1. To discuss an organization’s stakeholder groups, including shareholders, employees, local communities, and unions. (2.1) 2. To examine difficulties in meeting stakeholders’ goals: competing goals, allocating rewards, and long-term effectiveness. (2.2) 3. To review and examine how top management is structured, and the role of authority in making decisions (2.3). 4. To understand agency theory, and how it explains the relationship between top management and the board of directors (2.3). 5. To understand the role that ethics plays in top management (2.4). 6. To examine how to create an ethical organization (2.4).

This chapter examines the role that managers and stakeholders play in the organization. Every company has two main groups of stakeholders: (1) inside stakeholders—shareholders, managers, and the workforce; and (2) outside stakeholders—customers, suppliers, the government, trade unions, local communities, and the general public. Although stakeholders have competing interests, an organization must minimally satisfy them all. Satisfying stakeholders creates problems due to competing goals, allocating rewards, and choosing a time frame to measure effectiveness. Difficulties arise in measuring organizational effectiveness even if stakeholders have shared goals. An organization must select the best way to achieve goals. Agency theory explains the relationship between top management and the board of directors. Ethics and ethical behavior is discussed, including the sources of ethics, moral hazard, and how to create an ethical organization.

CHAPTER OUTLINE 2.1 Organizational Stakeholders

Inside stakeholders are closest to an organization and have a direct claim on organizational resources. Q: Name some inside stakeholder groups. A. Inside stakeholders include shareholders, managers, and employees. Shareholders are company owners who buy stock to earn dividends and stock appreciation. They can withdraw support if inducements fall below contributions.


Organizations create value for stakeholders—those with an interest, claim, or stake in the organization. Stakeholders are motivated to participate in an organization if they receive inducements or rewards that exceed their contributions. Organizational stakeholders include inside and outside stakeholders. (Table 2.1)

It sends birthday cards to frequent fliers. and gets feedback from customers on service. The money paid for a product is a customer’s contribution to the organization. they feel motivated to treat customers (another stakeholder group) well. MANAGERS. Calpers watches managers and boards to guard against the pursuit of personal interests at shareholders’ expense. Organizational Insight 2. suppliers. Top managers are indirectly appointed by shareholders through a board of directors. Outside stakeholders include customers. Motivation is related to the rewards and punishments that influence performance. and the company loses a stakeholder. the government. How do large investors monitor managers? A. How does Southwest satisfy stakeholders? A. Q. manages $65 billion for over 1. local communities.1: The Increasing Power of Institutional Investors Large institutional investors have increased the power of shareholders in dealing with management. they own 13 percent of the stock. Q. They block provisions that prevent shareholder benefits and decision making and control managers’ escalating salaries and bonuses. If employees (one stakeholder group) are treated well.CHAPTER 2: STAKEHOLDERS. Employees decrease performance or leave if contributions exceed inducements. the largest American public sector pension fund. PHAM HOANG HIEN . Unless they get value.2: Southwest Airlines Satisfies Its Customers Q. Customers are the largest outside stakeholder group. The California Public Employees Retirement System (Calpers).000. Managers contribute skills to receive compensation and satisfaction. Who are outside stakeholders? A. and the general public. AND ETHICS Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 2 Organizational Insight 2. customers withdraw monetary support. The workforce includes nonmanagerial employees who contribute through the performance of assigned duties. Managers often leave an organization if contributions exceed inducements. Southwest focuses on customer satisfaction. Managers coordinate resources to meet organizational goals and strive to invest shareholder money profitably. Southwest treats employees well. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Outside stakeholders neither own nor work for the company but have an interest in it. answers letters.000 members. trade unions.

