From the EditorFree Access

From the Editors—Why We Need a Theory of Stakeholder Governance—And Why This is a Hard Problem

    Published Online:

    “There is nothing more powerful than an idea whose time has come.”―Victor Hugo, Les Misérables

    Corporate governance is an important topic for both scholars and practicing managers. To date, most work on this subject has focused on how to resolve potential conflicts of interest between a firm’s senior managers and its shareholders in how firms create and distribute economic value. This work, based in agency theory (Alchian & Demsetz, 1972; Jensen & Meckling, 1976), has led to the design of a variety of corporate governance mechanisms that have been widely implemented by many firms around the world (Aguilera & Jackson, 2003; Williamson, 1996). These mechanisms include incentive programs for senior managers—such as CEO compensation in the form of stock and stock options based on firm performance—that act as management “bonding” devices (Jensen & Murphy, 1990), and a variety of disciplinary mechanisms—such as the inclusion of “outsiders” on boards of directors and legally mandated reporting requirements—that increase the ability of shareholders to “monitor” the performance of a firm (Fama & Jensen, 1983).

    Work on using governance to resolve possible conflicts between senior managers and shareholders has largely developed separately from governance questions focused on the broader relationships between a firm and its multiple stakeholders (Donaldson & Preston, 1995; Freeman, 1984). This is ironic since some of the earliest work on agency theory conceptualized a firm as “a nexus for a set of contracting relationships among individuals” (Jensen & Meckling, 1976: 310). These individuals, including “individuals” as legal fictions, can be viewed as a firm’s stakeholders. However, instead of examining how governance could enable a firm to work with all of its stakeholders in creating and distributing economic value, agency theorists have mostly focused on governing the relationship between managers and only a single stakeholder: shareholders.

    An idea whose time has come is that of considering more directly the governance of relations between a firm and its multiple stakeholders and not just with its shareholders. This will necessitate broadening the conceptualization of the value created by a firm beyond simply shareholder return (Barney, 2018; McGahan, 2020), a requirement accentuated by the recent COVID-19 public health crisis (Carney, 2020).

    However, on the face of it, the analysis of stakeholder governance seems likely to be a more difficult problem than the governance of manager–shareholder relations. Theories of shareholder governance focus on how economic value is created by and distributed between two groups—shareholders and senior managers—that are relatively homogenous with respect to their (sometimes)-conflicting interests regarding how they would like to see a firm managed (Jensen & Meckling, 1976). Governance mechanisms designed to reconcile these potential conflicts are relatively straightforward to formulate, although not always easy to implement (Baysinger & Butler, 1985; Tihanyi, Graffin, & George, 2014).

    Stakeholder governance, however, must deal with much broader relationships between a firm and its multiple stakeholder groups (Freeman, 1984) and the associated creation and distribution of value across them. Conventional corporate finance suggests that, with perfect factor markets, a firm that maximizes the wealth of its shareholders as its sole residual claimants will correspondingly maximize the economic value of the firm (Jensen, 2001). However, this is not the case in a world of incomplete contracting and strategic factor markets: maximizing shareholder wealth does not necessarily address the conflicting economic interests of shareholders, employees, suppliers, and other stakeholders, and thus does not necessarily maximize the value of the firm (Barney, 1986, 2018; Klein, Mahoney, McGahan, & Pitelis, 2012; Zingales, 2000).

    Moreover, while shareholder governance has primarily focused on economic returns, stakeholders can have interests that go well beyond narrow economic concerns (Campbell, Coff, & Kryscynski, 2012; Carney, 2020; McGahan, 2020). Employees, for example, are likely to be concerned about appropriating some of the economic profits their human capital helps to create (Morris, Alvarez, Barney, & Molloy, 2017), but may also have interests in personal health (Michel, 2011), work life quality (Lambert, 2000), internal and external pay equity (Buttner & Lowe, 2017), and employment stability (Failla, Melillo, & Reichstein, 2017). Customers generally want to purchase the highest-quality products at the lowest price possible (Gale & Rosenthal, 1994), but may also have concerns about exploiting child labor in developing countries (Eden, 2003), a firm’s impact on global climate change (Wright & Nyberg, 2017), modern slavery (Crane, 2013; Phung & Crane, 2018), and rising economic and social inequality (Amis, Mair, & Munir, 2020; Bapuji, Husted, Lu, & Mir, 2018). The communities within which a firm operates will be interested in the employment opportunities and taxes that can be generated by a firm in their midst, but might also be alarmed by environmental pollution (Howard-Grenville, Buckle, Hoskins, & George, 2014), traffic congestion (Verhoef, 2010), and urban sprawl (Nechyba & Walsh, 2004).

