what corporations can do, to that extent they are limited to what they can do to maximize the profits of stockholders. These laws have become increasingly demanding in recent years. Unfortunately, managerial capitalism requires that the corporation be able to maximize the profits of stockholders without constraint. For such constraints often lead to a loss (or at least the prevention of the maximization) of profits. For example, a corporation that manufactures a product is liable for any damage or harm caused by their products, even if they have done everything they could think of to prevent it. This has led to massive lawsuits and recalls of products, which in turn has often led to severe decrease in profits (cf. The example in the article, where a U.S. car company recalled more cars in 1980 than it produced!). Therefore, recent legislation has rendered managerial capitalism an inadequate model of the contemporary corporation.

The “Pro-Stakeholder Theory” Part of the Argument
The laws mentioned above - the ones that constrain corporations - all have something in common: they protect and give rights to the groups that directly affect, and are directly affected by, the activity of corporations (i.e., employees, the communities that host corporations, suppliers, stockholders, and management. See the article, pp. 78-79 for examples of laws that give rights to each of these groups of stakeholders). In other words, they give stakeholders of corporations some influence over the ways in which such corporations conduct their business. These groups include employees, the communities that host corporations, suppliers, stockholders, and management. But this is exactly what Stakeholder theory recommends. But if so, then current law lends some support to Stakeholder theory.


Here’s the “bare bones” of the argument (logic buffs, please forgive the imprecision!):

1. The corporation is a legal person.
2. So, the laws that apply to persons also apply to corporations.
3. But if so, then to the extent that such laws limit what corporations can do, to that extent they are limited to what they can do to maximize the profits of stockholders.
4. But managerial capitalism requires that the corporation be able to maximize the profits of stockholders without constraint, since such constraints can lead to a decrease in profits (cf. The “massive car recall” example above).
5. Therefore, managerial capitalism is an inadequate model of the contemporary corporation.
6. The corporation-constraining laws mentioned above give some power to stakeholders to influence the decisions of corporate managers (although their influence is indirect: they “influence” manager decisions in the sense that such managers, when making decisions, consider the legal repercussions of violating laws and other regulation that protect them).
7. But this is just what stakeholder theory recommends.
8. Therefore, current law gives some reason for corporations to adopt the Stakeholder Model.

B. The Economic Argument

According to managerial capitalism, the corporate manager can best pursue the wishes of stockholders (profit maximization) only if it is unconstrained. The unconstrained operation of the corporation - in other words, a totally de-regulated free market economy - is also, according to managerial capitalism, supposed to bring about the best results for society. But such real-life phenomena as the free rider problem1 and the tendency of corporations to avoid competition (by creating miniature monopolies or oligarchies) show that unconstrained corporations have unacceptable negative consequences for others outside the corporation. Therefore, corporations must have constraints placed upon them. Therefore, we see once again that managerial capitalism can’t meet it’s desiderata of satisfying the wishes of stockholders by maximizing their profits. For they are constrained from doing so in various ways.



II. The Development of an Alternative Theory: Stakeholder Theory: pp. 79-84.

Stakeholder Theory: Corporations are not just responsible - or even primarily responsible - to their stockholders. Rather, corporations are responsible to a variety of groups of people, viz., stakeholders. Each of these groups of stakeholders have in common the fact that they directly affect, or are directly affected by, the corporation (management, owners, employees, suppliers, customers, local community. Read pp. 80-82 for the role and importance of each of these groups of stakeholders). No group’s needs/wishes are to be treated as more important than those of any other. The function of the corporation is to serve as a forum for the competing needs and claims of each group of stakeholders. And the corporate manager’s primary responsibility is to look after the health of the corporation by balancing and coordinating the competing needs/claims of these groups. This responsibility requires him or her to run the corporation in such a way that it benefits each group of stakeholders. For (i) as we have seen, each group is vital to the success and existence of the corporation, and (ii) failure to meet each group’s needs will result in substantial legal consequences. The legal consequences are justified, for no group (e.g., the stockholders) of stakeholders is privileged. Just as stockholders can legally retaliate against a corporation under certain circumstances (they are mistreated by the corporation in substantial ways, e.g., misappropriation of their funds), so can any other stakeholder (e.g., the local hosting community can legally retaliate if the corporation contaminates their water supplies). No stakeholder can be treated as a mere means to corporate ends (quote, p. 79), but each person must be treated as an end in themselves. This is the justifying (Kantian) moral principle of Stakeholder theory.