codes, stakeholders and business philosophy

International Journal of Value-Based Management12: 241–257, 1999.© 1999Kluwer Academic Publishers. Printed in the Netherlands.

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Codes, Stakeholders and Business Philosophy∗

JOHN DONALDSONUniversity of Leicester Management Centre, Leicester, U.K.; Contact address:14 Charvil House Road, Reading, Berkshire, RG10 9RD U.K.

Abstract. Two concepts that business ethics has made its own arecodes of practiceandstakeholding. They pre-date the self-conscious, organised business ethics effort. Codes arestandard in large businesses in the United States, but are not so widely used elsewhere. Stake-holder models remain largely aspirational. Both concepts have critics, and their practical valuehas yet to be proved. Despite this, they have the potential to transform the quality of businesslife. Their main strength is in combination with an appropriate business philosophy, whichdoes not yet exist. Widely respected business values can be identified, but they need to befounded on basic principles, which is a requirement for any discipline to move from ideologyto maturity. Some possible principles are suggested. An illustration is taken from financialservices regulation, where markets are generally seen (to borrow Rousseau’s phrase) as havingto be ‘forced to be free.’

Keywords: (2–6) codes, stakeholders, values, business philosophy

1. Codes, stakeholders and practical improvement

Two concepts that business ethics has made its own are codes of practice andstakeholding. The concepts pre-date the self-conscious, organised businessethics effort.1 The use of codes has become standard in large businesses inthe United States, but less so elsewhere. Although reservations about codesare expressed from time to time, there are few sustained attempts to deny theirlegitimacy.2 Stakeholder models remain largely at the aspirational level withfew, if any, significant areas of practical application. Both concepts have crit-ics who insist, for example, that business has no mandate to provide welfarefor employees or anyone else. Some would allow benefits to accrue to partiesother than shareholders and consumers as an accidental by-product of profit-making activities. Some critics deny the legitimacy of stakeholders other thanshareholders.3

The central proposition of this paper is that identifying the interests ofstakeholders and ensuring that they are met cannot be a sufficient justificationfor business practice, or for the practice of business ethics. More is needed:the proper andauthenticaspirations need to be identified and met. The keyterms ‘authentic’ and ‘proper’ are, of course, heavily value-laden, as are most

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business activities and most discussions of them. Logically, these value-loadsneed to be identified and reconciled in the context of some philosophicalprinciples, and this paper represents an attempt to do so.

As a matter of practice, there are many provisions for protecting variousconstituents such as employees and consumers through safety laws, truckacts, supervisory boards containing elected employee-members, and the like.Governments in democracies are generally regarded as having the right tolegislate to protect the public, shareholders, employees, customers or, upto a point, their own interests. Particular laws can be challenged on ethicalgrounds, as can all and any acts in, or on behalf of, businesses and sharehold-ers. Many important businesses are not-for-profit, and have Members who arenot shareholders. Many small businesses are set up and run as ‘lifestylers.’Co-operatives, of which there are probably over three million worldwide,usually have limited dividends as a constitutional principle. Their key valuesrelate to benefits to members and community development. Profit maximisa-tion as the sole criterion for judging businesses is sometimes seen as requiredon the grounds that it is the most efficient economic system possible, creatingwealth for distribution (and therefore available for welfare) that would nototherwise exist. Clearly, not all businesses have the same end-values or thesame process values.

Although the practical value of codes of practice and stakeholding con-cepts has yet to be proved, they do have the potential to transform the qual-ity of business life for the better, in the sense of identifying and meetingshared values. The misapprehension that there can be only one value at thecore of business and of its philosophical justification should be dropped:profit-centredness and human-centredness can coexist. An example, illus-trative of the problem and suggested solutions, is taken from financial ser-vices and their regulation, where the markets are almost universally seen (toborrow Rousseau’s term) as having to be ‘forced to be free.’ In financialservices, worldwide, authorities attempt to ensure that consumers’ interestsare satisfied through regulatory policies.4 Provider companies (especially infinancial services and the pensions industry) are often genuinely puzzled asto what customers want, and expend much effort and money on consumersurveys.5 Firms are sometimes surprised to hear what their employees havebeen doing.6

The paper concludes with a discussion of how, if they choose to do so,businesses could designresponsivecodes and put stakeholder ideas into prac-tice to achieve specified and ethically defensible ends or values. The usesand limitations of codes and of stakeholder concepts must first be identified,along with their ethical implications. It will be claimed that business cannotbe reduced to dealing with only the mutual adjustment of interests, or to the