and long-term goals. The government contributes to organizations by standardizing rules. The public wants corporations to behave in a socially responsible way. Yet ownership and control are separated because managers control the company and can pursue personal interest. Suppliers indirectly attract customers because high-quality inputs lead to high-quality products. _________________________________________________________________________________ _________________________________________________________________________________ • 2. safety.CHAPTER 2: STAKEHOLDERS. thus managers should maximize shareholder wealth. or PHAM HOANG HIEN Organizations are coalitions of stakeholders who bargain to balance inducements with contributions. depend on local businesses. Trade unions directly impact a company’s productivity and effectiveness. . the organization faces the problems of competing goals. short-term profit. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Refer to discussion question 1 here to highlight the potential controversy between shareholders and managers. and other issues. To win stakeholder approval. AND ETHICS Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Suppliers provide raw materials and parts and directly affect company efficiency. An organization must minimally satisfy the interests of all stakeholders who often have conflicting goals. automakers are imitating the Japanese. yet it is difficult to determine the distribution of excess rewards. MANAGERS. whose cars have high-quality parts. The public was upset in 1992 when the president of United Way misused funds. by creating strong ties with suppliers to improve quality. 2 Allocating Rewards Reward allocation is important because it motivates stakeholders. growth. The general public: The wealth of a nation is tied to the success of its businesses. allocating resources. including real estate and employment.2 Organizational Effectiveness: Satisfying Stakeholder’s Goals and Interests 1 Competing Goals Shareholders own the company.S. discrimination. Local communities: The economics of a community. and balancing short. U. Which criteria should measure effectiveness. but union demands can conflict with shareholder demands. 3 The government wants companies to compete fairly and comply with laws pertaining to employee pay. They may focus on short-term profits instead of long-term growth or avoid risk taking because they control their own salaries.

Authority is the power to hold people accountable for what they do. employees. doctors see themselves as professionals and feel there is no reason to assume they lack integrity. However.3: Should Doctors Own Stock In Hospitals? There is a trend for medical doctors to become stockholders in the hospitals in which they work. PHAM HOANG HIEN . the responsibility of using organizational resources to create value is delegated to managers. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 3 Managing Stakeholder Interests Satisfying stakeholders such as customers. 2. who act as trustees.CHAPTER 2: STAKEHOLDERS. 5. 2. The CEO controls the allocation of scarce resources among an organization’s functions and divisions. The board has the legal authority to hire. The CEO’s actions and reputation influence inside and outside stakeholders opinions of the organization and impact the organizations ability to attract resources from its environment. Still. MANAGERS. The CEO determines top management’s rewards and incentives. Is this a conflict of interest between doctors and patients? A.1 shows the reporting relationships of a large company. The CEO is responsible for setting an organization’s goals and designing its structure. and they are represented by a board of directors. and discipline top management. doctors might have the incentive to give patients minimum standards of care to cut costs or overcharge patients to increase hospital profits. As owners. Figure 2. 3. and the government reaches the ultimate goal of satisfying managers and shareholders.3 Top Managers and Organizational Authority Shareholders are the legal owners of the corporation. AND ETHICS long-term wealth maximization? Should employees receive short-term bonuses or lifetime employment? Should shareholders receive dividends or have profits reinvested? 4 Organizational Insight 2. There are potentially competing goals for doctors as shareholders and caregivers. 4. Q. The Chief Executive Officer The CEO is at the top of the hierarchy and can influence organizational effectiveness and the decision making process in the following five ways: 1. The CEO chooses key executives to fill top-level positions in the hierarchy. fire.

