The Corporation and Its Stakeholders

Chapter 1

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, All Rights Reserved.

Ch. 1: Key Learning Objectives

Understanding the relationship between business and society, and the ways in which they are part of an interactive system

Considering the purpose of the modern corporation Knowing what is a stakeholder, and who are a

corporation’s market and nonmarket stakeholders Conducting a stakeholder analysis, and

understanding how it can be used to build collaborative relationships

Analyzing the forces of change that continually reshape the business and society relationship

1 - 2

1 - 3

Introduction – The Business and Society Relationship

Business: Any organization that is engaged in making a product or providing a service for a profit

Society: Human beings and the social structures they collectively create

Business and Society are high interdependent

1 - 4

Introduction – The Business and Society Relationship

We borrow “General Systems Theory (GST)” from Biology to explain this relationship; first introduced in 1940’s Theory posits that organisms cannot be understood in

isolation, even though they have clear boundaries; they can only be understood in relationship to their surroundings

Adapted to management theory means that business firms are embedded in a broader social environment with which they constantly interact Business and society together form an interactive social

system (shown graphically in the following slide)

1 - 5

Business and Society: An Interactive System

Figure 1.1

1 - 6

Introduction –The Stakeholder Theory of the Firm

Two critical questions:1. What is the purpose of the modern corporation?

2. To whom, or what, should the firm be responsible?

Traditional view: “Ownership Theory of the Firm” Firm is the property of its owners Purpose is to maximize returns to shareholders Shareholders’ interests are paramount and take precedence

over all others

1 - 7

Introduction –Stakeholder Theory of the Firm

Contrasting view: “Stakeholder Theory of the Firm” Argues the corporation serves a broader purpose, to create

value for society Must make profit for owners to survive, however, creates

other kinds of value too Corporations have multiple obligations, all “stakeholder”

groups must be taken into account

1 - 8

Core Arguments forStakeholder Theory of the Firm

Descriptive More realistic description of how companies really work

Instrumental More effective corporate strategy

Normative Stakeholder management is the right thing to do

1 - 9

The Stakeholder Concept

A stakeholder refers to persons or groups that affect, or are affected by, an organization’s decisions, policies, and operations

A stake is an interest in – or claim to – a business enterprise

Businesses are embedded in networks that involve many groups with such a stake

1 - 10

The Stakeholder Concept A Tip for Understanding

Term stakeholder is NOT the same as stockholder

Words sound similar BUT are not the same

Stockholders are one of several kinds of stakeholders

1 - 11

Market and Nonmarket Stakeholders Stakeholder groups can be divided in to two categories:

1. Market stakeholders

2. Nonmarket stakeholders

Market stakeholders are those that engage in economic transactions with the company as it carries out its primary purpose of providing society with goods and services Sometimes referred to as primary stakeholders

1 - 12

Stakeholder “Maps”

Drawing “maps” of stakeholder systems, with the business firm in the center, is one way to visualize the relationship between the firm and its stakeholders

Each relationship is based on a unique transaction or two-way exchange

1 - 13

Figure 1.2 Market Stakeholder Map

1 - 14

Nonmarket Stakeholders

Nonmarket stakeholders are people or groups who—although they do not engage in direct economic exchange with the firm—are affected by or can affect its actions Sometimes called secondary stakeholders

1 - 15

Figure 1.3 Nonmarket Stakeholder Map

1 - 16

Issues: Market and Nonmarket Stakeholders Should government be a nonmarket or market

stakeholder? Normally governments do not have direct exchange with

businesses, but in some industries there is such an exchange

Should the natural environment be a nonmarket stakeholder? Not a social group, generally considered to be represented

by activist groups

Should managers be classified as stakeholders? Addressed in Exhibit 1.A on next slide

1 - 17

Are Managers Stakeholders?

On one hand, the answer is “yes.” Like other stakeholders, managers are impacted by the firm’s decisions. As employees of the firm, managers receive compensation – often very generous compensation. Their managerial roles confer opportunities for professional advancement, social status, and power over others. Managers benefit from the company’s success and are hurt by its failure. For these reasons, they might properly be classified as employees on the perimeter of the stakeholder wheel, as shown in Figure 1.2.

On the other hand, top executives are agents of the firm and are responsible for acting on its behalf. In the stakeholder theory of the firm, their role is to integrate stakeholder interests, rather than to promote their own more narrow, selfish goals. For these reasons, they might properly be classified in the center of the stakeholder wheel, as representatives of the firm.

