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
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 their company cars and if the employee needs to travel to
the hospital, he can use his own car. The instructor may want to ask students their opinion on how
appropriate the punishment is to the ethics code violated. 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
stakeholder framework helps identify the internal stakeholders such as employees, boards of
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,
descriptive and instrumental.
a. The normative approach identifies ethical guidelines that dictate how firms ought to threat
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,
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
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
astakeholder 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.
2. A stakeholder orientation comprises three sets of activities.
a. The organization-wide generation of data about stakeholder groups and assessment of the
II. Social Responsibility and Ethics
A. The concepts of ethics and social responsibility are often used interchangeably, although each has a
distinct meaning.
10 Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance
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
III. Issues in Social Responsibility
A. 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.
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
safety
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. Because sustainability is
a major ethical issues, we will cover this topic in more detail in chapter 12.
Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance 11
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
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.
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. 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.
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. 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
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.
12 Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance
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
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.
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.
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. 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.
Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance 13
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
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.
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
“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.
14 Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance
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