ArticlePDF Available

Towards a Property Rights Foundation for a Stakeholder Theory of the Firm



This research paper suggests that due to the changing nature of the firm in todayÕs business world, viewing shareholders as the sole residual claimants is an increasingly tenuous description of the actual relationships among a firmÕs various stakeholders. Thus, a shareholder wealth perspective is increasingly unsatisfactory for the purpose of accurately answering the two fundamental questions concerning the theory of the firm: that of economic value creation, and the distribution of that economic value. The thesis of the current paper is that examining the firm from a property rights perspective of incomplete contracting and implicit contracting provides a solid economic foundation for the revitalization of a stakeholder theory of the firm in strategic management and in expanding the resource-based theory of the firm. In order to make progress in strategic management, a clearer conceptual and empirical understanding of implicit contracting is required. The perspective outlined in this research paper provides for a more accurate direction towards both measuring economic value creation, and analyzing the distribution of that value. It is also submitted that such a perspective has important implications for corporate governance, particularly when managers must balance the legitimate and conflicting claims among stakeholders to achieve the goal of enhancing economic value.
Views and Debates
Towards a Property Rights Foundation for a
Stakeholder Theory of the Firm
* and
Department of Economics, College of Commerce and Finance, Villanova University, 1007
Bartley Hall, 800 Lancaster Avenue, Villanova, PA, 19085-1678, USA;
Federal Reserve Bank of New York, 33 Maiden Lane, New York, NY, 10045, USA (*Author
for correspondence, e-mail:;
Department of Business Administration, College of Business, University of Illinois at Urbana-
Champaign, 339 Wohlers Hall, 1206 South Sixth Street, Champaign, IL, 61820, USA
Abstract. This research paper suggests that due to the changing nature of the firm in todayÕs
business world, viewing shareholders as the sole residual claimants is an increasingly tenuous
description of the actual relationships among a firmÕs various stakeholders. Thus, a share-
holder wealth perspective is increasingly unsatisfactory for the purpose of accurately
answering the two fundamental questions concerning the theory of the firm: that of economic
value creation, and the distribution of that economic value. The thesis of the current paper is
that examining the firm from a property rights perspective of incomplete contracting and implicit
contracting provides a solid economic foundation for the revitalization of a stakeholder theory of
the firm in strategic management and in expanding the resource-based theory of the firm. In order
to make progress in strategic management, a clearer conceptual and empirical understanding
of implicit contracting is required. The perspective outlined in this research paper provides for
a more accurate direction towards both measuring economic value creation, and analyzing the
distribution of that value. It is also submitted that such a perspective has important impli-
cations for corporate governance, particularly when managers must balance the legitimate and
conflicting claims among stakeholders to achieve the goal of enhancing economic value.
The two fundamental questions in the history of economic thought concern
the theory of economic value and the theory of the distribution of this value
(Schumpeter, 1954; Weintraub, 1977). These two persistently challenging
questions are also – or, arguably should be – the two fundamental questions
concerning the so-called ‘‘theory of the firm’’ as developed within industrial
organization economics since the 1930s (e.g., Coase, 1937), within corporate
finance since the 1950s, and more recently within the discipline of strategic
management. For the purpose of the current research paper, we largely focus
on prospects for developing within the discipline of strategic management a
new theoretical approach to address these two fundamental questions, one
Journal of Management and Governance (2005) 9:5–32 ÓSpringer 2005
DOI 10.1007/s10997-005-1570-2
which is based primarily on a property rights foundation for a stakeholder
theory of the firm.
Seminal works in classical property rights literature include Alchian and
Demsetz (1972), Coase (1960), and Demsetz (1967). The modern property
rights approach, discussed in Hart (1995), builds on Grossman and Hart
(1986) and Hart and Moore (1990). Whereas the modern property rights
research literature equates ownership with residual control rights, classical
property rights theory defines ownership as residual rights to income
(residual claimancy). On the one hand, the appropriate allocation of residual
control rights suggests mitigating ex post contractual problems, while on the
other hand effectively aligning residual claims leads to mitigating ex ante
contractual problems. Both residual claimancy and residual control (ex ante
and ex post contractual) issues are at the heart of a definition of ownership.
The strategic management research literature has begun to utilize and de-
velop both the classical and modern property rights theory in recent years
(e.g., Chi, 1994; Liebeskind, 1996; Miller and Shamsie, 1996; Argyres and
Liebeskind, 1998; Oxley, 1999; Foss and Foss, 2001; Kim and Mahoney,
2005). However, the implications of property rights theory for stakeholder
analysis are still at a nascent stage of development (Donaldson and Preston,
1995; Zingales, 2000; Thompson and Driver, 2002; Aguilera and Jackson,
2003; Aguilera and Cuervo-Cazurra, 2004; Grandori, 2004).
The strategic management discipline has made some conceptual and
empirical progress in the past two decades on addressing the first of these two
fundamental questions of economic value creation, although it has been
primarily from a shareholder wealth perspective, rather than from a broader
stakeholder perspective (Blair, 1995), which we espouse in this paper.
second of these two fundamental questions of how the economic surplus
generated by the firm is, or should be, allocated among the various stake-
has been given little research attention. The thesis of the current
research paper is that in order to answer more precisely these two funda-
mental questions concerning economic value creation and the distribution of
this economic value, a property rights theory of the firm from a stakeholder
perspective must first be developed.
Development of a property rights theory of the firm should prove fruitful
in moving forward the strategic management fieldÕs primary theory –
i.e., resource-based theory (e.g., Penrose, 1959; Rumelt, 1984; Wernerfelt,
1984; Peteraf, 1993) – beyond a shareholder wealth perspective. This share-
holder wealth perspective focuses on whether resources are valuable, rare,
inimitable and non-substitutable (the so-called VRIN criteria) (Barney, 1991)
for achieving sustainable competitive advantage (typically from a share-
holder wealth perspective and the maximization of NPV, see Barney, 2002).
Indeed, the VRIN criteria of valuable, rare, inimitable and non-substitutable
of Barney (1991) bear some resemblance to the Hart and Moore (1990)
framework with its emphasis on economic value creation. The commonality
of the property rights theory and the resource-based theory is that both
theories rely on market frictions. An important difference is that the property
rights theory is seeking a set of market frictions to explain the efficient
boundary of the firm, while resource-based theory is seeking a set of market
frictions to explain the firm achieving economic rents. We conjecture here
that the set of market frictions to explain economic rents in resource-based
theory will be a sufficient set of market frictions to explain the boundary of
the firm (ownership) in property rights theory (see Mahoney, 2001).
In this research paper we emphasize that a stakeholder perspective indi-
cates that it is no longer tenable to regard the shareholders as the only
residual claimants, where residual claimants are defined as persons or col-
lectives whose relationship to the firm gives rise to a significant residual
interest in the firmÕs success or failure. Indeed, Stout forcefully argues that:
‘‘the residual claimants argument for shareholder primacy is a naked asser-
tion, and an empirically incorrect one at that’’ (2002: 1193). Stout (2002)
points out that the argument that shareholders are the sole residual claimants
in corporations not only does not hold as a practical matter, but also as a
matter of law. The idea that the law views shareholders as the sole residual
claimants is a common misconception among many economists. Such a view
is not legally accurate.
In the current paper we maintain that such a fundamental change in
perspective is considered especially promising because a careful examination
of the property rights research literature not only informs the determination
of economic value creation, but also enables a fine-grained analysis of dis-
tributional conflicts (Libecap, 1989; Coff, 1999; Kim and Mahoney, 2002). In
order to provide an economic theoretical foundation for stakeholder theory,
we consider next property rights theory.
1. What are Property Rights?
The fact that multiple definitions have been attached to the single term
Ôproperty rightsÕhas been a source of some confusion in the property rights
literature. Some scholars, for example, consider a narrow definition of
property rights in terms of legal recourse available to owners of property
(either tangible or intangible) in the case of inappropriate actions by non-
owners. More generally, property rights refer to any sanctioned behavioral
relations among decision makers in the use of potentially valuable resources;
such sanctioned behaviors allow people the right to use resources within the
class of non-prohibited uses. This more inclusive definition of property rights
is conceptually broad and emphasizes both the legal aspect of property rights
and the social conventions that govern (business) behavior, such as corporate
culture and reputation (North, 1990). Thus, in the current research paper,
property rights include any social institutions that define or delimit the range
of privileges regarding specific resources granted to individuals. Private
ownership of these resources may involve a variety of property rights
including the right to exclude non-owners from access, the right to appro-
priate the stream of economic rents from use of and investments in the
resource, and the right to sell or otherwise transfer the resources to others
(Libecap, 1989). Conceptualizing property rights to have multiple dimensions
has the important economic implication of many different people being able
to hold partitions of rights to particular facets of a single resource.
According to Coase (1960), it is useful to think of resources as the bundle
of rights rather than physical entities. Thus, from the property rights per-
spective, resources that a firm ‘‘owns’’ are not the physical resources but
rather are the property rights. In the property rights approach the corpora-
tion is viewed as a ‘‘method of property tenure’’ (Berle and Means, 1932: 1).
Utilizing such a property rights perspective of the firm, one can systemati-
cally examine each stakeholder in this ‘‘method of property tenure.’’ For
example, managers may have golden parachutes, stock options, and decision
rights over organizational resources. Workers may have property rights
concerning such factors as notification of layoffs, severance payments, or
pension benefits.
Asset specificity is the source of potentially appropriable quasi-rents
(Williamson, 1985), and property rights allocations are ways of governing the
division of economic rents so as to avoid inefficient appropriation and under-
investment. Since bundles of property rights can attenuate the problem of
under-investment in firm-specific assets, they can be the source of potential
economic value creation since investments in complementary assets are
promoted (Teece, 1986; Mahoney, 1992). Specifically, property rights are the
conduits upon which economic value of resources can be channeled to high
yield uses. Thus, property rights theory complements resource-based and
dynamic capabilities research (Mahoney and Pandian, 1992; Teece et al.,
Currently, resource-based theory is lacking in at least two respects that
can be remedied by property rights theory: (1) with few exceptions, resource-
based theory has made little use of the property rights research literature in
the business contexts of both positive externalities such as complementary
and co-specialized resources (Teece, 1986; Helfat, 1997), and negative
externalities, such as the lack of oil field unitization for migratory oil (Kim
and Mahoney, 2002), and hence, business cases where property rights re-
sources are not secure often fall outside of its analytical framework; and (2)
the presence of a feedback loop with distribution issues impacting productive
utilization of resources falls outside current resource-based theory. Extant
property rights theory enables us to relax the implicit resource-based view
assumption that property rights to resources are secure, and thus take into
account processes where there are struggles in establishing property rights that
enhance the realized economic value of resources.
2. Why is a link between Property Rights- and Resource-Based-Theories of the
Firm needed?
Since this property rights view has been expressed in the research literature for
several decades, an explanation is required as to why a renewed interest in the
property rights research literature in the field of strategic management is
warranted. This research paper examines three reasons why a connection
between a property-rights theory of the firm and the resource-based theory of
the firm is now needed. First, changes in the (reconstructed) conceptualization
of the firm is needed because the nature of the firm (in the world of management
practice) is changing, especially in a business environment with increasing
importance placed on intellectual property rights and knowledge-based
resources and capabilities (Nelson and Winter, 1982; Itami and Roehl, 1987;
March 1991; McEvily and Chakravarthy, 2002; Madsen et al., 2003). With the
increasing relevance of intangible assets and knowledge-based capabilities,
dealing effectively with potential property rights problems due to asymmetric
information and distribution conflicts becomes increasingly important.
