STAKEHOLDERS

DEFINE ETHICAL
ISSUES IN BUSINESS

Week 5
 Topics

1 2 3 4 5
Definition of Stakeholder A Stakeholder Social Four Levels of
Stakeholders Groups and Issues Orientation Responsibility and Social
Ethics Responsibility

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Business ethics issues, conflicts, and successes revolve around
relationships. Building effective relationships is considered one of the
more important areas of business today. A business exists because of
relationships between employees, customers, shareholders or
investors, suppliers, and managers who develop strategies to attain
success. In addition, an organization usually has a governing
authority often called a board of directors that provides oversight
and direction to make sure that the organization stays focused on
objectives in an ethical, legal, and socially acceptable manner. When
unethical acts are discovered in organizations, it is often found that in
most instances there is knowing cooperation or compliancy that
facilitates the acceptance and perpetuation of unethical conduct.
Therefore, relationships are not only associated with organizational
success but also with organizational misconduct.

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Stakeholders
Definition
• In a business context, customers, investors and shareholders, employees, suppliers, government agencies,
communities, and many others who have a “stake” or claim in some aspect of a company’s products, operations,
markets, industry, and outcomes are known as stakeholders.
• These groups are influenced by business, but they also have the ability to influence businesses; thus, the
relationship between companies and their stakeholders is a two-way street.

• Stakeholders provide resources that are more or less critical to a firm’s long-term success. These resources may be
both tangible and intangible.

• Shareholders, for example, supply capital;

• suppliers offer material resources or intangible knowledge;
• employees and managers grant expertise, leadership, and commitment;
• customers generate revenue and provide loyalty and positive word-of-mouth promotion;
• local communities provide infrastructure;
• and the media transmits positive corporate images.
• When individual stakeholders share similar expectations about desirable business conduct, they may
choose to establish or join formal communities that are dedicated to better defining and advocating
these values and expectations. Stakeholders’ ability to withdraw—or to threaten to withdraw—these
needed resources give them power over businesses.
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 Primary Stakeholders / Market Stakeholders

• Are those whose continued association is absolutely

necessary for a firm’s survival; these include employees,
customers, investors, and shareholders, as well as the
governments and communities that provide necessary
infrastructure.

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 Secondary Stakeholders / Non-Market Stakeholders

• They do not typically engage in transactions with a

company and thus are not essential for its survival; these
include the media, trade associations, and special
interest groups.

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 Internal Stakeholders
• Responsible for defining and evaluating the ongoing mission of a
business after its founding.
Board of Directors
• It broadly oversees decisions about the mission and direction of
the business, the products or services offered, the markets in
which the business will operate, and, salary and benefits for the
senior officers of the organization.
• The board also sets goals for income and profitability.

• The only employee who reports directly to the board of directors,

• He or she is charged with implementing the policies the board sets and
consulting with them on significant issues pertaining to the company, such as a
dramatic shift in products or services offered or discussions to acquire—or be
acquired by—another firm
Chief Executive Officer (CEO)
• The CEO hires executives to lead initiatives and carry out procedures in the
various functional areas of the business, such as finance, sales and marketing,
public relations, manufacturing, quality control, human resources (sometimes
called human capital), accounting, and legal compliance.
• Employees in these areas are internal stakeholders in the success of both their
division and the larger corporation.
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 External Stakeholders

Customers Suppliers Government Local

/ Clients Community

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1. Customers and Clients

• They need to be able to trust that products and services are

backed by the integrity of the company.
• They also provide reviews, positive or negative, and referrals.
Customers’ perceptions of the business matter, too. Those who
learn that a business is not treating employees fairly, for
instance, may reconsider their loyalty or even boycott the
business to try to influence change in the organization.

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2. Suppliers

 Suppliers and vendors form part of the external stakeholders.

 Their reputation relies on the quality of goods or materials of
production that they offer their companies of engagement.
 To be retained, they have to offer suitable quality materials,
deliver them on time and match the required quantity.

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3. Government
 The government is an external stakeholder in all businesses. In fact, it is considered
one of the major stakeholders since it collects taxes from these establishments in
the form of corporate income tax and income tax from the employees of the
company.
 The government also offers development opportunities for businesses. It improves
infrastructure, which is needed for the movement of resources from place to place,
funded by the taxes paid by these businesses.
 The government also ensures that these businesses do not harm the general public.
Companies are expected to adhere to several rules regarding the protection of the
environment and the general public.

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4. The Local Community

• Businesses are generally located around communities

that form the major external stakeholders.
• Therefore, they have a duty to ensure the safety, health,
and economic development of the communities around
them.

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 “
”
Richard Branson

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 Stakeholder Groups and Issues

Employees
 Compensation and benefits
 Occupational health and safety

 Product Safety and quality

Customers  Management of customer complaints
 Services to disabled customers

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 Stakeholder Groups and Issues

Community/Environmental  Public health and safety protection

Groups
 Conservation of energy and materials
 Donations and support of local organizations

Suppliers • Encouraging minority suppliers

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 A Stakeholder Orientation
The degree to which a firm understands and addresses stakeholder demands can be
referred to as a stakeholder orientation.

