The Context of Business Ethics: Stakeholders, Issues, and Social Responsibility

A stakeholder is any group or individual who can affect or is affected by the achievement of the firm’s objectives. (R. Edward Freeman, 1984)

Who Are a Company’s Stakeholders? Employees Customers Shareholders Suppliers Communities Government units NGOs And….

Stakeholder Interests: Simple Model Employees want higher wages, easier work. Customers want lower prices, better quality. Suppliers want higher prices, faster payment. Stockholders want price growth & dividends. Governments want taxes & legal compliance. Communities want jobs, clean air, civic contributions. NGOs want money, cooperation.

Stakeholder Interests: Complex Model In reality, stakeholders within a class may want different things: – Some customers may want low prices, – Some may want high quality, – Some may want union-made products, – Some may want less polluting production, – Some may want …. (what else?)

Stakeholders may want a combination of things: – Investors may want dividends, growth, protection of the environment and human rights…. – Employees may want wages, meaningful work, job security, promotion opportunities, cleaner and safer technology…. – Communities may want ….

Ways of Parsing the Stakeholder Set Primary stakeholders are those that have placed something at risk on behalf of the company, or without whose support the company would not survive. Secondary stakeholders may affect or be affected by the company’s operations, but their participation and support are not essential to the firm’s success.

Voluntary stakeholders intend to place something at risk, or mean to participate in the company’s operations. Involuntary stakeholders benefit or are harmed by the company’s actions without their permission, and sometimes without their knowledge.

An Ethical Company…. Engages voluntary stakeholders in free (not coerced), fair, and fully informed relationships, and Does not cause harm to involuntary stakeholders. This is a very high standard!

Stakeholder Salience: Who and What Matters to Managers? Managers attribute some combination of these three characteristics to their stakeholders: Power – the stakeholder’s ability to influence the focal firm’s behavior. Legitimacy – the stakeholder’s social standing or acceptability Urgency – the degree to which stakeholder claims have time-sensitivity and importance to the stakeholder.

POWER LEGITIMACY URGENCY Discretionary Stakeholders “Mosquitoes” Dependent Stakeholders Dominant Stakeholder s Dangerous Stakeholders Immediate Core Stakeholders Dormant Stakeholders Mitchell, Agle & Wood: The Stakeholder Salience Model

Stakeholders with one attribute: Dormant stakeholders possess power only (money, media access, bombs…); they have no legitimate standing with the firm and no urgent claim on the firm. Discretionary stakeholders possess legitimacy, but have no power to influence the firm and no urgent claims. There is absolutely no pressure on managers to engage in an active relationship with such a stakeholder, although managers can choose to actively engage. Charitable or arts organizations are often discretionary stakeholders. “Mosquitoes” have an urgent claim but no power or legitimacy. These stakeholders may be irritating but they’re not dangerous unless and until they manage to acquire power and/or legitimacy. ANY OF THESE CAN ACQUIRE ANOTHER ATTRIBUTE….

Stakeholders with two attributes: Dependent stakeholders are legitimate and have urgent claims, but have no power to enforce their will. Dangerous stakeholders have power and urgent claims, but no legitimate standing. Dominant stakeholders have power and legitimate standing, but no urgent claims.

Stakeholders with all three attributes: Immediate core stakeholders have power, legitimacy, and an urgent claim. Managers will normally attend to and give priority to that stakeholder's claim.

Stakeholder Relationship Management All companies need to manage their relationships with stakeholders, – To avoid harms and ensure legitimate benefits to stakeholders, – To monitor the latent stakeholders, – To prevent stakeholders from harming the company, – To reap the benefits that stakeholders can offer the company. Stakeholder engagement – two-way communication – is key.

The Clarkson Principles: Segue from Stakeholders to Social Responsibility Principle 1: Managers should acknowledge and actively monitor the concerns of all legitimate stakeholders, and should take their interests appropriately into account in decision-making and operations. Principle 2: Managers should listen to and openly communicate with stakeholders about their respective concerns and contributions, and about the risks that they assume because of their involvement with the corporation. Principle 3: Managers should adopt processes and modes of behavior that are sensitive to the concerns and capabilities of each stakeholder constituency.

Principle 4: Managers should recognize the interdependence of efforts and rewards among stakeholders, and should attempt to achieve a fair distribution of the benefits and burdens of corporate activity among them, taking into account their respective risks and vulnerabilities. Principle 5: Managers should work cooperatively with other entities, both public and private, to insure that risks and harms arising from corporate activities are minimized and, where they cannot be avoided, appropriately compensated.