CODES, STAKEHOLDERS AND BUSINESS PHILOSOPHY 243

pursuit of objectives, whether technical, prudential or ethical. Much of thepractical language of business in general is persuasive in nature.7 It is usedwith a view to persuading consumers, regulators and the public that practicesare technically efficient and ethically sound. Thus, to practise Total QualityManagement, or to have a Code of Practice, is to present an image of anefficient, ethically aware business. Businesses which close major plants oroff-load large numbers of personnel, rarely, if ever, claim the right to do soin terms of a wish to maximise profits, even though their critics may accusethem of doing that. Justification is generally seen to be needed, and it usuallyturns on unfavourable conditions in the market, difficulties with the exchangerate, or the need to compete in an era of unprecedented change, for example,i.e., ‘Don’t blame us . . . .’

To make the above point is not to condemn the practices. Exchange ratemovements can create difficulties, as can technical obsolescence. Firms arein business to make money. Even if that is not the only reason, it is a neces-sary condition. The market and trading conditions are used to justify profits,losses, pay levels and prices, whether or not notions of ‘just price,’ ‘justprofit’ and ‘just wage’ are invoked explicitly. Thus, on the whole, businesses,and economic theorists, have preferred to leave the problem of justificationof practice to the impersonal mechanisms of the market. Problems arisingfrom that have provided the impetus for business ethicists, sometimes ascritics and sometimes as supporters of the established business system.8 Insome markets, there seems to be a broad consensus that to operate freelymeans to operate within strict rules. Even self-regulation permits regulatorybodies to impose fines, withhold membership and set stringent rules for op-eration. The self-conscious discipline of business ethics is concerned withstandards in business. It rarely offers to improve business or to provide cri-teria for improvement, but its stock-in-trade includes discussions of topicsthat are thought to be morally wrong. There are frequent discussions of howbusinesses can become more ethically aware or create more ethically self-conscious decisions. In drawing attention to codes of practice and Total Qual-ity management and ethics training, business ethics as a discipline is in factrecommending or prescribing outlooks and practices, and in so doing is mak-ing value judgements of its own. These judgements include ethical judge-ments as well as technical and prudential ones.

There is now widespread, though not universal, acceptance that businessstandards need to be maintained or raised through conscious effort. Thereare many products that are not well understood by the public, as is often thecase with insurance products and information technology. Where there arevery many consumers, and some organised pressure groups, problems arisein identifying and matching the expectations of suppliers and consumers.

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The same applies to employees and other people who have dealings withthe business. If these dealings are simply calculative transactions involvingbargaining or preferences between competing products, few ethical consider-ations arise, so long as the rules governing the transaction are known and areagreed upon. Where they are not known, not agreed nor adhered to, ethicalproblems do arise. Many of the standard problems of business ethics andof management generally arise because these conditions are difficult to fulfil.This difficulty gives rise to the common problems noted by business ethicists,including transport disasters, pension mis-selling, whistleblowing and factoryexplosions, for example.

In the absence of the requisite knowledge, codes, surveys and stakeholdermodels have potential. But problems remain. Universal agreement is impossi-ble, as is perfect knowledge of the rules by all participants. Agency theory canhelp but how can anyone identify what theproperaspirations of participantsare?9 Customers and employees can and often do have unrealistic expecta-tions. Consumers’ lobbies, pressure groups or unions can represent only theactive members. Expectations can be not only unrealistic, but ethically ques-tionable, as when people expect to retain unfair advantages or competitiveprivileges.

So, who is to say what is or is not aproperor authenticaspiration on thepart of stakeholders, constituents or other parties with a claim on the inputsand outputs of business? How can anyone justify such a claim? Three answersare now considered:

The Hegemony Mode.This is not a formal theoretical model, but can bestbe described as a syndrome or mode. In it, captains of industry, throughtheir superior business acumen, ensure the flow of products and services thatcreate income and wealth for everyone. The roles of business ethics, codesand stakeholder ideas become those of helping the captains of industry andtheir lieutenants to become more aware of their ethical responsibilities, andto pass similar awareness down the chain of command. Much of this is whathappened before a self-conscious business ethics came into prominence. Thecodes were less formal, and attached to an ethic of technique rather than anethic of aspirations. The influential spokespersons were Frederick W. Taylorand Henri Fayol in the early Twentieth Century.10 People’s proper expecta-tions are, in the hegemony mode, confined to their traditional roles specifiedby classical economic and management theory. Before the days of formalcodes, writers in this mode were often aware of the existence of values otherthan their own but, like Taylor and Fayol, saw them as operating outside thefactory, mine or office. The opportunity to operate these values came fromthe income generated at work, where only managerial values were sought orprescribed.