Intangible capital, especially capital embedded in a firmÕs social and hu-
man capital, generally requires different organizational structures from those
used for tangible capital to address the exercise of property rights by the firm.
In an economy with a well- developed legal system, it is unlikely that a firm
will have problems exercising its property rights over its tangible property, its
physical plants, and its equipment. Most legal systems are quite effective at
addressing physical property disputes. The firm generally does not have the
capability to retain the legal ownership of its intangible resources embodied
in its employees – resources such as technical expertise, marketing know-
how, or industry knowledge. Therefore, if an employee decides to leave a firm
to join a competitor or to start up a new competing firm, the firm must
develop alternatives to the legal system – or must develop detailed structures
within the existing legal framework – when dealing with disputes involving
these intangible resources,
A second reason for proposing new connections between property rights-
and resource-based theories of the firm is that changes in the nature of the
firm motivate a new conceptualization of the firm from which economic value
creation emerges. For example, many (but by no means all) large conglom-
erate firms – the evolution of which in the 1920–1960 time period was
extensively documented by Chandler (1962) – have been broken up, and
some of the strategic business units have been spun off as stand-alone firms
(Woo et al., 1992). Vertically integrated enterprises – the evolution of which
in the 1840–1920 time period was extensively documented by Chandler (1977)
– have often moved toward vertical de-integration, and toward more
decentralized forms for the purpose of achieving both more efficient tactical
coordination and more effective strategic collaboration (Leiblein and Miller,
2003). Such substantive changes in the structures of corporations give rise for
the need to reevaluate the tools and overall framework used to analyze these
Perhaps most importantly, business enterprises that historically could be
usefully understood in large measure as leveraging physical resources to
achieve both economies of scale and economies of scope (Chandler, 1990) are
now becoming increasingly dominated by firm-specific human and organi-
zational capital. For example, the 1990s wave of initial public offerings of
purely human capital firms, and technology firms whose main resources are
key employees, is challenging our understanding of the nature of the firm,
where economically valuable human resources (Lado and Wilson, 1994) are
often operating with commodity-like physical resources. Therefore, both
human and organizational capital are now emerging as the most crucial
organizational assets (Williamson, 1996), and such fundamental economic
changes arguably call for changes in governance in terms of the constraints
on management, compensation and/or board representation (OÕConnor,
1993; Luoma and Goodstein, 1997; Hillman, Keim and Luce, 2001; Huse and
Rindova, 2001).
It is worth noting here that if the defining dimension of the firm is that it
substitutes authority for the price mechanism in determining how decisions
are made (Coase, 1937; Williamson, 1985), what are the decision control
rights of shareholders in a firm that consists of economically valuable human
resources operating with commodity-like physical assets? In such a firm,
should workers also be allocated decision control rights (Blair, 1995)? Such
corporate governance issues can already be witnessed in medical practices,
investment banks (especially ‘‘boutique’’ banks), law firms, and advertising
firms (Zingales, 2000). Blair states that: ‘‘A knowledge companyÕs primary
resource and principal competitive advantage is the knowledge that its
employees possess, which may or may not be captured in some form of
intellectual property such as patented drugs, copyrighted books, or pro-
prietary software. Where the critical resources are embodied in the employees
and corporate boundaries are shifting rapidly, the traditional notion of re-
mote and uninvolved shareholders as owners of corporations is an inher-
ently unsuitable basis for thinking about how these institutions should be
governed’’ (1995: 292).
Furthermore, along these lines, currently one of the more tangled thickets in
corporate law concerns the proper interpretation of corporate constituency
statutes at the state level, and the question of to whom, exactly, do the directors
of the firm owe their fiduciary duty. Typically, these statutes require directors
to consider the ‘‘best interests of the corporation’’ as a whole (Blair, 1995).
Indeed, consideration of distributional conflicts among stakeholders and
the evolution of property rights are essential for a more complete strategic
management (resource-based) theory of realized and not just potential
economic value creation (Kim and Mahoney, 2002). As resource-based
theory is extended to studying economic value creation in transitional
economies and intellectual property (Takeyama, 1997), property rights
theory will take on even greater managerial significance. Indeed, in the
property rights perspective, where there are positive transaction costs, an
important source of economic value creation stems from reduction of the
dissipation of economic value in the exchange process (Libecap, 1989; North
1990; Barzel, 1997).
There is also another important sense in which resource-based theory and
property rights theory are complementary: the more economically valuable
the resources the more economic incentives there are to make property rights
of such resources more precise, and the more precisely delineated the prop-
erty rights of these resources, the more economically valuable resources be-
come (Libecap, 1989; Mahoney, 1992). The process of making property
rights of resources more precise can be another way of looking at the eco-
nomic value creation process. Systems of property rights are, in essence,
conduits upon which value-creating activities are implemented so that re-
sources can be channeled to these higher-yield uses (Kim and Mahoney,
2002). We hasten to add that asymmetric information and distributional
conflicts may limit resources from being channeled to these higher yield uses.
Consideration of distributional conflicts and the (imperfect) evolution of
property rights are essential for a more complete resource-based theory of
(realized) economic value creation.
As a result of these fundamental economic changes (which typically alter
underlying transaction costs), the boundaries of the firm are in constant flux
and governance structure decisions can typically be anticipated to change the
boundaries of the firm, and (perhaps less apparent) can consequently influ-
ence the outcomes for economic value creation and distribution among
stakeholders. Indeed, to more fully understand and explain: ‘‘what is going
on here?’’ Williamson (1996) requires that the strategic management disci-
pline become informed beyond its current (implicit) intellectual focus (e.g.,by
becoming more informed about rudimentary aspects of corporate law, and
by analyzing more deeply the competitive structure of both strategic factor
input markets and output markets).
A third reason for connecting property rights- and resource-based theories
of the firm is the need to address more precisely the fundamental question of
economic value in a business world where the economic maximization of a
single residual claimant is becoming increasingly tenuous. The connections
between the property rights theory of the firm and the economic value
creation of the firm have not been made apparent even in contemporary
state-of-the-art strategy research literature. Such fundamental connections
are important to make clear.
When the stakeholder perspective of the firm is considered, and the entire
economic value created by the firm is of importance, one needs to consider
the discounted sum of the economic payoffs generated by the firm minus the
economic opportunity costs of the input resources used. However, a coherent
theory of the economic value creation of the firm presupposes a definition of
what a firm is, as well as an understanding of the prices paid in strategic
factor markets for input resources, usually the opportunity costs of alter-
native uses of these resources.
It is not only shareholders and management who extract economic value
from the firm beyond their opportunity costs. Unionized workers, for
example, may receive economic compensation above their next-best alter-
native. The stakeholder perspective then requires that the entire economic
value of the firm include the economic rent appropriation by union workers.
More generally, in the case of collective action or small-numbers bargaining
situations, the balance of bargaining power to extract economic value may
reside in the hands of suppliers, customers, labor or other stakeholders,
whose benefits beyond their opportunity costs should be taken into account
in order to capture the firmÕs entire economic value-added. While, of course,
such an approach is economically very sensible, this stakeholder perspective
is clearly at odds with the traditional shareholder wealth approach used in
most finance textbooks, which identifies the economic value of the firm as the
value of all market claims outstanding.
Whether this financial shareholder wealth approach or the (older-style)
strategic management stakeholder approach is justified depends on what
theory of the firm we hold. Thus, the theory of the firm has important con-
sequences for the theory of economic valuation, which is one of the two fun-
damental questions of the strategic management discipline, and is of enormous
relevance to managerial practice. The theory of the firm has fundamental
economic implications for understanding (and arguably in the long-run
influencing) economic value creation and distribution. Towards this objective,
we next consider more closely the modern property rights research literature.
3. Two Property Rights Perspectives
Here we consider two prominent theories of the firm from a property rights
perspective. First, the theory of the firm as a nexus of explicit contracts (and
complete contracting) is analyzed. Second, the theory of the firm as a nexus
of explicit and implicit contacts (and incomplete contracting) is further
The Firm as a Nexus of Explicit Contracts. Clearly, the currently dominant
(agency) theory of corporate governance in strategic management – and a
conceptualization of the firm prevailing in corporate finance – can be traced
to the seminal articles of Alchian and Demsetz (1972) and Jensen and
Meckling (1976). This conceptualization defines the firm as a nexus of con-
tracts. Sometimes this definition includes only explicit contracts and is typ-
ically studied from a (ex ante) complete contracting perspective (while
allowing for asymmetric information and divergent goals between principal
and agent). From the mathematical principal-agent model (Holmstrom,
1982), the only residual claimants are the shareholders and therefore share-
holders warrant the control rights to make decisions. Thus, the economic
basis for shareholdersÕsupremacy is established.
Zingales (2000) comments, however, that to accept this conceptualization
of the firm at face value, one has to take a very narrow view of contracts. In
such a narrow view, shareholders are the only residual claimants. In fact,
however, a firmÕs decisions influence the economic payoffs of many other
members of the nexus, sometimes even to a greater extent than that of the
shareholders. The claim that shareholders are the firmÕs only residual
claimants fails to fit the economic facts in almost all real-world business
circumstances (Pitelis, 2004). First, employees are important residual claim-
ants especially when firm-specific human capital is involved. Second, credi-
tors can be important residual claimants. Third, complex network
relationships among industrial suppliers and customers produce interde-
pendencies and lead to important residual gains and losses.
The academic economic counterpart to such a narrow view of the firm of
shareholder supremacy is the conceptualization of the firm as a nexus of
explicit contracts in a world of complete contracting. In such an agency
model – especially in its more formal mathematical form – there are no
residual rights of control, by definition, since the nexus of explicit contracts
are posited to specify in advance all the future economic payoff-relevant
We hasten to add here that the complete contracting approach is not
necessary to defend the shareholder value maximization criterion for the
firm. For example, one line of argument in favor of shareholder value
maximization in a world of incomplete contracting is that shareholders have
fewer contractual safeguards than other stakeholders (Williamson, 1985).
Our response in the current research paper is that there will be cases where a
combination of bounded rationality, potentially opportunistic behavior,
uncertainty, firm-specific capital asset specificity and asymmetric information
can lead to inadequate contractual safeguards for those other than the
Another line of argument by Hansmann (1996) maintains that one
advantage of involving only shareholders in corporate governance is that
both corporate decision-making costs and managerial discretion will be
reduced (Sternberg, 1996, 2000; Oswald, 1998; Jensen, 2001; Grandori, 2004).
Roe argues that: ‘‘a stakeholder measure of managerial accountability could
leave managers so much discretion that managers could easily pursue their
own agenda, one that might maximize neither shareholder, employee, con-
sumer, nor national wealth, but only their own’’ (2001: 2065). In the current
research paper, we accept the critique that there are potential problems in
moving to a stakeholder perspective, including potential increased discretion
on the part of management and potential increased costs of corporate deci-
sion making. We maintain, however, that there are potential benefits of
moving towards the stakeholder view, which we highlight in the text. To
balance these potential costs and benefits may require case-specific analysis:
There may not be a single ÔbestÕgovernance structure. Therefore, we are not
arguing that we should abandon the shareholder as an important claimant,
but rather we are arguing that we should at least allow the consideration of
other claimants. In fact, there may be many cases (e.g., under the complete
contracting assumption) where the results from a shareholder-only perspec-
tive will indeed coincide with the results from a stakeholder perspective.
However, there will likely be many other cases where the results from the two
perspectives will not coincide. Further, we hold open the possibility that the
ex post and ex ante inefficiencies that flow from shareholder primacy may
turn out to be worse than the increased agency costs that may occur using a
stakeholder approach.
