The microfoundations of stakeholder theory: Understanding individual behavior in a business context through the lens of moral psychology

How do individuals behave in a business context? Throughout the 20th century, economists started from the assumption that individuals in a business context act in their own financial interest. The last decades, social scientists rejected this assumption of self-interest, having found instead that individuals often deviate from self-interested behavior. Their insights trickled down to the field of management. Here stakeholder scholars developed an updated model of individual behavior, based on bounded self-interested. This means that individuals are self-interested, but they also care about others and morality, even in a business context.

This updated model of individual behavior has important consequences for how we think of firms. In general, the model suggests that firms should be stakeholder-oriented and not profit-oriented. Stakeholder-oriented firms take the interests of a broad range of stakeholders into account. Profit-oriented firms in contrast aim to maximize the firm’s profit for the benefit of shareholders. In other words, in the debate over the proper purpose of the firm – shareholder value or stakeholder value – this model supports the stakeholder view.
There are two arguments why bounded self-interest supports a stakeholder-oriented view of the firm. The first, instrumental argument, holds that if individual stakeholders care about others and morality, they will be more cooperative towards and attracted to stakeholder-oriented firms than towards profit-oriented firms. Stakeholder-oriented firms can therefore create more value than profit-oriented firms. The second, normative argument, holds that if stakeholders care about others and morality, stakeholder-oriented firms, more than profit-oriented firms, will enable individuals to show moral consideration, leading to moral behavior.

But there are problems with these arguments. First, stakeholder-oriented firms might also elicit morally motivated punishment, or they could be unattractive to potential stakeholders. Stakeholder-oriented firms would therefore create less value than profit-oriented firms, undermining the instrumental argument. Second, the effect of stakeholder-oriented firms on individuals’ moral consideration has not been investigated. In this dissertation, I therefore take up the challenge to investigate morally motivated punishment, individuals’ attraction to firms, and individuals’ moral consideration. I then discuss the consequences of these results for stakeholder-oriented firms.

Chapter 2 of this dissertation presents a dual model predicting that stakeholder-oriented firms trigger moralistic behavior while profit-oriented firms trigger self-interested behavior. This explains that, when a firm is engaged in wrongdoing, a stakeholder-oriented firm is more likely to elicit individuals’ punishment than a profit-oriented firm. At first sight, this undermines the instrumental argument for a stakeholder orientation. In the long term though, punishment might sustain cooperative stakeholder behavior. In chapter 5 I discuss the possibility that stakeholder-oriented firms manage individuals’ punishment in order to create more value than profit-oriented firms.

Chapter 3 reports the results of 5 experiments. This chapter shows that stakeholder-oriented firms are more attractive than profit-oriented firms, and also than firms mixing elements of a stakeholder and a profit orientation. The explanation is that individuals perceive a firm’s profit motives and its social motives to be in conflict. This leads to the insight that firms don’t necessarily benefit from combining profit and social motives. In chapter 5, I discus how this calls into question theories that advocate mixing elements from a stakeholder orientation with elements from a profit orientation. This has implications for corporate social responsibility activities that are not part of a consistent stakeholder orientation. These activities will not increase the firm’s attractiveness.

Chapter 4 reports the results of 3 experiments. This chapter shows that stakeholder-oriented firms enable individuals to see stakeholders as human beings, and this humanization triggers individuals to express more negative moral evaluations when the firm harms its stakeholders. However, chapter 4 correspondingly shows that individuals also see stakeholder-oriented firms as more human than profit-oriented firms. This, in turn, decreases negative moral evaluations when the firm harms its stakeholders. In chapter 5, I discuss how these results defend the subset of normative stakeholder theories that focus more on stakeholders’ interests and less on firms and their motives.

These insights contribute to the descriptive, instrumental and normative approach in stakeholder theory. I argue that the dual model presented in chapter 2 is descriptively more accurate. Instrumentally, stakeholder-oriented firms can create more value, but only if they are consistent and if they manage punishment well. Normatively, stakeholder-oriented firms can enable individuals to show moral considerations, but only if stakeholder-oriented firms highlight stakeholders and their legitimate interests. Further studies should therefore develop more specific theories about consistently stakeholder-oriented firms that leverage punishment, and that focus on stakeholder interests.