Business Ethics and Corporate Social Responsibility(MGMT4231) Chapter Two 2016

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CHAPTER TWO: MANAGEMENT OF STAKEHOLDERS

2.1. Definition of Stakeholders

What is Stakes?

A stake is any interest, share, or claim that a group or individual has in the outcome of a
corporation’s business firm’s policies, procedures, or actions toward others. Stakes may be based
on any type of interest. The stakes of stakeholders are not always obvious. The economic
viability of competing firms can be at stake when one firm threatens entry into a market. The
physical environment, employees’ lives, and the health and welfare of communities can be at
stake when corporations either relax or do not have in place proper equipment, safety standards,
and emergency plans for crises. Stakes also can be present, past, or future oriented. For example,
stakeholders may seek compensation for a firm’s past actions, as occurred when lawyers argued
that certain airlines owed their clients monetary compensation after having threatened their
emotional stability when pilots announced an impending disaster (engine failure) that,
subsequently, did not occur. Stakeholders may seek future claims; that is, they may seek
injunctions against firms that announce plans to drill oil or build nuclear plants in designated
areas or to market or bundle certain products in noncompetitive ways.

What is a Stakeholder?
Stakeholders are “any individuals or groups who can affect or be affected by the actions,
decisions, policies, practices, or goals of the organization.” A stakeholder, according to Freeman
is “any group or individual who can affect or is affected by the achievements of the
organization’s objectives”
Many different definitions and perspectives
Stakeholders are a person, group, organization, or system who affects or can be affected by an
organization’s actions. In a business context, customers, investors and shareholders, employees,
suppliers, government agencies, communities, and many others who have a “stake” or claim in
some aspect of a company’s products, operations, markets, industry, and outcomes are known as
stakeholders

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Business influences these groups, but these groups also have the ability to influence business;
thus, the relationship between companies and their stakeholders is a two-way street. Sometimes
activities and negative press generated by special interest groups force a company to change its
practices. For example, consumer groups have put pressure on government and business to
decrease the amount of sodium, sugars, and other fatty ingredients in fast food and sodas.

There are three approaches to stakeholder theory: normative, descriptive, and instrumental

approaches. The normative approach identifies ethical guidelines that dictate how firms should

treat stakeholders. Principles and values provide direction for normative decisions. The

descriptive approach focuses on the actual behavior of the firm and usually addresses how

decisions and strategies are made for stakeholder relationships. The instrumental approach to

stakeholder theory describes what happens if firms behave in a particular way. This approach is

useful because it examines relationships involved in the management of stakeholders including

the processes, structures, and practices that implement stakeholder relationships within an

organization. The survival and performance of any organization is a function of its ability to
create value for all primary stakeholders and attempt to do this by not favoring one group over
the others.

2.2. Identifying Stakeholders, Who are Stakeholders? The following are some of the lists of
stakeholders of a corporation:
Religious groups Shareholders
NGOs /special interest groups Suppliers/distributors
Financial analysts and providers Customers
Academics Employees/and potential employees
Regulatory bodies Community
User groups/opinion groups/bloggers Media
Referral groups Professional bodies/lobbyists
Political bodies/local/national Competitors

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Trade groups

The classification of stakeholders

I. Primary Stakeholders vs. secondary stakeholders
 Primary stakeholders are those whose continued association is absolutely necessary for a
firm’s survival. These include owners, employees, suppliers, customers, investors, and
shareholders, as well as the governments and communities that provide necessary
infrastructure. Some firms take actions that damage relationships with primary stakeholders.
 Secondary stakeholders do not typically engage in transactions with a company and are
therefore not essential to its survival. These include the media, competitors, consumers,
lobbyists, trade associations, the public, and society and special interest groups like the
Association of Retired People (ARP), a special interest group working to support retirees’
rights such as health care benefits. 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.
Figure 2.1 Interactions between a Company and Its Primary and Secondary Stakeholders

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Source: Adapted from Isabelle Maignan, O. C. Ferrell, and Linda Ferrell, “A Stakeholder
Model for Implementing Social Responsibility in Marketing.” European Journal of Marketing 39
(2005): 956–977.
Generally, the difficulty with such a categorization is that stakeholders' involvement and
influence shift over time and vary among corporations. It is difficult to ascertain who should be
on each list; for example, government is listed as in some sector secondary, whereas in some
countries it is primary in regulated or protected industries.
II. Internal stakeholder vs. external stakeholder
Internal stakeholders are those included within the organization such as employees or managers
whereas external stakeholders are such groups as suppliers or customers who are not generally
considered to be a part of the organization. Although this classification is fine it becomes
increasingly difficult in a modern organization to distinguish the two types when employees
might be subcontractors and suppliers might be another organization within the same group.
III. Voluntary stakeholder vs. involuntary stakeholder
Voluntary stakeholders can choose whether or not to be a stakeholder to an organization
whereas involuntary stakeholders cannot. For example an employee can choose to leave the
employment of the organization and therefore is a voluntary stakeholder. The local society or the
environment are not able to make this choice and must therefore be considered to be involuntary
stakeholders.
IV. Normative stakeholder vs. derivative stakeholder

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Phillips identifies two types of stakeholders, making a useful distinction. Normative

stakeholders are those to whom the organization has an obligation and stakeholders from whom
the corporation has voluntarily accepted benefits. Examples are financiers, employees,
consumers, suppliers, and the local community. In contrast, derivative stakeholders are those
from whom the corporation has not accepted benefits, but they hold power over the corporation
and may exert either a beneficial or harmful influence. Two examples are NGOs and
competitors.

