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Chapter 2 Stakeholder Relationships, Social Responsibility, & Corporate Governance

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Chapter 2 Stakeholder Relationships, Social Responsibility, & Corporate Governance

1. 1. Chapter 2 :Stakeholder Relationships, Social Responsibility, and Corporate Governance 1
2. 2. TABLE OF CONTENT  Summary  Stakeholders Define Ethical Issues in Business  Social Responsibility and Ethics  Issues in Social Responsibility  Social Responsibility and the Importance of a Stakeholder Orientation  Corporate Governance Provides Formalized Responsibility to Stakeholders  Implementing a Stakeholder Perspective  Contributions of a Stakeholder Perspective
3. 3. SUMMARY  In this chapter, first we identify stakeholders’ different roles in business ethics. We examine the relationships between businesses and various stakeholder groups and examine how a stakeholder framework can help us understand organizational ethics.  Then we define social responsibility and examine the relationships between having a stakeholder orientation and social responsibility.  Next, we delineate how a stakeholder orientation helps to create corporate social responsibility.  We then examine corporate governance as a dimension of social responsibility and its role in structuring ethics and social responsibility in business. The ethical decision making process is covered in order to provide an understanding of the importance of oversight in responding to stakeholders.  Finally, we provide the steps for implementing a stakeholder perspective in creating both social responsibility and ethical decisions in business.
4. 4. STAKEHOLDERS DEFINE ETHICAL ISSUES IN BUSINESS
5. 5. STAKEHOLDERS DEFINE ETHICAL ISSUES IN BUSINESS What is the Stakeholder Framework?  Building effective relationships is considered one of the more important areas of business today.  A stakeholder framework helps identify the  Internal stakeholders such as  Boards of directors,  Managers and  employees,  External stakeholders such as  customers,  special interest groups,  regulators, and  others who agree, collaborate, and have confrontations on ethical issues
6. 6. STAKEHOLDERS DEFINE ETHICAL ISSUES IN BUSINESS Stakeholder in a Business Context In a business context, customers, investors and shareholders, employees, suppliers, government agencies, communities, and others who have a “stake” or claim in some aspect of a company’s products, operations, markets, industry, and outcomes are known as stakeholders.  The survival and performance of any organization is a function of its ability to create value for all primary stakeholders. There are three approaches to stakeholder theory: normative, descriptive and instrumental.  The normative approach identifies ethical guidelines that dictate how firms ought to threat stakeholders. Principles and values provide direction.  The descriptive approach focuses on the actual behavior of the firm and usually addresses how decisions and strategies are made for stakeholder relationships.  The instrumental approach describes what will happen if firms behave in a particular way.
7. 7. STAKEHOLDERS DEFINE ETHICAL ISSUES IN BUSINESS Stakeholder in a Business Context The relationship between companies and their stakeholders is a two-way street. Stakeholders are influenced by business, but they also have the ability to affect businesses.  Stakeholders apply their values and standards to many diverse issues—working conditions,  consumer rights, environmental conservation, product safety, and proper information  disclosure—that may or may not directly affect an individual stakeholder’s own welfare.  Stakeholders provide both tangible and intangible resources that can be critical to a firm’s  long-term success.  When individual stakeholders share similar expectations about desirable business conduct, they may choose to organize into communities.  Ethical misconduct can damage a firm’s reputation, causing stakeholders to withdraw valuable resources. This gives stakeholders power over businesses.
8. 8. STAKEHOLDERS DEFINE ETHICAL ISSUES IN BUSINESS Identifying Stakeholders  Stakeholders can be divided into two categories.  Primary stakeholders are those whose continued association is necessary for a firm’s survival (employees, customers, investors, and stockholders, governments and communities that provide necessary infrastructure).  Secondary stakeholders do not typically engage in transactions and are not essential for its survival (the media, trade associations, and special-interest groups).  Although primary groups may present more day-to-day concerns, secondary groups cannot be ignored or given less consideration in the ethical decision-making process.  The stakeholder interaction model indicates that there are two-way relationships between the firm and a host of stakeholders.
