CHAPTER 2
Stakeholder Relationships, Social Responsibility,
and Corporate Governance
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.
INSTRUCTOR NOTES FOR “AN ETHICAL DILEMMA”
Megan’s dilemma is her involvement and knowledge of GAC’s tracking of employees and whether to report
this to higher authorities. GAC tracked one employee traveling ten miles to an area hospital every night after
work and planned to reprimand the employee for using the company car for personal use. According to the
company, GAC can legally place GPS devices in its company cars. Also, according to corporate policy,
company cars should only be used for business activities, and any personal needs should be done with the
employee’s own personal car. The instructor may want to ask students their opinion on how appropriate the
punishment is to the violation. The instructor could push the issue with questions such as what if this is the
employee’s first offense and he is otherwise a very productive worker? Could the company simply give the
employee a warning?
A second case involved GAC’s plans to fire another employee for sharing company secrets. Company
evidence included computer activity, cell phone usage, GPS tracking, audio and video of personal
conversations, dinners, and even hotel rooms. The instructor may want to ask students if GAC is within the
law when obtaining this evidence. Has GAC overstepped its bounds in tracking personal conversations?
Could the fired employee sue GAC for wrongful dismissal? Would it be different if the employee leaked
national secrets instead of company secrets concerning an app? The company has an established ethical
reputation, so one rogue employee should not tarnish that reputation if the company acts responsibly in how it
handles the employee. Megan’s boss brushes aside her concerns and reminds Megan how competitive the
industry is and how necessary it is to make sure employees are not sharing confidential information with
rivals. Megan is also reminded her job is simply to suggest appropriate action. Should Megan suggest what
she really thinks? Should she ‘suggest’ what she knows her boss wants to hear?
9Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate
Governance
LECTURE OUTLINE
I. Stakeholders Define Ethical Issues in Business
A. Building effective relationships is considered one of the more important areas of business today. A
stakeholder framework helps identify the internal stakeholders such as employees, boards of
directors, and managers as well as external stakeholders such as customers, special interest groups,
regulators, and others groups who agree, disagree, collaborate, and engage in normal business
transactions.have confrontations on ethical issues.
B. 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.
1. 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.
a. The normative approach identifies ethical guidelines that dictate how firms ought to treat
stakeholders. Principles and values provide direction.
b. The descriptive approach focuses on the actual firm’s behavior of the firm and usually
addresses how decisions and strategies are made for stakeholder relationships.
c. The instrumental approach describes what will happen if firms behave in a particular way.
2. 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.
a. 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.
b. Stakeholders provide both tangible and intangible resources that can be critical to a firm’s
long-term success.
3. When individual stakeholders share similar expectations about desirable business conduct, they
may choose to organize into communities.
4. Ethical misconduct can damage a firm’s reputation, causing stakeholders to withdraw valuable
resources. This gives stakeholders power over businesses.
C. Identifying Stakeholders
1. Stakeholders can be divided into two categories.
a. 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).
b. Secondary stakeholders do not typically engage in transactions and are not essential for
its survival (the media, trade associations, and special-interest groups).
c. 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.
2. The stakeholder interaction model indicates that there are two-way relationships between the
firm and a host of stakeholders.
D. A Stakeholder Orientation
1. 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
Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate
Governance 10
system of social institutions that facilitate and maintain value through exchange relationships
with multiple stakeholders.”
2. A stakeholder orientation comprises three sets of activities.
a. The organization-wide generation of data about stakeholder groups and assessment of the
firm’s effects on these groups.
b. The distribution of this information throughout the firm.
c. The organization’s responsiveness as a whole to this intelligence.
3. Given the variety of employees involved in the generation of information about stakeholders, it
is essential the information gathered be circulated throughout the firm.
4. A stakeholder orientation is not complete unless it includes activities that address stakeholder
issues.
5. Responsiveness processes may involve the participation of the concerned stakeholder groups. A
stakeholder orientation can be viewed as a continuum as firms adopt the concept to varying
degrees.
II. Social Responsibility and Ethics
A. The concepts of ethics and social responsibility are often used interchangeably, although each has a
distinct meaning.
1. 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
2. Business ethics involves carefully thought-out rules or heuristics of business conduct that guide
decision making.