The Consensus Mode.The Consensus mode allocates a more significantrole to constituents of business other than the captains of industry. Top man-agers and the major institutions are encouraged to recognise their ethicalresponsibilities. Codes can be produced and pressure groups can be recog-nised and listened to, but in the end the buck has to stop somewhere, andthat somewhere is on the top managers’ desks. Much of the business ethicsliterature fits the consensus mode. A search for reasonable common values isattempted on a national and an international scale, with some success. Anti-bribery stances, fair wages clauses, use of locals in managerial positions inhost countries of multinational corporations, and respect for local customs areall usable, and are being proposed.11

A Value-Explicit Mode.All business activity is value based in the sensethat it is governed by rules and assumptions that are themselves rooted invalues.12 Not all values are of the same kind, and not all ethical values aredefensible or acceptable to all. Thus there can be good ethics and bad ethics.The ethical codes of secret societies and gangs are powerful, but ethicallyquestionable. The ethical ideas of the Philosophical Radicals in the Nine-teenth Century were undoubtedly well-intentioned, but in Britain led to anexceptionally harsh set of social measures, including the infamous Poor LawReform Act of 1834, which drove unemployed families into what were essen-tially custodial punishment-centred institutions for separating the needy fromthe lazy. A value-explicitapproach can questionwhich values, andwhosevalues areproperly acceptable, to whom, and on what grounds.13 How theiroperation should be assessed and improved, and by whom, and how it shouldbe done are all relevant questions.14

These three modes are capable of co-existence, but only if they all shareat least some values. The hegemony mode is one-sided. One set of values isimposed, causing inevitable problems and resistances that have created thedemand for a more defensible value-set through the self-conscious businessethics movement. The consensus mode can find no basis for choosing one setof values over another, except to say that particular values are commonly heldhere and now. It cannot resolve the problem of who the legitimate stakehold-ers are. The explicit value mode is capable of encompassing the other twomodels, without attempting to replace them. Its advocates can be found inthe debates about welfare economics and in the suggestion that though valuescannot be excluded, as some positivists wish to do, they can be made explicitin an attempt to avoid bias.

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2. Business philosophy as source of criteria for improvement

As yet, business and management lack a coherent philosophy.15 Other disci-plines can boast their own philosophical underpinnings. There is a philosophyof science, of mathematics, of theology, social sciences, law and economics.These underpinnings are important, because without them, business and man-agement theory can easily reduce to an approving description of what man-agers do for or to their businesses. Business ethics can not take on the role of amanagement philosophy, as ethics is but one of the philosophical disciplines,and only some of the values that form the subject matter of management areethical values. Many others are technical or prudential, and are representedby the functional and departmental specialisms, some of which have scientificpretensions. So far, management theory has been confined to the theory of themanagement of people for business purposes.16

Typically, when disciplines acquire a philosophy, there is a drive to un-derstand the nature of their subject matter at several levels. Mathematiciansdiscuss whether number systems are invented, intuited or are products offormal or logical rules. Finding the ultimate status of principles and rulesis important. Physical scientists interested in the roots of their discipline haveexplored whether scientific laws are essentially heuristics, probability state-ments or are realities of a special kind. The ultimate constituents of matter aredebated. The nature of scientific method is a serious matter, where doctrinessuch as Popper’s falsifiability doctrine are controversial. Economics echoessome of these concerns, and quasi-philosophical deliberations in that disci-pline include the status of economic models: for example, ‘Do they reflectreality? Do they need to do so?’

Similar enquiries can be found in the social sciences, law, logic, and manymore. All this is not to say that there are no discussions on these particularlines in particular sub-disciplines in management and business, but they donot encompass business and management as a corpus of related topics. Theyremain as discrete series of methods, techniques and orientations.

Why does business not have its own philosophy, as opposed to discretemethodological discussions of sub-disciplines that include some topics thatare philosophy-related? Is it because business as a discipline is still young,and has not yet emerged from the ideology stage? Most business methods, oldand new, are presented, often justifiably, as offering improvement in perfor-mance. The improvements are usually technically determined over a narrowrange of values (including profit, environmental benefit, etc.). Overall criteriathat meet the requirements of constituents are rarely offered.