V. Multiple stake holding

It is normal to consider all of these stakeholder groups separately. It should be noted however
that each person will belong to several stakeholder groups at the same time. For example a single
person might be a customer of an organization and also an employee and a member of the local
community and of society at large. He or she may also be a shareholder and a member of a local
environmental association and therefore concerned about the environment.
Most probably that person will also be concerned about the future also, on their own behalf or on
behalf of their children. You can therefore see that it is often not helpful to consider each
stakeholder group in isolation and to separate their objectives. Hence, it is called multiple stake
holding. Reality is more complex.

2.3. A Stakeholder Orientation

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

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] The organization-wide generation of data about stakeholder groups and assessment of the
firm’s effects on these groups;
] The distribution of this information throughout the firm; and
] The responsiveness of the organization as a whole to this information.

2.4. Stakeholder Management

What is Stakeholder Management? It is management of relationships with individuals or
groups. It is a planned approach to identify, analyse, and engage stakeholders, thereby
influencing outcomes.

Key questions:

 Who are the key stakeholders?

 What are their “stakes?”: power/interest
 What opportunities/challenges do they present?
 What responsibility does the firm have to the stakeholders?
 What are the best strategies/actions for engagement?
Stakeholder management is the process of managing the expectations and the requirements of
these stakeholders. Simply, it is the management of relationships with individuals or groups. It is
a planned approach to identify, analyze, and engage stakeholders, thereby influencing outcomes.
It involves identifying and analyzing stakeholders and systematically planning to communicate
and engaging with them. Corporations should identify and attempt to understand the stakeholders
that influence and are influenced by the corporation. At the least, the corporation should prepare
a stakeholder map of its stakeholders.
Figure 2.2 Stakeholder Map of a Large Organization

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Source: Freeman, R. Edward. (1984). Strategic management: A Stakeholder approach, 25

Boston: Pitman.

The process of stakeholder management

Stakeholder management emphasized mechanisms of how an organization identified, monitored,
and responded to its stakeholders. The elements and process of stakeholder management involve
the following key steps:
I. Stakeholder identification- Identify the key organizational stakeholders by considering
factors such as relative power, the specific context and history of the relationship, and
specific issues that may be salient.
II. Stakeholder diagnosis- Analysis of stakeholders needs/stakes and their power/interest
relationships according to critical dimensions for potential threat or opportunity.
III. Development of policies and procedures- Formulating appropriate strategies to integrate
with stakeholders needs.
IV. Engagement- Implementing the strategies effectively including the possibility of
transforming the stakeholder relationship from a less favorable to a more favorable one if
appropriate. Strategies should attempt to satisfy the needs of marginal stakeholders
minimally and to satisfy the needs of supportive and mixed blessing stakeholders maximally.
How and when to talk to stakeholders and involvement in helping to provide solutions to
common problems

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Stakeholder management capability is the ability of managers to identify stakeholders and their
influence, to develop the organizational practices to understand stakeholders, and to undertake
direct contact with stakeholders. Stakeholder management capability (SMC) levels
 Level 1: rational level: identifies stakeholders and develop stakeholder maps
 Level 2: process level: organization develops and implements procedures, policies,
environmental scanning etc
 Level 3: transactional level: engagement

Stakeholder Engagement/commitment involves identifying:

h Desired outcomes –change perception or reduce conflict etc. Defined desired outcomes help
select methodology
h Scope - Purpose and rationale; scope; context, securing where appropriate, institutional or
key stakeholder support
h Engagement – facilitation and communication.
h Scope – how much can be achieved? What is the level of participation/risks involved? Are
aspects mandated by law?
h Context: history, the decision making environment, shared interests, timing

Criteria for Engagement

What criteria determine actions to influence corporations?
] Severity of problem
] Corporate image and credibility
] Strong demand from clientele
] Corporate visibility
] Corporate power and financial situation
Ways to Engage
Social media/blogs/ face book /podcasts Forums
Published material Meetings/events/visits
Focus groups Media briefings

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Questionnaires Corporate advertising

Surveys Sponsorships
Presentations Conferences
Internal communications CSR Reports
External corporate affairs

2.5. Implications for CSR

A primary objective of corporate stakeholder engagement is to build relationships with
stakeholders to better understand their perspectives and concerns on key issues (including
CSR issues) and to integrate those perspectives and concerns (when and where feasible and
prudent) into the company’s corporate strategy.
The prevalence of stakeholder theory is grounded in the belief that CSR-stakeholder
relationships are the essential assets that corporate must manage. While CSR aims to define what
responsibilities a business ought to fulfill, the stakeholder concept addresses the issue of whom
business is or should be accountable. Both concepts are closely interrelated. However, while the
CSR concept still suffers from a level of abstraction, the stakeholder approach offers a practical
alternative for assessing the performance of firms as well as the key stakeholder groups.