9. 9. STAKEHOLDERS DEFINE ETHICAL ISSUES IN BUSINESS A Stakeholder Orientation  The degree to which a firm understands and addresses stakeholder demands can be expressed as a stakeholder orientation. A stakeholder orientation involves “activities and processes within a system of social institutions that facilitate and maintain value through exchange relationships with multiple stakeholders.  A stakeholder orientation comprises three sets of activities.  The organization-wide generation of data about stakeholder groups and assessment of the  firm’s effects on these groups.  The distribution of this information throughout the firm.  The organization’s responsiveness as a whole to this intelligence.  A stakeholder orientation is not complete unless it includes activities that address stakeholder issues.  Responsiveness processes may involve the participation of the concerned stakeholder groups. It can be viewed as a continuum as firms adopt a stakeholder orientation to varying degrees.
10. 10. SOCIAL RESPONSIBILITY AND ETHICS
11. 11. SOCIAL RESPONSIBILITY AND ETHICS The Concepts of Ethics and Social Responsibility  The concepts of ethics and social responsibility are often used interchangeably, although each has a distinct meaning.  Social responsibility is an organization’s obligation to maximize its positive impact on stakeholders and minimize negative impacts. It can be viewed as a contract with society  Business ethics involves carefully thought out rules or heuristics of business conduct that guide decision making.
12. 12. SOCIAL RESPONSIBILITY AND ETHICS Level of Social Responsibility  There are four levels of social responsibility—  economic,  legal,  ethical, and  Philanthropic  They can be viewed as steps.
13. 13. SOCIAL RESPONSIBILITY AND ETHICS What is Corporate Citizenship?  The term corporate citizenship is often used to express the extent to which businesses strategically meet the economic, legal, ethical, and philanthropic responsibilities placed on them by their various stakeholders.  Corporate citizenship has four interrelated dimensions:  Strong sustained economic performance  Rigorous compliance  Ethical actions beyond what the law requires  Voluntary contributions that advance the reputation and stakeholder commitment of the organization.
14. 14. SOCIAL RESPONSIBILITY AND ETHICS Level of Social Responsibility  There are four levels of social responsibility—  economic,  legal,  ethical, and  Philanthropic  They can be viewed as steps.
15. 15. SOCIAL RESPONSIBILITY AND ETHICS Reputation as Greatest Assets  Reputation is one of an organization’s greatest intangible assets with tangible value. The value of a positive reputation is difficult to quantify, but it is very important.
16. 16. ISSUES IN SOCIAL RESPONSIBILITY
17. 17. ISSUES IN SOCIAL RESPONSIBILITY  Social responsibility rests on a stakeholder orientation and companies are looking at broader issues which consider the long-term welfare of society; each stakeholder is given due consideration.  Long-term relationships with stakeholders develop trust, loyalty and the performance necessary to maintain profitability.  Issues generally associated with social responsibility can be separated into four general categories:  social issues,  consumer protection,  sustainability and  corporate governance.
18. 18. ISSUES IN SOCIAL RESPONSIBILITY Social Issues  Social issues are associated with the common good and deal with concerns that affect large segments of society and the welfare of our entire society.  There is a need to reflect on issues indirectly related to business, such as jobs lost through outsourcing, abortion, guns rights, poverty, childhood obesity when developing strategies in certain cases.  Issues that more directly relate to business include obesity, smoking, and exploiting valuable or impoverished populations, as well as a number of other issues  Some economic issues have economic ramifications to society such as antitrust, employee well-being, insider trading and other issues that diminish competition and consumer choice.  Another major social issue involves internet tracking and privacy and may soon become a consumer protection issue as government is considering passing legislation limiting the types of tracking companies can perform over the internet without users’ permission.