2.1. What should business philosophy be able to do?

A business philosophy could be asked to provide the groundwork (i.e., jus-tification) for business practices and for business ideologies. The usage herefollows the ordinary language convention in which an ideology is a set ofattitudes and beliefs characteristic of a class or category of persons. If it isaccepted that the basic materials of management are values (technical, pru-dential, political, social and ethical, for example), then it is possible to searchfor key values that are more than widespread whims of great longevity.

2.2. Some building blocks?

The three modes described in the first section can be seen as representingdifferent lifestyles and different value-sets. In brief: thetraditional/hegemonymode is an authoritarian outlook, perhaps best suited to people who take com-fort in certainty, and prefer either to do the decision-making or to have it donefor them. Theconsensus/bargainingmode seems to fit people who prefer touse the currently debated value sets, help to make them consistent, etc. Thisgives rise, for example, to stakeholder theory. It wrestles with contemporaryproblems of the traditional mode (bribery, ‘fat cats,’ discrimination, transportdisasters, whistleblowers, consistent standards in multinational corporations,for example). Theexplicit valuesmode could be applied to all businesses, butit appears to be the best fit for the mutual sector, co-operatives, underpriv-ileged groups, some idealists and industrial democrats, though the explicitvalues are unlikely to be the same for all groups.

2.3. Values and fundamental uncertainties

In Key Issues in Business Ethics(1989) I offered the view that (a) no ethicaltheory can refute any other, though versions of each can be discredited; and(b) that individual ethical theories are incomplete, and can be dangerous ifunchecked.17 Utilitarians may need to be restrained from scapegoating andindifference to other people’s values when they seek to decide for everyonewhether a change is for the better. Deontologists may be prone to becomingrigid enforcers of rules, including bad ones. Human rights enthusiasts havenot yet escaped their Jacobin past, as noted by Sir Isaiah Berlin in his famouslectureTwo Concepts of Liberty.18 The theories are all persuasive, but only upto a point. Even if a reconciliation were possible, their implications, howeverimpeccable, would face the strong possibility of application that falls wellshort of the ideals.

I suggest that principles ought, logically to be permanently open to re-assessment, and their applications ought, logically, to be subject to amend-ment by the people subject to them and by the people who are their intended

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beneficiaries. All this could apply to all business principles, whether generallyregarded as being in the ethical province or not. Authentication of businessaction by the constituents of business can rarely be seen to be done withoutexternal validation, local procedures and open procedures.

2.4. Widely-accepted values

A philosophy for business would thus need accepted first-order values asa major step. There have been several statements listing values that havelong been accepted in different cultures. In the context of education for the‘triple E’-efficiency, effectiveness and ethics, Ryan (1996) identifies: ‘Hon-esty, truthfulness, promise-keeping, non-maleficence, mutual aid, respect forpersons and respect for property. Each of these norms is important and to-gether they provide a moral foundation for a free market economy.’19 Thelist is well supported.20 It has considerable overlap with Sir David Ross’s(1939) prima facie duties, which have had something of a revival in the1990s.21 Even where there is cultural diversity, including different religious,behavioural and legal norms, it is possible to find basic values that can berecognised by the parties concerned. People’s basic needs, physical and psy-chological, have common ground. Recognising cultural differences, Natale etal. (1996) note that cultural bias can be avoided:

It would appear that the manager must consider the following checklist,if you will, of elements to make certain that the decisions made are notculturally biased. These components include: having the concept of a‘person’ in the sense demanded by morality . . . . In short, all personshave basic needs, wants, desires in the more generic sense of needingrespect, affirmation, etc.22

They add:

Most important of all, is that much of the argument for cultural diversityis common sense. If workers feel unsupported or discriminated againsttheir confidence will decline and they are unlikely to perform at theirbest (ibid., p. 243).

