Chapter 01 - The Corporation and its Stakeholders

CHAPTER 1
THE CORPORATION AND ITS
STAKEHOLDERS

INTRODUCTION

Business corporations have complex relationships with many individuals and

organizations in society. The term stakeholder refers to all those that affect, or are
affected by, the actions of the firm. How corporations manage their interactions with
stakeholders powerfully contributes to business success or failure. Building positive and
mutually beneficial relationships across organizational boundaries is a growing part of
management’s role. In a world of faced-paced globalization, shifting public expectations
and government policies, growing ecological concerns, and new technologies, managers
face the difficult challenge of achieving economic results while simultaneously creating
value for all of their diverse stakeholders.

PREVIEW CASES

Wal-Mart

Teaching Tip: Preview Case Video *

The Wal-Mart example that opens the chapter illustrates the
challenges of managing successfully in a complex global network of
stakeholders. It may also be used to illustrate how different
stakeholders may perceive a corporation differently, depending on
their vantage point. Instructors that wish to explore this theme more
fully may wish to use material from the several films about the
company. “Wal-Mart: The High Cost of Low Prices”
(www.walmartmovie.com) takes a highly critical stance. “Why Wal-
Mart Works and Why That Makes Some People Crazy”
(www.hannoverhouse.com) was made by the company to respond to
its critics. “The Age of Wal-Mart: Inside America’s Most Powerful
Company” (http://cnbc.burrelles.com), made for CNBC, tried to take
a balanced view.
* The video segments are from the Public Broadcasting Services’s “News Hour with
Jim Lehrer” and are available on the Instructor’s Resource Manual DVD that
accompanies the textbook, available upon request from the publisher.

CHAPTER OUTLINE
I. BUSINESS AND SOCIETY

A. A Systems Perspective
II. THE STAKEHOLDER THEORY OF THE FIRM

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A. The Stakeholder Concept

B. Market and Nonmarket Stakeholders

III. STAKEHOLDER ANALYSIS AND ENGAGEMENT

A. Stakeholder Interests and Power

B. Stakeholder Coalitions

C. Stakeholder Engagement

Teaching Tip: Forces Shaping Business-Society Relations

“The Clayoquot Controversy: A Stakeholder Dialogue Simulation” by

Anne T. Lawrence and Ann Svendsen, is designed to teach the skills of
stakeholder engagement and dialogue. Through an experiential exercise,
students are taught to find common ground when facing complex
conflicts involving business firms and their stakeholders. The particular
situation involves a leading forest products company in Canada,
MacMillan Bloedel. During the 1990s, this company was involved in a
difficult and protracted dispute with several of its stakeholders, including
environmentalists, local communities, native peoples, labor unions, and
government agencies. At issue was the company’s logging practices in
Clayoquot Sound on the western side of Vancouver Island, located off the
coast of British Columbia. At the time, Clayoquot Sound was home to
one of the largest remaining stands of old-growth, temperate rainforest in
the world. The case situation is presented as it appeared to the parties in
1998. The controversy is left deliberately unresolved, and student teams
must engage in a simulated stakeholder dialogue process in an effort to
find common ground. An epilogue in the instructor’s manual provides
information about how the controversy played out in real life. The time
allotted to the exercise may range from two-and-a-half to eight hours. A
full instructor’s manual is available. The case materials are provided on a
PC-compatible CD-ROM, but may also be delivered to students over an
institutional Intranet. For more information or to order a complimentary
examination copy of the CD-ROM, please go to:
www.cim.sfu.ca/clayoquot.

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IV. THE DYNAMIC ENVIRONMENT OF BUSINESS

A. Creating Value in a Dynamic Environment

GETTING STARTED

KEY LEARNING OBJECTIVES

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

Business firms are organizations that are engaged in making a product or providing a
service for a profit. Society, in its broadest sense, refers to human beings and to the social
structures they collectively create. Business is part of society and engages in ongoing
exchanges with its external environment. Together, business and society together form an
interactive social system in which each profoundly influences the other.

2. Considering the purpose of the modern corporation.

According to the stakeholder theory of the firm, the purpose of the modern corporation is
to create value for all of its stakeholders. To survive, all companies must make a profit
for their owners. However, they also create many other kinds of value as well for their
employees, customers, communities, and others. For both practical and ethical reasons,
corporations must take all stakeholders’ interests into account.

3. Knowing what is a stakeholder, and who are a corporation’s market and non-
market stakeholders.

Every business firm has economic and social relationships with others in society. Some
are intended, some unintended; some are positive, others negative. Stakeholders are all
those who affect, or are affected by, the actions of the firm. Market stakeholders are those
that engage in economic transactions with the company; non-market stakeholders are
those who—although they do not have engage in direct economic exchange with the firm
—are nonetheless affected by its actions.

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4. Conducting a stakeholder analysis, and understanding how it can be used to build

collaborative relationships.

A stakeholder analysis is an analytic process by which managers identify relevant

stakeholders and understand their interests and power. Stakeholders can exercise their
economic, political, and other power in ways that benefit or challenge the organization.
Stakeholders may also act independently or create coalitions to influence the company.
Managers must learn how to engage interactively with stakeholders to create mutually
beneficial outcomes. Positive relationships with stakeholders can create value.

