KOCHAN AND RUBINSTEIN Toward a Stakeholder Theory of the Firm a theory and to illustrate some of its propositions with a case study

This paper seeks to engage the organization theory community in contemporary debates over the role of the corporation in American society by using the case of the Saturn corporation to develop and illustrate a stakeholder theory of the firm. One normative and three positive questions are posed for a stakeholder theory: The normative question is: Why should stakeholder models be given serious consideration at this moment in history? The positive questions are: (1) Under what conditions is a stakeholder firm likely to emerge in the United States, (2) what are the critical determinants of performance in a stakeholder firm, and (3) what will determine the sustainability and diffusion of this organizational form in the American environment? The history, design features, and dynamics of the labormanagement partnership at Saturn are used to illustrate and interpret a specific case of employees as stakeholders. Saturn's original mission, governance structure, and internal processes fit the characteristics of a stakeholder firm. Employees establish themselves as influential, definitive stakeholders by using their knowledge to improve organizational performance. The local union likewise contributes to firm performance by organizing workers into a dense social network that contributes to problem solving, conflict resolution, and quality improvement. However, the legal and political environment in which the firm operates produces considerable uncertainty over the sustainability and diffusion of Saturn's features in particular, and the stakeholder organizational form in general. Additional hypotheses and research questions are proposed to continue theory building around the more general model of the stakeholder firm. Researchers are encouraged to take up the analysis of stakeholder models and thereby contribute to the contemporary and future debates over the role of the corporation in American society. (Organization Theory; Saturn; Stakeholder; Partnership; Labor-Management Relations; Social Networks; Labor Unions; Firm Governance) Organization theorists have recently been challenged to give greater attention to the role of the corporation in the larger society (Stern and Barley 1996, Selznick 1996) and to build and test theories of alternative organizational forms by studying new models as they emerge in practice (Daft and Lewin 1993, Zald 1993, Wicks and Freeman 1998.) A variety of new forms, such as networked firms, learning organizations, etc., have been examined in recent years. None of these, however, explicitly join what we see as the essence of the public debate over the future of the American corporation. That is, should maximizing shareholder wealth continue to be the singular purpose of American corporations, or should they be designed to accommodate and be held accountable for meeting the goals of multiple stakeholders? Ultimately, this is a partly normative and partly positive question, and one that requires research that both explicates the normative issues and poses the theoretical questions in ways that promote tractable empirical research. This paper seeks to develop such 1047-7039/00/1 104/0367/$05.00 ORGANIZATION SCIENCE, C) 2000 INFORMS 1526-5455 electronic ISSN Vol. 11, No. 4, July-August 2000, pp. 367-386 KOCHAN AND RUBINSTEIN Toward a Stakeholder Theory of the Firm a theory and to illustrate some of its propositions with a case study of the first decade of experience at the Saturn Corporation, an organization that appears to embody many of the features of a stakeholder firm. But because Saturn has some rather idiosyncratic features, it represents only one specific approach to creating a stakeholder firm. Thus, after presenting the case, we return to theorizing about alternative models and suggest the need for additional case studies of these alternatives. As such, our approach fits Weick's (1995) description of "theorizing," i.e.,'building a grounded theory (Glaser and Strauss 1967) by iterating between inductive and deductive methods. The Normative Debate Contrary to common belief, the shareholder-maximizing perspective is not an immutable law of economics, but in fact emerged as the dominant goal for the American corporation out of a particular historical context. Indeed, debate over the purpose of the corporation has a long history in American society. In the early years of the nation, corporations were expected to exist for the public good. Over the course of the 1800s considerable theorizing and experimentation ensued with alternative organizational forms that sought to internalize the interests and objectives of different groups, such as consumer, producer, or worker cooperatives (Webb and Webb 1930, Abrahamsen 1976). Various types of industrial democracy movements also developed and were promoted in early to mid-1800s, ranging from the early Knights of Labor as envisioned by Terrence Powderly, to the utopian communities built