Executive vice presidents are directly below the president. Moral hazard occurs when the agent has more information than the principle and the agent has an incentive to pursue his or her own self-interests. but also the parties may have different goals. who report to executive vice presidents. A relationship exists when one party (the principle) delegates decision making authority or control to another (the agent). These managers are divisional management and not corporate management and they determine policies for the divisions that they run instead of objectives for the organization as a whole. A manager who has a staff role has no direct responsibility for production and is in an advisory role. The president and executive vice president constitute a company’s top-management team and are part of corporate management. Companies may also have general managers or divisional managers. Q. In most companies the president takes responsibility for managing the organization’s internal operations. How does the agency problem make managing difficult? PHAM HOANG HIEN . Divisional managers generally report to a member of the topmanagement team. 5 Other Managers Other corporate managers include senior vice presidents and vice presidents. An Agency Theory Perspective Agency theory is useful for understanding the relationships between various levels of management. like marketing or finance. The agency problem is that of accountability. They oversee a company’s most important line and staff functions. a person could be in charge of the Frito-Lay Division of Pepsi-Cola. such as a production manager. To solve the agency problem. governance mechanisms must be put in place. AND ETHICS The Top-Management Team The president is the person who has a position directly below the CEO and generally is called the chief operating officer (COO). The topmanagement team is a critical part of an organization. MANAGERS. such as what strategy the organization should pursue. Q. R&D and sales managers have staff roles. Functional managers are responsible for developing capabilities in their area that lead to core competences. Vice presidents report to senior vice presidents. because they make many important decisions.CHAPTER 2: STAKEHOLDERS. these managers are in charge of a certain function. and the CEO takes responsibility for managing the organization’s relationship with external stakeholders and for formulating a long-range business plan. which are some forms of control which align the interests of the principles and agents. These managers are present only in companies that are organized into separate business divisions. For example. What is the difference between a line role and a staff role? A manager who has a line role is directly responsible for the production of goods and services. Managers at the next level are called functional managers. both because one party may have more information than the other.

If that is combined with incentive to pursue selfinterests. Consider a job such as a delivery driver. and in the norms and values that people use to interact with each other. Societal Ethics PHAM HOANG HIEN These include such things as the legal system. Q. it is useful to understand the frameworks that individuals use in making ethical decisions. Table 2. and justice perspectives so that they get a feel for why people can come to different conclusions. and it defends its position by responding to every letter of protest. Organizational Insight 2.S.4 Top Managers and Organizational Ethics Ethics are the moral principles or beliefs about what is right or wrong. and individual. the moral rights model. or when different stakeholders have different needs. a delivery driver may decide to spend company time running personal errands. companies to purchase products from these companies? A. Again. They are basically on the road with little supervision. Organizational Insight 2. the situation is such that bad things are possible. answers will vary. For example. try to frame their answers into the utilitarian. group or professional. because it is in his best interests. MANAGERS. and the justice model. and the two positions are detailed in the case.CHAPTER 2: STAKEHOLDERS. customs in a society or culture. These principles help guide managers when the best course of action is not clear. and even telephoning children at home to explain. Instead of letting the students “argue” about the merits of each position. society. Is using animals ethical? A. the utilitarian model. so they have more information than their managers do regarding the day-to-day requirements of the job. Q. Answers will vary dramatically. Is it ethical for U.2 discusses three models that are relevant for management. moral rights. and management will not find out. Because management decisions are often difficult.4: The Use of Animals in Cosmetic Testing Gillette believes that the only safe way to test its products is to use animals. but try and frame the discussion around the thought processes that managers might use in making this decision. AND ETHICS 6 The theory is typically used to describe relationships that could exist when managers don’t have a clear picture of or understanding of the job at hand. Professional Ethics . Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 2. Sources of Organizational Ethics Ethics come from three sources.5: Is it Right to Use Child Labor? Many low-cost foreign suppliers employ young children to produce their products.

