LECTURE OUTLINE
I. Stakeholders Define Ethical Issues in Business A. Stakeholders In a business context, customers, investors and shareholders, employees, suppliers, government agencies, communities, and others who have a “stake” or claim in some aspect of a company’s products, operations, markets, industry, and outcomes are known as stakeholders.

1. Stakeholders are influenced by business, but they also have the ability to affect businesses. 2. They apply their values and standards to many diverse issues—for example, working conditions, consumer rights, environmental conservation, product safety, and proper information disclosure—which may or may not directly affect an individual stakeholder’s own welfare. 3. They provide both tangible and intangible resources that are more or less critical to a firm’s long-term success. 4. Individual stakeholders that share similar expectations about desirable business conduct may choose to establish or join formal communities to advocate their values and expectations. 5. Stakeholders’ ability to withdraw—or to threaten to withdraw—valuable needed resources gives them power over businesses. B. Identifying Stakeholders 1. Stakeholders can be divided into two categories. a) Primary stakeholders are those whose continued association is absolutely necessary for a firm’s survival; these include employees, customers, investors, and stockholders, as well as the governments and communities that provide necessary infrastructure. b) Secondary stakeholders do not typically engage in transactions with a company and thus are not essential for its survival; these include the media, trade associations, and special-interest groups. c) Although primary groups may present more day-to-day concerns, secondary groups cannot be ignored or given less consideration in the ethical decision-making process. 2. Businesspeople have historically viewed the principal objective of business as profit maximization, but perceptions of business accountability shifted toward a broader view of the role and responsibilities of business in society in the latter half of the twentieth century. 3. The stakeholder interaction model indicates that there are two-way relationships between the firm and a host of stakeholders. C. A Stakeholder Orientation 1. The degree to which a firm understands and addresses stakeholder demands can be expressed as a stakeholder orientation. 2. A stakeholder orientation comprises three sets of activities. a) The organization-wide generation of data about stakeholder groups and assessment of the firm’s effects on these groups, a process that begins with identifying stakeholders who are relevant to the firm, including their basis of power and concerns. b) The distribution of this information throughout the firm. c) The organization’s responsiveness as a whole to this intelligence. (1) Responsiveness to stakeholder intelligence consists of the initiatives adopted to ensure that the firm abides by or exceeds stakeholder expectations and has a positive impact on stakeholder issues. (2) Responsiveness processes may involve the participation of the concerned stakeholder groups. 3. A stakeholder orientation can be viewed as a continuum as firms are likely to adopt the concept to varying degrees.
II. Social Responsibility and the Importance of a Stakeholder Orientation From the perspective of social responsibility, business ethics embodies standards, norms, and expectations that reflect a concern of major stakeholders, including consumers, employees, shareholders, suppliers, competitors, and the community.

A. Relationship Between Social Responsibility and Profitability 1. Much evidence shows that social responsibility, including business ethics, is associated with increased profits. Studies show that social responsibility contributes directly to employee commitment and customer loyalty. 2. Ethics and social responsibility cannot be just a reactive approach to issues as they arise. Only if a firm makes ethical concerns a part of its foundation and incorporates ethics into its business strategy can social responsibility as a concept be embedded in daily decision making.
III. Social Responsibility and Ethics The concepts of ethics and social responsibility are often used interchangeably, although each has a distinct meaning. Social responsibility can be viewed as a contract with society, whereas business ethics involves carefully thought-out rules or heuristics of business conduct that guide decision making. If social responsibility is considered an important corporate concern, then it does need quantitative credibility. Employee satisfaction, consumer loyalty, and other stakeholder concerns can be quantified to some extent, but some of the values and other dimensions are more qualitative. The International Organization for Standardization (ISO) has tried to establish a corporate responsibility standard, the ISO 26000; although the ISO 26000 has been demoted to a guideline rather than a standard, the discussion and debate surrounding the process is valuable. There are four levels of social responsibility—economic, legal, ethical, and philanthropic—and they can be viewed as steps. The term corporate citizenship is often used to express the extent to which businesses strategically meet the economic, legal, ethical, and philanthropic responsibilities placed on them by their various stakeholders. Corporate citizenship has four interrelated dimensions: strong sustained economic performance, rigorous compliance, ethical actions beyond what the law requires, and voluntary contributions that advance the reputation and stakeholder commitment of the organization. Reputation is one of an organization’s greatest intangible assets with tangible value. The value of a positive reputation is difficult to quantify, but it is very important.

