Legislation and ethics for data

and businesses

Chapter 2: STAKEHOLDER RELATIONSHIPS, SOCIAL

RESPONSIBILITY, AND CORPORATE GOVERNANCE
*Source: Ferrell et al., Business Ethics: Ethical Decision Making
& Cases, 11e
Stakeholders
Introduction

 Building effective relationships is considered one of the most important areas

of business today.
 A business exists because of relationships between employees, customers,
shareholders or investors, suppliers, managers, and the community who
develop strategies to attain success.
 In addition, an organization usually has a governing authority, often called a
board of directors that provides oversight and direction to assure the
organization stays focused on its objectives in an ethical, legal, and socially
responsible manner.
 Few decisions are made by one individual. Therefore, relationships are
associated with organizational success and also organizational misconduct.
STAKEHOLDERS DEFINE ETHICAL ISSUES IN BUSINESS

 Stakeholders: are those who have a “stake” or claim in some aspect of a company’s
products, operations, markets, industry, and outcomes.

 Stakeholders could be customers, shareholders, employees, suppliers, government agencies,

communities, and many others.

 Businesses engage and influence these groups, but these groups also have the ability to
engage and influence businesses; thus, the relationship between companies and their
stakeholders is a two-way street.
Stakeholder Framework

A stakeholder framework identifies:

the internal stakeholders (employees, boards of directors, and managers),
the external stakeholders (customers, special interest groups, regulators, and others)

who all agree, collaborate, and engage in confrontations on ethical issues.

 Most ethical issues exist because of conflicts in values and belief patterns about right and
wrong among and within stakeholder groups.
 This framework allows an organization to identify, monitor, and respond to the needs,
values, and expectations of different stakeholder groups.
STAKEHOLDERS DEFINE ETHICAL ISSUES IN BUSINESS

 Stakeholders provide resources critical to a firm’s long-term success. These resources may be
tangible and intangible.

 Shareholders, for example, supply capital; suppliers offer material resources or intangible
knowledge; employees and managers grant expertise, leadership, and commitment;
customers generate revenue and provide loyalty with word of-mouth promotion; local
communities provide infrastructure; and the media transmits positive corporate images.

 Stakeholders should be fair, loyal, and treat the corporation in a responsible way.

 When individual stakeholders share expectations about desirable business conduct, they may
choose to establish or join formal communities dedicated to defining and advocating these
values and expectations.
Identifying Stakeholders

We can identify two types of stakeholders:

 Primary stakeholders: are those whose continued association and resources are absolutely necessary for a firm’s
survival.

 These include: employees, customers, and shareholders, as well as the governments and communities that provide
necessary infrastructure.
 Ethical corporate cultures are important because they are linked to positive relationships with stakeholders.
 By the same token, concern for stakeholders’ needs and expectations is necessary to avoid ethical conflicts.
 Secondary stakeholders: do not typically engage directly in transactions with a company and are therefore not
essential to its survival.

 These include for example the media and trade associations

Both primary and secondary stakeholders embrace specific values and standards that dictate acceptable and unacceptable
corporate behaviors.

It is important for managers to recognize that while primary groups may present more day-to-day concerns, secondary groups
cannot be ignored or given less consideration in the ethical decision-making process because they have legitimacy.

 Sometimes a secondary stakeholder can have as much—if not more—power to influence outcomes than a primary stakeholder.
Stakeholder interaction model
Stakeholder Orientation

The degree to which a firm understands and addresses stakeholder demands can be referred to as a stakeholder
orientation

A stakeholder orientation involves: “activities and processes within a system of social institutions that facilitate and
maintain value through exchange relationships with multiple stakeholders.”

This orientation comprises three sets of activities:

(1) the organization-wide generation of data about stakeholder groups and assessment of the firm’s effects on these
groups;

Generating data about stakeholders begins with identifying the stakeholders relevant to the firm. Relevant
stakeholder groups should be analyzed on the basis of the power each enjoys, as well as by the ties between them
and the company
Stakeholder Orientation (cont’d)

(2) the distribution of this information throughout the firm

 The firm should identify the concerns about the business’s that are relevant to each stakeholder group. This
information is derived from formal research, including surveys, focus groups, Internet searches, and press reviews.