An organization that develops effective corporate governance and understands the importance of
business ethics and social responsibility in achieving success should also develop processes for
managing these important concerns. Although there are different approaches to this issue, we
provide basic steps found effective in utilizing the stakeholder framework to manage
responsibility and business ethics. The steps include (1) assessing the corporate culture, (2)
identifying stakeholder groups, (3) identifying stakeholder issues, (4) assessing organizational
commitment to social responsibility, (5) identifying resources and determining urgency, and
(6) gaining stakeholder feedback. These steps include getting feedback from relevant
stakeholders in formulating organizational strategy and implementation.
Step 1: Assessing the Corporate Culture
To enhance organizational fit, a social responsibility program must align with the corporate
culture of the organization. The purpose of this first step is to identify the organizational mission,

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values, and norms likely to have implications for social responsibility. Relevant existing values
and norms are those that specify the stakeholder groups and stakeholder issues deemed most
important by the organization. Often, relevant organizational values and norms can be found in
corporate documents such as the mission statement, annual reports, sales brochures, and
websites. For example, Dell’s mission is to be the most successful computer company (2) in the

world (3) at delivering the best customer experience in markets we serve (1). In doing so, Dell

will meet customer expectations of highest quality; leading technology (4); competitive pricing;
individual and company accountability (6); best-in-class service and support (7); flexible

customization capability (7); superior corporate citizenship (8); financial stability.

Step 2: Identifying Stakeholder Groups

In managing this stage, it is important to recognize stakeholder needs, wants, and desires. Many
important issues gain visibility because key constituencies such as consumer groups, regulators,
or the media express an interest. When agreement, collaboration, or even confrontations exist,
there is a need for a decision-making process such as a model of collaboration to overcome
adversarial approaches to problem solving. Managers can identify relevant stakeholders who
may be affected by or may influence the development of organizational policy.

Stakeholders have a level of power over a business because they are in the position to withhold
organizational resources to some extent. Stakeholders have the most power when their own
survival is not affected by the success of the organization and when they have access to vital
organizational resources. For example, most consumers of shoes do not need to buy Nike shoes.
Therefore, if they decide to boycott Nike, they endure only minor inconveniences. Nevertheless,
consumer loyalty to Nike is vital to the continued success of the sport apparel giant. A proper
assessment of the power held by a given stakeholder community includes an evaluation of the
extent to which that community collaborates with others to pressure the firm.
Step 3: Identifying Stakeholder Issues
Together, steps 1 and 2 lead to the identification of the stakeholders who are both the most
powerful and legitimate. The level of stakeholders’ power and legitimacy determines the degree

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of urgency in addressing their needs. Step 3, then, consists of understanding the main issues of
concern to these stakeholders. Conditions for collaboration exist when problems are so complex
that multiple stakeholders are required to resolve the issue, and adversarial approaches to
problem solving are clearly inadequate.

For example, obesity in children is becoming an issue across groups and stakeholders. The
United States is the most obese nation in the world with almost 40 percent of its population
obese or overweight. This results in a huge rise in health problems. Additionally, while
Americans have traditionally not supported government health care plans, increasing health care
costs are causing some stakeholders to reconsider their stance. Job-based health insurance costs
for families doubled in the past decade.
Step 4: Assessing Organizational Commitment to Social Responsibility
Steps 1 through 3 are geared toward generating information about social responsibility among a
variety of influences in and around an organization. Step 4 brings these three stages together to
arrive at an understanding of social responsibility that specifically matches the organization of
interest. This general definition will then be used to evaluate current practices and to select
concrete social responsibility initiatives. Firms such as Starbucks selected activities that address
stakeholder concerns. Starbucks formalized its initiatives in official documents such as annual
reports, web pages, and company brochures.
Starbucks is concerned with the environment and integrates policies and programs throughout all
aspects of its operations to minimize its environmental impact. The company also has many
community-building programs that help it to be a good neighbor and contribute positively to the
communities where its partners and customers live, work, and play.

Step 5: Identifying Resources and Determining Urgency

The prioritization of stakeholders and issues and the assessment of past performance lead to the
allocation of resources. Two main criteria can be considered: the level of financial and
organizational investments required by different actions, and the urgency when prioritizing social

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responsibility challenges. When the challenge under consideration is viewed as significant and
stakeholder pressures on the issue can be expected, the challenge is considered urgent.
Step 6: Gaining Stakeholder Feedback
Stakeholder feedback is generated through a variety of means. First, stakeholders’ general
assessment of a firm and its practices can be obtained through satisfaction or reputation surveys.
Second, to gauge stakeholders’ perceptions of a firm’s contributions to specific issues,
stakeholder-generated media such as blogs, websites, podcasts, and newsletters can be assessed.
Third, more formal research may be conducted using focus groups, observation, and surveys.

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