19. 19. ISSUES IN SOCIAL RESPONSIBILITY Consumer Protection  Consumer protection often occurs in the form of laws passed to protect consumers from unfair and deceptive business practices; these issues usually have an immediate impact on the consumer after a purchase.  Major areas of concern include advertising, disclosure, financial practices and product safety  Because consumers are less knowledgeable, it is the responsibility of companies to take precautions preventing consumers from being harmed by their products.  Deceptive advertising has been a hot topic in the consumer protection area and some advertising practices skirt the line between ethical and questionable behavior  Companies must be knowledgeable about consumer protection laws and recognize whether their practices could be construed as deceptive or unfair.
20. 20. ISSUES IN SOCIAL RESPONSIBILITY Sustainability  Sustainability is defined as the potential for the long- term well-being of the natural environment and businesses can no longer ignore the environment as a stakeholder.
21. 21. ISSUES IN SOCIAL RESPONSIBILITY Corporate Governance  Corporate governance involves the development of formal systems of accountability, oversight and control. Strong corporate governance mechanisms help remove the possibility for employees to make unethical decisions.  Research has shown that corporate governance has a positive relationship with social responsibility and we discuss corporate governance in more detail later in this chapter.
22. 22. SOCIAL RESPONSIBILITY AND THE IMPORTANCE OF A STAKEHOLDER ORIENTATION
23. 23. SOCIAL RESPONSIBILITY AND THE IMPORTANCE OF A STAKEHOLDER ORIENTATION  Many businesspeople and scholars have questioned the role of ethics and social responsibility in business because legal and economic responsibilities are accepted as the most important determinants of performance.  Milton Friedman said “the basic mission of business [is]...to produce goods and services at a profit, and in doing this, business [is] making its maximum contribution to society and in, fact being socially responsible.” Friedman believes the market is a better deterrent to wrongdoing than new laws and regulations.  Adam Smith, one of the founders of capitalism, established expectations for motives and behaviors in his invisible hand theory. Smith distinguished justice as consisting of perfect or inalienable rights, from beneficence, consisting of imperfect rights that should be performed but cannot be forced.
24. 24. SOCIAL RESPONSIBILITY AND THE IMPORTANCE OF A STAKEHOLDER ORIENTATION  Evidence suggests that caring about the well-being of stakeholders leads to increased profits. The support stakeholders have for companies they perceive to be socially responsible can also serve to enhance the firms’ profitability.
25. 25. CORPORATE GOVERNANCE PROVIDES FORMALIZED RESPONSIBILITY TO STAKEHOLDERS
26. 26. CORPORATE GOVERNANCE PROVIDES FORMALIZED RESPONSIBILITY TO STAKEHOLDERS Balancing Stakeholder Interest  Today, the failure to balance stakeholder interests can result in a failure to maximize shareholders’ wealth.  Directors and corporate officers have a duty of care, or duty of diligence, to make informed and prudent decisions.  Directors have a duty of loyalty, which means all their decisions should be in the best interests of the corporation and its stakeholders.
27. 27. CORPORATE GOVERNANCE PROVIDES FORMALIZED RESPONSIBILITY TO STAKEHOLDERS What is Corporate Governance? To remove the opportunity for employees to make unethical decisions, most companies have developed formal systems of accountability, oversight, and control— known as corporate governance.  Accountability refers to how closely workplace decisions are aligned with a firm’s stated strategic direction and its compliance with ethical and legal considerations. Oversight provides a system of checks and balances that limit employees’ and managers’ opportunities to deviate from policies and strategies and that prevent unethical and illegal activities. Control is the process of auditing and improving organizational decisions and actions.
28. 28. CORPORATE GOVERNANCE PROVIDES FORMALIZED RESPONSIBILITY TO STAKEHOLDERS What is Corporate Governance?  A clear delineation of accountability helps employees, customers, investors, government regulators, and other stakeholders understand why and how the organization chooses and achieves its goals.  Corporate governance establishes fundamental systems and processes for preventing and detecting misconduct, for investigating and disciplining, and for recovery and continuous improvement. The development of a stakeholder orientations should interface with the corporation’s governance structure.