    Milton Friedman (1962: 133) maintained that “the one and only obligation of business is to maximize its profits while engaging in open and free competition without deception or fraud.” Many scholars have subsequently argued that firms can safely ignore the noneconomic interests of their stakeholders when making business decisions (e.g., Black & Kraakman, 1996). Some have suggested that these noneconomic issues can be better managed through political processes, and are not part of a firm’s sphere of operations.1 However, not only may failing to attend to stakeholder economic interests result in firm value loss (Connelly, Haynes, Tihanyi, Gamache, & Devers, 2016; Cuypers, Koh, & Wang, 2016), there is also increasing evidence that overlooking noneconomic interests of stakeholders often leads to negative financial consequences for firms (Richard, 2000; Shan, Fu, & Zheng, 2017). Focusing on maximizing shareholder wealth, the conventional corporate governance model, is incapable of addressing the conflicting economic interests of a firm’s stakeholders, let alone their noneconomic interests.

    Developing a theory of stakeholder governance that explains how firms can reconcile the conflicting economic and noneconomic interests of its multiple stakeholders is a hard problem. However, this is the governance problem that senior managers currently face, a reality reaffirmed by the recent announcement by 181 CEOs associated with the Business Roundtable (2019) that they will now focus on addressing broader stakeholder interests instead of just maximizing the wealth of shareholders.

    Our brief essay cannot hope to propose a general answer to this stakeholder governance question, but we hope to accomplish two things: first, we want to call attention to the problem, and, second, we would like to suggest some possible approaches to addressing it. In this spirit, here are some, but certainly not all, possible ways to begin to think about a revised theory of stakeholder governance:

    • Stakeholder governance as a bargaining gameamong stakeholders. One approach might be to think of stakeholder governance as an outcome of multilateral bargaining among stakeholders that have conflicting economic and noneconomic interests. Bargaining could be simultaneous, such as when the interests of stakeholders are reconciled in a single negotiation (Krishna & Serrano, 1996), or extended over a period of time, as in a series of bilateral negotiations in which stakeholders A and B strike a deal, then stakeholders B and C strike a deal that is consistent with B’s deal with A, then stakeholders C and D strike a deal that is consistent with C’s deal with B and B’s deal with A, and so on (Machlup & Taber, 1960).

    • Stakeholder governance as creating forums where conflicts among stakeholders can be addressed.Blair and Stout (1999) focused on how firms can create forums within which stakeholder negotiations take place. In this context, they maintained that an independent board of directors could act as trustees of the diverse stakeholders of a corporation. This mediating hierarchy provides a vehicle through which publicly traded corporations can formulate strategies that protect firm-specific investments and increase the joint welfare of a firm’s multiple stakeholders (Hoskisson, Gambeta, Green, & Li, 2018; Klein et al., 2012; Wang, He, & Mahoney, 2009).

    • Stakeholder governance through establishing priorities among different stakeholders.McGahan (2020) has pointed to the need to identify which stakeholders should be of concern to a firm. In making such judgements, firm leaders will also be faced with having to prioritize the interests of some of its stakeholders over others, based on managerial judgment or some guiding principle such as variations in stakeholders’ power, legitimacy, or urgency (Mitchell, Agle, & Wood, 1997). For example, firms may choose to give precedence to the interests of stakeholders that provide profit-generating resources over stakeholders that provide generic resources (Barney, 2018). In addition, firms could make these priorities widely known by signaling (Spence, 1974) their willingness to address the interests of some stakeholders over others. These actions could address the stakeholder governance problem by attracting stakeholders, including shareholders, who prefer working with a firm with particular (signaled) stakeholder priorities (Mackey, Mackey, & Barney, 2007; Morris et al., 2017). In this setting, managers would focus on addressing the interests of their highest-priority stakeholders while still maintaining a level of satisfaction among lower priority stakeholders such that they continue to engage with the firm (Barney, 2018; Simon, 1952).