B. There are four levels of social responsibility—economic, legal, ethical, and philanthropic—and they
can be viewed as steps.
C. 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.
1. Corporate citizenship has four interrelated dimensions:
a. Strong sustained economic performance
b. Rigorous compliance
c. Ethical actions beyond what the law requires
d. Voluntary contributions that advance the reputation and stakeholder commitment of the
organization.
D. 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.
III. Issues in Social Responsibility
A. Social responsibility rests on a stakeholder orientation.
1. Companies are looking at broader issues that consider the long-term welfare of society; each
stakeholder is given due consideration.
B. Long-term relationships with stakeholders develop trust, loyalty and the performance necessary to
maintain profitability.
11 Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate
Governance
C. Issues generally associated with social responsibility can be separated into four general categories:
social issues, consumer protection, sustainability and corporate governance.
1. 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.
a. There is a need to reflect on issues indirectly related to business, such as jobs lost through
outsourcing, health issues, and gun rights when developing strategies in certain cases.
b. Issues that more directly relate to business include obesity, smoking, and exploiting
valuable or impoverished populations, as well as a number of other issues
c. Data privacy is one of the most important social and ethical issues facing marketing today.
There is a need to address the ethical and legal responsibilities to determine risks and
develop protection to consumers. All organizations need to understand how to develop
cybersecurity and have contingency plans to respond if a data breach happens. With big
data and the need to collect consumer data come the responsibility to establish a data
privacy ethical culture as a top priority. Another major social issue involves internet
tracking and privacy and may soon become a consumer protection issue as the government
is considering passing legislation limiting the types of tracking companies can perform
over the Internet without users’ permission.
2. 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.
a. Major areas of concern include advertising, environmental hazardsdisclosure, financial
practices, and product safety
b. Because consumers are less knowledgeable, it is the responsibility of companies to take
precautions preventing consumers from being harmed by their products.
c. Deceptive advertising has been a hot topic in the consumer protection area, and some
advertising practices skirt the line between ethical and questionable behavior.
i. For example, native advertising blends digital advertisements or company promotions
with content on the website where it is featured. This may be construed as deceptive if
consumers cannot tell the difference between the ad and the content.
d. Companies must be knowledgeable about consumer protection laws and recognize whether
their practices could be construed as deceptive or unfair.
3. 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.
a. Because sustainability is a major ethical issue, we will cover this topic in more detail in
chapter 12.
4. 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.
a. 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.
Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate
Governance 12
IV. Social Responsibility and the Importance of a Stakeholder Orientation
A. 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.
1. 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.
2. 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.
B. 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.
V. Corporate Governance Provides Formalized Responsibility to Stakeholders
A. Today, the failure to balance stakeholder interests can result in a failure to maximize shareholders’
wealth.
1. Directors and corporate officers have a duty of care, or duty of diligence, to make informed and
prudent decisions.
2. Directors have a duty of loyalty, which means all their decisions should be in the best interests of
the corporation and its stakeholders.
3. Two major challenges for boards of directors are officer compensation and the temptation to use
knowledge about investments, business ventures, and the stock market to engage in insider
trading.
B. 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.
1. Accountability refers to how closely workplace decisions are aligned with a firm’s stated
strategic direction and its compliance with ethical and legal considerations.
2. 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.
3. Control is the process of auditing and improving organizational decisions and actions.
4. 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.
5. 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 orientation should interface with the
corporation’s governance structure.
C. Views of Corporate Governance
1. The shareholder model of corporate governance is founded in classic economic precepts,
including the goal of maximizing wealth for investors and owners.
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Governance
a. Focuses on developing and improving the formal system for maintaining performance
accountability between top management and the firms’ shareholders.
b. A shareholder orientation should drive a firm’s decisions toward serving the best interests
of investors.
2. 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.
a. Because of limited resources, companies must determine which of their stakeholders are
primary.
D. The Role of Boards of Directors
1. 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
2. Traditionally, boards of directors rarely perform the management function. They are concerned
with monitoring the decisions made by executives on behalf of the company.
3. 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.
4. Greater Demands for Accountability and Transparency
a. Directors are chosen for their expertise, competence, and ability to bring diverse
perspectives to strategic discussions.
b. Outside directors are thought to bring more independence to the monitoring function.
c. 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.
d. 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.