As a figurehead. in golf. Why Does Unethical Behavior Occur? Unethical behavior occurs due to lapses in personal ethics. Self-Interest Individuals face ethical issues when they weigh personal interests against the impact of their actions on others. Companies with financial problems are more likely to commit unethical and illegal acts (price fixing). AND ETHICS These are the moral values and rules that a specific group relies on. Top managers influence a company’s ethical culture. such as doctors or lawyers. Players don’t call penalties on themselves. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 2. In football or basketball. is communicated to all affected parties and is approved by those with whom the decision maker has significant personal relationships. Research suggests that individuals with high stakes are more likely to behave unethically. and outside pressure. Ethical rules and laws emerge to control this type of behavior. The “Tragedy of the Commons” example illustrates this well. self-interest. An unethical decision hurts stakeholders in a manner that is unacceptable in the organization’s environment. An employee decision is ethical if it falls within acceptable standards in the organization’s environment. However. even if it harms others. it is acceptable and not considered cheating to try and sneak something by an official.CHAPTER 2: STAKEHOLDERS. A manager informs customers and stakeholders about values and allocates resources to social causes. Lapses in Personal Ethics Individuals may believe that any help to the organization is acceptable. PHAM HOANG HIEN . a manager models the company position on ethics and promotes ethical behavior through employee incentives. 7 Individual Ethics These are the personal and moral standards that individuals use to structure their interactions with people. Why do ethical rules develop? Because individuals when left to their own devices tend to pursue their own goals at the expense of the common good. Outside Pressure The probability of unethical behavior increases when outsiders pressure individuals to perform. the ethical standards are such that players are expected to call infractions on themselves. A good example is athletics.5 Creating an Ethical Organization Ethical people create an ethical organization. MANAGERS.

Supporting the Interests of Stakeholder Groups Although shareholders want high profits. An organization can take the following actions to make whistle-blowing acceptable: 1. they may confide in an outside person or agency.CHAPTER 2: STAKEHOLDERS. This is a good way to illustrate how different groups will view the same issue. You might also compare what a top management team does in a small company versus a large company. shareholders would want a dividend. The mission statement can direct employees towards ethical decisions. we expect top management to know everything that goes on in their organization. A good way to illustrate this is to have the students imagine that an organization has much more profit at the end of the year than originally forecasted. and lowers its stock price. AND ETHICS Designing an Ethical Structure and Control System Structure and culture can be designed to encourage ethical behavior. Ethical top managers foster an ethical culture. but unethical top managers make an ethical culture difficult to establish. For example. 3. Create an ethics officer to investigate claims and inform employees about ethics. Outside stakeholders such as the government can create rules to promote ethical behavior. 2. they don’t want increased profits through unethical behavior. etc. customers would like to see reduced prices. employees would want a bonus. 2. or designing the strategic mission. Outside regulation can help establish societal ethics. Create an ethics committee to make formal ethical judgments. and top management impacts ethics. What is the role of the top management team? Make sure that students understand that top management has specific duties. MANAGERS. when their job may involve staffing. What would each stakeholder group want to do with the profits. hurts a company’s reputation. What is the agency problem? What steps can be taken to solve it? PHAM HOANG HIEN . These are whistle-blowers. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ DISCUSSION QUESTIONS AND ANSWERS 1. Authority relationships and rules can be designed to foster ethical behavior. Give some examples of how the interests of different stakeholder groups may conflict. Unethical behavior makes a company a riskier investment. Too often. budgeting. 8 Creating an Ethical Culture Ethics are part of an organization’s culture. Allow subordinates to discuss ethical concerns with upper-level managers. If employees feel helpless to prevent an unethical act or are afraid to discuss ethical concerns. 3.