29. 29. CORPORATE GOVERNANCE PROVIDES FORMALIZED RESPONSIBILITY TO STAKEHOLDERS Views of Corporate Governance  The shareholder model of corporate governance is founded in classic economic precepts, including the goal of maximizing wealth for investors and owners.  Focuses on developing and improving the formal system for maintaining performance accountability between top management and the firms’ shareholders.  A shareholder orientation should drive a firm’s decisions toward serving the best interests of investors.
30. 30. CORPORATE GOVERNANCE PROVIDES FORMALIZED RESPONSIBILITY TO STAKEHOLDERS Views of Corporate Governance  The stakeholder model of corporate governance adopts a broader view of the purpose of business because it must answer to other stakeholders, including employees, suppliers, government regulators, communities, and special-interest groups.  Because of limited resources, companies must determine which of their stakeholders are primary.
31. 31. CORPORATE GOVERNANCE PROVIDES FORMALIZED RESPONSIBILITY TO STAKEHOLDERS The Role of Boards of Directors  For public corporations, boards of directors hold the ultimate responsibility for their firms’ success or failure, as well as for the ethics of their actions. Board members have a fiduciary duty to act in the best interests of those they serve.  Traditionally, boards of directors rarely perform the management function. Are concerned with monitoring the decisions made by executives on behalf of the company.  Compensation, both of organizational executives and board members themselves, is a difficult ethical area because board members may place self-interest above those of shareholders.
32. 32. CORPORATE GOVERNANCE PROVIDES FORMALIZED RESPONSIBILITY TO STAKEHOLDERS The Role of Boards of Directors  Greater Demands for Accountability and Transparency  Directors are chosen for their expertise, competence, and ability to bring diverse perspectives to strategic discussions.  Outside directors are thought to bring more independence to the monitoring function.  Many of the corporate scandals uncovered in recent years might have been prevented if each of the companies’ boards of directors had been better qualified, more knowledgeable, and less biased.  The concept of board members being linked to more than one company is known as interlocking directorate. The practice is legal unless it involves a direct competitor.
33. 33. CORPORATE GOVERNANCE PROVIDES FORMALIZED RESPONSIBILITY TO STAKEHOLDERS The Role of Boards of Directors  Executive Compensation  Many boards spend more time discussing compensation than they do ensuring the integrity of the firm’s financial reporting systems.  How executives are compensated has become a controversial topic with many people believing no executive is worth millions of dollars in annual salary and stock options; while others argue that because executives assume so much risk, they deserve the rewards.  The topic of executive compensation is important to boards because it receives much attention in the media, sparks shareholder concern, and is hotly debated in discussions of corporate governance.  One area for board members to consider is the extent to which executive compensation is linked to company performance.  Issues related to high compensation are excessive risk-taking, a focus on short-term financial performance, and reduced transparency at the expense of long-term growth.
