Part One

An Overview of
Business Ethics
Chapter 2
Stakeholder
Relationships,
Social
Responsibility, And
Corporate
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Governance
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Learning Objectives
• Identify stakeholders’ roles in business ethics
• Define social responsibility
• Examine the relationship between stakeholder
orientation and social responsibility
• Delineate a stakeholder orientation in creating
corporate social responsibility

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Learning Objectives
• Explore the role of corporate governance in
structuring ethics and social responsibility in
business
• List the steps involved in implementing a
stakeholder perspective in social responsibility
and business ethics

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Stakeholders Define Ethical

Issues in Business
• In a business context, customers, 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.
• Businesses engage and influence these groups, but
these groups also have the ability to engage and
influence businesses; thus, the relationship between
companies and their stakeholders is a two-way
street.

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Stakeholders Define Ethical

Issues in Business
• Many firms experience conflicts with key stakeholders and
consequently damage their reputations and shareholder
confidence.
• To maintain the trust and confidence of its stakeholders,
CEOs and other top managers are expected to act in a
transparent and responsible manner. Executives who are
involved in misconduct create negative perceptions of their
companies.

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Stakeholders Define Ethical

Issues in Business
• Primary stakeholders
• Those whose continued association and resources
are absolutely necessary for a firm’s survival
(customers, shareholders, employees, suppliers,
government agencies and communities).
• Secondary stakeholders
• Those who are not typically engaged directly in
transactions with a company and are therefore not
essential to its survival (media, trade associations,
and special interest).

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Stakeholders Define Ethical

Issues in Business
• There are three approaches to stakeholder theory:
1. Normative: Identifies ethical guidelines that dictate
how firms should treat stakeholders.
2. Descriptive: Focuses on the firm’s behavior;
addresses how decisions are made for
stakeholder relationships.
3. Instrumental: Describes what happens if firms
behave in a particular way.

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Stakeholder Orientation
• The degree to which a firm understands and
addresses stakeholder demands can be referred to
as a stakeholder orientation.
• This orientation comprises three sets of activities:
1. Organization-wide generation of data about
stakeholder groups and assessment of the firm’s
effects on these groups;
2. Distribution of this information throughout the firm;
and
3. Responsiveness of the organization as a whole to
this information.

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Stakeholder Orientation
• Generating data about stakeholders begins with identifying
the stakeholders relevant to the firm. Relevant stakeholder
groups should be analyzed on the basis of the power each
enjoys, as well as by the ties between them and the
company.
• This information is derived from formal research, including
surveys, focus groups, Internet searches, and press reviews.
• For example, Shell has an online discussion forum that
invites website visitors to express their opinions on the
implications of the company’s activities. Employees and
managers also generate this information informally as they
carry out their daily activities.
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Stakeholder Orientation
• Given the variety of employees involved in the generation
of information about stake holders, it is essential the
information gathered be circulated throughout the firm.
• The dissemination of stakeholder intelligence can be
formally organized through newsletters and internal
information forums.
• The responsiveness of an organization as a whole to
stakeholder intelligence consists of the initiatives the firm
adopts to ensure it abides by or exceeds stakeholder
expectations and has a positive impact on stakeholder
issues.
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Social Responsibility and

Business Ethics
• Social responsibility: An organization’s obligation to
maximize its positive impact on stakeholders and
minimize its negative impact.
• For example:
• SABIC launched its Global Waste-Free Environment
Initiative comprising 44 programs across 16 countries
that aimed to sustain oceans and marine life, besides
tackling climate change and its impact.
• SC Johnson gives 5 percent of pre-tax profits to
corporate giving and is investing in wind turbines to
power some of its manufacturing plants.

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Social Responsibility and

Business Ethics
• Social responsibility can be viewed as a contract with
society, whereas business ethics involves carefully
thought-out rules or heuristics of business conduct
that guide decision making.
• Some economists believe if companies address
economic and legal issues they satisfy the demands
of society, and trying to anticipate and meet additional
needs would be almost impossible.