5. Executive Compensation
a. Many boards spend more time discussing compensation than they do ensuring the integrity
of the firm’s financial reporting systems.
b. 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.
c. 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.
d. One area for board members to consider is the extent to which executive compensation is
linked to company performance.
e. 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.
VI. Implementing a Stakeholder Perspective
A. 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.
Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate
Governance 14
B. 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.
1. Step 1: Assessing the Corporate Culture
a. To enhance organizational fit, a social responsibility program must align with the corporate
culture of the organization.
b. The purpose of this step is to identify the organizational mission, values, and norms that are
likely to have implications for social responsibility.
2. Step 2: Identifying Stakeholder Groups
a. In managing this stage, it is important to recognize stakeholder needs, wants, and desires.
b. 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.
3. Step 3: Identifying Stakeholder Issues
a. This step involves understanding the nature of the main issues of concern to primary
stakeholders.
4. Step 4: Assessing Organizational Commitment to Social Responsibility
a. Step 4 brings the previous three steps together to arrive at an understanding of social
responsibility that specifically matches the organization of interest.
5. Step 5: Identifying Resources and Determining Urgency
a. The prioritization of stakeholders and issues, along with the assessment of past
performance, provides guidance for allocating resources.
b. Two main criteria should be considered:
i. the level of financial and organizational investments required by different actions.
ii. the urgency when prioritizing social responsibility challenges.
6. Step 6: Gaining Stakeholder Feedback
a. Stakeholder feedback can be generated through a variety of means.
i. Satisfaction or reputation surveys
ii. Assessment of stakeholder-generated media (blogs, websites, podcasts, and
newsletters)
iii. Formal research using focus groups, observation, and surveys
VII. Contributions of a Stakeholder Perspective
A. Balancing stakeholder interests requires good judgment because broader societal interests can create
conflicts.
B. 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.
DEBATE ISSUE: TAKE A STAND
Have your students split into two teams. One team will argue for the first point, and the other will argue for
the opposing view. The purpose is to get students to realize that there are no easy answers to many of these
issues. This particular issue deals with whether a socially irresponsible product—in this case, a product that
15 Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate
Governance
promotes adultery—should be sold if it is legal. Students on the first team could argue that as long as the
product is legal and allows for freedom of choice, there should be no barriers to selling it. Students on the
other team could argue that the product causes emotional harm to people. Since it is a detriment to society, it
should be banned. The instructor might also want to bring up the hacking attack that ended up revealing the
real names of customers because Ashley Madison refused to shut down. It would be interesting for students
who believe Ashley Madison is morally wrong to discuss whether the hackers were also wrong in what they
did.
“RESOLVING ETHICAL BUSINESS CHALLENGES” NOTES
In this case, Demarco has to balance various stakeholder interests in his daily job while his employer is
asking him to exploit a vulnerable population. Xeon Natural Resources Incorporated hired Demarco right out
of college due to his heritage and strong language skills. Xeon plans to mine niobium in a Brazilian rainforest
and Demarco’s job, along with a small group of other employees, is to explain to the local indigenous tribes
how Xeon wants to strip mine their government issued land. The reader learns how manufacturers use
niobium and how much ($5 billion over 20 years) Xeon plans to make in profits.
Demarco soon learns his assigned indigenous tribe is one of the few left unaltered by western culture, but that
will soon change once Xeon begins strip mining. His boss agrees their culture will change forever but urges
him to think instead of the increase in the standard of living for the tribe. Demarco still feels uneasy and
believes the tribal elders are being steamrolled and do not understand the impact this mining will have on
their community. His boss says she too is worried about the interests of the various stakeholders, but the time
to move is now and the company is depending on these mining rights.
Instructors may ask students to name the various stakeholders and describe their interest in the project.
Which stakeholder has the largest interest in the project? This depends on which stakeholder the students
assign the greatest priority.
Demarco’s co-workers fear their jobs are in jeopardy. Now the tribal elders have raised concerns and have
called for meetings to obtain feedback from tribal members. While Xeon tries to mine using environmentally
friendly methods, there really is no such thing when it pertains to strip mining. Demarco is meeting with
tribal elders to discuss their concerns. He understands that some groups of stakeholders will suffer negative
effects no matter how the issue is decided. Demarco is not sure what he will tell the tribal elders when they
meet.