    • Stakeholder governance as a process of finding ways to resolve stakeholder conflicts. Finally, perhaps there is no general theory for resolving conflicting interests among a firm’s stakeholders (Barnard, 1938/1968; Follett, Fox, & Urwick, 1940; Miller, 1992; Nickerson & Zenger, 2002). Instead, maybe all that can be developed is a framework for a process by which managers in firms can create ways to resolve these conflicts in their “particular circumstances of time and place” (Hayek, 1945: 521). This process framework would be, at its core, entrepreneurial in nature, as a superior governance outcome may not be known before the process unfolded (Alvarez & Barney, 2007). That some managers might be more skilled at this than others suggests that stakeholder governance could be a source of a firm’s competitive advantage (Barney, 1991; Klein et al., 2012).

    These are only four possible approaches to thinking about the stakeholder governance problem; they are neither mutually exclusive nor jointly exhaustive. What is apparent is that the need to reconsider how we theorize, teach, and practice stakeholder governance is compelling and pressing. Depending on the outcome, a theory of stakeholder governance could be among the most important theoretical—and deeply practical—contributions to the field of management in the 21st century.

    * Authors are listed in alphabetical order.

    1 An assertion contradicted by the political activities of many firms (Barley, 2010; Hillman, Keim, & Schuler, 2004; Sampson, 1973).