To be clear, here is the essence of why we suggest that there are funda-
mental advantages of developing strategic management theory more along
the lines of property rights theory rather than maintaining the current
hegemony of agency theory. In the mathematical formulation of the princi-
pal-agent model (e.g., Holmstrom, 1982), agency theorists have modified the
‘‘contingent claims contracting’’ approach to take into account asymmetric
information. Such complete contracting solutions posited by agency theory
are hardly satisfactory in the world of business experience where contracts
are usually incomplete. Real-world business contracting is typically in-
complete if for no other reason than bounded rationality (Simon, 1978;
Williamson, 1985). Finessing the problem of bounded rationality and con-
structing a complete contracting ‘‘solution’’ is often not satisfactory, prag-
matically speaking, in terms of being operational. Fundamentally,
incomplete contracting occurs because making (ex ante) complete contingent
claims contracting is too costly, if not outright impossible, to achieve.
The agency perspective (Jensen and Meckling, 1976; Holmstrom, 1982)
posits that explicit complete contracting has to a superlative degree con-
tractually protected (ex ante) all stakeholders, other than the shareholders,
against any negative consequences resulting from the choices of managers
representing the equity holders. Indeed, any potential negative economic
consequences have already been anticipated and factored in by all other
stakeholders within the explicit contract. Therefore, the shareholders, as the
only residual claimants, should be allocated decision rights.
Thus, the proper goal from the agency theory perspective – indeed, the
typically assumed goal from an economic efficiency perspective within such
an orthodox economic model – is for the firm to maximize shareholder
wealth. Consequently, the fiduciary duty of the managers acting as an agent
for the principals (i.e., the shareholders) is to maximize the stock price of the
firm. The economic logic under the nexus of explicit contracting perspective
is since (by definition under this perspective) the shareholders are the only
ones who bear risks from discretionary decisions made, the firm should be
governed to maximize shareholdersÕvalue by maximizing net present value
(NPV) via, for example, the discounted cash flow approach.
With this explicit contracting framework as a foundation, the stock price
has become the complete arbiter of social value and has been used exclusively
as the way to evaluate the social consequences of decisions made by the firm,
such as corporate investments, mergers & acquisitions, and other corporate
events. Hence, a proliferation of event studies that use share price movement
as the sole criterion in the evaluation of strategic corporate actions is evident
not only in industrial organization economics and corporate finance, but also
in the discipline of strategic management.
The Firm as a Nexus of Explicit and Implicit Contracts. Such a retrench-
ment from the stakeholder perspective, in our view, is a primary reason why
the current state of theoretical development of the theory of the firm, the
theory of economic valuation in its entirety, and the theory of the distribu-
tion of that economic valuation is poor. What to do? In answering this
question we begin by noting that in recent years there has been developing
within industrial organization economics and corporate finance a new con-
ceptualization of the property rights theory of the firm, which considers both
explicit and implicit contracting (Zingales, 2000; Baker et al., 2002). This
seemingly minor change in premises has profound consequences for how we
are to understand the theory of the firm, the economic valuation of the firm
in its entirety, and the distribution of this economic value.
For example, when considering both explicit and implicit contracts when
assessing the economic value generated by the firm, one needs to assess the
economic surplus captured by all stakeholders. It is worth noting, for
example, that Blair (1995) reports that accounting profits may represent less
than 60 percent of the total economic rents and quasi-rents generated by U.S.
corporate activities in 1993. The remainder of the economic rents went to
employees as returns for specialized human capital. Blair (1995) goes on to
argue that rarely do we consider this specialized human capital as one part of
what the corporation as a whole should be trying to maximize. In fact,
finance texts typically assume that the NPVs for all stakeholders (other than
the shareholders) are zero in competitive strategic factor input markets.
Thus, by definition, maximizing NPV refers to maximizing the NPV exclu-
sively in terms of shareholder value.
A more economically cogent stakeholder approach to economic valuation
would be to discount the entire economic value generated by the firm. To
move from a stockholder wealth evaluation to a stakeholder economic val-
uation, however, requires a theory of economic value distribution of how the
economic surplus is divided among different stakeholders, be they financial
claim-holders (e.g., holders of equity, debt or options issued by the firm) or
non-financial ones (e.g., employees, key customers, and suppliers).
In short, the modern property rights theory of the firm (initiated by
Grossman and Hart, 1986; Hart and Moore, 1990) will in the long-run, we
believe, lead – to a consequence quite unintended by these property rights
authors – towards a revitalization of a stakeholder theory of the firm.
Prospects for developing a solid economic foundation for a new stakeholder
theory of the firm are quite promising in the next generation of strategic
management research both because of its sufficient intellectual rigor and its
superior relevance in dealing with real managerial problems.
In recent years, the firm has become understood as a nexus of both explicit
and implicit contracts, which are understood from an incomplete contracting
perspective (Hart and Moore, 1990; Aghion and Bolton, 1992; Baker et al.,
2001). Thus, the firm is no longer simply the sum of its components readily
available on the market but is rather a unique combination of potentially
complementary and co-specialized assets that can possibly be worth more (or
less) than the sum of its parts.
For example, consider a firm with the reputation for upholding the ‘‘im-
plicit contract’’ of not expropriating ‘‘quasi-rents’’ that have been generated
by employees investing in firm-specific human assets (Klein et al., 1978;
Williamson, 1985). Or put differently, the firm has a credible policy of
rewarding employees fairly on the basis of their economic contribution to the
firm, regardless of how much lower the economic value of these specialized
human skills would be compensated in the marketplace as the employeesÕ
next best option outside the firm. Relying on such a non-tradeable reputation
(Dierickx and Cool, 1989), the employees can be anticipated to be willing to
make firm-specific human capital investments that are greater than they
would have been willing to make in the marketplace, where complete explicit
contracting is not feasible. If such firm-specific human capital investments are
indeed economically valuable, and could not have been elicited by explicit
contracting, then the firmÕs non-tradeable reputation adds economic value
and represents an organizational asset. Similarly, a subcontractor exploring
for oil will buy site-specific new equipment only if there is a warranted belief
that the contracting oil firm will not try to squeeze the subcontractorÕs
economic rents once the subcontractor has made a sunk cost relationship-
specific investment (Shleifer and Summers, 1988).
Indeed, it is worth noting that two challenges face managers in attempting to
build and maintain a reputation for fair treatment of stakeholders in an implicit
contract. First, the managers of the firm are subject to periodic shareholder
vote, so that a future management team that does not share the current man-
agement stakeholder philosophy may replace the current management team.
Second, managers that currently embrace the stakeholder focus may recon-
sider their approach if the firm faces financial difficulties; for example, the only
way for the firm to survive an economic downturn may be to renege on
promises embedded in previous implicit contracts. Therefore, even if a man-
agement team embraces the stakeholder approach, it could have difficulties
ensuring that these Ôtime consistencyÕproblems do not undermine their efforts.
To emphasize a point made earlier in the current paper: From an
incomplete contracting theoretical perspective, other contracting parties be-
sides the stockholders are not fully protected by explicit contracting, thereby
undermining the foundational premise of shareholdersÕsupremacy. The logic
is that the combination of bounded rationality, opportunism, uncertainty,
asset specificity and asymmetric information can make contractual safe-
guarding inadequate (Arrow, 1974; Williamson, 1996). Therefore, it logically
follows in theory, and can be readily observed in the world of experience that
unlike in the mathematical principal agent model, in the real-business world
of incomplete contracting sometimes stakeholders will have their economic
wealth unexpectedly expropriated (Shleifer and Summers, 1988). From this
modern property rights perspective, Zingales inquires: ‘‘If many members of
the nexus [of contracts] are residual claimants, why are shareholders neces-
sarily the ones affected the most by the firmsÕdecisions? Even if they are, are
they the party that benefits the most from the additional protection granted
by the control rights?’’ (2000: 1632).
Of course, once we admit that implicit contracts are part of the ‘‘nexus of
contracts’’ then our conceptualization of the firm differs from its legal
counterpart. Indeed, the firm may have implicit contracts with other stake-
holders such as bondholders (Parrino and Weisbach, 1999), suppliers, and
customers, among others.This implicit contracting view of the firm is far
removed from the complete contracting approach.
Empirical research studies frequently focus on stakeholder issues in terms
of the bottom line to shareholders (Waddock and Graves, 1997; Harrison
and Freeman, 1999; Hillman and Keim, 2001). In this vein, there are many
excellent research papers demonstrating the importance of including the
customer as a stakeholder. For example, product recalls generate negative
market returns (Davidson and Worrell, 1992); product innovations through
R&D are generally shown to be positively associated with market stock
price (Sougiannis, 1994); and improved customer satisfaction measures are
found to be value relevant to shareholders (Ittner and Larcker, 1997). These
empirical papers suggest an ‘‘instrumental approach’’ (Jones, 1995) in
which concern for other stakeholders are in the enlightened self-interest of
shareholders. A particularly noteworthy empirical study found that because
private information and associated relationship-specific activities are intrinsic
to bank lending, borrowers incur significant economic costs in response to
unanticipated reductions in bank durability (Slovin et al., 1993), and thus are
stakeholders that indeed bear risk due to the actions of banks.
Once we recognize the existence of implicit contracts (and incomplete
contracting), then other stakeholders besides the shareholders are residual
claimants and these stakeholders may need to be protected. For example, the
issue of incomplete contracts has also been addressed in the legal field. Ayres
and Gertner (1989) discuss the distinction between immutable rules and de-
fault rules and the use of each to fill the gaps in incomplete contracts. It may
be that some stakeholders would need to be protected through the estab-
lishment of immutable rules, particularly those who are not able to contract
with the firm as they are either not part of the discussion (environmental
concerns) or they are too disperse a group (consumers). Other groups, such
as employees or suppliers, may be protected through the use of default rules,
though the question still remains as to what form such default rules should
take. An important consideration, we would argue, is that the default rules
should be designed to minimize transaction costs.
It is now not clear whether decision rights should reside exclusively with
shareholders, because the unfettered pursuit of shareholdersÕvalue maximi-
zation may lead to inefficient strategic actions, such as the breach of valuable
implicit contracts. While in theory such discretionary financial contracting
can be desirable (Ayres and Gertner, 1989; Boot, Greenbaum and Thakor,
1993), it is often troublesome when carefully scrutinized in real-world busi-
ness practice (Shleifer and Summers, 1988). For instance, hostile takeovers
sometimes result in the takeover firms terminating defined benefit pension
funds mid-stream to enable economic transfers from workers to shareholders
(Shleifer and Summers, 1988). Pontiff et al. (1990), in their sample of 413
takeovers, find that pension funds were reverted by 15.1%of acquirers in the
two years following hostile takeovers compared to 8.4%in the two years
following friendly takeovers. Further, reversions tended to occur when the
potential for wealth transfer was the greatest. These empirical results are
consistent with the view that hostile takeovers sometimes do (and may in
some cases well be primarily intended to) breach implicit contracts between
firms and employees. Economic efficiency losses will occur because stake-
holders who anticipate opportunistic behavior will be reluctant to enter into
implicit contracts with the firm (see also, Ippolito and James, 1992).
Moreover, the presence of implicit contracts makes it impossible to
identify precisely the entire economic value created by the firm. As a result,
stock price changes are not reliable arbiters of social welfare changes even
when financial markets are perfectly (strong-form) efficient (Mahoney and
Mahoney, 1993; Demski, 2003). Therefore, we should not draw social welfare
conclusions from event study analysis that incorporates only share price
reactions to informative events.
