1. Week 2 - Doing what is right

2. Doing what is right - Not only caring for ourselves but promoting the welfare of others and promoting what is considered valuable e.g. education, health. In business we should think about our career, company and social welfare. These can be in conflict so it’s not easy. Introduction

3. Framework A framework with principles can help guide decision making.

4. Neoclassical economics principles 1.People have rational preferences between outcomes that can be identified and associated with values. 2.Individuals maximize utility and firms maximize profits. 3.People act independently on the basis of full and relevant information. Neoclassical framework

5. A narrow framework but has had great influence on management theory and practice It suggests that by maximizing profits for shareholders they can do the best for themselves their company and promote overall welfare. Neoclassical framework

6. Wider and better for promoting ethical- organizational integrity. Stakeholder orientated framework

7. CSR activists in 60s and 70s – business persons should look beyond their economic interests to support and drive social causes like poverty or environmental issues. Milton Friedman – “ There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase it 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.” Group Question - What do you think? Neoclassical account

8. Individual preferences define the advantage for the individual and the collective advantage is the sum of the individual advantages. People will only engage in transactions that they see as in their own interest and so individual preferences will be maximized. Pareto efficiency happens when one persons happiness cannot be increased without the other person being lowered. How to link profits and social welfare?

9. Managers should try to efficiently get products and services to those who are willing to pay the most for them. This satisfies consumer preferences. Shareholders get a return on investment. Successful companies attract capital to provide jobs and taxes contributing to social welfare. Consequently collective preference satisfaction is maximized. How to link profits and social welfare?

10. Managers are the wrong people to help solve societies problems like crime or poverty – managers have no training or expertise in that area - managers would not allocate resources efficiently due to favoritism. Neoclassical Model - Friedman

11. Freidman does not explain what moral rules companies are bound by (except to avoid fraud and deception) or why they would be bound by those rules. Freidman's idea on preferences has had philosophical criticism. Profitability for shareholders as an objective tends to reduce a managers attention to short term gains. Managers have shown that they can be effective at helping with societal problems. Criticisms

12. Is not forward looking enough to consider longer term opportunities and risks. These days is considered poor management. Balanced score card is one suggested alternative Given as a reason for the recent financial crisis. Even if financial success if the main objective this model doesn’t work well. Focusing on short term success

13. A new subcompact car to compete with foreign automakers Accelerated production – product development and tooling happened at the same time. Crash tests revealed a serious flaw in the gas tank Ford made a cost benefit analysis – it would cost $45million to pay compensation and $137 million to fix the flaw. So they made an unethical decision not to fix the flaw. Ford Pinto example

14. Johnson and Johnson “ customers come fist and shareholders last, when customer satisfaction is at the top of the list, shareholders do just fine.” Empirical data supports a positive link between a companies commitment to ethics and social responsibility and financial performance. Long term outlook

15. May not be experts but are not necessarily bad especially when working with other stakeholders together. Ford currently “have never lost sight of the social and environmental goals that are key elements of the business.” Ford global week of caring, Ford dreams, Automotive Industry Action Group. US financial institutions and non-profit group consumer action have launched Moneywise – free financial education. Managers are bad at social issues?

16. What narrow measurement does the neoclassical model suggest that managers should focus on? How can we link profits and social welfare? What are some criticisms of the neoclassical theory? Questions

17. Stakeholder management formalized in 1980s by RE Freeman – How managers should identify and align the interests of a wide range of individuals and groups. Has endured some criticisms –Ant capitalistic –Doesn’t provide an objective corporate function –Could be some favoritism behavior from the manager. Another approach – Stakeholder Management

18. Triple bottom line – financial, environmental and social performance are measured. http://www.economist.com/node/14301663 http://www.economist.com/node/14301663 Balanced scorecard approach. http://www.economist.com/node/12677043 Long term wealth production (Economic value added, Market value added, Shareholder value creation) Other options

19. Nowadays effective stakeholder management is seen as essential for long term company value production and success. William George “ Serving all your stakeholders is the best way to produce long-term results and create a growing prosperous company… there is no conflict between servicing all your stakeholders and providing excellent returns for shareholders. In the long term it is impossible to have one without the other.” Stakeholder management

20. General guiding stakeholder management strategies to be fitted to a specific industry. Properly identifying company stakeholders. Stakeholder = Any individual or group whose claim on a firms activities could promote or inhibit company value creation and ultimately company success. Step 1

21. Within each category in Figure 1.1 managers must identify the specific stakeholders with which they are related. E.g short term vs long term shareholders. Each different group makes a different kind of “claim” on the company. –Employees claim wages –Shareholders a financial return on their investment. –Activist groups may complain about environmental degradation or global warming Step 1

22. Fill in the specific stakeholder groups and identify the claims each group is making. In principle meeting the stakeholders claims adds value and processes should be established to do so. E.g. Failing to pay suppliers on time could lead to poor quality. It adds social capital “a capability that arises from the prevalence of trust in a society or in certain parts of it… if people who work together in an enterprise trust one another because they are all operating according to a set of ethical norms, doing business costs less.” Step 1

23. Sometimes even if the stakeholders don’t make a claim we could do what’s best for them and in turn our company. E.g. improving workplace health and safety or educating employees can boost company performance. Step 1

24. Improving on what a stakeholder can achieve (e.g. through education) in order to generate valuable outcomes and mutually drive company success. Mutual stakeholders – have a shared or joint interest in company success so developing their capabilities helps drive company success –Shareholders –Employees –Suppliers –Consumers Step 2

25. Ford actively works with suppliers and industry partners to encourage the development and implementation of environmental management systems, life-cycle product and tooling analysis, environmental modeling and other sustainability management tools. Capital one – financial literacy of consumers Deutsche bank – community arts, music and educational programs. Step 2

26. 1 Help all stakeholders by underst anding and meeting their claims 2 Help mutual stakeholders by developing th eir capabilities. Two steps

27. 1. Don’t ignore any group and take some action for 1 or 2. Don’t make “either - or” situations “Either we meet our shareholder claims or our employee claims” 2. Prioritize claims with regard to the potential for short and long term value production and competitive advantage. 3. Think creatively about how to best meet claims and develop capabilities. Also use benchmarking. 4. Establish processes to ensure continual improvement. Competing stakeholder demands

28. 1. It’s not an easily measurable corporate objective function so managerial favoritism can happen. Counter argument - it can be tied to various performance metrics (we will see later). 2. All stakeholders must be treated equally. Counter argument - no stakeholder group ignored but managers can attend to stakeholder claims which better drive sustainable company success. 3. Stakeholder management requires democratic forms of corporate governance. Counter argument – all types of governance are ok. Response to Criticisms

29. Managers should do what is right for their company and social welfare. In the neoclassical model managers do what is right by optimizing profits for shareholders. However this model is too narrow, doesn't consider long term value creation and is risky. The stakeholder management model is a far better model which includes meeting stakeholders claims, developing capabilities and being socially and environmentally responsible. Summary

30. Who is a stakeholder of a company? What are the 2 steps of efficient stakeholder management? Give an example of how mutual stakeholders capabilities can be improved? What steps should a manager follow if there is a conflict between stakeholders claims? Questions