Organizational Theory,

Design, and Change

Sixth Edition
Gareth R. Jones

Chapter 2

Stakeholders,
Managers, and Ethics

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Organizational Stakeholders
 Stakeholders: people who have an
interest, claim, or stake in an
organization
 Inducements: rewards such as
money, power, and organizational
status
 Contributions: the skills,
knowledge, and expertise that
organizations require of their
members during task performance
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Inside Stakeholders
 People who are closest to an
organization and have the strongest and
most direct claim on organizational
resources
 Shareholders: the owners of the
organization
 Managers: the employees who are
responsible for coordinating organizational
resources and ensuring that an
organization’s goals are successfully met
 The workforce: all non-managerial
employees
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Outside Stakeholders
 People who do not own the organization,
are not employed by it, but do have
some interest in it
 Customers: an organization’s largest
outside stakeholder group
 Suppliers: provide reliable raw materials
and component parts to organizations
 The government
 Wants companies to obey the rules of fair
competition
 Wants companies to obey rules and laws
concerning the treatment of employees and
other social and economic issues
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Outside Stakeholders (cont.)
 Trade unions: relationships with
companies can be one of conflict or
cooperation
 Local communities: their general
economic well-being is strongly affected by
the success or failure of local businesses
 The general public
 Wants local businesses to do well against
overseas competition
 Wants corporations to act in socially
responsible way

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Table 2.1: Inducements and
Contributions of Stakeholders

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Organizational Effectiveness: Satisfying
Stakeholders’ Goals and Interests
 An organization is used simultaneously by
various stakeholders to achieve their goals
 Each stakeholder group is motivated to
contribute to the organization
 Each group evaluates the effectiveness of
the organization by judging how well it
meets the group’s goals
 For an organization to be viable, the
dominant coalition of stakeholders has to
control sufficient inducements to obtain the
contributions required of other stakeholder
groups
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Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 2-
Stakeholder Goals
 Shareholders: return on their
investment
 Customers: product reliability

and product value

 Employees: compensation,

working conditions, career

prospects

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Competing Goals
 Organizations exist to satisfy stakeholders’
goals
 But which stakeholder group’s goal is most
important?
 In the U.S., the shareholders have first claim
in the value created by the organization
 However, managers control organizations
and may further their own interests instead
of those of shareholders
 Goals of managers and shareholders may be
incompatible
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Allocating Rewards
 Managers must decide how to allocate
inducements to provide at least minimal
satisfaction of the various stakeholder
groups
 Managers must also determine how to
distribute “extra” rewards
 Inducements offered to shareholders affect
their motivation to contribute to the
organization
 The allocation of reward is an important
component of organizational effectiveness
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Top Managers and
Organizational Authority
 Authority: the power to hold people
accountable for their actions and to make
decisions concerning the use of
organizational resources
 Shareholders: the ultimate authority over
the use of a corporation’s resources
 They own the company
 They exercise control over it through their
representatives

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Top Managers and
Organizational Authority (cont.)
 The board of directors: monitors corporate
managers’ activities and rewards corporate
managers who pursue activities that satisfy
stakeholder goals
 Inside directors: hold offices in a company’s

formal hierarchy
 Outside directors: not full-time employees

 Corporate-level management: the

inside stakeholder group that has ultimate
responsibility for setting company goals and
allocating organizational resources

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The Chief Executive Officer’s (CEO)
Role in Influencing Effectiveness
 Responsible for setting organizational
goals and designing its structure
 Selects key executives to occupy the
topmost levels of the managerial
hierarchy
 Determines top management’s rewards
and incentives

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The CEO’s Role in Influencing
Organizational Effectiveness (cont.)
 Controls the allocation of scarce
resources such as money and decision-
making power among the organization’s
functional areas or business divisions
 The CEO’s actions and reputation have
a major impact on inside and outside
stakeholders’ views of the organization
and affect the organization’s ability to
attract resources from its environment

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Top Management Roles
 CEO—Often has primary responsibility
for managing the organization’s
relationship with external stakeholders
 COO—Responsible for managing the
organization’s internal operations
 Exec. Vice Presidents—Oversees and
manages the company’s most
significant line and staff roles

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Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 2-
 To be included, a CEO had to have
assumed the job no earlier than
January 1995 and no later than
December 2007
 On average, the top 50 CEOs
increased the wealth of their
shareholders by $48 million.

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Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 2-
The Top-Management Team
 Line-role: managers who have direct
responsibility for the production of
goods and services
 Staff-role: managers who are in
charge of a specific organizational
function such as sales or research and
development (R&D)
 Are advisory only

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The Top-Management Team
(cont.)
 Top-management team: a group of
managers who report to the CEO and
COO and help the CEO set the
company’s strategy and its long-term
goals and objectives
 Corporate managers: the members
of top-management team whose
responsibility is to set strategy for the
corporation as a whole

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Other Managers
 Divisional managers: managers who
set policy only for the division they
head
 Functional managers: managers
who are responsible for developing the
functional skills and capabilities that
collectively provide the core
competences that give the
organization its competitive advantage

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Figure 2.1: The Top-
Management Hierarchy

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An Agency Theory
Perspective
 Agency theory suggests a way to
understand the conflict that often
arises between shareholder goals and
top managers’ goals
 Agency relation occurs when one
person (the principle, i.e. shareholders)
delegates decision-making authority to
another (the agent, i.e. managers)

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Agency Problem
 There is a problem in determining
managerial accountability that arises
when delegating authority to managers
 Shareholders are at information
disadvantage compared to top
managers
 It takes considerable time to see the
effectiveness of decisions managers
may make

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The Moral Hazard Problem
 A moral hazard problem exists when
agents have the opportunity and incentive
to pursue their own interests
 Very difficult to evaluate how well the agent
has performed because the agent possesses an
information advantage over the principal
 Self-dealing describes the conduct of
corporate managers who take advantage of
their position in an organization to act in their
own interests

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