34. 34. IMPLEMENTING A STAKEHOLDER PERSPECTIVE
35. 35. IMPLEMENTING A STAKEHOLDER PERSPECTIVE  An organization that develops effective corporate governance and understands the importance of business ethics and social responsibility in achieving success should develop processes for managing these important concerns.  Although there are many different approaches, there are some steps to follow that are effective in utilizing the stakeholder framework in managing responsibility and business ethics. The Six Steps Step 1: Assessing the Corporate Culture Step 2: Identifying Stakeholder Groups Step 3: Identifying Stakeholder Issues Step 4: Assessing Organizational Commitment to Social Responsibility Step 5: Identifying Resources and Determining Urgency Step 6: Gaining Stakeholder Feedback
36. 36. IMPLEMENTING A STAKEHOLDER PERSPECTIVE Step 1: Assessing the Corporate Culture  To enhance organizational fit, a social responsibility program must align with the corporate culture of the organization.  The purpose of this step is to identify the organizational mission, values, and norms that are likely to have implications for social responsibility. Step 1: Assessing the Corporate Culture Step 2: Identifying Stakeholder Groups Step 3: Identifying Stakeholder Issues Step 4: Assessing Organizational Commitment to Social Responsibility Step 5: Identifying Resources and Determining Urgency Step 6: Gaining Stakeholder Feedback
37. 37. IMPLEMENTING A STAKEHOLDER PERSPECTIVE Step 2: Identifying Stakeholder Groups  In managing this stage, it is important to recognize stakeholder needs, wants, and desires.  Stakeholders have some level of power over a business because they are in the position to withhold, or at least threaten to withhold, organizational resources. Step 1: Assessing the Corporate Culture Step 2: Identifying Stakeholder Groups Step 3: Identifying Stakeholder Issues Step 4: Assessing Organizational Commitment to Social Responsibility Step 5: Identifying Resources and Determining Urgency Step 6: Gaining Stakeholder Feedback
38. 38. IMPLEMENTING A STAKEHOLDER PERSPECTIVE Step 3: Identifying Stakeholder Issues  This step involves understanding the nature of the main issues of concern to primary stakeholders. Step 1: Assessing the Corporate Culture Step 2: Identifying Stakeholder Groups Step 3: Identifying Stakeholder Issues Step 4: Assessing Organizational Commitment to Social Responsibility Step 5: Identifying Resources and Determining Urgency Step 6: Gaining Stakeholder Feedback
39. 39. IMPLEMENTING A STAKEHOLDER PERSPECTIVE Step 4: Assessing Organizational Commitment to Social Responsibility  Step 4 brings the previous three steps together to arrive at an understanding of social responsibility that specifically matches the organization of interest. Step 1: Assessing the Corporate Culture Step 2: Identifying Stakeholder Groups Step 3: Identifying Stakeholder Issues Step 4: Assessing Organizational Commitment to Social Responsibility Step 5: Identifying Resources and Determining Urgency Step 6: Gaining Stakeholder Feedback
40. 40. IMPLEMENTING A STAKEHOLDER PERSPECTIVE Step 5: Identifying Resources and Determining Urgency  The prioritization of stakeholders and issues, along with the assessment of past performance, provides guidance for allocating resources.  Two main criteria should be considered:  the level of financial and organizational investments required by different actions.  the urgency when prioritizing social responsibility challenges. Step 1: Assessing the Corporate Culture Step 2: Identifying Stakeholder Groups Step 3: Identifying Stakeholder Issues Step 4: Assessing Organizational Commitment to Social Responsibility Step 5: Identifying Resources and Determining Urgency Step 6: Gaining Stakeholder Feedback
41. 41. IMPLEMENTING A STAKEHOLDER PERSPECTIVE Step 6: Gaining Stakeholder Feedback  Stakeholder feedback can be generated through a variety of means.  Satisfaction or reputation surveys  Assessment of stakeholder- generated media (blogs, websites, podcasts, and newsletters)  Formal research using focus groups, observation, and surveys Step 1: Assessing the Corporate Culture Step 2: Identifying Stakeholder Groups Step 3: Identifying Stakeholder Issues Step 4: Assessing Organizational Commitment to Social Responsibility Step 5: Identifying Resources and Determining Urgency Step 6: Gaining Stakeholder Feedback
42. 42. CONTRIBUTIONS OF A STAKEHOLDER PERSPECTIVE
43. 43. CONTRIBUTIONS OF A STAKEHOLDER PERSPECTIVE  Balancing stakeholder interests requires good judgment because broader societal interests can create conflicts.  This chapter provides a good overview of the issues, conflicts, and opportunities of understanding more about stakeholder relationships. The stakeholder framework helps recognize issues, identify stakeholders, and examine the role of boards of directors and managers in promoting ethics and social responsibility.

Is the extent to which businesses meet the legal ethical economic and voluntary responsibilities placed on them by their various stakeholders?

What is the ethical responsibility of business?

What are the ethical and social responsibilities of businesses?

What is the legal responsibilities of the business in society?