4. Suggestions for Possible Research Agendas
In terms of further development of the stakeholder perspective, we believe
that the distinction offered by Berman et al. (1999) between an ‘‘instrumental
approach’’ (McGuire et al., 1988; Bowen et al., 1995; Greenley and Foxall,
1997; Ogden and Watson, 1999) – in which concern for other stakeholders is
in the enlightened self interest of shareholders – and an ‘‘intrinsic commit-
ment’’ view – concern for stakeholders as ends and not merely as means
(Donaldson and Dunfee, 1994; Meznar, Nigh and Kwok, 1994; Blair, 1998;
Agle et al., 1999) – has much to offer. In this regard, it is worth pointing out
that a more fine-grained and potentially useful classification has been offered
by Donaldson and Preston (1995), which offers three interrelated but distinct
aspects of the stakeholder theory: descriptive accuracy (does the theory de-
scribe or explain characteristics or behaviors observed in the world of
experience?), instrumental power (can the theory be used to identify connec-
tions between stakeholder analysis and traditional corporate objectives?),
and normative validity (can the theory be used to guide managers in the moral
or philosophical decisions to be made in the corporation?).
While the current research paper focuses primarily on an instrumental
approach to stakeholder theory, developing research along the lines
of intrinsic commitment to the stakeholder view also looks promising
(Donaldson, 1999). We fail to see why advocating the maximization of the
entire economic value is labeled as merely a value judgment, while advocating
the maximization of shareholder wealth is rarely labeled so. In fact, a min-
imum ethical standard of holding to the desirability of Pareto improving
strategic moves would support the maximization of the entire economic value
(and appropriate side-payments could then, in theory, be distributed).
The current paper makes the case for the stakeholder perspective from an
instrumentalist approach. However, a well-developed theory of justice
(Rawls, 1971) needs to be applied to the second fundamental question of the
distribution of economic value among various stakeholders. One cannot
sidestep the fact that stakeholder theory will require value judgments and
dialogue about the purpose of the corporation. As Andrews noted: ‘‘Coming
to terms with the morality of choice may be the most strenuous undertaking
in strategic decision’’ (1980: 89). Similarly, Barnard (1938) – a seminal
management book providing the foundations for a stakeholder theory of the
firm – maintains that executive leadership requires the personal capacity for
affirming decisions that lend quality and morality to the coordination of
organized activity and to the formulation of purpose.
Ansoff (1965: 35–36) noted that the Carnegie SchoolÕsBehavioral Theory
of the Firm (Cyert and March, 1963), which emphasized firm-level objectives
derived from a negotiated outcome by subgroups, has much in common with
stakeholder theory. Moreover, the ‘‘inducements-contributions model’’ of
Barnard (1938) and Simon (1952) in which each participant (e.g., entrepre-
neur, employee, customer) is offered an inducement (e.g., revenue from sales,
wages, goods and services) for participation in the organization and in turn
makes a contribution to the organization (e.g., costs of production, labor,
purchase price) was an early seminal research framework from the stake-
holder perspective (see Mahoney, 2005). Miller (1992), after a thorough
analysis of agency theory (Jensen and Meckling, 1976), property rights the-
ory (Grossman and Hart 1986), and institutional leadership (Barnard, 1938),
concludes that a managerÕs task of inspiring ‘‘sacrifice’’ (from the institu-
tional leadership perspective) may be as, or even more critical, than manip-
ulating the economic incentives (which are emphasized in the agency theory
and property rights theory approaches).
Along these institutional lines, in addition to highly influencing the
Carnegie School (Simon, 1947; March and Simon, 1958; Cyert and March,
1963), Barnard (1938) also influenced Selznick (1957). Selznick (1957:
138–139) writes that: This process of becoming infused with value is part of
what is meant by institutionalization. As this occurs, organization manage-
ment becomes institutionalized leadership. The latterÕs main responsibility is
not so much technical administrative management as the maintenance of
institutional integrity ... The building of integrity is part of what we have
called the ‘‘institutional embodiment of purpose’’ and its protection is a
major function of leadership.
If one is convinced that property rights systems are conduits through
which resources can be channeled to their highest-valued uses, several
empirical implications emerge. Countries in which the legal regimes of
property rights are more poorly protected will find it harder to attract
financial capital or develop specialized human capital (North, 1990). Fur-
thermore, within a given legal regime, industries that rely on resources that
have attributes that are inherently more difficult to specify completely
(ex ante) in a standardized contract (e.g., it may be more difficult to contract
on intellectual or creative outputs than on commodity-like outputs), will find
it necessary to develop relational contracts between the firm and the spe-
cialized resources. Within an industry, firms that are innovators in specialized
relational contracts will be able to attract financial capital and will be better
positioned to outperform their non-innovating rivals in terms of sales growth
or return on assets.
Even within countries with well-developed legal regimes, changes over
time may be suggestive of the importance of better-defined property rights. In
the United States, for example, the movement away from defined benefit
pension funds towards defined contribution pension funds may have been
motivated in part by the fact that defined contribution pension funds have
better defined property rights over the economic value that the pension fund
participants will receive when they retire. Conceptually, the firm has a greater
capacity than the pension plan participant to bear the investment risk
associated with pension assets. However, as Shleifer and Summers (1988)
argue, (ex ante) risk sharing between the firm and the participants can be-
come opportunistic (ex post) risk shifting because the (legally enforceable)
property rights held by the pension fund beneficiaries are, in general, poorly
The study of lease contracts could potentially provide a window into the
world of implicit versus explicit contracts. Consider, for example, vendor-
financing terms. Vendor financing occurs when the manufacturer of a
product helps the buyer find funding to purchase the product. As the asset
becomes more specialized, the contract becomes more explicit about con-
tingencies – often the manufacturer or its financing arm becomes the
depository of information regarding the primary sale and the resale markets
for the product. Medical equipment leases, for example, provide for the
termination of the lease if a better technology comes along, which is much
different from the conditions of leases for less specialized assets, such as
automobiles. In addition, a close study of the various contingencies in more
specialized assets such as medical equipment, software, or commercial air-
liners, may bring a heightened understanding of the complexities of assigning
property rights in industries with innovation paths that are hard-to-predict,
and where the study of incomplete contracting, and implicit contracting have
clear relevance in the discipline of strategic management.
A solid understanding of property rights from a stakeholder approach
sheds light on well documented but poorly understood strategic management
decisions and processes. For example, the Saturn car division of General
MotorsÕoriginal mission, governance structure, and internal processes fit the
key criteria of a stakeholder firm. Employees establish themselves as influ-
ential stakeholders who contribute to problem solving, conflict resolution,
and quality improvement (Kochan and Rubenstein, 2000). Saturn emerged as
a stakeholder firm because the company and union leaders who shared power
jointly, decided to create and develop an organization that would utilize
workersÕskills and knowledge and that would provide employees with a voice
in the governance process.
5. Conclusions
In the current paper, we note that the research governance literature in
strategic management over the past two decades has been dominated by
agency theory and its conceptualization of the firm as a nexus of complete
explicit contracting. While the past twenty years in the discipline of strategic
management have clearly witnessed a vast improvement in the scientific rigor
within the research journal publications in strategic management, we argue
here that such rigor has come at a high price in terms of managerial rele-
Our main point here is that it is far superior to have a reasonably accurate
understanding of the right (stakeholder) issues in the discipline of strategic
management than rigorous and perhaps even precise answers to less relevant
or contrived (shareholder wealth) questions. Indeed, scholars from the
complete contracting approach (which essentially suppresses economic
problems stemming from bounded rationality and limited information pro-
cessing) often finesse the really difficult stakeholder questions that managers
typically face.
The intellectual heritage of the discipline of strategic management owes
much to what used to be called business policy (e.g., Ansoff, 1965; Andrews,
1971). This early business policy (and typically case study) perspective was
unabashedly dedicated to a stakeholder perspective – which made the subject
of management within the business school truly differentiated from the
stockholder wealth perspective of industrial organization economics and
corporate finance.
However, in recent years, the discipline of strategic
management, perhaps due in part to the pursuit of greater academic standing
and scientific legitimacy, has significantly retrenched from the stakeholder
perspective (both in research journals and major textbooks) and has gravi-
tated toward the shareholder wealth perspective, where stock price data are
readily available.
We argue that the modern property rights perspective of incomplete
contracting and implicit contracting provides a solid economic foundation
for the revitalization of a stakeholder theory of the firm in strategic man-
agement. In order to make progress in strategic management an improved
(conceptual and empirical) understanding of implicit contracting is needed.
Currently, a firmÕs assets are certainly understated by the economic value of
the implicit contracts with a firmÕs employees, when valuable firm-specific
human capital is excluded from the balance sheet (DeAngelo, 1982). The
same can be said for the economic value that other stakeholders bring, or the
loss in economic value these stakeholders suffer when decisions are made
strictly on the basis of shareholder value. For example, financial distress can
create a tendency for the firm to take actions that are harmful to debt-holders
and other non-financial stakeholders (Cornell and Shapiro, 1987; Baden-
Fuller, 1989; Jog, Kotlyar and Tate, 1993; Opler and Titman, 1994). If the
goal is to maximize total economic value, and this value is to be allocated
among those contributing to/gaining from this economic value, then one
needs a property rights stakeholder theory, which recognizes the role each of
these groups plays in the creation and distribution of that economic value.
In 1932, two preeminent corporate scholars published a debate concerning the proper
purpose of the public corporation in the Harvard Law Review. Berle (1931) argued for what
is now called ‘‘shareholder primacy’’ – the view that the corporation exists for shareholder
wealth maximization. Dodd (1932) argued for what is now called the ‘‘stakeholder ap-
proach’’ – the view that the proper purpose of the corporation also included more secure
jobs for employees, better quality products for consumers, and greater contributions to the
welfare of the community. Stout (2002) provides an insightful analysis of the intellectual
progress made over the years concerning the Berle-Dodd debate. For example, the argu-
ment that even the single controlling stockholder ‘‘owns’’ the firm is questionable. As Black
and Scholes (1973) make clear, once the firm has issued debt (as almost all firms do), it
makes just as much sense to say the debt-holders ‘‘own’’ the right to the corporationÕs cash
flow but have sold a call option to the shareholder, as it does to say that the shareholder
‘‘owns’’ the rights to the corporationÕs cash flow but has bought a put option from the
debt-holders. Financial options analysis clarifies that bondholders and equity shareholders
each share contingent control and bear residual risk in firms. Blair and Stout (1999), along
the lines of Rajan and Zingales (2001), go beyond the team production model of Alchian
and Demsetz (1972) by considering that numerous corporate stakeholders may make firm-
specific investments and that a ‘‘mediating hierarchy solution’’ requires team members, in
their own self interests, to give up important property rights to a legal entity created by the
act of incorporation. Thus, corporate assets are ‘‘owned’’ not by the shareholders, but by
the corporation itself and the board of directors should not be under direct control of either
shareholders or stakeholders, providing a theory that is consistent with the way that many
directors have historically described their own roles and is consistent with the law itself
with directors acting as trustees to do what is best for ‘‘the firm.’’ In this mediating hierar-
chy model of the modern corporation, the firm is frequently not so much a ‘‘nexus of con-
tracts’’ as a ‘‘nexus of firm-specific investments’’ (Blair and Stout, 1999).
