BUSINESS ETHICS

Lecture 7

Ethics and Stakeholders

Learning Objectives:

• Understand the meaning of stakeholder

• Define primary and secondary stakeholders
• Understand Stakeholder Management Process
• Review the Stakeholder Engagement Framework
• Understand the importance of Stakeholder
Engagement for effective business ethics
Learning Outcomes:

At the end of this unit, students should be

able:
• to understand the organization’s role in
building and enhancing relationship with
its stakeholders under the concept of
business ethics.
Stakeholder Definition

• Any group or individual that can affect, or is

affected by, the performance of the organisation”
(Freeman,1987)
• “Individuals or groups who depend on the
organisation to fulfil their own goals and on
whom, in turn, the organisation depends”
(Johnson & Scholes,1999)
• “The firm is a system of stakeholders operating
within the larger system of the host society that
provides the necessary legal and market
infrastructure for the firms activities” (Clarkson,
1994)
Stakeholder theory

• The stakeholder theory is a theory of

organizational management and business ethics
that addresses morals and values in managing
an organization.
• It identifies and models the groups which are
stakeholders of a corporation , and both
describes and recommends methods by which
management can give due regard to the
interests of those groups. (R. Edward Freeman
:Strategic Management: A Stakeholder
Approach)
Stakeholder Theory Development

• Berle
• all the powers given to a corporation are to be
used to create benefits to the interests of the
shareholders
• Argued that managers within a corporation
should consider themselves trustees and
guardians of the investments made by the
shareholders
Stakeholder Theory Development

• Dodd:
• Not only should the interests of the shareholders be
considered, but corporations also need to recognize
their obligations to the community, to their workers,
and to the consumers
• Argued that corporations are allowed to become legal
entities because they serve a purpose to the
community instead of just providing opportunities for
financial gain by its owners.
Stakeholder Theory Development

• Friedman
• “The Social Responsibility of Business is to Increase
its Profits”
• Argued that in a free market system in which people
are allowed to own property, the executives of the
company need to be considered as the employees of
the shareholders
• Argued that the only social responsibility that a
manager has is to ensure that the company’s
resources are optimized to enhance the level of
profitability of the firm
Stakeholder Theory Development

• Freeman
• Believed a stakeholder was any individual or
group that can impact or be impacted by the
actions of the firm
• Definition encompasses any individual or
group that has a vested interest in the
operations of the firm
Stakeholder Theory (Donaldson and
Preston, 1995)

• Takes account of the various needs of the

different interested parties
• Stakeholder power is key
• Stakeholders get traded off against each other
• Stakeholder interests are not always consistent
• Stakeholders are rewarded in different ways
• Stakeholders are not affected in the same way
by every strategic decision
Stakeholder theory (Others)

• Mitchell, et al. – The Descriptive theory of stakeholder

salience is a typology of stakeholders based on the
attributes of power , legitimacy (socially accepted and
expected structures or behaviors), and urgency (time
sensitivity or criticality of the stakeholder's claims).
Lessons to be learned from Stakeholder
theory – from literature
1. Corporations are facing increasing pressures
to respond to their stakeholders
2. Corporations have a legal basis for responding
to a wide range of stakeholders
3. Corporations are being led by executives no
longer guided by the principles of their
professions
4. Corporations respond to powerful stakeholders
with legitimate, urgent claims
5. Corporations can improve the bottom line by
responding to stakeholder concerns
 WHY CONSIDER STAKEHOLDERS?

• Failure to account for stakeholders often leads to poor

performance, failure or even disaster….
• Nutt (2002) analysis of 400 strategic decisions - half
“failed” because didn’t attend to interests and information
held by key stakeholders.
• Increased globalization, interconnected nature of the
world (Bryson and Bromiley, 1993)
• Increasing tendency to make organisations more visibly
accountable to shareholders and also the wider
community.
• Emphasis on markets, participation, flexibility, and
deregulation (Peters 1996).
• As entrepreneurial ventures grow they are likely to have
increasing numbers of stakeholders who can impact
performance
Categories of Stakeholders

• Primary stakeholders - people or groups that

are directly affected, either positively or
negatively, by an effort or the actions of an
organisation. A firm cannot exist without their
continuing participation
• Secondary stakeholders - people or groups
that are indirectly affected, either positively or
negatively, by an effort or the actions of an
organisation. But they are not engaged in
transactions with the corporation or essential for
its survival.
 Primary Secondary
Stakeholders: Stakeholders:

Shareholders Media
Employees Special Interest Groups
Customers Trade Associations
Suppliers Pressure Groups/NGOs
Governments Competitors
Local Communities
Organizations’ Stakeholders
The Stakeholder Interaction Model
Stakeholders of Wal-Mart, the World’s
Largest Retailer
Stakeholders of Coca Cola, the World’s
Largest Beverage Company
In whose interest:
The Traditional Answer

• The shareholders/owners
• Managers have a fiduciary relationship
to the owners to look after their interests
• Legal constraints on this duty

• Problems with this understanding of

single view of responsibility
A shareholder mission statement

From Coca-Cola:
• We exist to create value for our share owners on a
long term basis by building a business that
enhances the Coca-Cola company’s trademark.
This is also our ultimate commitment.

