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
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?
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
Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance 9
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,
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.
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
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
2. A stakeholder orientation comprises three sets of activities.
a. The organization-wide generation of data about stakeholder groups and assessment of the
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.
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
10 Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance
II. Social Responsibility and Ethics
A. The concepts of ethics and social responsibility are often used interchangeably, although each has a
distinct meaning.
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
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.
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
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, disclosure, financial practices, and product
Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance 11
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
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.
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
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
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.
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
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.
2. Oversight provides a system of checks and balances that limit employees’ and managers’
3. Control is the process of auditing and improving organizational decisions and actions.
4. A clear delineation of accountability helps employees, customers, investors, government
5. Corporate governance establishes fundamental systems and processes for preventing and
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.
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’
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.
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
Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance 13
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.
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
2. Step 2: Identifying Stakeholder Groups
3. Step 3: Identifying Stakeholder Issues
4. Step 4: Assessing Organizational Commitment to Social Responsibility
5. Step 5: Identifying Resources and Determining Urgency
a. The prioritization of stakeholders and issues, along with the assessment of past
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
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
14 Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance
“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
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