Ethical Decision Making for Business 8e Fraedrich/ Ferrell/Ferrell

CHAPTER 2
CHAPTER 2

Stakeholder Relationships,
Social Responsibility, and
Corporate Governance
 Chapter Objectives

• To identify stakeholders’ roles in business ethics

• To define social responsibility
• To examine the relationship between stakeholder
orientation and social responsibility
• To delineate a stakeholder orientation in creating
corporate social responsibility
• To explore the role of corporate governance in
structuring ethics and social responsibility in business
• To list the steps involved in implementing a
stakeholder perspective in social responsibility and
business ethics
 Chapter Outline

• Stakeholders Define Ethical Issues in Business

• Social Responsibility and the Importance of a
Stakeholder Orientation
• Social Responsibility and Ethics
• Corporate Governance Provides Formalized
Responsibility to Stakeholders
• Implementing a Stakeholder Perspective
Corporations in USA
 Relationships and Business

• Building relationships is one of most important areas

in business today
• Stakeholder framework
– Helps identify internal and external stakeholders
– Helps monitor and respond to needs, values, and
expectations of stakeholder groups
 What Is a Stakeholder?
• All parties who have a stake or claim in some
aspect of a company’s product, operation,
markets, industry, and outcome.
• Business influence these groups, but these
groups also have the ability to influence
business
• It is a two-way street relation
 Primary vs. Secondary Stakeholders

• Primary stakeholders: Those whose continued

association is necessary for a firm’s survival
 Customers
 Employers
 Share holders
 Suppliers
 Community
 government
 Primary vs. Secondary Stakeholders

• Secondary stakeholders: Are not essential to a

company’s survival
 Special interest
 Mass media
 Competitor
 Trade Association
 Stakeholders Orientation

•Is defined as; The degree to which a firm understands

and addresses stakeholder demands.

•Compromise three sets:

1.generate data about stake holders, and assessment
of effect
2.Distribution of this information collected throughout
the firm\
3.Responsiveness of the org as whole to this
information
 Social Responsibility and Ethics

 Organization obligation to maximize its positive

impact on stakeholders and minimize its
negative impact.

 Business ethics involves carefully thought-out

rules (heuristics) of conduct that guide decision
making
 Social Responsibility and Ethics
Steps of Social responsibility
•Social responsibility can be viewed as a contract
with society
– Economic; maximizing stakeholder wealth

– Legal; abiding by laws and government

regulations

– Ethical; following standers of acceptable behavior

and judged by stakeholders

– Philanthropic; giving back to society

 Social Responsibility and Ethics
Corporate citizenship

The extent to which businesses strategically meet

the economic, legal, ethical, and philanthropic
responsibilities placed on them by various
stakeholders.
Selection of the world’s most Ethical Companies
 Loreal
 Xerox
 OfficeMax
 Ford Motors
 General Electric
 eBay
 Microsoft Corporation
 Corporate Governance
Corporations: legal entity that is separate and distinct from its owner
 Corporate Governance
• Defined as; involves the development of formal
systems of Accountability, Oversight, and Control.
• Provides formalized responsibility to stake holders
 Corporate Governance
Agency theory;

Agents need to own amount of stock in corp in order to

bear responsibility of their decision

Stewardship theory:
Tend to identify with the Corp. and its success
Corporate Governance
Corporate Governance
 Corporate Governance
• Board of directors :

is a group of people who jointly supervise the activities

of an organization, which can be either a for-profit
business, nonprofit organization, or a government
agency. Such a board's powers, duties, and
responsibilities are determined by government
regulations (including the jurisdiction's corporations
law) and the organization's own constitution and
bylaws

They approve all decisions that might affect the long-

term performance of a Corp.

The Corp. is governed by the directors overseeing top

management
Corporate Governance
 The role of BoD in Public Org
• Create ethical culture
• Legal responsibility for the firms
resources and decisions
• Appoint top executives
• Fiduciary duty
• Today’s trend in BoDs:
• Transperency
• Directors chosen for their expertise,
competence, diverse perspectives to
strategic decisions
 BoD in Public Org

Members of BoDs

•Inside; (management directorates)

•Outside; directorates form outside Corp.
•Example: USA 80% outside, UK 50%
•Audit & compensation committees are
independent
 Corp Gove continued,,,,
• Shareholders have minimum ability to
impact decision making because they
are so dispersed.
• Passive Vs Active shareholders
• Interlocking directorate; member of BoD
serving on the board of multiple
corporations (multiple director)
• Proxy fight; competitive struggle over
proxy votes between shareholders and
Management needed to control corp.
 Corp Gove continued,,,,
• Executive compensation (determined by
BoD)
Salary Vs Stock option/ Both
• SEC; Security Exchange Commission –
proposed that corp disclose how they
compensate lower-ranking Vs top
executives
• Align pay with performance
• Dual designation; example CEO has a
position of Chairman at the same time
 Views of Corporate Governance
Implementing a Shareholder Perspective

1.Assessing the corporate culture

2.Maximize wealth for investors
3.By maintaining performance accountability between
top management and shareholders
4.Align investors and management interest
 Views of Corporate Governance
Implementing a Stakeholder Perspective

1.Assessing the corporate culture

2.Determine primary stakeholders
3.Implement the appropriate Governance mechanism
4.To develop long-term relationship

Shareholder view can be an initial or first step to the

stakeholder view