What caused these behaviors. ANALYZING THE ORGANIZATION PHAM HOANG HIEN . Look at Arthur Andersen. MANAGERS. The Ethical Dimension This one asks the student to think about the last time they either were treated unethically or saw someone else being treated unethically.CHAPTER 2: STAKEHOLDERS. because most management decisions have an ethical component. and how this applies to organizations. 4. there are financial reasons to behave ethically as opposed to it just “being the right thing to do. but in management. Make sure they understand the difference between ethics and “bad behavior. Use the 3 questions on page 38 as a guide for the students to assess the code. The point is.” 5. This is easy to do. Ask a manager to describe an instance of ethical behavior that she or he observed and an instance of unethical behavior. ORGANIZATIONAL THEORY IN ACTION Practicing Organizational Theory Small groups of students are designing a code of ethics for a large supermarket chain. This is a good exercise for illustrating agency theory and moral hazard. it means something different. you might discuss which stakeholders are affected most by the code of conduct. and use the material in the chapter to analyze it. . First they need to discuss what ethical dilemmas employees will face. AND ETHICS 9 The main focus of this is to understand the problems that can occur when individuals that need to work together have different goals. Making the Connection Students are looking for managers that have pursued their own self-interest at the expense of other stakeholders. Also.” It is easy to think that everything wrong in society is an ethical dilemma. 6. and the organization is better off in the long-term. and have the opportunity and motivation to pursue their own self interests. and what were the outcomes? Make sure the focus is on the long-term outcomes. so that students can see the real value of ethical behavior. Why is it important for managers and organizations to behave ethically? Because society is better off. and then design a code of conduct that is most appropriate. Look at the longterm benefits of Johnson & Johnson’s decision as compared to Dow Corning. The solution is to make sure systems are in place that keep everyone focused on the same goals. Search business magazines such as Fortune or Business Week for an example of ethical or unethical behavior. and justice models to compare solutions from different perspectives. make a deal with a distributor.” What this shows is that organizations must put forth effort to manage ethically. and try to look at what their ethical stances are. The supervisor does not know that the worker overheard the conversation. A role play can be used to encourage a discussion on ethics. have the students identify all of the stakeholders of a well known organization. and discuss what their interest or “claim” in the organization is. identify its top management structure.” Johnson and Johnson does this. you might discuss how at Dow Corning. If you will bypass procurement procedures. used franchising to launch growth. It might be worthwhile to either print this out or bring up the website during class. moral rights. In contrasting the stance. Point out that huge companies like Arthur Andersen really can’t afford to have a PHAM HOANG HIEN . Consultants recommended centralized control and a set of internal authority relationships. Discuss what the worker should do. was the largest retailer of copying stores.CHAPTER 2: STAKEHOLDERS. The setting will be a government warehouse. AND ETHICS This module focuses on having students identify the stakeholders of their chosen organization. which contains cleaning supplies. Outline a series of steps Dow Corning’s directors and managers should have taken to have prevented this problem. 3. The distributor comes to the warehouse. Kinko’s had an informal management process and difficulty managing growth. 1. or electric company. The point is that they should have had some sort of ethical system in place to help guide them in making decisions. In small groups. CASE FOR ANALYSIS 10 Kinko’s New Operating Structure Kinko’s Inc. make sure the students really understand the value of behaving ethically. MANAGERS. One student will be a warehouse worker who overhears the supervisor. I can sell you brooms at a lower price and give you a 5% commission on the deal. Why did the managers at the two organizations have different ethical stances towards their customers? (Hint go to J&J’s website and look at its Code of Ethics).htm. TEACHING SUGGESTIONS 1. but this approach did not assist Kinko’s in controlling costs or improving customer service. Use the utilitarian. a third volunteer. The credo can be viewed at http://www. In light of the recent corporate Had they had a system like J&J. and says to the supervisor: “This warehouse has thousands of items. and this is illustrated quite well by their credo. Have them make a list of all of the stakeholders. Orfalea. the management behavior seemed “out of character. but it had to change its operating structure in response to competitive pressures from Quick Copy and OfficeMax. 2. The founder. this would have never happened. church. such as their local gas station. another volunteer. It is clear from looking at J&J’s credo that they really focus on stakeholders and making ethical decisions. This helps them to relate the theory to actual practice.” The supervisor states that he or she is tired of paperwork and that will be fine. it does not just come naturally to so called “good managers.

11 PHAM HOANG HIEN . and consumers have too many choices. remembering to keep the focus on how managers must make decisions.CHAPTER 2: STAKEHOLDERS. The global economy is too competitive. AND ETHICS bad image. yet profoundly effective this philosophy is. The organizational insights in this chapter are very useful for classroom discussion. Visit the Johnson & Johnson website and look at their credo. For example. using Insight 2. 5. split the class into two groups based upon their initial opinion of using animals in cosmetic testing. Point out that a few bad decisions at Arthur Andersen effectively shut the company down. You can then have a mini-debate in class on the issues.4. MANAGERS. Discuss with the class how simple. 4.

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