Principle 6: Managers should avoid altogether activities that might jeopardize inalienable human rights (e.g., the right to life) or give rise to risks which, if clearly understood, would be patently unacceptable to relevant stakeholders. Principle 7: Managers should acknowledge the potential conflicts between (a) their own role as corporate stakeholders, and (b) their legal and moral responsibilities for the interests of stakeholders, and should address such conflicts through open communication, appropriate reporting and incentive systems and, where necessary, third party review.

Issues Management Issues management is a set of processes that allow a company to identify, analyze, and act on the social or political issues that may affect it significantly. May be in public affairs May be in strategic planning May be in its own unit

How do you know something is an issue? Look for expectational gaps: inconsistencies in views of what is and/or what ought to be. a factual gap: an inconsistency between what is and what is. a conformance gap: an inconsistency between what is and what ought to be. an ideals gap: an inconsistency between what ought to be and what ought to be.

Two more factors Controversy, or intensity, is necessary for an issue to exist. Controversy is generated by stakeholders exercising voice through: (1) their willingness and ability to confront the relevant parties in an expectational gap, or (2) their willingness and ability to push their concerns into a broader public forum. Impact is necessary for an issue to exist, because expectational gaps can develop and be contro- versial, but unless there is some impact on the organization, there is no issue for that organization.

The Issue Life Cycle TIME Public Attention Early/Nascent Middle/Developing Late/Mature Stage Stage Stage Trigger Event Resolution or Abandonment A – The issue re-emerges because the resolution was unsatisfactory, new players enter, or old players re-enter. B – The issue plateaus because of resolution or declining interest. C – The issue dies because it’s resolved, there’s no more interest, or it has become irrelevant.

Issues Management Process Identify expectational gaps. Assess controversy and salience. Develop response, depending on the type of expectational gap.

A factual gap (what is vs. what is) calls for responses such as objective studies to clarify the facts, and not debates with stakeholder groups over what ought to be the company's operations or policies. An ideals gap (what ought to be vs. what ought to be) calls for discussions over the values and ideals at stake; facts are not the issue. A conformance gap, (what is vs. what ought to be) requires attempts to adjust the positions of one or both or all conflicting parties. Can be unilateral change, negotiated responses, legislative and regulatory public policy processes, arbitration, mediation, collaborative problem solving, etc.

Corporate Social Responsibility Corporate social responsibility (CSR) can be defined as the set of duties that companies owe to their stakeholders and to society. Corporate social performance (CSP)is a process and outcome measure. It is defined as “a business organization’s configuration of principles of social responsibility, processes of social responsiveness, and observable outcomes as they relate to the firm’s societal relationships.” (Wood, 1991)

Milton Friedman’s Challenge “The view has been gaining widespread acceptance that corporate officials … have a ‘social responsibility’ that goes beyond serving the interest of their stockholders…. This view shows a fundamental misconception of the character and nature of a free economy. In such an economy, there is one and only one social responsibility of business – to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud…. Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.” --Capitalism and Freedom, 1962

What’s your response? Arguments pro-Friedman Arguments anti-Friedman Theory vs. reality: stakeholders do exist, do have claims, do have power and legitimacy, and companies must deal with them. Friedman was really talking about corporate charity. What do you think about that?

Carroll’s CSR Model and Kang’s Modification

Wood’s Model of Corporate Social Performance PRINCIPLES OF SOCIAL RESPONSIBILITY Legitimacy: businesses that abuse the power society grants them will lose that power. Public Responsibility: Businesses are responsible for outcomes related to their primary and secondary areas of involvement with society. Managerial Discretion: Managers and other employees are moral actors and have a duty to exercise discretion toward socially responsible, ethical outcomes.

PROCESSES OF SOCIAL RESPONSIVENESS Environmental Scanning: gather the information needed to understand and analyze the firm’s social, political, legal, and ethical environments. Stakeholder Management: active and constructive engagement in relationships with stakeholders. Issues/Public Affairs Management: a set of processes that allow a company to identify, analyze, and act on the social or political issues that may affect it significantly.

OUTCOMES & IMPACTS OF PERFORMANCE Effects on people and organizations. Effects on the natural and physical environments. Effects on social systems and institutions.

Kang’s Model Mapped to Wood’s

Stakeholders are key to understanding CSR and CSP: Stakeholders are the source of expectations about what constitutes desirable and undesirable firm performance. Stakeholders experience the effects of corporate behavior, that is, they are the recipients of corporate actions and output. Stakeholders evaluate how well firms have met expectations and/or how firms' behaviors have affected the groups and organizations in their environment. (Wood & Jones, 1995)

Connect the Dots Stakeholders have power, standing, & claims. Stakeholder interests will generate issues for companies. Corporate social responsibility defines a firm’s duties to stakeholders and society. Corporate social performance is a template for evaluating a firm’s fulfillment of CSR and effectiveness at managing stakeholder relations and issues.