 For example:

 Shell has an online discussion forum that invites website visitors to express their opinions on the implications of
the company’s activities. Employees and managers also generate this information informally as they carry out
their daily activities.

 purchasing managers know about suppliers’ demands, public relations executives are tuned into the media, legal
counselors are aware of the regulatory environment, financial executives connect to investors, sales
representatives are in touch with customers, and human resources advisers communicate directly with
employees.
Stakeholder Orientation (cont’d)

(3) the responsiveness of the organization as a whole to this information.

 Finally, companies should evaluate their impact on the issues of importance to the various
stakeholders they identify.

 While shareholders desire strong profitability and growth, societal stakeholders have needs
extending beyond these two requirements.
Stakeholder Orientation (cont’d)

 Given the variety of employees involved in the generation of information about stakeholders, it is
essential the information gathered be circulated throughout the firm.

 The firm must facilitate the communication of information about the nature of relevant stakeholder
communities, concerns, and impact of the firm on these issues to all members of the organization.

 Companies should use these activities to communicate the company’s code of conduct to employees.

 Such communication informs employees about appropriate and inappropriate conduct within the
organization.

 Research suggests employees in organizations with ethical codes of conduct are less accepting of
potential misconduct toward stakeholders.

 Ethical codes are of little use if they are not effectively communicated throughout the firm.

 The responsiveness of an organization as a whole to stakeholder intelligence consists of the initiatives

the firm adopts to ensure it abides by or exceeds stakeholder expectations and has a positive impact on
stakeholder issues. Such activities are likely specific to a particular stakeholder group.
Social Responsibility
SOCIAL RESPONSIBILITY AND BUSINESS ETHICS

 Social responsibility can be defined as an organization’s obligation to

maximize its positive impact on stakeholders and minimize its negative
impact.
 Social responsibility can be viewed as a contract with society, whereas business
ethics involves carefully thought-out rules of business conduct that guide decision
making.

 There are four levels of social responsibility—economic, legal, ethical, and

philanthropic
Steps of Social Responsibility
Steps of Social Responsibility

1. At the most basic level, companies have a responsibility to be profitable at an acceptable level to meet the objectives of shareholders and create value.

2. Businesses are expected to obey all relevant laws and regulations.

3. Business ethics, as previously defined, comprises principles and values that meet the expectations of stakeholders.

4. Philanthropic responsibility refers to activities that are not required of businesses but that contribute to human welfare or goodwill.

 Ethics, then, is one dimension of social responsibility.

 Ethical decisions by individuals and groups drive appropriate decisions and are interrelated with all of the levels of social responsibility.

 For example, the economic level can have ethical consequences when making managerial decisions.
ISSUES IN SOCIAL RESPONSIBILITY

 Social responsibility depends on a stakeholder orientation.

 global warming, obesity, consumer protection, and other issues are causing companies to look at a broader, more
inclusive stakeholder orientation.

 In other words, a broader view of social responsibility looks beyond pragmatic and firm-centric interests and considers
the long-term welfare of society.

 There needs to be a movement away from selfserving and a narrow focus on profit maximization.

 In fact, there is strong evidence that an overemphasis on profit maximization is counter-productive.

 Long-term relationships with stakeholders develop trust, loyalty, and the performance necessary to maintain
profitability.
ISSUES IN SOCIAL RESPONSIBILITY

 Issues generally associated with social responsibility can be separated into four general categories:

1. social issues,

2. consumer protection,

3. sustainability,

4. corporate governance.
1. Social issues

Social issues are associated with the common good, which is the idea that because people live in a community, social rules should benefit
the community

social issues deal with concerns affecting large segments of society and the welfare of the entire society.

In terms of social responsibility, managers address social issues by examining the different groups to which they have an obligation.
Managers failing to meet these social obligations can create criticism and negative publicity for their organizations

Examples are:

 jobs lost through outsourcing, health issues, and poverty. While these issues may be indirectly related to business, there is a need to
reflect on them in developing strategies in certain cases.

