Stakeholder Relationships, Social

Responsibility, and Corporate

Governance
FERRELL, FRAEDRICH & FERRELL (2016)
PAGE
Stakeholders Define Ethical Issues in
Business

 Building effective relationships one of the more important areas

of business
 Stakeholder framework helps identify the internal and external
stakeholders
 Stakeholders are those who have a stake or claim in some
aspect of a company’s products, operations, markets, industry
and outcomes:
Stakeholders Define Ethical
Issues in Business

Internal stakeholders External stakeholders

 Employees  Customers
 Board of directors  Special interest groups
 managers  regulators
Stakeholders Define Ethical
Issues in Business

 Businesses engage and influence these groups, but

these groups also have the ability to engage and
influence businesses
 Stakeholders provide tangible and intangible resources
critical to a firm’s success. E.g …?
 They apply their values and standards to many diverse
issues. E.g ….?
 E.g. activities and negative press generated by
special interest groups force a company to change
its practices
 Identifying Stakeholders

 Primary stakeholders are those whose continued association is

absolutely necessary for a firm’s survival.
 Employees, customers, investors, governments and communities
 Secondary stakeholders do not typically engage in transactions
with a company and are therefore not essential to its survival.
 Media, trade associations, and special interest groups
 Secondary groups cannot be ignored or given less consideration
in the ethical decision making process.
2-6
Interactions Between a Company and Its
Primary and Secondary Stakeholders
Stakeholder interaction model

 Two way relationship between firm and stakeholders

Source: Adapted from Isabelle Maignan, O.C. Ferrell, and Linda Ferrell, “A Stakeholder Model for Implementing
Social Responsibility in Marketing,” European Journal of Marketing 39 (2005): 956-977. Used with permission.
 A Stakeholder orientation

 Stakeholder orientation is the degree to which a firm understands

and addresses stakeholder demands.
 Involves three activities:
 Generation of data about stakeholder groups and assessment
the firm’s effect on these groups
 Distribution of the information throughout the firm
 The organization’s responsiveness as a whole to this intelligence
Is It Acceptable to Promote a
Socially Irresponsible but Legal
Product to Stakeholders?
 When you think of cheating, you may think of irresponsible behavior in the classroom. But Noel
Biderman created a company called Avid Life Media (based in Toronto) that is dedicated to
another form of cheating. Avid Life Media is owner of several different love connection brands,
including Cougar Life and its most controversial brand, Ashley Madison. With the motto “Life is Short.
Have an Affair,” the website has had more than 31 million users over its lifetime. The company
encourages married men and women to spend less than a minute to register on the largest website
to openly promote infidelity. The company employs hundreds of programmers, designers, and
marketers and has conducted a private placement for investors. While many stakeholders would
say the purpose of the website is wrong, there is nothing illegal about this business. But the fact that
the website helps people engage in cheating on their spouses— including providing an e-mail
address to which one’s spouse would never have access—has many people concerned. They
consider facilitating secrecy for socially questionable conduct to be wrong. In response to these
concerns, the site was hacked and a threat was made to reveal the real names of the members of
Ashley Madison if the site was not shut down.52 1.

1. There is nothing wrong in providing a legal service many people desire, and those that hack the site
to close it down should be punished.

2. From a stakeholder perspective, it is wrong to provide socially irresponsible services, and those who
hacked the site to have it shut down were providing a public service
Social responsibility and ethics

 Ethics and social responsibility often used interchangeably, but

each concept has a distinct meaning
 Social responsibility is an organization’s obligation to maximize its
positive impact on stakeholders and minimize its negative impact.
 Ethics???What are they?
 Four levels of social responsibility:
 Economic
 Legal
 Ethical
 Philanthropic
Steps of Social Responsibility

Source: Adapted from Archie B. Carroll, “The Pyramid of Corporate Social Responsibility,” Business Horizons (July-
August 1991): 42, Figure 3
Corporate Citizenship

 The term corporate citizenship is often used to express the extent to

which businesses meet the economic, legal, ethical, and
philanthropic responsibilities
 Four interrelated dimensions of corporate citizenship:
 Strong sustained economic performance
 Rigorous (strict) compliance (conformity)
 Ethical actions beyond what is required by the law
 Voluntary contributions that advance reputation and stakeholder
commitment
 World’s most ethical companies
 Many of these companies have superior financial performance
compared to the indexes of other publicly traded firms
 Corporate Citizenship

 Corporate citizenship involves:

 acting on the firm’s commitment to corporate citizenship philosophy
 measuring the extent to which it follows through by actually
implementing citizenship initiatives
 Reputation is one of an organization’s greatest intangible assets
with tangible value.
 value of a positive reputation is difficult to quantify, but it is important
 A single negative incident can influence perceptions of a corporation’s
image and reputation instantly and for years afterward. Any examples?
 Corporate reputation, image, and brands are among the most critical
aspects of sustaining relationships with constituents including investors,
customers, employees, media, and regulators
Issues in social responsibility

 Social responsibility rests on a stakeholder orientation. How?