There are numerous definitions of stakeholders in the governance research literature,
based in part on the economic salience of these stakeholders (Aoki, 1984, 2001; Carroll,
1989; Preston, 1990; Hill and Jones, 1992; Hosseni and Brenner, 1992; Logsdon and Yu-
thas, 1997; Mitchell, Agle and Wood, 1997; Rowley, 1997; Clarke, 1998; Lowendahl and
Revang, 1998; Scholes and Clutterback, 1998; Wheeler and Sillanpea, 1998; Frooman,
1999; Gioia, 1999; Jones and Wicks, 1999; Shankman, 1999; Trevino and Weaver, 1999;
Scott and Lane, 2000; Charreaux and Desbrieres, 2001; Jawahar and McLaughlin, 2001;
McWilliams and Siegel, 2001; Winn and Keller, 2001; Friedman and Miles, 2002; Kassinis
and Vafeas, 2002; Mahon, 2002; Orts and Strudler, 2002; Windsor, 2002; Kaler, 2003; Phil-
lips et al., 2003; Ryan and Schneider, 2003; Brammer and Millington, 2004; McLaren,
2004). For the purposes of this research paper we define stakeholders broadly as those per-
sons and groups who either voluntarily or involuntarily become exposed to risk from the
activities of a firm (Clarkson, 1995). Thus, stakeholders include shareholders (preferred and
common), holders of options issued by the firm, debt holders (Parrino and Weisbach,
1999), (banks, secured debt holders, unsecured debt holders), employees (especially those
investing firm-specific human capital) (Blair, 1996; Child and Rodrigues, 2004), local com-
munities (e.g., charities) (Morris et al., 1990), environment as ‘‘latent’’ stakeholders (e.g.,
pollution) (Barth and McNichols, 1994; Henriques and Sadorsky, 1999; Phillips and Rei-
chart, 2000; Buysse and Verbeke, 2003; Driscoll and Starik, 2004), the government (as tax
collector) (Brouthers and Bamossy, 1997; Buchholz and Rosenthal, 2004), customers and
suppliers (Freeman and Reed, 1983; Freeman, 1984; Freeman and Evan, 1990; Freeman
and Liedtka, 1997). These stakeholders often gain substantially when the firm does well and
suffer economic losses when the firm does poorly. Bowman and Useem state that: ‘‘To
exclude labor and other stakeholders from the governance picture ... is theoretically tidy
and empirically foolhardy’’ (1995: 34).
Interestingly, some have reinterpreted the modern property rights theory of the firm of
Grossman and Hart (1986) and Hart and Moore (1990) – the GHM model – to support the
shareholdersÕwealth maximization approach (Shleifer and Vishny, 1997). However, such an
interpretation misses the key point of the modern property rights approach that it might be
efficient to allocate formal control rights to the stakeholder who has a lot of de facto pow-
er, as is the case for key workers who can easily leave (Blair, 1995; Zingales, 2000). These
alternative views support Donaldson and PrestonÕs astute commentary that: ‘‘The theory of
property rights, which is commonly supposed to support the shareholder theory of the firm,
in its modern and pluralistic form supports the stakeholder theory of the firm instead’’
(1995: 88). Boatright (2002) draws a similar conclusion and provides the provocative com-
mentary that: ‘‘The present system of corporate governance appears to sanction, indeed
mandate, that managers externalize [externality] costs wherever possible’’ (2001: 1849).
Holmstrom (1999) provides a mathematical model with distinctive features from that of the
GHM model. In this model, the firm is viewed as a sub-economy in which the top manage-
ment team has the decision rights to regulate trade by assigning tasks, delegating authority,
and delineating principles for how explicit and implicit contracts are to be structured. Kim
and Mahoney (2005) list over 40 published papers that extend and/or critique the GHM
model, with Holmstrom (1999) being a prominent example. It should be noted that modern
property rights theory supports a narrow, rather than a broad, definition of stakeholders
emphasizing those who make critical firm-specific capital investments (Blair, 1995; Hart,
1995). We thank Anna Grandori for bringing this important theoretical point to our atten-
At the beginning of the current paper, we noted that Berle (1931) was a major proponent
of the shareholder primacy view of the corporation. Berle (1954) offered the following ac-
count of the Berle-Dodd debate concerning the shareholder supremacy versus stakeholder
approach: ‘‘Twenty years ago the writer had a controversy with the late Professor E. Mer-
rick Dodd of the Harvard Law School, the writer holding that corporate powers were pow-
ers in trust for shareholders while Professor Dodd argued that these powers were held in
trust for the entire community. The argument has been settled (at least for the time being)
squarely in favor of Professor DoddÕs contention’’ (1954: 169). Blair and Stout (1999) note
that BerleÕs (1954) retreat is supported by a series of mid- and late-twentieth-century cases
that have allowed directorsÕdecisions to sacrifice shareholdersÕprofits to stakeholdersÕinter-
ests when necessary for the best interest of ‘‘the corporation.’’ Case law interpreting the
‘‘business judgment rule’’ often explicitly authorizes directors to sacrifice shareholders inter-
ests to protect other stakeholders. Stout comments that: ‘‘Half a century after BerleÕs con-
cession, academics continue to argue the merits of the [shareholder primacy] versus the
[stakeholder] model of the firm. The business world continues to prefer the [stakeholder]
model of the firm’’ (2002: 1209).
We thank Ruth Aguilera, Russ Coff, Andrea DeMaskey, Jonathan Doh,
Henry Hansmann, David Ikenberry, Matt Kraatz, Steve Michael, Jack
Pearce, Lynn Stout, Dave Ziebart, and especially Margaret Blair, Nicolai
Foss, Anna Grandori and Charlie Kahn for their comments and sugges-
tions. Financial support from the Center for Responsible Leadership and
Governance at Villanova University is gratefully acknowledged. The views
expressed in this paper are those of the authors and do not necesssarily
represent those of the Federal Reserve Bank of New York or the Federal
Reserve System.
Aghion, P. and P. Bolton: 1992, ‘‘An ÔIncomplete ContractsÕApproach to Financial Con-
tracting’’, Review of Economic Studies 59: 473–494.
Agle, B.R., R.K. Mitchell and J.A. Sonnenfeld: 1999, ‘‘Who Matters to CEOs? An Investi-
gation of Stakeholder Attributes and Salience, Corporate Performance, and CEO values’’,
Academy of Management Journal 42: 507–525.
Aguilera, R.V. and A. Cuervo-Cazurra: 2004, ‘‘Codes of Good Governance Worldwide: What
is the Trigger?’’, Organization Studies 25: 417–446.
Aguilera, R.V. and G. Jackson: 2003, ‘‘The Cross-National Diversity of Corporate Gover-
nance: Dimensions and Determinants’’, Academy of Management Review, 28(3): 447–465.
Alchian, A. and H. Demsetz: 1972, ‘‘Production, Information Costs and Economic Organi-
zation’’, American Economic Review 62: 777–795.
Andrews, K.: 1971, 1980, The Concept of the Corporation (Homewood, IL: Irwin).
Ansoff, I.: 1965, Corporate Strategy ( New York, NY: McGraw Hill).
Aoki, M.: 1984, The Cooperative Game Theory of the Firm (Oxford, UK: Clarendon Press ).
Aoki, M.: 2001, Towards a Comparative Institutional Analysis (Cambridge, MA: MIT Press ).
Argyres, N. and J.P. Liebeskind: 1998, ‘‘Privatizing the Intellectual Commons: Universities
and the Commercialization of Biotechnology’’, Journal of Economic Behavior and Orga-
nization 35: 427–454.
Arrow, K.J.: 1974, The Limits of Organization (New York, NY: W.W. Norton).
Ayres, I. and R. Gertner: 1989, ‘‘Filling Gaps in Incomplete Contracts: An Economic Theory
of Default Rules’’, Yale Law Journal 99: 87–130.
Baden-Fuller, C.W.F.: 1989, ‘‘Exit from Declining Industries and the Case of Steel Castings’’,
Economic Journal 99 (December): 949–961.
Baker, G., R. Gibbons and K.J. Murphy: 2001, ‘‘Bringing the Market Inside the Firm?’’,
American Economic Review 91(2): 212–218.
Baker, G., R. Gibbons and K.J. Murphy: 2002, ‘‘Relational Contracts and the Theory of the
Firm’’, Quarterly Journal of Economics 117: 39–83.
Barnard, C.I.: 1938, The Functions of the Executive (Cambridge, MA : Harvard University
Barney, J.: 1991, ‘‘Firm Resources and Sustained Competitive Advantage’’, Journal of Man-
agement 17: 99–120.
Barney, J.: 2002, Gaining and Sustaining Competitive Advantage, 2nd edn. (Upper Saddle
River: NJ: Prentice-Hall).
Barth, M.E. and M. McNichols: 1994, ‘‘Estimation and Market Valuation of Environmental
Liabilities Relating to Superfund Sites’’, Journal of Accounting Research 32(Supplement):
Barzel, Y.: 1997, Economic Analysis of Property Rights (Cambridge, MA: Cambridge Uni-
versity Press).
Berle, A.A: 1931, ‘‘Corporate Powers as Powers in Trust’’, Harvard Law Review 44: 1049–
Berle, A.A. and G.C. Means: 1932, The Modern Corporation and Private Property (New York,
NY : Macmillan).
Berle, A.A.: (1954), The 20th Century Capitalist Revolution (New York, NY: Harcourt, Brace
& World).
Berman, S.L., A.C. Wicks, S.L. Kotha and T.M. Jones: 1999, ‘‘Does Stakeholder Orientation
Matter? The Relationship Between Stakeholder Management Models and Firm Financial
Performance’’, Academy of Management Journal 42(5): 488–506.
Black, F. and M. Scholes: 1973, ‘‘The Pricing of Options and Corporate Liabilities’’, Journal
of Political Economy 81: 637–659.
Blair, M.M.: 1995, Ownership and Control (Washington, D.C.: Brookings Institution).
Blair, M.M.: 1996, Wealth Creation and Wealth Sharing (Washington, D.C: Brookings
Blair, M.M.: 1998, ‘‘For Whom Should Corporations be Run?: An Economic Rationale for
Stakeholder Management’’, Long Range Planning 31(2): 195–200.
Blair, M.M. and L. Stout: 1999, ‘‘A Team Production Theory of Corporate Law’’, Virginia
Law Review 85(2): 247–328.
Boatright, J.R.: 2002, ‘‘Contractors as Shareholders: Reconciling Stakeholder Theory with the
Nexus-of-Contracts Firm’’, Journal of Banking and Finance 26: 1837–1852.
Boot, A.W.A., S.I. Greenbaum and A.V. Thakor: 1993, ‘‘Reputation and Discretion in
Financial Contracting’’, American Economic Review 83(5): 1165–1183.
Bowen, R.M., L. DuCharme and D. Shores: 1995, ‘‘StakeholdersÕImplicit Claims and
Accounting Method Choice’’, Journal of Accounting and Economics 20: 255–295.
Bowman, E.H. and M. Useem: 1995. ‘‘The anomalies of corporate governance’’, in E.H.
Bowman and B. Kogut (eds.), (New York: NY: Oxford University Press), pp. 21–48).
Brammer, S. and A. Millington: 2004, ‘‘The Development of Corporate Charitable Contri-
butions in the U.K.: A Stakeholder Analysis’’, Journal of Management Studies 41(8): 1411–
Brouthers, K.D. and G.J. Bamossy: 1997, ‘‘The Role of Key Stakeholders in International
Joint Venture Negotiations: Case Studies from Eastern Europe’’, Journal of International
Business Studies 28(2): 285–308.
Buchholz, R.A. and S.B. Rosenthal: 2004, ‘‘Stakeholder Theory and Public Policy: How
Governments Matter’’, Journal of Business Ethics 51(2): 143–153.
Buysse, K. and A. Verbeke: 2003, ‘‘Proactive Environmental Strategies: A Stakeholder
Management Perspective’’, Strategic Management Journal 24(5): 453–470.
Carroll, A.B.: 1989, Business and Society: Ethics and Stakeholder Management (Cincinnati,
OH: South-western).