Tolerance of diversity – or pluralism – also follows from the impossibilityof proving the superiority of one specific set of values over another. Widely-accepted values of great age have often been in conflict with the dominantones in a particular place and at a particular time. An example from ClassicalGreece is provided by Sabine (1960) from Sophocles’sAntigone:

Taxed with having broken the law by performing the funeral rites ofher brother, Antigone replies: ‘Yea, for these laws were not ordained by


Zeus, and she who sits enthroned with the gods below, Justice, enactednot these human laws, not did I deem that thou, a mortal man, couldstby a breath annul and override the immutable unwritten laws of Heaven.They were not born today nor yesterday; they did not die; and noneknoweth whence they sprang.’23

2.5. Process values

The application of principles is always contingent, but no logical process canforce people to accept values they do not want.24 Thus workable principlescan start with a search for first-order values, as indicated above. It should benoted that values are not all of one type. Kant usefully distinguished ‘rulesof skill’ (technical values), ‘counsels of prudence’ (prudential values) and‘categorical imperatives’ (moral values). Although they are usually difficultto disentangle in practice, the distinction is serviceable. They can be broughttogether as basic (moral), and prudential and technical values, and treated asfirst order values.

A second order of values consists of procedural or process ones. Particularvalues can be in both categories. For instance, justice can be regarded asa fundamental right, but also one that requires an appropriate procedure toensure that it is applied. The value of the procedure itself can be held tobe fundamental, as is the case with democracy and the rule of law. If basicvalues include a right to life and liberty and justified divisions of efforts andrewards, then procedural values need to be justified in terms of whether ornot they promote the basic values and are seen to do so.

A crucial problem remains. If we are all entitled to prescribe whatevervalues we like, how can one set of values be properly enforced on those whodo not hold them? This problem is an ancient one in moral and political the-ory. The answers generally require an appeal to authority, including that of thedemocratic process. But it is generally accepted that democratic processes areopen to abuse, just as ethical codes can become merely means of reinforcinghegemony. I suggest that it needs to be recognised that values alone can notbe logically proved. They are in the nature of axioms. Value-sets and culturalnorms, by themselves need to be more than widespread preferences. As val-ues, they cannot be derived from the facts of human nature, as the philosopherDavid Hume demonstrated in hisTreatise of Human Nature. Values need tobe underpinned by philosophical principles of greater range than those of thetraditional principles of utilitarianism, rules of duty or claims to human rights,valuable though they are. I suggest, as candidates:

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2.6. Principles

1. Recognition that there is and can be no ‘bedrock certainty.’Once raised,Descartes’ sceptical demon cannot be laid.

2. Openness to revision. Even the grandest values can be interpreted differ-ently within a particular culture as well as between cultures.

3. Pluralism. An argument for pluralism can be derived from the impossi-bility of ‘bedrock certainty.’ A practical argument is well-rehearsed in theeconomic literature: monopoly of intellectual products and principles hassimilar effects to monopoly in the supply of goods and services.

4. Autonomy. Business activity is conducted under rules. Properly made andfollowed, they provide legitimacy. Considerable effort is spent in formingpeople’s perceptions of business in general as well as in the case of indi-vidual products. To the extent that the information available to people isunevenly distributed or withheld, the autonomy of individuals is reduced.

5. Externality. The most impeccable rules are capable of being ignored orre-interpreted with bias. The possibility exists that the unofficial rulesthat are actually followed diverge from the properly-made ones. Exter-nal checks and balances are needed to provide some balancing pressuresagainst these possibilities.

6. Pluralism of method. Business needs a philosophy. The one being offeredhere is not the only possible one, and there is always room for debate.For example, the physical sciences have gone through a series of debatesabout the nature of scientific laws, the ultimate constituents of matter,the nature of scientific method, whether conflicting laws can co-exist,and much more. That business principles cannot be demonstrated putsbusiness in no worse a condition than others. The same applies to theexistence of rival theories of ethics.

Deeper philosophical principles can shed light on the dilemmas and dysfunc-tions of business practice, and may point to some solutions. Without theseprinciples, business thought is difficult to distinguish from ideology. Clearly,any such principles will not imply only one possible set of assumptions fromwhich management theory can be derived. What I have called the hegemony,consensus and explicit value modes would draw on features and first-ordervalues that differ from each other. One possible outlook, suggested in Davisand Donaldson (1998), combines philosophical and business-specific val-ues to produce a set of principles particularly suited to co-operative busi-nesses and management styles, but not necessarily specific to them. These aremerely listed here. Their derivation and implications are discussed in the bookcited. They are: pluralism, autonomy of individuals and businesses, mutuality,distributive justice, natural justice, people centredness and the concept that


labour, uniquely among the factors of production, has a multiple role. Thisrole includes elements offactor of production, bearer of moral rights anddutiesand ofjustification(among others) for the existence of a business.

3. Codes and stakeholding: the state of play

The main problem that this paper has sought to shed light on is that of iden-tifying the ‘proper’ and ‘authentic’ aspirations of those who have to do withbusiness, or are affected by its activities.

