Evolutionary stakeholder theory and public utility regulation

• Published date: 01 June 2019
• DOI: http://doi.org/10.1111/basr.12172
• Date: 01 June 2019
• Author: Karl McDermott,William Kline

Bus Soc Rev. 2019;124:283–298.

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Thus, a utility might sit down with its “consumer advocate” stakeholder and try to plan

how it should proceed with a rate increase proposal. But, to create the future of the

stakeholder system which includes the utility, consumer group and other stakeholders

is a much more difficult, if not impossible task. (Freeman, Harrison, Wicks, & Parmar,

2010, pp. 37–38).

DOI: 10.1111/basr.12172

ORIGINAL ARTICLE

Evolutionary stakeholder theory and public utility

regulation

WilliamKline1

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KarlMcDermott2

© 2019 W. Michael Hoffman Center for Business Ethics at Bentley University. Published by Wiley Periodicals, Inc., 350 Main Street, Malden,

MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.

William Kline and Karl McDermott are listed alphabetically reflecting the equal contributions made to this paper.

1Department of Business

Administration,University of Illinois

Springfield, Springfield, Illinois

2Department of Accounting,University of

Illinois Springfield, Springfield, Illinois

Correspondence

William Kline, Department of Business

Administration, University of Illinois

Springfield, One University Plaza,

Springfield, IL 62703.

Email: wklin2@uis.edu

Abstract

Public utility regulation is one example of how stakeholder

theory has actually evolved in practice. Through trial and

error, court cases, statutory law and economic realities,

stakeholder theory has its origins almost a century before

R Edward Freeman published his seminal work Strategic

Management: A Stakeholder Approach. This wealth of his-

torical data is largely overlooked by the stakeholder litera-

ture. We will show in this article how the specific history

of public utility regulation provides at least one answer to

how stakeholder theory can be formulated, used, and ap-

plied. This process of determining and protecting stake-

holder interests is significantly different from rationalist

trends in stakeholder theory.1

Rather than first trying to de-

termine the requirements of stakeholder theory in conjunc-

tion with an ideal ethical theory, the account given here is

of an evolutionary stakeholder theory where rules arise out

of the ongoing search for cooperative solutions among all

stakeholders.

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KLINE aNd MCdERMOTT

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INTRODUCTION

Public utility regulation is one example of how stakeholder theory has actually evolved in practice.

Through trial and error, court cases, statutory law and economic realities, stakeholder theory was being

put into practice almost a century before R Edward Freeman published his seminal work Strategic

Management: A Stakeholder Approach. If our true concern is equity, this experience ought to inform

the theory. Yet, this wealth of historical data is largely overlooked by the stakeholder literature. We

will show in this article how the specific history of public utility regulation provides at least one an-

swer to how stakeholder theory can be formulated, used, and applied. This process of determining and

protecting stakeholder interests, as exemplified in public utility regulation, is significantly different

from rationalist trends in stakeholder theory.1 We agree with Earl Spurgin (2004) “To do applied eth-

ics, we need an approach to the issues that affect people's lives that does not depend on first settling

issues in ethical (stakeholder) theory” (p. 303, parenthesis ours). Like Spurgin, we too think that the

philosopher David Hume provides a framework for understanding applied ethics. Rather than first

trying to determine the requirements of stakeholder theory in conjunction with an ideal ethical theory,

the account given here is of an evolutionary stakeholder theory where rules arise out of the ongoing

search for cooperative solutions among all stakeholders.

Historically bound rather than hypothetically chosen, evolutionary stakeholder theory could sup-

plement gaps in rationalist accounts through examining actual methods of rule selection. Alternatively,

if rule selection must be an entirely rational process in order to be moral and fair, then evolutionary

stakeholder theory stands as an alternative if not oppositional account. Either way, the actual evolution

of stakeholder theory in practice, as exemplified in public utility regulation, potentially impacts our

understanding of stakeholder theory and this is why it must be explored.

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THEORETICAL FRAMEWORK

Privately owned but publicly regulated through an administrative agency charged with setting “just

and reasonable rates,” the public utility network in the United States binds together people from all

walks of life, our vast array of commercial establishments, and even our largest industrial manufac-

turing operations. It would not be a stretch to argue that the very fiber of our civilized world depends

on the smooth functioning of these regulated industries. The problems that ensue from an extended

power outage, natural gas shortage, or water contaminations are illustrations of how essential these

industries and products are to our daily lives. As early as 1930 Justice Frankfurter observed:

No task more profoundly tests the capacity of our government … than its share in se-

curing for society those essential services which are furnished by public utilities. Our

whole social structure presupposes … dependen[ce] upon private economic enterprise.

To think of contemporary America without the intricate and pervasive systems which

furnish light, heat, power, transportation, and communication is to conjure up another

world. (1930, p. 81)

Affecting everyone as they do, the interest in regulatory proceedings and the administrative process of set-

ting just and reasonable rates is universal and because of this the regulatory process attempts to embrace

the needs of every stakeholder group. Stakeholder theory has been rightly criticized on the grounds that

the theory is so general that it fails to offer any action guiding principles (Marcoux, 2000). The regulatory