(1) The organization- ​

2. The distribution of (3) The
wide generation of this information organization’s
data about throughout the firm, responsiveness as a
stakeholder groups and whole to this
and assessment of intelligence.
the firm’s effects on
these groups.
​

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A Stakeholder Orientation
(1) The organization-wide generation of data about stakeholder groups and assessment of the firm’s effects on
these groups.

• For example, Ford Motor Company obtains input on social and environmental responsibility issues from company
representatives, suppliers, customers, and community leaders.

• Shell has an online discussion forum where website visitors are invited to express their opinions on the company’s
activities and their implications. Employees and managers can also generate this information informally as they
carry out their daily activities.

• For example, purchasing managers know about suppliers’ demands, public relations executives about the media,
legal counselors about the regulatory environment, financial executives about investors, sales representatives
about customers, and human resources advisers about employees.

• Finally, the company should evaluate its impact on the issues that are important to the various stakeholders it has
identified.

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A Stakeholder Orientation

(2) the distribution of this information throughout the firm, and

• This requires that the firm facilitate the communication of information about the
nature of relevant stakeholder communities, stakeholder issues, and the current
impact of the firm on these issues to all members of the organization.
• The dissemination of stakeholder intelligence can be organized formally through
activities such as newsletters and internal information forums.

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A Stakeholder Orientation

(3) the organization’s responsiveness as a whole to this intelligence.

• The responsiveness of the organization as a whole to stakeholder intelligence consists
of the initiatives that the firm adopts to ensure that it abides by or exceeds
stakeholder expectations and has a positive impact on stakeholder issues.
• Such activities are likely to be specific to a particular stakeholder group (for example,
family-friendly work schedules) or to a particular stakeholder issue (for example,
pollution reduction programs). These responsiveness processes typically involve the
participation of the concerned stakeholder groups.

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Social Responsibility and
Ethics
Social Responsibility is an
organization’s obligation to
maximize its positive
impact on stakeholders and
to minimize its negative
impact.
 PNC Financial Services Group, for
example, contributes $28 million annually in grants
and corporate sponsorships to arts, community
improvement, and educational causes. The
company also supports employees with flexible
work schedules and backup and holiday daycare, as
well as a free daycare center for new parents. For
its operations and technology center in Pittsburgh,
the company built the nation’s largest “green
building,” conforming to environmental guidelines
on site planning, energy efficiency, water
conservation, material conservation, and indoor
environmental quality. It also built several “green”
bank branches in New Jersey.

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• Another example of a company
being green is Whole Foods,
which installs solar panels on
many of its stores and buys
wind power credits to offset
more than 100 percents of its
non-renewable energy use.

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General Electric also pledged
to decrease pollution and double
research and development
spending on cleaner technologies.

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Wal-Mart has also joined the
growing ranks of green companies. It
has a number of environmentally
friendlier stores, which reduce
energy consumption and pollution.
Wal-Mart hopes to take what it
learns from the stores and use it in
all of the new stores that it builds.

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 Four Levels of Social Responsibility

1. Economic 4. Philanthropic
2. Legal 3. Ethical
responsibility responsibility
responsibility responsibility

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 1. Economic •
The responsibility to be profitable
•
The only way for a business to survive and support society
responsibility in the long term

•
Operating in a consistent way in accordance with
government requirements and the law
2. Legal •
Complying with different national and local regulations
•
Behaving as loyal state and company citizens
responsibility •
Meeting legal obligations
•
Supplying goods and services that meet the minimum legal
requirements

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 • Performing in a way that’s consistent with society’s
expectations
•
Recognizing and respecting new or evolving ethical and
moral standards that have been adopted by society
3. Ethical •
Preventing ethical standards from being infringed upon to
responsibility achieve objectives.
•
Being proper business citizens by doing what’s ethically or
morally expected.
•
Acknowledging that business integrity and ethical behavior
go beyond compliance with laws and regulation

4. Philanthropic • The philanthropic responsibility of businesses includes the

responsibility voluntary or discretionary activities and practices of businesses

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• Books/References:
BUSINESS ETHICS: Ethical Decison Making and Cases, 8th edition,
by O.C. Ferrell. John Fraedrich and Linda Ferrell

BUSINESS ETHICS AND CORPORATE GOVERNANCE 102 III 22/101 VII

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UTKAL UNIVERSITY
Directorate of Distance & Continuing Education
Bhubaneswar

BUSINESS ETHICS
STEPHEN M. BYARS, USC MARSHALL SCHOOL OF BUSINESS
KURT STANBERRY, UNIVERSITY OF HOUSTON-DOWNTOWN
OpenStax
Rice University
6100 Main Street MS-375
Houston, Texas 77005