 Issues that directly relate to business include obesity, smoking, and exploiting vulnerable or poor populations

 Marketers are increasingly targeting food advertising to children through Internet websites. With the childhood obesity epidemic
increasing, marketers of foods perceived to be unhealthy are being pressured to change their strategies to account for this growing
concern

 A major social issue gaining prominence involves loss of privacy for marketing purposes. Many consumers are shocked when they
realize marketers are using cookies and other mechanisms to track their online activity
2. Consumer Protection

 often occurs in the form of laws passed to protect consumers from unfair and deceptive business practices.

 Issues involving consumer protection usually have an immediate impact on the consumer after a purchase.

 Examples include advertising, disclosure, and product safety.

 Because consumers are less knowledgeable about certain products or business practices, it is the responsibility of
companies to take precautions to prevent consumers from being harmed by their products.

 For instance, businesses marketing products that could potentially be harmful have the responsibility to put warning
labels on their products.
3. Sustainability

 We define sustainability as the potential for the long-term well-being of the natural environment, including all
biological entities, as well as the mutually beneficial interactions among nature and individuals, organizations, and
business strategies.

 With major environmental challenges such as global warming and the passage of new environmental legislation,
businesses can no longer afford to ignore the natural environment as a stakeholder.

 Companies with an effective environmental management system tend to have improved financial performance in the
long run.

 Even industries traditionally considered high in pollution, such as the oil and gas industry, are investing in sustainable
practices like alternative energy.
4. Corporate Governance

 involves the development of formal systems of accountability, oversight, and control.

 Strong corporate governance mechanisms remove the opportunity for employees to make unethical decisions.

 Additionally, firms with strong corporate governance mechanisms that prompt them to disclose their social
responsibility initiatives can establish legitimacy and trust among their stakeholders
Corporate governance
What is Corporate Governance?

Normally involves strategic decisions and actions by boards of directors, business owners, top executives,
and other managers with high levels of authority and accountability.

It is the structure of rules, practices, and processes used to direct and manage a company.

A company's board of directors is the primary force influencing corporate governance.

Bad corporate governance can cast doubt on a company's operations and its ultimate profitability.

Corporate governance entails the areas of environmental awareness, ethical behavior, corporate strategy,
compensation, and risk management.

The basic principles of corporate governance are accountability, transparency, fairness, and responsibility.
Corporate Governance

 Directors and officers of corporations are fiduciaries for the shareholders.

 Fiduciaries are persons placed in positions of trust that act on behalf of the best interests of the
organization.

 They have what is called a duty of care, or a duty of diligence, to make informed and careful
decisions

 Directors have a duty to avoid ethical misconduct and provide leadership in decisions to prevent
ethical misconduct in the organization.

 Directors are not generally held responsible for negative outcomes if they have been informed and
diligent in their decision making.

 Board members have an obligation to request information, conduct research, use accountants and
attorneys, and obtain the services of ethical compliance consultants to ensure the corporations in
which they have an interest are run in an ethical manner
Views of Corporate Governance

Two major approaches to corporate governance:

The shareholder model of corporate governance: founded in classic economic precepts, including the
goal of maximizing wealth for investors and owners

The stakeholder model of corporate governance: adopts a broader view of the purpose of business.
Although a company certainly has a responsibility for economic success and viability to satisfy its
stockholders, it must also answer to other stakeholders
SOCIAL RESPONSIBILITY AND THE IMPORTANCE OF A STAKEHOLDER
ORIENTATION

 Many business people and scholars question the role of ethics and social responsibility in business.

 Legal and economic responsibilities are generally accepted as the most important determinants of performance. “If this is well done,”
say classical economic theorists, “profits are maximized more or less continuously and firms carry out their major responsibilities to
society.”

 Some economists believe if companies address economic and legal issues they satisfy the demands of society, and trying to anticipate
and meet additional needs would be almost impossible

 although the purpose of a stakeholder orientation is to maximize positive outcomes that meet stakeholder needs, the support
stakeholders have for companies they perceive to be socially responsible also serve to enhance the firms’ profitability.

 Evidence suggests caring about the well-being of stakeholders leads to increased profits.