Chandler, A.A.: 1962, Strategy and Structure (Cambridge, MA: MIT Press).
Chandler, A.A.: 1977, The Visible Hand (Cambridge, MA: Belknap Press).
Chandler, A.A.: 1990, Scale and Scope (Cambridge, MA: Belknap Press).
Charreaux, G. and P. Desbrieres: 2001, ‘‘Corporate Governance: Stakeholder Versus Share-
holder Value’’, Journal of Management and Governance, 5: 107–128.
Chi, T.: 1994, ‘‘Trading in Strategic Resources: Necessary Conditions, Transaction Cost
Problems, and Choice of Exchange Structure’’, Strategic Management Journal 15: 271–290.
Child, J. and S.B. Rodrigues: 2004, ‘‘Repairing the Breach of Trust in Corporate Gover-
nance’’, Corporate Governance 12(2): 143–152.
Clarke, T.: 1998, ‘‘The Stakeholder Corporation: A Business Philosophy for the Information
Age’’, Long Range Planning 31(2): 182–194.
Clarkson, M.: 1995, ‘‘A Stakeholder Framework for Analyzing and Evaluating Corporate
Social Performance’’, Academy of Management Review 20(1): 92–117.
Coase, R.H.: 1937, ‘‘The Nature of the Firm’’, Economica 4: 386–405.
Coase, R.H.: 1960, ‘‘The Problem of Social Cost’’, Journal of Law and Economics 3: 1–44.
Coff, R.W.: 1999, ‘‘When Competitive Advantage doesnÕt Lead to Performance: Resource-
Based Theory and Stakeholder Bargaining Power’’, Organization Science, 10: 119–133.
Cornell, B. and A.C. Shapiro: 1987, ‘‘Corporate Stakeholders and Corporate Finance’’,
Financial Management (Spring): 5–14.
Cyert, R.M. and J.G. March: 1963, A Behavioral Theory of the Firm (Englewood Cliffs, NJ:
Prentice-Hall ).
Davidson, W.N. and D.L. Worrell: 1992, ‘‘The Effects of Product Recall Announcements on
Shareholder Wealth’’, Strategic Management Journal 13: 467–473.
DeAngelo, L.E.: 1982, ‘‘Unrecorded Human Assets and the ‘‘Hold-Up’’ Problem’’, Journal of
Accounting Research 20: 272–274.
Demsetz, H.: 1967, ‘‘Toward a Theory of Property Rights’’, American Economic Review 57:
Demski, J.S.: 2003, ‘‘Corporate Conflicts of Interest’’, Journal of Economic Perspectives 17(2):
Dierickx, I. and K. Cool: 1989, ‘‘Asset Stock Accumulation and Sustainability of Competitive
Advantage’’, Management Science 35: 1504–1514.
Dodd, E.M.: 1932, ‘‘For Whom are Corporate Managers Trustees?’’, Harvard Law Review 45:
Donaldson, T.: 1999, ‘‘Making Stakeholder Theory Whole’’, Academy of Management Review
24: 237–241.
Donaldson, T. and T.W. Dunfee: 1994, ‘‘Toward a Unified Concept of Business Ethics:
Integrative Social Contracts Theory’’, Academy of Management Review 19: 252–284.
Donaldson, T. and L.E. Preston: 1995, ‘‘The Stakeholder Theory of the Corporation: Con-
cepts, Evidence and Implications’’, Academy of Management Review 20(1): 85–91.
Driscoll, C. and M. Starik: 2004, ‘‘The Primordial Stakeholder: Advancing the Conceptual
Consideration of Stakeholder Status for Natural Environment’’, Journal of Business Ethics
49(1): 55–73.
Foss, K. and N. Foss: 2001, ‘‘Assets, Attributes, and Ownership’’, International Journal of the
Economics of Business 8: 19–37.
Freeman, R.E.: 1984, Strategic Management: A Stakeholder Approach (Englewood Cliffs, NJ :
Prentice Hall).
Freeman, R.E. and W.M. Evan: 1990, ‘‘Corporate Governance: A Stakeholder Interpreta-
tion’’, Journal of Behavioral Economics 19(4): 337–359.
Freeman, R.E. and J. Liedtka: 1997, ‘‘Stakeholder Capitalism and the Value Chain’’, Euro-
pean Management Journal 15(3): 286–296.
Freeman, R.E. and D.L. Reed: 1983, ‘‘Stockholders and Stakeholders: A New Perspective on
Corporate Governance’’, California Management Review 25(3): 88–106.
Friedman, A.L. and S. Miles: 2002, ‘‘Developing Stakeholder Theory’’, Journal of Manage-
ment Studies 39(1): 1–21.
Frooman, J.: 1999, ‘‘Stakeholder Influence Strategies’’, Academy of Management Review 24:
Gioia, D.: 1999, ‘‘Practicability, Paradigms and Problems in Stakeholder Theorizing’’,
Academy of Management Review 24: 228–232.
Grandori, A.: 2004, Corporate Governance and Firm Organization (New York, NY : Oxford
University Press).
Greenley, G.E. and G.R. Foxall: 1997, ‘‘Multiple Stakeholder Orientation in UK Companies
and the Implications for Company Performance’’, Journal of Management Studies, 34(2):
Grossman, S. and O. Hart: 1986, ‘‘The Costs and the Benefits of Ownership: A Theory of
Vertical and Lateral Integration’’, Journal of Political Economy 94: 691–719.
Hansmann, H.B.: 1996, The Ownership of Enterprise (Cambridge, MA : Harvard University
Press ).
Harrison, J.S. and R.E. Freeman: 1999, ‘‘Stakeholders, Social Responsibility and Perfor-
mance: Empirical Evidence and Theoretical Perspectives’’, Academy of Management
Journal 42(5): 479–487.
Hart, O.: 1995, Firms, Contracts, and Financial Structure (Oxford: Clarendon Press).
Hart, O. and J. Moore: 1990, ‘‘Property Rights and the Nature of the Firm’’, Journal of
Political Economy 98: 1119–1158.
Helfat, C.E.: 1997, ‘‘Know-How and Asset Complementarity and Dynamic Capability
Accumulation: The Case of R&D’’, Strategic Management Journal 18: 339–360.
Henriques, I. and P. Sadorsky: 1999, ‘‘The Relationship Between Environmental Commitment
and Managerial Perception of Stakeholder Importance’’, Academy of Management Journal
42(1): 89–99.
Hill, C.W.L. and T.M. Jones: 1992, ‘‘Stakeholder-Agency Theory’’, Journal of Management
Studies 29(2): 131–154.
Hillman, A. and G.D. Keim: 2001, ‘‘Shareholder Value, Stakeholder Management and Social
Issues WhatÕs the Bottom Line?’’, Strategic Management Journal 22: 125–139.
Hillman, A., G.D. Keim and R.A. Luce: 2001, ‘‘Board Composition and Stakeholder Per-
formance: Do Stakeholder Directors Make a Difference?’’, Business and Society 40(3):
Holmstrom, B.: 1982, ‘‘Moral Hazard in Teams’’, Bell Journal of Economics 13(2): 324–340.
Holmstrom, B.: 1999, ‘‘The Firm as a Subeconomy’’, Journal of Law, Economics, and Orga-
nization 15(1): 74–102.
Hosseni, J. and S. Brenner: 1992, ‘‘The Stakeholder Theory of the Firm: A Methodology to
Generate Value Matrix Weights’’, Business Ethics Quarterly 2(2): 99–120.
Huse, M. and V.P. Rindova: 2001, ‘‘StakeholdersÕExpectations of Board Roles: The Case of
Subsidiary Boards’’, Journal of Management and Governance 5: 153–178.
Ippolito, R.A. and W.H. James: 1992, ‘‘LBOs, Reversions, and Implicit Contracts’’, Journal of
Finance 47(1): 139–167.
Itami, H. and T.W. Roehl: 1987, Mobilizing Invisible Assets (Cambridge, MA: Harvard
University Press).
Ittner, C.D. and D.L. Larcker: 1997, ‘‘Are non-Financial Measures Leading Indicators for
Financial Performance? An Analysis of Customer Satisfaction’’, Journal of Accounting
Research 35: 1–35.
Jawahar, I.M. and G.L. McLaughlin: 2001, ‘‘Toward a Descriptive Stakeholder Theory: An
Organizational Life-Cycle Approach’’, Academy of Management Review 26: 397–414.
Jensen, M.C.: 2001, ‘‘Value Maximization, Stakeholder Theory, and the Corporate Objective
Function’’, Journal of Applied Corporate Finance 14(3): 8–21.
Jensen, M.C. and W. Meckling: 1976, ‘‘Theory of the Firm: Managerial Behavior, Agency
Costs and Capital Structure’’, Journal of Financial Economics 3: 305–380.
Jog, V.M., I. Kotlyar and D.G. Tate: 1993, ‘‘Stakeholder Losses in Corporate Restructuring:
Evidence from Four Cases in the North American Steel Industry’’, Financial Management
(Autumn): 185–201.
Jones, T.M.: 1995, ‘‘Instrumental Stakeholder Theory: A Synthesis of Ethics and Economics:
A Survey’’, Academy of Management Review 20(2): 404–437.
Jones, T.M. and A.C. Wicks: 1999, ‘‘Convergent Stakeholder Theory’’, Academy of Man-
agement Review 24(2): 206–221.
Kaler, J.: 2003, ‘‘Differentiating Stakeholder Theories’’, Journal of Business Ethics 46(1): 71–
Kassinis, G. and N. Vafeas: 2002, ‘‘Corporate Boards and Outside Stakeholders as Deter-
minants of Environmental Litigation’’, Strategic Management Journal 23(5): 399–415.
Kim, J. and J.T. Mahoney: 2002, ‘‘Resource-Based and Property Rights Perspectives on Value
Creation: The Case of Oil Field Unitization’’, Managerial and Decision Economics 23(4):
Kim, J. and J.T. Mahoney: 2005, Property Rights Theory, Transaction Costs Theory, and
Agency Theory: An Organizational Economics Approach to Strategic Management.
Managerial and Decision Economics, forthcoming.
Klein, R., V. Crawford and A. Alchian: 1978, ‘‘Vertical Integration, Appropriable Rents and
the Competitive Contracting Process’’, Journal of Law and Economics 21: 297–326.
Kochan, T.A. and S.A. Rubinstein: 2000, ‘‘Toward a Stakeholder Theory of the Firm: The
Saturn Partnership’’, Organization Science 11(4): 367–386.
Lado, A.A. and M.C. Wilson: 1994, ‘‘Human Resource Systems and Sustained Competitive
Advantage: A Competence-Based Perspective’’, Academyof Management Review 19: 699–727.
Leiblein, M.J. and D.J. Miller: 2003, ‘‘An Empirical Examination of Transaction- and Firm-
Level Influences on the Vertical Boundaries of the Firm’’, Strategic Management Journal
24: 839–859.
Libecap, G.D.: 1989, Contracting for Property Rights (New York, NY : Cambridge University
Press ).
Liebeskind, J.P.: 1996, ‘‘Knowledge, Strategy, and the Theory of the Firm’’, Strategic Man-
agement Journal (Winter Special Issue) 17: 93–107.
Logsdon, J.M. and K. Yuthas: 1997, ‘‘Corporate Social Performance, Stakeholder Orienta-
tion, and Organizational Moral Development’’, Journal of Business Ethics 16: 1213–1226.
Lowendahl, B. and O. Revang: 1998, ‘‘Challenges to Existing Theory in a Postindustrial
Society’’, Strategic Management Journal 19(8): 755–773.