3.1. Codes of ethics

A solution that is frequently offered is the issuance of codes of practice orcharters. Formal codes have merits and disadvantages.25 A summary of theseis provided by Maclagan (1998, p. 166):

As I observed earlier, codes are typically introduced to help ensure thatan ethically acceptable organization has a good public image. It is widelybelieved among managers and academics that codes must be enforced ifthey are to be of any value.26

Maclagan cites Manley (1992) and Weber (1993) as providing examples ofthat argument. From the literature, Maclagan (op cit., p. 162) identifies anumber of recurring topics, paraphrased here as:

1. Theprocedureby which a code is arrived at (Donaldson, 1989; L’Etang,1992; Manley, 1992).

2. Thecommunicationto employees (Benson, 1989; Manley, 1992; Weaver,1995).

3. Enforcement(Benson, 1989; Brooks, 1989; Donaldson, 1992; Manley,1992; Weaver, 1995).

4. The corporaterationale(Manley, 1992). ‘Good citizen,’ good image, andreinforcing the company values and culture figure prominently in this.

Maclagan’s account provides a balanced view of the state of play of codes ofpractice and codes of ethics. They remain top-down and often contain uncer-tainties if not contradictions. It can be added that they lack provision for thosewho are subject to them or are their intended beneficiaries to influence theircontent, application, enforcement or revision. They also lack provision forexternal validation. I know of no studies that trace their operation or evaluatetheir effects on performance, or seek participation by subjects or intendedbeneficiaries. Maclagan proposes a developmental approach, in which ethicstrainers and consultants engage in dialogue with managers. I do not dissent

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from that view, but many of the people concerned at the receiving end or the‘sharp end’ are difficult to fit within this framework.

3.2. Stakeholding

In their contribution to the 1996 volume,Human Action in Business, Freemanand Phillips divide stakeholder theory into three time periods. The first, fromthe early 1960s, is summarised as saying that there are constituencies otherthan shareholders ‘who merit the consideration of managers in business de-cisions and actions’ (p. 72). The second period, from the mid-1980s, beginswith Freeman’s own (1984) work operationalising the concepts ‘into a co-herent set of ideas for the practising manager’ (p. 73). Freeman and Phillipsidentify a minor interest in some survey work on ‘how stakeholders thinkand feel towards the object firm’ (p. 75). Freeman and Phillips also identifya normative stream, exemplified by Donaldson (Tom) and Preston, drawingattention to the idea that normative thinking is at the core of all businessand economic thinking.27 Apart from prescriptive and survey research, thereseem to be few ways of involving stakeholders, or of deciding, in a particularcontext, who they are, although the practice of some European companies ofhaving employee representatives on a supervisory board is cited.

In a review of stakeholder theory, Maclagan accepts Goodpaster’s distinc-tion between astrategicand amulti-fiduciarymodel. The first of these usesstakeholder concepts in the organisation’s interest (somehow identified). Thesecond envisages management as having duties to all stakeholders, with nospecial privileges to shareholders.28 Maclagan, in reviewing the literature,identifies some key problems: Who are the stakeholders? How can the organ-isation’s interest be recognised? Maclagan opts for a solution in which indi-vidual managers are provided with the conceptual means to make individualmoral choices, noting the variety of arrangements for representing interests,from British Health Service Boards to arrangements for employee partici-pation. Identifying objective philosophical principles can provide a partialsolution, but practical procedures that are derived from them are needed.Current practice seems to be a top-down mixture of prudential values andcurrentmores. There are few, if any, mechanisms for identifyingproperandauthenticaspirations of stakeholders/constituents.

4. Towards responsive business practices

Codes, stakeholder concepts and business practices need, logically, to begrounded in an acceptable philosophy if they are to become more than acollection of techniques and expressions of the perceptions of business mag-


nates, however eminent. Some co-operation is needed to apply the rules ofthe competitive game. Co-operative businesses need to compete to survive.There is a need to reach a balance between the two poles. Below are someobservations on the theme, drawn from current research on financial services.

The global market for provision of financial services is well recognised asone that has many of the features associated with pure competition, but alsohas some very large institutions competing in the market. Very many elab-orate rules, operated by complex structures, demonstrate that the authoritiestake the quality of provision very seriously.29 Problems of pension mis-sellingand bank collapses testify to the difficulty of creating and enforcing the rulesof the competitive market place, at least in this area of endeavour, requiring adegree of co-operation.