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Social Responsibility and

Business Ethics
• Four levels of social responsibility:
1. Economic: maximizing stakeholder wealth and/or
value
2. Legal: abiding by all laws and government
regulations
3. Ethical: following standards of acceptable
behavior as judged by stakeholders
4. Philanthropic:“giving back” to society

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Corporate Citizenship
• The extent to which businesses strategically meet the
economic, legal, ethical, and philanthropic
responsibilities placed on them by various stakeholders.
• Four interrelated dimensions:
1. Strong sustained economic performance.
2. Rigorous compliance.
3. Ethical actions beyond what the law requires.
4. Voluntary contributions that advance the reputation and
stakeholder commitment of the organization.

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Corporate Governance

• Corporate governance involves the development of

formal systems of accountability, oversight, and control.
• Strong corporate governance mechanisms remove the
opportunity for employees to make unethical decisions.
• study revealed a positive correlation with corporate
governance and corporate social responsibility
engagement. Additionally, firms with strong corporate
governance mechanisms that prompt them to disclose
their social responsibility initiatives can establish
legitimacy and trust among their stakeholders.

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Corporate Governance
• There are two major approaches to corporate
governance: the shareholder model and the
stakeholder model.
• The shareholder model of corporate governance is
founded in classic economic precepts, including the
goal of maximizing wealth for investors and owners.
• The shareholder model has been criticized for its
singular purpose and focus

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Corporate Governance
• The stakeholder model of corporate governance
adopts a broader view of the purpose of business:
although a company certainly has a responsibility for
economic success and viability to satisfy its
stockholders, it must also answer to other stakeholders,
including employees, suppliers, government regulators,
communities, and the special interest groups with which
it interacts.Investors and managers are distinct parties
with unique insights, goals, and values.

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Board of Director
Responsibilities
• boards of directors hold the ultimate
responsibility for their firms’ success or failure, as
well as the ethics of their actions.
• Duty of loyalty. All decisions should be in the best
interests of the corporation.
• most challenging ethical issues boards of
directors must deal with is compensation. When
considering executive pay raises, directors may
put their own self-interest above the interests of
shareholders.

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Board of Director
Responsibilities
• Organizational ethics. Receive training to
increase competency in ethics program
development.
• Audit committee. Address issues such as whistle-
blower claims, cyber security, and bribery.
• Accountability. Oversight for system of checks
and balances that limit employees’ and
managers’ opportunities to deviate from policies
and strategies aimed at preventing unethical and
illegal activities.

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Implementing a Stakeholder
Perspective
Step 1: Assessing the Corporate Culture
• Identify the organizational mission, values,
norms, and behavior likely to have implications
for social responsibility.
Step 2: Identifying Stakeholder Groups
• Recognize stakeholder needs, wants, and
desires.
Step 3: Identifying Stakeholder Issues

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Implementing a Stakeholder
Perspective
Step 4: Assessing Organizational Commitment to
Stakeholders and Social Responsibility
• Used to evaluate current practices and to select
concrete social responsibility initiatives.
• Social responsibility disclosures in company
annual reports are directly related to the quality
of corporate governance.

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Implementing a Stakeholder
Perspective
Step 5: Identifying Resources and Determining
Urgency
• Two main criteria: Level of financial and
organizational investments required by different
actions and urgency when prioritizing social
responsibility challenges.
• When the challenge under consideration is
viewed as significant and stakeholder pressures
on the issue can be expected, the challenge is
considered urgent.

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Implementing a Stakeholder
Perspective
Step 6: Gaining Stakeholder Feedback
• General assessment of a firm and its practices
can be obtained through satisfaction or
reputation surveys.
• To gauge stakeholders’ perceptions of a firm’s
contributions to specific issues, stakeholder-
generated media such as blogs, websites,
podcasts, and newsletters can be assessed.
• Formal research may be conducted using focus
groups, observation, and surveys.
© 2019 Cengage. All rights reserved.