The Corporation and Its Stakeholders Business and Society The Stakeholder Theory of the Firm Stakeholder Analysis and Engagement The Dynamic Environment of Business Chapter 1

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. Business and society: An interactive system Figure 1.1 Business and society: An interactive system Business Society

Arguments for the stakeholder theory of the firm Descriptive Says that the stakeholder view is simply a more realistic description of how companies really work. Instrumental Says that stakeholder management is more effective as a corporate strategy. Normative Says that stakeholder management is simply the right thing to do.

The Stakeholder Concept A stakeholder refers to persons or groups that affect, or are affected by, an organization’s decisions, policies, and operations. Two types of stakeholders Market stakeholders Nonmarket stakeholders

Market Stakeholders Those that engage in economic transactions with the company as it carries out its primary purpose of providing society with goods and services. Employees Stockholders Customers Suppliers Retailers/Wholesalers Creditors

Market stakeholders of business Business firm Distributors, Wholesalers, Retailers CreditorsCustomers Stockholders Employees Suppliers Figure 1.2

Nonmarket Stakeholders People or groups who—although they do not engage in direct economic exchange with the firm—are affected by or can affect its actions. Communities Activist Groups Media Business Support Groups Governments The General Public

Nonmarket stakeholders of business Business firm General Public Activist Groups Business Support Groups Governments Communities Media Figure 1.3

Stakeholder analysis asks four questions: Who are the relevant stakeholders? What are the interests of each stakeholder? What is the power of each stakeholder? How are coalitions likely to form?

Exhibit 1.Ba Market stakeholders: Nature of interest Stakeholder Wishes To: Stakeholder Employees Maintain stable employment in firm Receive fair pay for work Work in safe, comfortable environment Stockholders Receive a satisfactory return on investments Realize appreciation in stock value over time Customers Receive fair exchange: value and quality for money spent Receive safe, reliable products

Exhibit 1.Bb Market stakeholders: Nature of interest Stakeholder Wishes To: Stakeholder Suppliers Receive regular orders for goods Be paid promptly for supplies delivered Retailers/ Wholesalers Receive quality goods in a timely fashion at reasonable cost Offer reliable products that consumers trust and value Creditors Receive repayment of loans Collect debts and interest

Exhibit 1.Bc Market stakeholders: Nature of power Stakeholder Influences Company by: Stakeholder Employees Union bargaining power Work actions or strikes Publicity Stockholders Exercising voting rights based on share ownership Exercising rights to inspect company books and records Customers Purchasing goods from competitors Boycotting companies whose products are unsatisfactory or whose policies are unacceptable

Exhibit 1.Bd Market stakeholders: Nature of power Stakeholder Influences Company by: Stakeholder Suppliers Refusing to meet orders if conditions of contract are breached Supplying to competitors Retailers/ Wholesalers Buying from other suppliers if terms of contract are unsatisfactory Boycotting companies whose goods or policies are unsatisfactory Creditors Calling in loans if payments are not made Utilizing legal authorities to repossess or take over property if loan payments are severely delinquent

Exhibit 1.Be Nonmarket stakeholders: Nature of interest Stakeholder Wishes To: Stakeholder Communities Employ local residents in the company Ensure that the local environment is protected Ensure that the local area is developed Activist Groups Monitor company actions and policies to ensure that they conform to legal and ethical standards, and that they protect the public’s safety Media Keep the public informed on all issues relevant to their health, well-being, and economic status Monitor company actions

Exhibit 1.Bf Nonmarket stakeholders: Nature of interest Stakeholder Wishes to: Stakeholder Business Support Groups Provide research and information which will help the company or industry perform in a changing environment Governments Promote economic development Encourage social improvements Raise revenues through taxes The General Public Protect social values Minimize risks Achieve prosperity for society

Exhibit 1.Bg Nonmarket stakeholders: Nature of power Stakeholder Influences Company by: Stakeholder Communities Refusing to extend additional credit Issuing or restricting operating licenses and permits Lobbying government for regulation of the company’s policies or methods of land use and waste disposal Activist Groups Gaining broad public support through publicizing the issue Lobbying government for regulation of the company Media Publicizing events that affect the public, especially those that have negative effects

Exhibit 1.Bh Nonmarket stakeholders: Nature of power Stakeholder Influences Company by: Stakeholder Business Support Groups Using its staff and resources to assist company in business endeavors and development efforts Providing legal or “group” political support beyond that which an individual company can provide for itself Governments Adopting regulations and laws Issuing licenses and permits Allowing or disallowing industrial activity The General Public Supporting activists Pressing government to act Condemning or praising individual companies

Forces that shape the business and society relationship Figure 1.4 Business and its Stakeholders Growing Emphasis on Ethical Values Evolving Government Regulation of Business Globalization Dynamic Natural Environment Explosion of New Technology Changing Societal Expectations

The relationship of business to its stakeholders has changed over time: Inactive Companies ignore stakeholder concerns. Reactive Companies act only when forced to do so. Proactive Companies try to anticipate stakeholder concerns. Interactive Companies actively engage with stakeholders in an ongoing relationship of mutual respect, openness, and trust. Inactive Reactive Proactive Interactive