The problems of regulation on financial services are widely discussedand will not be rehearsed here. The North American and British systemsprovide some clear indications of who some major stakeholder/constituentsmight be. Regulation is backed by consumer protection legislation. Con-sumers, provider companies, sales personnel, brokers and independent fi-nancial advisers, consumers’ associations, and trade associations are all con-stituents of the market. Almost ten years after the (British) Financial ServicesAct of 1986, the pension’s regulator, the Personal Investment Authority, ad-vocated market research to cover product disclosure.30 This was aimed atfinding out, for example: what information consumers want before buying;when they want the information; how they would like the information tobe given; the proportion of written material wanted; how consumers use theinformation and, what information do firms believe consumers need at thepoint of sale.

The above questions clearly identify important market information. Thepoint here is not that with such important lifetime investment, observers mightbe surprised that the answers were not already well known, but that the verymany market surveys undertaken by provider firms have not included the in-formation. It is suggested here that market research needs to be supplementedby other methods if the ‘proper and authentic’ aspirations of consumers andother constituents are to be determined. This provides a possible way of ap-plying stakeholder-type thinking toresponsivecodes and practices, validatedby use of values set againstagreed principles. Examples could include (1)that the code is evolutionary, and will be improved in the light of experi-ence of constituents/stakeholders (the ‘no bedrock certainty’ principle and theopenness to revision principle); (2)the pluralism principle, e.g., that agreeingto the code is not a condition of trading or participating, but that acceptingit, implies moral obligations; (3)autonomy, so that information will not beunreasonably withheld or obscured; (4) externality, that no constituents will

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be ‘judge and jury in their own cause,’ and that this implies a range of avenuesfor comment, redress, etc.

The usual code contents could be added: integrity, no bribery, etc., butthese might well be explained. (What does ‘integrity’ mean? Who is to decidewhether it has been adhered to?). Other principles could include a mix ofend-values and process values. Examples are distributive justice; prohibit-ing false claims or evasive rejections. Responsive codes and practices couldalso includeproceduresfor implementing the principles. It is unlikely thatbusinesses committed to the hegemony mode would use responsive codes.

If I am right, this would be to the commercial advantage of operators whouse the codes. In practice the responsive code would belong to its users. Onemethod, first described by the accountant, David Huddy, for using customers’comments and complaints would be to establish a register in which com-ments or complaints relating to a particular business or product type wouldbe recorded, together with a response. This element requires no continuingdialogue: constituents interested in the product could build a picture from theevidence, and use it in their decision whether or not to do business. Clearly,the mechanism to operate such a register is far from simple. The crux is thatthe custodians of the code would need to build a reputation for impartiality,and would need to be accessible to constituents, with an open process formembership and a continuing dialogue.

In financial services and its regulation, the assumptions behind such a codeare more in keeping with a stakeholder philosophy than are the ones currentlyin use. These latter seem to be based oncaveat emptor, moderated by protec-tive rules, imposition of complex rules and a cycle, in Britain at least, ofrule development and increasing severity of penalties for infringement, andinstitutional reform – a cycle that has yet to prove its effectiveness.

In business practice, more is needed than a set of techniques, ethical prin-ciples and awareness raising. A set of underlying philosophical principlesand testable practical procedures that are compatible with them can providefor this need.31 These two elements seem to be the minimum that is requiredfor any discipline to emerge from the ideology stage and progress to ma-turity. There are widely accepted values and well established philosophicalprinciples that can be used. Responsive codes, though not yet in operation,can be used in combination with stakeholder models (which also remain atthe theoretical stage), to provide acceptability, authentication and validationof business activities.


Notes

∗ Some of the arguments in Sections II and III are abstracted from P. Davis and J. Donald-son (1998)Co-operative Management: A Philosophy for Business, New Harmony Press,Cheltenham.

1. Freeman and Phillips (1996, p. 72) date the term ‘stakeholder’ to the work of the StanfordResearch Institute in 1963. Formal Codes of Practice gained popularity in the 1980s,but have a long history, as do informal codes, which are discussed in Donaldson (1992),especially Chapter 4.