Luoma, P. and J. Goodstein: 1997, ‘‘Stakeholders and Corporate Boards Institutional Influence
on Board Composition and Structure’’, Academy of Management Journal 42(5): 53–563.
Madsen, T.L., E. Mosakowski and S. Zaheer: 2003, ‘‘Knowledge Retention and Personnel
Mobility: The Nondisruptive Effects of Inflows of Experience’’, Organization Science, 14:
Mahon, J.F.: 2002, ‘‘Corporate Reputation: A Research Agenda Using Strategy and Stake-
holder Literature’’, Business and Society 41(4): 415–445.
Mahoney, J.M. and J.T. Mahoney: 1993, ‘‘An Empirical Investigation of the Effect of Cor-
porate Antitakeover Amendments on Stockholder Wealth’’, Strategic Management Jour-
nal, 14(1): 17–31.
Mahoney, J.T.: 1992. ‘‘Organizational Economics Within the Conversation of Strategic
Management’’, in P. Shrivastava, A. Huff and J. Dutton (eds.), Advances in strategic
Management, pp. 103––155.
Mahoney, J.T.: 2001, ‘‘A Resource-Based Theory of Sustainable Rents’’, Journal of Man-
agement 27: 651–660.
Mahoney, J.T.: 2005, Economic Foundations of Strategy (Thousand Oaks, CA: Sage Publi-
cations ).
Mahoney, J.T. and J.R. Pandian: 1992, ‘‘The Resource-Based View Within the Conversation
of Strategic Management’’, Strategic Management Journal 13: 363–380.
March, J.G. and H.A. Simon: 1958, Organizations (New York, NY: John Wiley and Sons).
March, J.G.: 1991, ‘‘Exploration and Exploitation in Organizational Learning’’, Organization
Science 1: 71–87.
McEvily, S.K. and B. Chakravarthy: 2002, ‘‘The Persistence of Knowledge-Based Advantage:
An Empirical Test for Product Performance and Technological Knowledge’’, Strategic
Management Journal 23: 285–305.
McGuire, J.B., A. Sundgren and T. Schneeweis: 1988, ‘‘Corporate Social Responsibility and
Firm Financial Performance’’, Academy of Management Journal 31(4): 854–877.
McLaren, D.: 2004, ‘‘Global Stakeholders: Corporate Accountability and Investor Engage-
ment’’, Corporate Governance 12(2): 191–201.
McWilliams, A. and D. Siegel: 2001, ‘‘Corporate Social Responsibility: A Theory of the Firm
Perspective’’, Academy of Management Review 26(1): 117–127.
Meznar, M., D. Nigh and C.C.Y. Kwok: 1994, ‘‘Effects of Announcements of Withdrawal
From South Africa on Stockholder Wealth’’, Academy of Management Journal 37(6):
Miller, G.J.: 1992, Managerial Dilemmas: The Political Economy of Hierarchy (New York,
NY: Cambridge University Press).
Miller, D. and J. Shamsie: 1996, ‘‘The Resource-Based View of the Firm in Two Environ-
ments: The Hollywood Film Studios from 1936 to 1965’’, Academy of Management Journal
39: 519–543.
Mitchell, R.K., B.R. Agle and D.J. Wood: 1997, ‘‘Toward a Theory of Stakeholder Identi-
fication and Salience: Defining the Principle of Who and What Really Counts’’, Academy
of Management Review 22: 853–896.
Morris, S.A., K.A. Rehbein, J.C. Hosseni and R.A. Armacost: 1990, ‘‘Building a Current
Profile of Socially Responsive Firms’’, IAB Proceedings : 297–303.
Nelson, R.R. and S.G. Winter: 1982, An Evolutionary Theory of Economic Change (Cam-
bridge, MA: Harvard University Press).
North, D.C.: 1990, Institutions, Institutional Change and Economic Performance (Cambridge,
MA: Harvard University Press).
OÕConnor, M.A.: 1993, ‘‘The Human Capital Era: Reconceptualizing Corporate Law to
Facilitate Labor-Management Co-operation’’, Cornell Law Review : 899–965.
Ogden, S. and R. Watson: 1999, ‘‘Corporate Performance and Stakeholder Management:
Balancing Shareholder and Customer Interests in the UK Privatized Water Industry’’,
Academy of Management Journal, 42(5): 526–538.
Opler, T.C. and S. Titman: 1994, ‘‘Financial Distress and Corporate Performance’’, Journal of
Finance 49(3): 1015–1040.
Orts, E.W. and A. Strudler: 2002, ‘‘The Ethical and Environmental Limits of Stakeholder
Theory’’, Business Ethics Quarterly 12: 215–233.
Oswald, L.J.: 1998, ‘‘Shareholders vs. Stakeholders: Evaluating Corporate Constituency
Statutes Under the Takings Clause’’, Journal of Corporation Law (Fall): 1–28.
Oxley, J.E.: 1999, ‘‘Institutional Environment and the Mechanism of Governance: The Impact
of Intellectual Property Protection on the Structure of Inter-Firm Alliances’’, Journal of
Economic Behavior and Organization, 38: 283–309.
Parrino, R. and M.S. Weisbach: 1999, ‘‘Measuring Investment Distortions Arising from
Stockholder-Bondholder Conflicts’’, Journal of Financial Economics 53: 3–42.
Penrose, E.T.: 1959, The Theory of the Growth of the Firm (New York, NY: John Wiley).
Peteraf, M.: 1993, ‘‘The Cornerstones of Competitive Advantage: A Resource-Based View’’,
Strategic Management Journal, 14: 179–191.
Phillips, R.A., R.E. Freeman and A.C Wicks: 2003, ‘‘What Stakeholder Theory is Not’’,
Business Ethics Quarterly, 13(4): 479–502.
Phillips, R.A. and J. Reichart: 2000, ‘‘The Environment as a Stakeholder? A Fairness-Based
Approach’’, Journal of Business Ethics, 23(2): 185–197.
Pitelis, C.N.: 2004, ‘‘(Corporate) Governance, (Shareholder) Value and (Sustainable) Eco-
nomic Performance’’, Corporate Governance, 12(2): 210–223.
Pontiff, J., A. Shleifer and M.S. Weisbach: 1990, ‘‘Reversions of Pension Assets After
Takeovers’’, Rand Journal of Economics 21: 600–613.
Preston, L.E.: 1990, ‘‘Stakeholder Management and Corporate Performance’’, Journal of
Behavioral Economics, 19(4): 361–375.
Rajan, R.G. and L. Zingales: 2001, ‘‘The Firm as a Dedicated Hierarchy: A Theory of the
Origins and Growth of Firms’’, Quarterly Journal of Economics 116(3): 805–51.
Rawls, J.: 1971, A Theory of Justice (Cambridge, MA : Belknap Press of Harvard University
Roe, M. J.: 2001, ‘‘The Shareholder Wealth Maximization Norm and Industrial Organiza-
tion’’, University of Pennsylvania Law Review 149 (6): 2063–2082.
Rowley, T.: 1997, ‘‘Moving Beyond Dyadic Ties: A Network Theory of Stakeholder Influ-
ences’’, Academy of Management Review 22: 125–139.
Rumelt, R.P.: 1984. ‘‘Toward a Strategic Theory of the Firm’’, in R. Lamb (eds.), (Engle-
wood Cliffs, NJ: Prentice Hall), pp. 556–570.
Ryan, L.V. and M. Schneider: 2003, ‘‘Institutional Investor Power and Heterogeneity:
Implications for Agency and Stakeholder Theories’’, Business and Society 42(4): 388–429.
Scholes, E. and D. Clutterback: 1998, ‘‘Communication with Stakeholders: An Integrated
Approach’’, Long Range Planning 31(2): 227–238.
Schumpeter, J.: 1954, History of Economic Analysis (New York, NY : Oxford University Press ).
Scott, S. and V. Lane: 2000, ‘‘Stakeholder Approach to Organizational Identity’’, Academy of
Management Review 25(1): 43–62.
Selznick, P.: 1957, Leadership in Administration: A Sociological Interpretation (Berkeley, CA:
University of California Press).
Shankman, N.A.: 1999, ‘‘Reframing the Debate Between Agency and Stakeholder Theories of
the Firm’’, Journal of Business Ethics 19(4): 319–334.
Shleifer, A. and L.H. Summers: 1988. ‘‘Breach of Trust in Hostile Takeovers’’, in A.J.
Auerbach (eds.), (Chicago: University of Chicago Press), pp. 33–56.
Shleifer, A. and R. Vishny: 1997, ‘‘A Survey of Corporate Governance’’, Journal of Finance
52: 737–783.
Simon, H.A.: 1947, Administrative Behavior (New York, NY: : Macmillan).
Simon, H.A.: 1952, ‘‘A Comparison of Organization Theories’’, Review of Economic Studies
20(1): 40–48.
Simon, H.A.: 1978, ‘‘Rationality as Process and as Product of Thought’’, American Economic
Review 68(May): 1–16.
Slovin, M.B., M.E. Sushka and J.A. Polonchek: 1993, ‘‘The Value of Bank Durability: Bor-
rowers as Bank Stakeholders’’, Journal of Finance 48( (11): 247–266.
Sougiannis, T.: 1994, ‘‘The Accounting-Based Valuation of Corporate R&D’’, The Accounting
Review 69: 44–68.
Sternberg, E.: 1996, ‘‘Stakeholder Theory Exposed’’, Corporate Governance Quarterly 2(1): 4–18.
Sternberg, E.: 2000, ‘‘The Defects of Stakeholder Theory’’, Corporate Governance 5(1): 3–10.
Stout, L.A.: 2002, ‘‘Bad and Not-So-Bad Arguments for Shareholder Primacy’’, Southern
California Law Review 75(5): 1189–1209.
Takeyama, L.N.: 1997, ‘‘The Intertemporal Consequences of Unauthorized Reproduction of
Intellectual Property’’, Journal of Law and Economics, 40: 511–522.
Teece, D.J.: 1986, ‘‘Profiting from Technological Innovation: Implications for Integration,
Collaboration, Licensing, and Public Policy’’, Research Policy, 15: 285–305.
Teece, D.J., G. Pisano and A. Shuen: 1997, ‘‘Dynamic Capabilities and Strategic Manage-
ment’’, Strategic Management Journal, 17(Winter): 11–25.
Thompson, G. and C. Driver: 2002, ‘‘Corporate Governance and Democracy: The Stake-
holder Debate Revisited’’, Journal of Management and Governance, 6(4): 111–130.
Trevino, L.K. and G.R. Weaver: 1999, ‘‘The Stakeholder Research Tradition: Converging
Theorists – Not Convergent Theory’’, Academy of Management Review, 24(2): 222–228.
Waddock, S.A. and S. Graves: 1997, ‘‘The Corporate Social Performance-Financial Perfor-
mance Link’’, Strategic Management Journal, 19: 303–317.
Weintraub, S.: 1977, Modern Economic Thought (Philadelphia, PA: : University of Pennsyl-
vania Press).
Wernerfelt, B.: 1984, ‘‘A Resource-Based View of the Firm’’, Strategic Management Journal
5: 171–180.
Wheeler, D. and M. Sillanpea: 1998, ‘‘Including Stakeholders: The Business Case’’, Long
Range Planning 31(2): 201–210.
Williamson, O.E.: 1985, The Economics Institutions of Capitalism (New York, NY : Free Press).
Williamson, O.E.: 1996, The Mechanisms of Governance (Oxford: Oxford University Press).
Windsor, D.: 2002, ‘‘Stakeholder Responsibilities: Lessons for Managers’’, Journal of Cor-
porate Citizenship 6(Summer): 19–35.
