Foster study on ethics of stakeholder relationships named IABS best paper

There’s no shortage of moral philosophy to guide the study of personal ethics. But what about the ethics of modern corporations, whose complex cultures and competing stakeholder relationships preclude any simple adaptation of Immanuel Kant, John Stuart Mill, John Rawls or even Adam Smith?

A trio of researchers at the University of Washington Foster School of Business has synthesized the vast body of theory in organizational behavior and moral philosophy to construct an ethical continuum of corporate stakeholder culture that ranges from selfish to selfless.

The International Association for Business and Society (IABS) has awarded its 2009 Best Paper honor to the study and its co-authors—Thomas Jones, the Boeing Company Endowed Professor in Business Management at the Foster School; former Foster PhD student Will Felps (now an assistant professor of organizational behavior at Erasmus University’s Rotterdam School of Management); and Greg Bigley, an associate professor of management and the Longbrake Endowed Professor in Innovation at Foster.

“Instead of simply trying to match an organization’s ethical behavior to the categories of moral behavior derived from philosophy,” says Jones, “we approached the problem in a way that suggests that understanding the ethics of the organization ought to have much more to do with the way that the organization actually conducts its affairs with its stakeholders.”

A punctuated continuum

In the paper, the authors identify different company approaches to stakeholders, a sprawling group that includes shareholders, employees, suppliers, alliance partners, creditors, customers, regulators, policy makers, neighbors and others. Five cultures punctuate an ethical continuum:

  • Agency – managers serve their personal self-interests.
  • Corporate egoist – managers serve the organization and its shareholders.
  • Instrumentalist – relationships with stakeholders are formed only to better serve shareholder interests.
  • Moralist – managers serve all stakeholders unless doing so places the organization in jeopardy.
  • Altruist – managers serve all stakeholders regardless of the outcome.

“Managerial behavior in agency cultures is already the subject of rigorous study in other disciplines, financial economics in particular. And you’ll find few, if any, true altruist cultures because they are unlikely to survive for long in the marketplace” says Jones. “But the central elements of this continuum—corporate egoist, instrumentalist and moralist cultures—represent positions on a spectrum of ethical postures toward stakeholders that companies can reasonably take.”

Power politics

The paper goes on to explore the ways that each culture dictates which stakeholders the company pays most attention to. Managers operating in corporate egoist or instrumentalist cultures will attend to the interests of stakeholders they regard as powerful. In moralist cultures, managers will also regard any stakeholder with a legitimate claim on the firm as important.

Take, for instance, a mining operation. If it has a corporate egoist culture, managers would generally disregard its neighbors, viewing them as powerless, until a regulator with power steps in. On the other hand, a mining company with a moralist culture would view its neighbors as having as much legitimacy as shareholders, and so would regard their concerns as legitimate concerns for the company.

“Power matters to everyone,” Jones adds. “But legitimacy also matters to those who believe that stakeholders other than shareholders deserve attention. It’s a way of responding to moral concerns as opposed to pragmatic power concerns.”

What’s the best approach?

This new theoretical continuum provides a framework for thinking about ethics in organizations. But what does it mean for the bottom line? Which approach is most effective for company performance and profitability?

Jones and Felps are working on a follow-on study to find out, and have developed some preliminary theoretical conclusions that some might find surprising. “There are areas of corporate activity where relationships built on trust work much better than relationships built on impersonal transactions—i.e., relationships that lack trust,” Jones explains. “And if an organization is clearly oriented toward taking care only of its shareholders rather than its other stakeholders, it’s difficult to develop trust.”

“Ethical Theory and Stakeholder Related Decisions: The Role of Stakeholder Culture” was published in the Academy of Management Review in 2007.