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Topic 2
Stakeholder
Relationships, Social
Responsibility, and
Corporate
Governance

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Learning Objectives

• Identify stakeholders’ roles in business ethics

• Define social responsibility
• Examine the relationship between stakeholder orientation and social responsibility
• Delineate a stakeholder orientation in creating corporate social responsibility
• Explore the role of corporate governance in structuring ethics and social responsibility
in business
• List the steps involved in implementing a stakeholder perspective in social
responsibility and business ethics

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Relationships and
Business
• Businesses exist because of organizational
relationships between employees, customers,
shareholders, and the community
• Relationships are associated with both organizational
success and misconduct
• Stakeholder framework identifies the internal and
external stakeholders who agree, collaborate, and
engage in confrontations on ethical issues
• Allows organizations to identify, monitor, and
respond to the needs and expectations of
stakeholder groups

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• People who have a stake or claim in some

aspect of a company’s operations, markets,
and industry
• Approaches to stakeholder theory
• Normative - Sets forth ethical guidelines
that dictate how firms should treat
Stakeholders stakeholders
• Descriptive - Focuses on the actual
behaviors of a firm and addresses how
decisions and strategies are made for
stakeholder relationships
• Instrumental - Describes what happens
if a firm behaves in a particular way

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• Provide resources that are critical to a firm’s

long-term success
Role of • Foster better/ethical decision making
• The level of social responsibility of an
Stakeholders organization can be assessed by
scrutinizing its effects on the issues of
concern to its stakeholders

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Primary stakeholders

• People whose support and resources are

needed for a firm’s survival
• Include employees, customers, and
Types of shareholders

Stakeholders Secondary stakeholders

• Do not engage directly in transactions

with a company
• Not essential to a firm’s survival
• Include the media and trade associations

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Interactions
between a
Company and Its
Primary and
Secondary
Stakeholders

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Stakeholder Orientation

• Degree to which a firm understands and

addresses stakeholder demands
• Consists of the following activities:
• Organization-wide generation of data
about stakeholder groups and
assessment of the firm’s effects on these
groups
• Distribution of the generated data
throughout the firm
• Responsiveness of the organization as a
whole to the data generated

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Social Responsibility

• Social responsibility as an organization’s obligation to

maximize its positive impact on stakeholders and minimize
its negative impact
• A contract with society
• Usually made by top management.
• Research indicates that ethical conduct in business has a
stronger impact on both employee and brand attitudes
than externally focused CSR initiatives
• No amount of CSR effort can overwhelm negative news
about unethical internal conduct.

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Steps of Social Responsibility

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Corporate Citizenship

• Degree to which businesses strategically meet the economic, legal, ethical, and
philanthropic responsibilities placed on them by their stakeholders
• Dimensions
• Strong sustained economic performance
• Rigorous compliance
• Ethical actions beyond what the law requires
• Voluntary contributions that advance the reputation and stakeholder
commitment of the organization

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Consumer
Social issues
Issues in protection
Social
Responsibility Corporate
Sustainability
governance

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• Friedman’s view - Stakeholders do not have

any role in requiring businesses to
demonstrate responsible and ethical
Importance of behaviors
Stakeholder • Adam Smith’s view – invisible hand -
Orientation in individuals (corporation) pursuing their own
best self-interest would result in the
Social greatest overall good to society
• He thought that “humanity, justice,
Responsibility generosity, and public spirit, are the
qualities most useful to others” (Smith,
1759, 190)

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• Pope Benedict XVI’s view “Economic activity

cannot solve all social problems through the
simple application of commercial logic. This
Importance of needs to be directed towards the pursuit of
the common good, for which the political
Stakeholder community in particular must also take
Orientation in responsibility. Therefore, it must be borne in
mind that grave imbalances are produced
Social when economic action, conceived merely as
an engine for wealth creation, is detached
Responsibility from political action, conceived as a means
for pursuing justice through redistribution.”
(§36)

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Milton Friedman Pope Benedict XVI

• Stakeholders do not have any • “Economic activity cannot solve
role in requiring businesses to all social problems through the
demonstrate responsible and simple application of commercial
ethical behaviors logic. This needs to be directed
towards the pursuit of the
common good, for which the
political community in particular
must also take responsibility.

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Importance of
Stakeholder Orientation
in Social Responsibility

• Stakeholder support for

companies that are socially
responsible enhances a firm’s
profitability

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Corporate Governance and Stakeholders

• Corporate governance provides formalized responsibility to stakeholders

• The failure to balance stakeholder interests can result in a failure to maximize
shareholders’ wealth.
• Directors and officers of corporations are fiduciaries for the shareholders.
• Duty of care (diligence), and duty of loyalty

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Models of Corporate Governance

• Shareholder model
• Goal - Maximize wealth for investors and owners
• Focuses on developing and improving the formal system for maintaining
performance accountability between top management and shareholders
• Stakeholder model
• Company is answerable to its stakeholders
• Promotes stakeholder welfare along with corporate needs and interests

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Corporate Governance and Stakeholders (continued)

• Corporate governance establishes systems and processes for:

• Preventing and detecting misconduct
• Investigating and disciplining
• Recovery and continuous improvement
• The development of a stakeholder orientation should interface with the corporation’s
governance structure

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Accountablity

• Accountability - Degree to which workplace decisions align with a firm’s goals and its
compliance with ethical and legal considerations
• Oversight: a system of checks and balances that limit employees’ and managers’
opportunities to deviate from policies and strategies aimed at preventing unethical
and illegal activities.
• Control: the process of auditing and improving organizational decisions and actions.

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• Responsible for the ethics of a firm’s actions

Board of • Assume ultimate authority for their
organization’s effectiveness and subsequent
Directors performance
• Governed by the related laws

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Demand for Accountability and Transparency

• Directors today are increasingly chosen for their expertise, competence, and ability to
bring diverse perspectives to strategic discussions
• Outside directors are hired as they do not have vested interests
• The concept of interlocking directorate is not illegal unless it involves a direct
competitor
• Interlocking directorate: Board members linked to more than one company

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Executive Compensation

• Compensation paid to top executives of the company

• Ratio between the salaries of the highest-paid executives and the median employee
wage should be less
• Stakeholders support high level of compensation only when it is linked to strong
company performance

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Steps to Implementing a Stakeholder Perspective

Assessing the corporate culture

Identifying stakeholder groups and issues

Assessing organizational commitment to social responsibility

Identifying resources and determining urgency

Gaining stakeholder feedback

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