Management theory has long recognized that these two roles of managers potentially conflict. The main job of executives is to act for the company, but all to often they act primarily for themselves.

Exhibit 1.Aexcerpt

1 - 18

Issues: Market and Nonmarket Stakeholders

Are stakeholder maps the best way to visualize the business/stakeholder relationship? Network may be more appropriate depiction, given

relationships often exist among stakeholder themselves See Figure 1.4 on next slide

1 - 19

A Stakeholder NetworkFigure 1.4

1 - 20

Stakeholder Analysis

It is part of every manager’s job

Process whereby identify relevant stakeholders and analyze their interest and power

Asks 4 Questions:1. Who are the relevant stakeholders?2. What are the interests of each stakeholder?3. What is the power of each stakeholder?4. How/what are coalitions likely to form?

1 - 21

Stakeholder Analysis – Question 1Who are the Relevant Stakeholders?

Answer this question by drawing market and nonmarket stakeholder maps

Use Figures 1.2 and 1.3 as guides

Recognize that not all of these groups are relevant to every situation; examples: Some businesses sell directly to the public and will not have retailers A certain stakeholder may not be relevant to a particular decision/action

1 - 22

Stakeholder Analysis – Question 2 What are the Interests of each Stakeholder?

Analyzing stakeholder interests includes addressing: What are the groups’ concerns?, and What does the group want/expect from their relationship with the firm?

Examples: Stockholders have an ownership interest, they expect to receive dividends and capital

appreciation Customers are interested in gaining fair value and quality in goods and services they

purchase Public interest groups advance broad social interests

1 - 23

1 - 24

Exhibit 1.Bcont.

Nonmarket Stakeholders: Nature of Interest and Power

1 - 25

Stakeholder Analysis – Question 3What is the Power of each Stakeholder?

Stakeholder power is the ability of a group to use resources to make an event happen or to secure a desired outcome

There are 4 types of stakeholder power:1. Voting power2. Economic power3. Political power4. Legal power

1 - 26

Stakeholder Analysis – Question 3What is the Power of each Stakeholder?

Alternative concept called stakeholder salience, meaning something that stands out from its background

Stakeholder salience is determined by each group’s power, legitimacy, and urgency attributes

The greater the stakeholder group’s salience, the more attention a manager should pay to that group Groups that have all 3 attributes are called definitive

stakeholders Groups that have 2 attributes are called expectant

stakeholders

1 - 27

Stakeholder Analysis – Question 4How are Stakeholder Coalitions Likely to Form?

Stakeholder groups often have common interests and will form temporary alliances to pursue these common interests

Coalitions are very dynamic (can change at any time) Coalitions are increasing international Internet has enabled coalitions to form quickly, across political

boundaries International alliances, coupled with media interest, can be a

very powerful strategic force for companies

1 - 28

Stakeholder Engagement

The action component following stakeholder analysis: Once you know who your stakeholders are, their interests, power, and any

coalitions, do you take action to engage with these groups?

Companies tend to follow a progression of stages in stakeholder engagement: Inactive (lowest level) to interactive (highest level) continuum shown on next slide The cases throughout the text demonstrate companies at different points on the

continuum

1 - 29

The Stakeholder Engagement Model Inactive

Companies ignore stakeholder concerns

Reactive Companies act only when forced to do so

Proactive Companies try to anticipate stakeholder concerns

Interactive Companies actively engage with stakeholders in an ongoing

relationship of mutual respect, openness, and trust

1 - 30

Stakeholder Dialogue Tool used by firms at higher stages of stakeholder

engagement Involves face-to-face meetings between corporate

representatives and representatives of their stakeholder groups to discuss issues of mutual concern

Steps in dialogue1. Each group describes their core issues & concerns2. Together groups reach common definition of problem/s3. Together groups invent innovative solutions that involve

mutual gain4. Together establish procedures for implementing solutions

1 - 31

Stakeholder Engagement and Dialogue Benefits

Helps companies learn about societal expectations

Generates creative solutions to problems Helps win stakeholder support for implementing

solutions Can neutralize critics Can improve corporate reputation for taking

constructive action

1 - 32

Conclusion – Chapter 1Core Arguments in Your Text

1. The external environment of business is dynamic and ever changing Six such forces identified in Figure 1.5 on next slide

2. A successful business must meet both its economic and

social objectives

3. The purpose of the firm is not simply to make a profit, but to create value for all its stakeholders

1 - 33

Figure 1.5 Forces that Shape the Business and Society Relationship