 Separated into four general categories
1. Social issues: associated with the common good.
2. Consumer protection: often occurs in the form of laws passed to
protect consumers from unfair and deceptive business practices.
3. Sustainability: the potential for the long-term well-being of the natural
environment.
4. Corporate governance: involves the development of formal systems
of accountability, oversight, and control.
Social Responsibility and the
importance of a stakeholder
orientation
 Social responsibility perspective: Business ethics embodies values,
norms and expectations that reflect concerns of major
stakeholders
 Role of ethics and social responsibility in business questioned.
Why?
 Adam Smith’s capitalism regaining popularity
 Ethics and social responsibility cannot just be a reactive approach
 CSR should includes rights, duties, consequences and values
Corporate Governance:
Provides formalized
responsibility to stakeholders
 Failure to balance stakeholder interests can result in a failure
to maximize shareholders’ wealth.
 Directors and corporate officers have a duty of care, or duty
of diligence, to make informed and prudent decisions on
behalf of their stakeholders and the organization.
 To remove the opportunity for employees to make unethical
decisions, most companies have developed formal systems
of accountability, oversight, and control—known as
corporate governance.
Corporate Governance:
Provides formalized
responsibility to stakeholders
Parts of corporate governance:
 Accountability
 Refers to how closely workplace decisions are aligned with a firm’s
stated strategic direction
 Oversight, (supervising)
 Provides a system of checks and balances that limits employees
and manages opportunities to deviate
 Control
 The process of auditing and improving organizational decisions
and actions
Corporate Governance:
Provides formalized
responsibility to stakeholders

 Corporategovernance establishes fundamental

systems and processes for:
 preventing and detecting misconduct
 investigating and disciplining
 recovery and continuous improvement
 Corporate Governance Issues

 Shareholder rights
 Board composition
 Financial oversight
 Risk management
 Board engagement and communication
 Link between executive compensation and
performance
 CEO and executive succession
 Board oversight of company talent
development
 Ethics and compliance programs
Pakistan’s Code of Corporate
Governance (CCG, 2019)

 Open file (provided in the folder)

Views/ models of Corporate
Governance

 Shareholder model
 Founded in classic economic precepts, including the
maximization of wealth for investors and owners
 Stakeholder model
 Adopts a broader view of the purpose of business that
includes satisfying the concerns of other stakeholders, from
employees, suppliers, and government regulators to
communities and special interest groups
 Because of limited resources, companies must determine which
of their stakeholders are primary.

 Many businesses evolved into the stakeholder model

as a result of government initiatives, consumer
activism, industry activity, and other external forces.
The role of Boards of Directors

 For public corporations, boards of directors hold the ultimate

responsibility f
 or their firms’ success or failure, as well as for the ethics of their
actions. Board members have a fiduciary duty to act in the
best interests of those they serve
 Fiduciaries
 Persons placed in positions of trust who use due care and loyalty in
acting on the behalf of the best interests of the organization
 Both directors and officers of corporations are fiduciaries for the
shareholders
 Issues related to corporate boards and directors
 Accountability
 Transparency
 Independence
 The Role of Boards of Directors

 Ultimate responsibility for their firms’ success or failure, as well as for the
ethics of their actions
 Increased demands for accountability and transparency
 Directors are chosen for their expertise, competence, and ability to bring
diverse perspectives to strategic discussions.
 Outside directors are thought to bring more independence to the monitoring
function.
 Many of the corporate scandals uncovered in recent years might have
been prevented if each of the companies’ boards of directors had been
better qualified, more knowledgeable, and less biased.
 The concept of board members being linked to more than one company is
known as interlocking directorate. The practice is legal unless it involves a
direct competitor.
 Issues of executive compensation
Issues of Executive
Compensation
 More time spent discussing compensation than ensuring
the integrity of the firm’s financial reporting systems.
 Most recent financial meltdown and high bonuses for
executives of failed firms re-ignited the public debate over
compensation issues.
 The topic receives much attention in the media, sparks
shareholder concern, and is hotly debated in discussions of
corporate governance.
 One area for board members to consider is the extent to
which executive compensation is linked to company
performance.
 Issues related to high compensation are excessive risk-
taking, a focus on short-term financial performance, and
reduced transparency at the expense of long-term growth.
Implementing a
Stakeholder Perspective
 Step 1: Assessing the corporate culture
 a social responsibility program must align with the
corporate culture of the organization.
 Step 2: Identifying stakeholder groups
 it is important to recognize stakeholder groups and their
needs, wants, and desires.
 Step 3: Identifying stakeholder issues
 involves understanding the nature of the main issues of
concern to primary stakeholders
Implementing a
Stakeholder Perspective
 Step 4: Assessing organizational commitment to social
responsibility
 Brings previous three steps together to arrive at an
understanding of social responsibility that specifically
matches the organization of interest.
 Step 5: Identifying resources and determining urgency
 prioritization of stakeholders and issues, along with the
assessment of past performance, provides guidance for
allocating resources.
 Step 6: Gaining stakeholder feedback
 Satisfaction or reputation surveys
 stakeholder-generated media (blogs, websites, podcasts,
and newsletters)
 Formal research using focus groups, observation, and
surveys
World’s most ethical
companies 2022
 Ethisphere, a global leader in defining and advancing
the standards of ethical business practices, announced
the 136 honorees representing 22 countries and 45
industries that have earned the coveted designation
of World’s Most Ethical Companies® in 2022.
 This is the 16th annual recognition of companies that
have demonstrated a commitment to ethical business
practices through programs that positively impact
employees, communities, and broader stakeholders,
and contribute to sustainable and profitable long-term
business performance.
 https://worldsmostethicalcompanies.com/honorees/
100 Best corporate
citizens (2022)
 Now more than ever, corporate leadership on environmental,
social and governance (ESG) issues is imperative. And so is
transparency.
 As companies decarbonize, align with the Sustainable
Development Goals and rebuild an equitable economy post-
pandemic, they must be open about their efforts.
 Each year, 3BL Media evaluates the largest public U.S.
companies on ESG transparency and performance.
 https://100best.3blmedia.com/