From Cadbury Schweppes:

• Our task is to build upon our tradition of quality
and value and to provide brands, products,
financial results and management performance
that meet the interest of our shareholders.
Coca cola’s mission statement changed
to:

• To refresh the world...

• To inspire moments of optimism and
happiness...
• To create value and make a difference
In whose interest:
the stake holder alternative

• Stockholders are one group among many.

• Stakeholders are those groups that have a
“stake in” or claim on the resources /
activities of the company.
• Each has a right to be treated as a end
itself not just means for enrichment of the
stockholders.
A stakeholder mission statement
• From Southwest Airlines:
• dedication to the highest quality of Customer
Service delivered with a sense of warmth,
friendliness, individual pride, and Company Spirit
• From Microsoft:
“To enable people and businesses throughout
the world to realize their full potential”
• From Starbucks:
“to inspire and nurture the human spirit – one
person, one cup and one neighborhood at a time”
Stakes and expectations:Employees

• Their stake:
• jobs, livelihood, career, human capital
investments
• Their expectation:
• decent wages, security, benefits,
working conditions and meaningful work
Stakes and expectations: Customers

• Their stake:
• need for / purchases of products and
services
• Their expectations:
• honesty, quality goods, fair pricing
Stakes and expectations: Suppliers

• Their stake:
• income from goods and services

• Their expectation:
• fairness, mutual prosperity, honesty

• Example: Intel’s Supplier Ethics Expectations:

• The supplier must be in strict compliance with the
law
• The supplier must have respect for competition
• The supplier must not have any actual or perceived
conflicts of interest with any other party
Stakes and expectations: the community

• Their stake:
• the environment, taxes, payroll,
infrastructure improvements

• Their expectations:
• good citizenship, open partnership
Stakeholders: Government

• Derives from compliance issues

• Government has the authority to ‘punish’

the firm through fines and possible prison
sentences for employees
 Stakeholder Management Approach
• The stakeholder management approach is a way of
understanding the effects of environmental forces and
groups on specific issues that affect real-time
stakeholders and their welfare.

• This approach attempts to enable individuals and groups

to articulate collaborative win-win strategies: based on:
• Identifying and prioritizing issues, threats, or opportunities
• Mapping who the stakeholders are
• Identifying their stakes, interests, and power sources
• Showing who the members of coalitions are or may become
• Showing what each stakeholder’s ethics are and should be
• Developing collaborative strategies and dialogue from a
higher ground perspective to move plans and interactions
to the desired closure for all parties
Stakeholder Management

• identifying conflicts/potential conflicts, gaps,

contradictions or incompatibilities between
stakeholder requirements, so that a
reconciliation strategy can be planned.

• ensuring ongoing communication, two-way

information access, monitor changes in
engagement, attitude and/or influence
Stakeholder Orientation

• The degree to which a firm understands

and addresses stakeholder demands
• Three activities:
• Generation of data about
stakeholder groups
• Distribution of the information
throughout the firm
• Organization’s responsiveness
to this intelligence
STAKEHOLDER MAPPING I

• To assist entrepreneurs/managers to
understand the socio/economic/political
context
• To identify potential strategies
• To identify the orientation of different
stakeholders
• To establish socio/economic and
political priorities and trends
STAKEHOLDER MAPPING II
• Used in relation to a particular strategic
development
• e.g. launch/withdrawal of a product/service
• Identifies the relationship that needs to be
established with the various groups of
stakeholders
• Identifies key blockers & facilitators of change
• Underlines the importance of ethical issues
for managers
• Relates power and interest
 STAKEHOLDER MAPPING – THE MATRIX

Level of interest

Low High

Low A (Public) B (Employees)

Power Minimal effort Keep informed

High C (Government) D (Customers)

Keep satisfied Key players
Stakeholder Engagement
Stakeholders have the power to determine the
“license to operate” of the organization.
Benefits of effective stakeholder engagement in
the aspect of business ethics

• Enabling informed decision making by generating business

intelligence and relationship.
• Reduce business risks.
• Engagement can build stakeholder trust in the organisation
and enhance social license to operate.
• Business decision with the consideration of key
stakeholders, enabling business operates ethically.
• Avoid wastage of resources and improve
social responsibilities.