    • Aguilera, R. V., & Jackson, G. 2003. The cross-national diversity of corporate governance: Dimensions and determinants. Academy of Management Review, 28: 447–465.LinkGoogle Scholar
    • Alchian, A. A., & Demsetz, H. 1972. Production, information costs, and economic organization. American Economic Review, 62: 777–795. Google Scholar
    • Alvarez, S. A., & Barney, J. B. 2007. Discovery and creation: Alternative theories of entrepreneurial action. Strategic Entrepreneurship Journal, 1: 11–26. Google Scholar
    • Amis, J. M., Mair, J., & Munir, K. A. 2020. The organizational reproduction of inequality. Academy of Management Annals, 14: 195–230.LinkGoogle Scholar
    • Bapuji, H., Husted, B. W., Lu, J., & Mir, R. 2018. Value creation, appropriation, and distribution: How firms contribute to societal economic inequality. Business & Society, 57: 983–1009. Google Scholar
    • Barley, S. R. 2010. Building an institutional field to corral a government: A case to set an agenda for organization studies. Organization Studies, 31: 777–805. Google Scholar
    • Barnard, C. I. 1968. The functions of the executive (30th anniversary ed.). Cambridge, MA: Harvard University Press. (Original work published 1938) Google Scholar
    • Barney, J. B. 1986. Strategic factor markets: Expectations, luck, and business strategy. Management Science, 32: 1231–1241. Google Scholar
    • Barney, J. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17: 99–120. Google Scholar
    • Barney, J. B. 2018. Why resource‐based theory’s model of profit appropriation must incorporate a stakeholder perspective. Strategic Management Journal, 39: 3305–3325. Google Scholar
    • Baysinger, B. D., & Butler, H. N. 1985. Corporate governance and the board of directors: Performance effects of changes in board composition. Journal of Law, Economics, & Organization, 1: 101–124. Google Scholar
    • Black, B., & Kraakman, R. 1996. A self-enforcing model of corporate law. Harvard Law Review, 109: 1911–1982. Google Scholar
    • Blair, M., & Stout, L. 1999. A team production theory of corporate law. Virginia Law Review, 85: 248–320. Google Scholar
    • Business Roundtable 2019, August 19. Business Roundtable redefines the purpose of a corporation to promote “an economy that serves all Americans.” Retrieved from Google Scholar
    • Buttner, E. H., & Lowe, K. B. 2017. Addressing internal stakeholders’ concerns: The interactive effect of perceived pay equity and diversity climate on turnover intentions. Journal of Business Ethics, 143: 621–633. Google Scholar
    • Campbell, B. A., Coff, R., & Kryscynski, D. 2012. Rethinking sustained competitive advantage from human capital. Academy of Management Review, 37: 376–395.LinkGoogle Scholar
    • Carney, M. 2020, April 18. Putting values above valuations. Economist: 54. Google Scholar
    • Connelly, B. L., Haynes, K. T., Tihanyi, L., Gamache, D. L., & Devers, C. E. 2016. Minding the gap: Antecedents and consequences of top management-to-worker pay dispersion. Journal of Management, 42: 862–885. Google Scholar
    • Crane, A. 2013. Modern slavery as a management practice: Exploring the conditions and capabilities for human exploitation. Academy of Management Review, 38: 49–69.LinkGoogle Scholar
    • Cuypers, I. R., Koh, P. S., & Wang, H. 2016. Sincerity in corporate philanthropy, stakeholder perceptions and firm value. Organization Science, 27: 173–188. Google Scholar
    • Donaldson, T., & Preston, L. E. 1995. The stakeholder theory of the corporation: Concepts, evidence, and implications. Academy of Management Review, 20: 65–91.LinkGoogle Scholar
    • Eden, D. 2003. Critical management studies and the Academy of Management Journal: Challenge and counterchallenge. Academy of Management Journal, 46: 390–394.LinkGoogle Scholar
    • Failla, V., Melillo, F., & Reichstein, T. 2017. Entrepreneurship and employment stability—Job matching, labour market value, and personal commitment. Journal of Business Venturing, 32: 162–177. Google Scholar
    • Fama, E. F., & Jensen, M. C. 1983. Separation of ownership and control. Journal of Law and Economics, 26: 301–325. Google Scholar
    • Follett, M. P., Fox, E. M., & Urwick, L. (Eds.). 1940. Dynamic administration: The collected papers of Mary Parker Follett. New York, NY: Pitman. Google Scholar
    • Freeman, R. E. 1984. Stakeholder management: Framework and philosophy. Mansfield, MA: Pitman. Google Scholar
    • Friedman, M. 1962. Capitalism and freedom. Chicago, IL: University of Chicago Press. Google Scholar
    • Gale, D., & Rosenthal, R. W. 1994. Price and quality cycles for experience goods. Rand Journal of Economics, 25: 590–607. Google Scholar
    • Hayek, F. A. 1945. The use of knowledge in society. American Economic Review, 35: 519–530. Google Scholar
    • Hillman, A. J., Keim, G. D., & Schuler, D. 2004. Corporate political activity: A review and research agenda. Journal of Management, 30: 837–857. Google Scholar
