Chapter 2

Stakeholders,
Managers, and Ethics
:Done By
Dania Al-Falah
Organizational Theory,
Design, and Change

Gareth R. Jones
Chapter 2

Stakeholders,
Managers, and Ethics
 :After studying this chapter you should be able to
 1. Identify the various stakeholder groups and their interests or
claims on an organization.
 2. Understand the choices and problems inherent in
distributing the value an organization creates.
 3. Appreciate who has authority and responsibility at the top
of an organization, and distinguish between different levels of
management.
 4. Describe the agency problem that exists in all authority
relationships and the various mechanisms, such as the board
of directors and stock options, which can be used to help
control illegal and unethical managerial behavior.
 5. Discuss the vital role that ethics plays in constraining
managers and employees to pursue the goals that lead to long-
run organizational effectiveness.
 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
 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
 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
 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
 Table 2.1: Inducements and
Contributions of Stakeholders
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
 Stakeholder Goals

 Shareholders: return on their investment

 Customers: product reliability and product value
 Employees: compensation, working conditions, career
prospects
 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
 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
 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
 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
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
 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
 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
 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
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
 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
 Figure 2.1:
The Top-
Management
Hierarchy
 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)
 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
 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
 Solving the Agency Problem

 Governance mechanisms: The forms of control that

align the interests of principal and agent so both
parties have the incentive to work together to
maximize organizational effectiveness.
 The next step in solving the agency problem is to find
the right set of incentives to align the interests of
managers and shareholders.
Solving the Agency Problem (cont.)
 There are several ways for solving the Agency problem.
 Stock-based compensation schemes: monetary
reward in the form of stocks or stock options that
are linked to the company’s performance.
 Promotion tournaments and career paths:
Incentives can also take other forms. One way of
linking rewards to performance over the long term
is by developing organizational career paths that
allow managers to rise to the top of the
organization.
 Top Managers and Organizational
Ethics

 Ethical dilemma: The quandary people experience

when they must decide whether or not they should act
in a way that benefits someone else, even if it harms
others and isn’t in their own interest.
 Ethics: Moral principles or beliefs about what is right
or wrong.
 Ethics and the Law

 The relationship between ethics and law, it is

important to understand that neither laws nor ethics
are fixed principles, cast in stone, which do not change
over time.
 ethical beliefs lead to the development of laws and
regulations to prevent certain behaviors or encourage
others, laws themselves can and do change and
disappear as ethical beliefs change.Thus both ethical
and legal rules are relative.
 Ethics and Organizational
Stakeholders
 Ethics help people determine moral responses to
situations in which the best course of action is unclear.
 Ethics guide managers in their decisions about what to
do in various situations.
 Ethics also help managers decide how best to respond
to the interests of various organizational stakeholders.
 Managers are in a difficult situation because they have
to balance their interests and the interests of the
“organization” against the interests of other
stakeholder groups.
 Ethics and Organizational
Stakeholders
A decision is probably acceptable on ethical grounds if
:a manager can answer “yes” to each of these questions
 1. Does my decision fall within the accepted values or
standards that typically apply I the organizational
environment?
 2. Am I willing to see the decision communicated to all
stakeholders affected by it—for example, by having it reported
in newspapers or on television?
 3. Would the people with whom I have a significant personal
relationship, such as family members, friends, or even
managers in other organizations, approve of the decision?
 The three models of what determines whether a decision is
.ethical: the utilitarian, moral rights, and justice models
 Sources of Organizational Ethics
 SOCIETAL ETHICS One important determinant of organizational
ethics is societal ethics. Societal ethics are codified in a
society’s legal system, in its customs and practices, and in the
unwritten norms and values that people use to interact with
each other.
 INDIVIDUAL ETHICS Individual ethics are the personal and
moral standards used by individuals to structure their
interactions with other people. Based on these ethics, a person
may or may not perform certain actions or make certain
decisions.
 PROFESSIONAL ETHICS Professional ethics are the moral rules
and values that a group of people uses to control the way they
perform a task or use resources.
 ?Why Does Unethical Behavior Occur
 PERSONAL ETHICS In theory, people learn ethical principles
and moral codes as they mature as individuals in a society.
Ethics are obtained from such sources as family and friends,
places of worship, education, professional training, and
organizations of all kinds.
 SELF-INTEREST we normally confront ethical issues when we
are weighing our personal interests against the effects of our
actions on others.
 OUTSIDE PRESSURE many studies have shown that the
likelihood of a person’s engaging in unethical or criminal
behavior is much greater when outside pressure exists for that
person to do so.
 Creating an Ethical Organization

 organization can encourage people to act ethically by putting in

place incentives for ethical behavior and disincentives to
punish those who behave unethically. Because the board and
top managers have the ultimate responsibility for setting
policy, they establish the ethical culture of the organization.
There are many ways in which they can influence
organizational ethics.
 Designing an Ethical Structure and
Control System
 Managers can design an organizational structure that reduces
the incentives for people to behave unethically. The creation of
authority relationships and rule that promote ethical behavior
and punish unethical acts.
 Whistle-blowing occurs when an employee informs an outside
person or agency, such as a government agency, a newspaper,
or television reporter, about an organization’s (its managers’)
illegal or immoral behavior. Employees typically become
whistle-blowers when they feel powerless to prevent an
organization from committing an unethical act or when they
fear retribution from the company if they voice their concerns.
 Creating an Ethical Culture

 The values, rules, and norms that define an organization’s

ethical position are part of culture. The behavior of top
managers strongly influences organizational culture. An ethical
culture is most likely to emerge if top managers are ethical,
and an unethical culture can become an ethical one if the top-
management team is changed.
 Supporting the Interests of
Stakeholder Groups
 the board of directors they have the power to hire and fire top
management, and thus in theory they can discipline manager
who engage in unethical behavior.
 Shareholders want higher profits, but do they want the to be
gained by unethical behavior?
Because unethical behavior makes a company a riskier
investment. If an organization loses its reputation, the value of
its shares will be lower than the value of shares offered by
firms that behave ethically. In addition, many shareholders do
not want to hold stock in companies that engage in socially
questionable activities.