in various Midwestern communities in fashions similar to the modern day Israeli kibbutz, to the utopian organizational models promoted by, among others, journalist/philosopher Horace Greeley. These ideas and organizations all sought to solve the problems brought on by industrialization, such as the growing separation of interests, control, and the distribution of surpluses (profits) between workers and owners/managers. Some of these ideas would later inspire formal theories of self-managed firms (Vanek 1975), and models of employee ownership that build in democratic governance principles (Rothschild 1986, Blasi and Kruse 1991). In this sense, these ideas and organizational models serve as precursors to the emergence of stakeholder arguments in more recent years. By the late 1800s, however, the modern American corporation and the shareholder-maximizing principle emerged and gained force when amassing a large pool of finance capital came to be seen the most important new resource to be mobilized in order to exploit the opportunities of growing mass markets (Phahalad 1993, Roe 1994, Smith and Dyer 1996, Calomiris and Ramirez 1996). Gradually, shareholders gained property rights enforced by contracts and limited liability doctrines and managers were held accountable for using the firm's resources to maximize shareholders' interests. Over time, management thus began to be viewed as the shareholders' agents. Given the importance of capital, within the firm financial specialists rose to the pinnacle of power (Fligstein 1990). Contemporary debates over the purpose of the corporation appear to rise and fall in response to changing economic and social events (Berle and Means 1932, Mason 1959, Kaysen 1996, Smith and Dyer 1996). In the 1960s for example, the urban crises, civil rights movement, and protests over the Viet Nam war generated a debate about the social responsibilities of business. This produced a spirited defense of the profit-maximizing principle for corporations by leading economists (Friedman 1970). In the 1980s, deep concerns over the competitiveness of American industry (Dertouzos et al. 1988) led to intense interest in the strengths of the German (Wever 1995) and the Japanese (Aoki 1988) corporate forms, both of which embody strong stakeholder principles and rights. In the 1980s the rise of hostile takeovers and pressures from institutional investors (Jensen 1989) produced a counter reaction that clearly strengthened the power and centrality of shareholders in American firms. In turn, the mid-1990s has produced another round of critiques of the American corporation, focused in large part around the question of whether the pendulum has swung too far, so that shareholders are getting a disproportionate share of the benefits flowing from corporate performance at the expense of other stakeholders in general and employees in particular (Useem 1996). With respect to employees, the concerns are that the long-term effects of corporate downsizing and outsourcing, stagnant real wages, increased income inequalities, the growth in various forms of contingent work, and declining union representation have broken the implicit psychological or social contract (Rousseau 1995) in employment relations (New York Times 1995, Hutton 1995, Reich 1996). These critiques were countered by voices in the business and financial press arguing the pitfalls of "stakeholder capitalism" (The Economist 1996). Most recently, the Asian economic crisis once again raised this debate, this time with some in the business press arguing that the American model of corporate governance has once again proved its superiority over the Japanese and other Asian models. This debate is likely not only to continue but to escalate as societies struggle with how to achieve a more equitable balance in the benefits and costs of economic and organizational growth and decline, and to find the right balance between government 368 ORGANIZATION SCIENCE/Vol. 11, No. 4, July-August 2000 KOCHAN AND RUBINSTEIN Toward a Stakeholder Theory of the Firm regulations, countervailing power of private institutions, and enterprise autonomy (Kaysen 1996). Thus, we believe the search for more equitable outcomes, or a better balance in the distribution of economic and social benefits and risks, lies at the heart of the normative debate over whether corporations should be designed and governed and held accountable for meeting the goals of multiple stakeholders. However, the lack of a clearly articulated theory of the differences between stakeholder and shareholder organizational forms, or empirical studies of these alternative forms operating in the United States, makes it difficult if not impossible for organizational theorists to participate in or inform these broad debates. The Theoretical Task The first task in developing the positive features of a stakeholder theory is to define who stakeholders are and how a stakeholder firm differs from a conventional American-style shareholder-wealth-maximizing firm. We develop these definitions here