Winn, M.I. and L.R. Keller: 2001, ‘‘A Modeling Methodology for Multi-Objective Multi-
Stakeholder Decisions: Implications for Research’’, Journal of Management Inquiry 10(2):
Woo, C., G. Willard and U Daellenbach: 1992, ‘‘Spin-Off Performance: A case of Overstated
Expectations?’’, Strategic Management Journal 13(5): 433–447.
Zingales, L.: 2000, ‘‘In Search of New Foundations’’, Journal of Finance 55(4): 1623–1653.
... (p. 8) Barnard made the case that executives have a fiduciary responsibility to the organization as a whole and not to any one stakeholder group-a view consistent with modern property rights theory and contemporary corporate law (Asher, Mahoney, & Mahoney, 2005;Blair & Stout, 1999;Klein, Mahoney, McGahan, & Pitelis, 2012). Responsibility means that individual action conforms to the requirements of some relevant code of conduct; executive responsibility entails the adoption of an "organizational personality" (p. ...
... NPOs are increasingly searching for tools capable of providing evidence of their impact on stakeholders and communities (Giovine and Taffari, 2017;Rotheroe and Richards, 2007). This is relevant from a governance perspective because managers must balance legitimate and conflicting claims and interests among stakeholders (Asher et al., 2005;Michelon and Parbonetti, 2012;Hazenberg et al., 2016). ...
Purpose This study aims to assess the effectiveness of social return on investment (SROI) as a measure of the social impact produced by non-profit organisations and social enterprises that support family-centred care, an approach that focuses on the pivotal role of families in paediatric health care. Design/methodology/approach The study offers an analytical evaluation of the SROI created by the Italian branch of the Ronald McDonald House Charities and highlights (a) the participatory analysis of stakeholders and outcomes; (b) the measurement of inputs; (c) the definition of outputs and proxies for the measurement of outcomes; (d) the calculation of the SROI ratio; and (e) the results of a sensitivity analysis. Findings This study discusses the advantages and shortcomings of SROI analyses, the practical implications of this research on governance and management and the role of engagement in managing the expectations of stakeholders. The value of SROI measurements in shaping strategic and management decisions – with special emphasis on stakeholder relations – is also discussed. Originality/value Non-profit organisations and social enterprises often require tools that assess the outcomes of their activities. The present research can provide new guidance to SROI analysts, while drawing attention to the most suitable proxies and indicators for evaluating the SROI of organisations operating in the health care sector.
... It is a governance issue because managerial efforts to promote implicit contracts may be fruitless without a supporting governance framework that makes any commitment credible by the allocation of control rights to all investing parties. Property rights theory -sometimes referred to in this context as team production theory - provides a useful grounding for this issue and generates an argument for broad stake-holder control (Driver and Thompson 2002;Asher et al 2005). The essential claim is that unless control rights are shared there will be underinvestment in human capital. ...
Full-text available
CORPORATE GOVERNANCE IN CONTENTION, OXFORD UNIVERSITY PRESS JUNE 2018 Ciaran Driver and Grahame Thompson bring together the thinking of 20 leading European scholars to offer a sustained critique of the shareholder wealth maximization norm, which became the dominant model of corporate law and governance in the U.S. in the 1980s and 1990s, and has infected corporate norms and law around the globe in the years since. From perspectives such as innovation, labor relations, finance, economics, social policy, and democratic values, the authors make the case that the goals and incentives of “financialized” corporations are not well-aligned with the needs of society in the 21st century. Dr. Margaret M. Blair, Professor of Law, Milton R. Underwood Chair in Free Enterprise, Vanderbilt University Law School …………………………………………………………………………………………………….. An original and critical perspective on corporate governance, this book offers valuable insights into more vital elements of corporate governance, including the contribution governance makes to investment and innovation. In turn this requires attention to how governance encourages the engagement of the collective talents of the enterprise (sadly neglected in conventional accounts of contemporary business). Finally, the analysis focuses on how governance impacts the distribution of wealth, power, and risk across the enterprise and economy. Thomas Clarke, UTS Business School, University of Technology Sydney
... From an unique perspective, an explanation on the ideology of stakeholders, their participation and affiliation with the firm as contemporary features of more modern firms is offered by Andriof et al (2002). An increasing count of research projects that deal with the basic factors and strategy to stakeholder participation in the decision-making processes of organizations has characterized the previous two decades according to Asher, Mahoney and Mahoney (2005). In fact, many studies (Harrison, Bosse and Phillips, 2010;Huang, Lenc and Szczesny, 2008;Desai, 2008) recommend the stakeholder theory usage in contemporary organization milieus. ...
... These acquirers have a strong sense of ownership over acquired targets (Pierce, Kostova, & Dirks, 2001). They strongly believe that they have the right to decide how to manage and integrate with acquired targets to create value and how to distribute the newly created value between acquirers and acquired targets (Mahoney, Asher, & Mahoney, 2004). This postacquisition integration and value distribution decision making is less likely to involve acquired foreign targets. ...
How do home country institutions influence cross-border postacquisition performance? We develop an institutional framework showing that informal and formal institutions not only have important individual effects but also work together in complex and interesting ways. While collectivism and humane orientation (two major informal institutions) can facilitate postacquisition integration and firm performance, shareholder orientation and property rights protection (two formal institutions) constrain postacquisition integration and firm performance. As acquirers are simultaneously embedded in their home countries’ informal and formal institutions, we further hypothesize that the positive effects of collectivism and humane orientation can be weakened by incompatible formal institutions that hamper postacquisition collaborative efforts. We find strong support for our hypotheses in a multilevel analysis of a sample of 12,021 cross-border acquisitions involving 43 home and target countries between 1995 and 2003.
... (p. 8) Barnard made the case that executives have a fiduciary responsibility to the organization as a whole and not to any one stakeholder group-a view consistent with modern property rights theory and contemporary corporate law (Asher, Mahoney, & Mahoney, 2005;Blair & Stout, 1999;Klein, Mahoney, McGahan, & Pitelis, 2012). Responsibility means that individual action conforms to the requirements of some relevant code of conduct; executive responsibility entails the adoption of an "organizational personality" (p. ...
Full-text available
The year 2013 marks the 75th anniversary of the publication of Chester I. Barnard's classic, The Functions of the Executive, a groundbreaking contribution to management theory. We maintain that Barnard's work provides a valuable perspective on the causes and potential solutions to challenges facing capitalism, business, and management consequent to the scandals and financial crises of the early 21st century. We believe Barnard would see a systemic failure of the moral dimension of organization as a driver of these crises, and that management theory and practice need to focus on both the science and the aesthetics of management. We look back on The Functions and provide a review of key elements of Barnard's theory of organization. We then look forward from The Functions and see unique insights and solutions into the ongoing challenges of managerial morality.
... to their nationalization and become public or collective property. Theoretically, this would be possible for the whole banking system, but it would reduce competitiveness and hence economic growth. Discarding collective property, we might look at stakeholders instead of owners. Here again we hit upon a theoretical vacuum. Following the example of Mahoney et. al. 2004, who examine the possibility of founding a theory of stakeholdership upon a theory of property rights (in enterprise in their case), we might try to generalize Ostrom's proposal into the question which sorts of stakeholdership regimes offer the perspective of finding forms of governance of the monetary and financial system that reduce t ...
Full-text available
During the current crisis we have discovered that a sick monetary and financial system and bad money are a collective bad. But if that is the case, then is it not reasonable to consider a sound monetary and financial system and good money to be a collective good? One of the reasons economists have not taken up this simple idea is that they have treated money as too homogenous a phenomenon – apart from the fact that economics has never been able to satisfactorily explain why money exists at all. In addition, the great majority of economists were unprepared for the world financial crisis and for the crisis of the euro because they have neglected three basic lessons of economics. By distinguishing different levels of interaction between economic and political agents, I will show that the idea of money as a private good (excludable and rival) with positive and negative externalities cannot fully account for either the positive or the negative effects of money. The concept of money as a collective good (non excludable and non rival) also has its defects. Money as a club good (excludable and non rival) comes closer to accounting for its peculiarities. But the global character of money leads me to conclude that it is better analyzed as a common pool good (non excludable and non rival), at least at the level at which attempts are undertaken to stabilize the world monetary andfinancial system. I apply Elinor Ostrom’s work on common pool resources to the analysis of money, and in particular of the euro and its vicissitudes. This throws more light on the nature and functions of money, and perhaps even on its existence. There is, however, one crucial difference between the problems of the sustainable natural resources that Ostrom studies and the sustainability of money. Natural resources, if not overused to complete exhaustion, may replenish themselves without human intervention, a process that may be stimulated by an adequate governance system. In the case of social or cultural resources such as money (which is a “social construct”), however, the governance system is part of the resource itself. This leaves intact, but complicates, the relationship between the stock or pool (which in the case of money is trust) that produces a flow of products (monetary and financial services). In order for the stock to be maintained and to continue yielding its services (so: to be a renewable resource), continuous investments are needed. This is a central idea in Friedrich von Hayek’s capital theory, which may be used to improve Ostrom’s analysis. So, in order to return to a sound global monetary and financial system, and to save the euro, we should invest in trust. How this can be done is a largely unexplored domain, but I will show that the way European politicians have been acting during the euro crisis is exemplary of how not to solve this problem. Getting the global and the European monetary and financial systems back on track is a complex problem of collective action, which - as Ostrom has shown - is at the centre of the governance of all common pool goods. The story of the euro is a perfect illustration.
This work analyses the impact of gaps in stakeholder aspiration levels concerning value capture and company performance, especially regarding the impact on this relationship by family management. The work offers empirical evidence from a sample of 114 Spanish companies of a collaborative attitude among stakeholders when the gaps of generated value appropriations increase, thereby positively affecting company performance. In addition, when stakeholders receive less value than expected, empirical evidence indicates that the management of internal resources and stakeholder demands is more efficient in a family business, and this efficiency increases future performance. These results are useful for management because they demonstrate the relevance of efficient management of relational capital, and family businesses are examples of such relational management.
Research Summary: We evaluate how the value appropriated by employees varies in response to an exogenous shock to the price of the firm's product and how this variation depends on institutional and ownership structures. Institutional and ownership structures that favor employees can influence firms’ location decisions and shareholders’ incentives to invest. Using data from the main copper mines in the world, we show that the value appropriated by employees rises in response to an exogenous increase in the price of minerals. Our results indicate that the magnitude of the increment in the value captured by employees is larger in stated‐owned companies, when labor regulations promote productivity‐based payments, when wages are determined through a centralized bargaining process, and when regulations associated with hiring and firing are more flexible. Managerial Summary: We show how labor regulations and state ownership affect the value appropriated by employees when there are exogenous changes in the price of the firm's products. Since the value generated by a firm is distributed among different stakeholders, a higher appropriation of value by employees results in lower appropriation by another party. Therefore, by changing the distribution of value, managerial decisions about location and entry could be affected. For instance, shareholders of firms with positive future expectations about the prices of their products might prefer to enter markets in which salary negotiations are not centralized or where partnership with the local government is not mandatory. Overall, our analysis calls for the consideration of the external environment when evaluating value appropriation by different types of stakeholders.
The article focuses on questions concerning the validity of a convergent stakeholder theory that would allow the theoretical integration of stakeholder research. It states that the proposed convergent theory lacks empirically testable constructs and explanatory relationships that could be found in established social scientific theories, and that conditions need to be identified where empirical and theoretical limitations can be tolerated so to allow for an empirically adequate and more complete theory. It suggests stakeholder theory could best be characterized as a stakeholder research tradition incorporating shared concepts and normative concerns for organizational-stakeholder relations.