2. Maclagan (1998), pp. 161–163.3. Freeman and Phillips (1996, p. 73).4. For a useful overview of regulatory policies involving consumer interests see Bakker

(1996) and U.K. House of Commons (1995).5. The Association of British Insurers (1997).6. One very major insurance company did not know what its employees were doing, and

(suspended and) retrained all its sales staff).The Times, London (8 March 1995).7. J. Donaldson (1992, 131 ff.) identifies some common ‘techniques of evasion’ and persua-

sive uses of language that hinder objective analysis.8. There are many discussions of the specific and overall distribution of gains and losses

of the business system. These were once the stock-in-trade of welfare economics. Moremodern discussion can be found, for example, in Hospers (1978), Davis and Donaldson(1998), Chapter 5: ‘Seven principles for co-operative management.’

9. For accounts and discussions of agency theory see J. Pratt and R. Zeckhauser (1984),Goodpaster (1991), and Freeman and Phillips (1996). Freeman and Phillips identify aneed for finding out how stakeholders ‘think, feel and act towards the object firm’ (p. 75),and note that these feelings, etc., are not capable of determining best practice, because toattempt to do so would commit a ‘naturalistic fallacy.’ In agreeing, it is worth adding thatvery little information on stakeholders’ views is available, but methods of identifying thegrounds on which they are held to be justified and representative are also needed. Dis-covering the ‘proper,’ ‘authentic’ and representative views are different problems, whichrequire different research methods.

10. Sheldrake (1996) for a modern commentary on Taylor (Chapter 2), and Fayol (Chapter 5),in the light of the business ethics movement; also Davis and Donaldson (1998), Chapter2: ‘The development of management theory.’

11. See, for example, Tom Donaldson (1991). ‘Rights in the global market.’ In Freeman (ed.),Chapter 9.

12. Even positivism, which, in its various forms, seeks to provide value-free analysis ofevents, relationships between variables, social systems, science, religion, etc., is itselfa value system. For any of these areas to be value-free is to be worthless, though not allvalues are moral ones, or are morally defensible. For a discussion of positivism, see J.Donaldson (1989).

13. How to decide whether something is ‘properly acceptable’ is discussed later in the paper.That a cosmic guarantee of the rightness of any action, event, state or process is ruled outboth by Descartes’ Demon, and Hume’s Fork, does not relegate it to a simple matter ofindividual preferences.

14. Procedures by which decisions are made have long been recognised to be as important asthe content, as when justice is required to be ‘seen to be done.’ The probability of seriouserror can be reduced, but not eliminated. From the perspective of the present paper, codes

256 JOHN DONALDSON

and stakeholder models can play a part, in concert with appropriate shared values andphilosophical concepts.

15. The argument of this section is drawn from and developed from the ideas in Davis andDonaldson (1998), Chapter 5: ‘Seven principles for co-operative management.’

16. For a critical review of the development of management theory, see Sheldrake (1996) andDavis and Donaldson (1998).

17. J. Donaldson (1989), Chapter 3.18. Sir Isaiah Berlin,Two Concepts of Liberty(1958).19. Ryan (1996), p. 506.20. Ryan cites Kidder (1995); Halme, Laine and Laurila (1994) from the many overlapping

lists.21. Sir David Ross (1939) provides examples of ‘prima facie obligations.’ They include

promise-keeping, truth-telling, repayment of debts, obligation to do good rather than harm(p. 84 ff.). Maclagan (1998) cites John Donaldson (1989) and Dancy (1993) as examplesof the revival of interest in Ross’s ideas.

22. Natale and Fenton (1996), bring out clearly that skill in handling relationships, interests(prudence) and ethical values are usually found in combination in practical circumstances,and tend to be productive (p. 241).

23. Sabine (1960), p. 39.24. Donaldson and Waller (1980) explore the problem of enforcement of codes when consent

is lacking. The conclusion is that to make moral claims is to appeal to shared values: thereis always common ground when claims are made, otherwise they would be meaningless.Whether society may properly claim the right to enforce codes where there is not commonground is a matter for jurisprudence. At the disaggregated level, for businesses, it remainsmore doubtful.

25. For a discussion of formal and informal codes, see John Donaldson (1992), p. 96 ff.26. Maclagan (1998), op. cit., p. 166.27. Thomas Donaldson and Lee E. Preston (1995). ‘The stakeholder theory of the corporation:

Concepts, evidence and implications.’Academy of Management Review 20(1), 1995.28. Maclagan, op. cit., pp. 147–152.29. Securities and Exchange Commission (1993).Annual Report. Washington: Securities and

Exchange Commission.30. Investment Authority (1997).The PIA’s Evolution Project: The Next Steps.London: PIA.31. Davis and Donaldson (1998), Chapter 6.

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codes, stakeholders and business philosophy

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