IV. Corporate Governance Provides Formalized Responsibility to Stakeholders Today, the failure to balance stakeholder interests can result in a failure to maximize shareholders’ wealth. Both directors and officers of corporations are fiduciaries for the shareholders. To remove the opportunity for employees to make unethical decisions, most companies have developed formal systems of accountability, oversight, and control—known as corporate governance. A clear delineation of accountability helps employees, customers, investors, government regulators, and other stakeholders understand why and how the organization chooses and achieves its goals. Corporate governance establishes fundamental systems and processes: for preventing and detecting misconduct, for investigating and disciplining, and for recovery and continuous improvement. The development of stakeholder orientation should interface with the corporation’s governance structure.

A. Views of Corporate Governance 1. The shareholder model of corporate governance is founded in classic economic precepts, including the goal of maximizing wealth for investors and owners. For publicly traded firms, corporate governance focuses on developing and improving the formal system for maintaining performance accountability between top management and the firms’ shareholders. Thus, a shareholder orientation should drive a firm’s decisions toward serving the best interests of investors. 2. The stakeholder model of corporate governance adopts a broader view of the purpose of business. Although a company has a responsibility for economic success and viability to satisfy its stockholders, it also must answer to other stakeholders, including employees, suppliers, government regulators, communities, and special-interest groups with which it interacts. Due to limited resources, companies must determine which of their stakeholders are primary. B. The Role of Boards of Directors For public corporations, boards of directors hold the ultimate responsibility for their firms’ success or failure, as well as for the ethics of their actions. The traditional approach to directorship assumed that board members managed the corporation’s business. Research and practical observation have shown that boards of directors rarely, if ever, perform the management function. Thus, boards of directors are concerned primarily with monitoring the decisions made by executives on behalf of the company.

1. Greater Demands 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 also thought to bring more independence to the monitoring function because they are not bound by past allegiances, friendships, a current role in the company, or some other issue that may create a conflict of interest.

2. Executive Compensation Executive compensation is a difficult but important issue for boards of directors and other stakeholders to consider because it receives much attention in the media, sparks shareholder concern, and is hotly debated in discussions of corporate governance. One area for board members to consider is the extent to which executive compensation is linked to company performance. Another issue is whether performance-linked compensation encourages executives to focus on short-term performance at the expense of long-term growth.

V. Implementing a Stakeholder Perspective An organization that develops effective corporate governance and understands the importance of business ethics and social responsibility in achieving success should develop some processes for managing these important concerns. Although there are many different approaches, we provide some steps that have been found effective to utilize the stakeholder framework in managing responsibility and business ethics.

A. 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, values, and norms that are likely to have implications for social responsibility.

B. Step 2: Identifying Stakeholder Groups In managing this stage, it is important to recognize stakeholder needs, wants, and desires.

C. Step 3: Identifying Stakeholder Issues This step involves understanding the nature of the main issues of concern to primary stakeholders.

D. Step 4: Assessing Organizational Commitment to Social Responsibility Step 4 brings the previous three steps together to arrive at an understanding of social responsibility that specifically matches the organization of interest.

E. Step 5: Identifying Resources and Determining Urgency The prioritization of stakeholders and issues, along with the assessment of past performance, provides for allocating resources. Two main criteria can be considered:

1. The levels of financial and organizational investments required by different actions. 2. The urgency when prioritizing social responsibility challenges. F. Step 6: Gaining Stakeholder Feedback Stakeholder feedback can be generated through a variety of means.

1. Satisfaction or reputation surveys 2. Assessment of stakeholder-generated media 3. Focus groups, observation, and surveys