    • Hoskisson, R. E., Gambeta, E., Green, C. D., & Li, T. X. 2018. Is my firm-specific investment protected? Overcoming the stakeholder investment dilemma in the resource-based view. Academy of Management Review, 43: 284–306.LinkGoogle Scholar
    • Howard-Grenville, J., Buckle, S. J., Hoskins, B. J., & George, G. 2014. Climate change and management. Academy of Management Journal, 57: 615–623.LinkGoogle Scholar
    • Jensen, M. C. 2001. Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance, 14: 8–21. Google Scholar
    • Jensen, M. C., & Meckling, W. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Finance Economics, 3: 305–360. Google Scholar
    • Jensen, M. C., & Murphy, K. J. 1990. Performance pay and top management incentives. Journal of Political Economy, 98: 225–264. Google Scholar
    • Klein, P. G., Mahoney, J. T., McGahan, A. M., & Pitelis, C. N. 2012. Who is in charge? A property rights perspective on stakeholder governance. Strategic Organization, 10: 304–315. Google Scholar
    • Krishna, V., & Serrano, R. 1996. Multilateral bargaining. Review of Economic Studies, 63: 61–80. Google Scholar
    • Lambert, S. J. 2000. Added benefits: The link between work–life benefits and organizational citizenship behavior. Academy of Management Journal, 43: 801–815.LinkGoogle Scholar
    • Machlup, F., & Taber, M. 1960. Bilateral monopoly, successive monopoly, and vertical integration. Economica, 27: 101–119. Google Scholar
    • Mackey, A., Mackey, T. B., & Barney, J. B. 2007. Corporate social responsibility and firm performance: Investor preferences and corporate strategies. Academy of Management Review, 32: 817–835.LinkGoogle Scholar
    • McGahan, A. M. 2020. Where does an organization’s responsibility end? Identifying the boundaries on stakeholder claims. Academy of Management Discoveries, 6: 8–11.LinkGoogle Scholar
    • Michel, A. 2011. Transcending socialization: A nine-year ethnography of the body’s role in organizational control and knowledge workers’ transformation. Administrative Science Quarterly, 56: 325–368. Google Scholar
    • Miller, G. J. 1992. Managerial dilemmas: The political economy of hierarchy. New York, NY: Cambridge University Press. Google Scholar
    • Mitchell, R. K., Agle, B. R., & Wood, D. J. 1997. Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts. Academy of Management Review, 22: 853–886.LinkGoogle Scholar
    • Morris, S. S., Alvarez, S. A., Barney, J. B., & Molloy, J. C. 2017. Firm‐specific human capital investments as a signal of general value: Revisiting assumptions about human capital and how it is managed. Strategic Management Journal, 38: 912–919. Google Scholar
    • Nechyba, T. J., & Walsh, R. P. 2004. Urban sprawl. Journal of Economic Perspectives, 18: 177–200. Google Scholar
    • Nickerson, J. A., & Zenger, T. R. 2002. Being efficiently fickle: A dynamic theory of organizational choice. Organization Science, 13: 547–566. Google Scholar
    • Phung, K., & Crane, A. 2018. The business of modern slavery: Management and organizational perspectives. In J. ClarkS. Poucki (Eds.), The SAGE handbook of human trafficking and modern day slavery: 177–197. London, U.K.: SAGE. Google Scholar
    • Richard, O. C. 2000. Racial diversity, business strategy, and firm performance: A resource-based view. Academy of Management Journal, 43: 164–177.LinkGoogle Scholar
    • Sampson, A. 1973. The sovereign state: The secret history of ITT. London, U.K.: Hodder and Stoughton. Google Scholar
    • Shan, L., Fu, S., & Zheng, L. 2017. Corporate sexual equality and firm performance. Strategic Management Journal, 38: 1812–1826. Google Scholar
    • Simon, H. A. 1952. A comparison of organisation theories. Review of Economic Studies, 20: 40–48. Google Scholar
    • Spence, A. M. 1974. Market signaling: Informational transfer in hiring and related screening processes. Cambridge, MA: Harvard University Press. Google Scholar
    • Tihanyi, L., Graffin, S., & George, G. 2014. Rethinking governance in management research. Academy of Management Journal, 57: 1535–1543.LinkGoogle Scholar
    • Verhoef, E. 2010. The economics of traffic congestion. Cheltenham, U.K.: Edward Elgar Publishing. Google Scholar
    • Wang, H. C., He, J., & Mahoney, J. T. 2009. Firm‐specific knowledge resources and competitive advantage: The roles of economic‐ and relationship‐based employee governance mechanisms. Strategic Management Journal, 30: 1265–1285. Google Scholar
    • Williamson, O. E. 1996. The mechanisms of governance. Oxford, U.K.: Oxford University Press. Google Scholar
    • Wright, C., & Nyberg, D. 2017. An inconvenient truth: How organizations translate climate change into business as usual. Academy of Management Journal, 60: 1633–1661.LinkGoogle Scholar
    • Zingales, L. 2000. In search of new foundations. Journal of Finance, 55: 1623–1653. Google Scholar
    Academy of Management
      Academy of Management
      555 Pleasantville Road, Suite N200
      Briarcliff Manor, NY 10510-8020, USA
      Phone: +1 (914) 326-1800
      Fax: +1 (914) 326-1900