5. Analyzing the forces of change that continually reshape the business and society
relationship.
A number of broad forces shape the relationship between business and society. These
include changing societal and ethical expectations; a redefinition of the role of
government; a dynamic global economy; emerging ecological and natural resource
concerns; and the transformational role of technology. To deal effectively with these
changes, corporate strategy must address the expectations of all of the company’s
stakeholders.
KEY TERMS AND CONCEPTS USED IN THE CHAPTER

business, 4

general systems theory, 5

interactive social system, 5

market stakeholders, 8

nonmarket stakeholders, 9

ownership theory of the firm, 6

society, 4

stakeholder (market and non-market), 7

stakeholder analysis, 11

stakeholder coalitions, 13

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stakeholder dialogue, 17

stakeholder engagement, 17

stakeholder interests, 11

stakeholder power, 12

stakeholder theory of the firm, 6

INTERNET RESOURCES

www.businessweek.com Business Week–broad range of business topics

www.economist.com The Economist–strong international coverage
www.fortune.com Fortune–useful profiles of large corporations
www.wsj.com Wall Street Journal—business and financial news

DISCUSSION CASE

CISCO IN THE COYOTE VALLEY

1. What is Cisco’s objective?

Cisco’s objective is to build a large new office park in an undeveloped area near
the southern border of the city of San Jose to accommodate its growing workforce. It has
an interest in remaining in the San Jose metropolitan area to retain its existing employees
and to be able to continue to recruit from the area’s highly skilled workforce.

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2. Who are the relevant market and nonmarket stakeholders in this situation?
The term stakeholder refers to persons and groups that affect, or are affected by,
an organization’s decisions, policies, and operations. Market stakeholders are those that
engage in economic transactions with the company. Nonmarket stakeholders, by
contrast, are people and groups who—although they do not engage in direct economic
exchange with the firm—are affected by or can affect its actions. The relevant market
stakeholders in this situation are Cisco employees. The relevant nonmarket stakeholders
are the city of San Jose, the communities south of San Jose, labor unions, environmental
activists, and local businesses (represented by the Chamber of Commerce).
à After listing these on the board, the instructor may wish to bring out two points:
 Not all stakeholders of Cisco are relevant to this particular situation. For example,
customers and stockholders are both important market stakeholders, but where Cisco
locates its offices is probably of little significance to them so long as prices, and the
value of the stock, are not affected.
 The classification “nonmarket” does not imply less important. In this situation,
nonmarket stakeholders are critical whether or not Cisco can meet its objectives.
Both environmentalists and community groups are able to block the company, at least
temporarily, by filing lawsuits.

3. What are their interests? Please indicate if each stakeholder is in favor of, or
opposed to, the Coyote Valley development project, and why.
Employees – to have adequate office space; to stay in the area; to have affordable
housing and social services. IN FAVOR.
Local businesses – to create opportunities for businesses that benefit from Cisco’s
presence in the community. IN FAVOR.
Labor unions – to create jobs in the construction of the office park. IN FAVOR.
City of San Jose – to increase employment, economic development, and tax revenue in
the city. IN FAVOR.
Communities to the south (Hollister, Watsonville, Salinas) – to avoid added demands on
social services (schools, police, fire, road construction) without compensation; to
maintain affordable housing and a good quality of life in their own jurisdictions.
OPPOSED.
Environmentalists – to preserve open space, wildlife habitat, and clean air; to promote
the use of mass transit instead of automobiles. OPPOSED.

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4. What would be the advantages and disadvantages to the company of working

collaboratively with its stakeholders to resolve this dispute?
The stakeholders who oppose Cisco (environmentalists, southern communities)
have the power to block Cisco’s objectives through litigation, at least in the short term.
Therefore, it is to Cisco’s advantage to attempt to work with them collaboratively to
address their concerns outside the courts. This might allow Cisco to move forward more
quickly with its office development, and would have the side benefit of enhancing the
company’s reputation as a good corporate citizen. The disadvantage of this approach is
that it might require Cisco to make expensive concessions that would not, ultimately, be
required by the courts should the company pursue a more adversarial strategy.

5. What possible solutions to this dispute do you think might emerge from dialogue
between Cisco Systems and its stakeholders?
Students should be asked to brainstorm creative solutions to the issues posed in
this dispute. These might include:
 Scaling back the office park to more modest proportions;
 Including some affordable housing in the development, so employees would not have
to find housing elsewhere;
 Additional provisions for preservation of open space at the site;
 An agreement for the company to purchase open space elsewhere as an “offset” to its
development in the Coyote Valley, which could be set aside as habitat or for
recreational use;
 An agreement to pay some subsidies to southern communities for road development
or provision of services;
 A plan for Cisco to provide car-pooling incentives, shuttle bus service to mass transit
hubs, or other plans to reduce single-vehicle commuting to the Coyote Valley site.

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
 After generating such a list, the instructor may wish to point out that students need
not select among these options; the take-away point is simply that a process of
dialogue can produce solutions that may be able simultaneously to meet multiple
stakeholder interests in creative ways.
Epilogue
In October 2001, a judge rejected the lawsuits that had sought to block Cisco’s plans to
build in the Coyote Valley, clearing a major obstacle to the development. However, a
sharp downturn in the market for Cisco’s products had in the meantime changed the
company’s strategic priorities. Instead of expanding, Cisco was in the process of
downsizing its work force, and it no longer needed a new campus. Just days after the
judge’s decision, Cisco announced that it had indefinitely suspended its plans to expand.
“We still believe Coyote Valley is a great location,” a company spokesperson said. “But
as the economy slowed, we re-evaluated our space needs and decided to make some
strategic adjustments.” As of 2006, the Coyote Valley property remains undeveloped,
and the fundamental dispute remains unresolved.

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