2/19/2019

BUSINESS ETHICS AND CORPORATE

SOCIAL RESPONSIBILITY

Lecture 1
Vo Thi Mai Ha
Faculty of Business Administration
University of Economics, Hue University
1 Topic 1: Corporation and stakeholders

Topic 1:
Corporation and its stakeholders

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• In this topic:
– Business and society
– The stakeholder theory of the firm
• Stakeholder concept
• Different kinds of stakeholders
– Stakeholder analysis

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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

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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

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• Video: “Wal- Mart Nation”

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Wal-Mart
• In 2006 – largest private employer worldwide – 1.3 million employees in the US –
“template for 21st century capitalism”
– 38,000 facilities & annual sales of $316 billion
• Very popular with customers – one stop shop under one roof!
– 175 million shopped at Wal-Mart each week
– Shareholders did well and it was a major customer to 61,000
suppliers WW – MNEs to SMEs!
• Criticisms:
– 2004: city council in Inglewood, California – mostly African-American in Los
Angeles voted “no” to a proposed Wal-Mart mega store on a 60 acre lot near
the Hollywood racetrack
• Impact small business, traffic, safety and wages
– 2004: Federal judge ruled that Wal-Mart discriminated against women – paid
them less than men, with fewer promotions, taking longer – could cost
millions!
– 2005: critical documentary released: showed Wal-Mart – has such a bad
employer that employees had to apply for public assistance because wages
were as low as $10 per hour
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Wal-Mart
• Their response:
– Realised they could no longer ignore the community
they operated in
• PR machine:
– Increased health insurance to workers
– Offered grants to small business
– Donated to wildlife habitat restoration
– Set up a rapid-response team at the New York Times to respond
to public criticism
• Accepted that other people, groups, organizations,
customers, suppliers, employees, stockholders, creditors,
business partners and local communities all had a “stake” in
Wal-Mart

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• FYI, other videos

– “Wal-Mart Nation”, long version
– “Why Wal-Mart Works and Why That makes Some
People Crazy”
– “Is Wal-Mart Good for America?”, a Frontline
documentary (www.pbs.org)

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Business and society relationship

• “General Systems Theory (GST)” from Biology, 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, it 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

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Business and Society:

An Interactive System
Figure 1.1

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Stakeholder Theory
• 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

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Stakeholder Theory

• 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

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Core Arguments for

Stakeholder 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

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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
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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

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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

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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

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Market Stakeholder Map

Figure 1.2

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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

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Nonmarket Stakeholder Map

Fig. 1.3

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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?

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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.

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Are Managers Stakeholders?

 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.

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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

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A Stakeholder Network
Figure 1.4

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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?

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Stakeholder Analysis – Question 1

Who 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

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Stakeholder Analysis – Question 2

What are the Interests of each Stakeholder?

• Analyzing stakeholder interests includes addressing:

– What are the group’s 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 the goods and services they purchase
– Public interest groups advance broad social interests

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Exhibit 1.B Nonmarket Stakeholders: Nature of

cont. Interest and Power

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Stakeholder Analysis – Question 3

What 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 power
2. Economic power
3. Political power
4. Legal power

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Stakeholder Analysis – Question 3

What 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

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Stakeholder Analysis – Question 4

How 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 increasingly 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

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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

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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
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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 dialogue
1. Each group describes their core issues & concerns
2. Together groups reach common definition of problem/s
3. Together groups invent innovative solutions that involve
mutual gain
4. Together groups establish procedures for implementing
solutions

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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

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Conclusion – Topic 1
Core Arguments
1. The external environment of business is
dynamic and ever changing
– Six such forces identified in Figure 1.5

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

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Forces that Shape the

Business and Society Relationship
Figure 1.5

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Sources

• Slide content is mainly based on

– Anne T. Lawrence and James Weber, Business and Society: Stakeholde
rs, Ethics, Public Policy, 14th edition, 2014, New York: McGraw‐Hill,
Lecture series by Adelaide University

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