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Corporation & Society

9/9/10

Perspective of Business & Society

Dr. Thierry Rakotobe


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Introduction

The Business and Society Relationship

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Business: Any organization that is engaged in making aproduct or providing a service for a profit

Society: Human beings and the social structures theycollectively create

Business and Society are high interdependent


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Introduction

The Business and Society Relationship

General Systems Theory (GST) from Biology to explainthis relationship; first introduced in 1940s

Theory posits that organisms cannot be understood inisolation, even though they have clear boundaries; they can onlybe understood in relationship to their surroundings

Adapted to management theory means that businessfirms are embedded in a broader social environment withwhich they constantly interact

Business and society together form an interactive social

system (shown graphically in the following slide)


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Business and Society: An Interactive SystemFigure 1.1


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Introduction

The Stakeholder Theory of the Firm

Two critical questions:1. What is the purpose of the modern corporation?

2. To whom, or what, should the firm be responsible?

Traditional view: Ownership Theory of the Firm

Firm is the property of its owners

Purpose is to maximize returns to shareholders

Shareholders interests are paramount and take precedenceover all others


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Introduction

Stakeholder Theory of the Firm

Contrasting view: Stakeholder Theory of the Firm

Argues the corporation serves a broader purpose, to

create value for society

Must make profit for owners to survive, however, createsother kinds of value too

Corporations have multiple obligations, all stakeholder

groups must be taken into account


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Core Arguments for

Stakeholder Theory of the Firm

Descriptive More realistic description of how companies really work

Instrumental More effective corporate strategy

Normative Stakeholder management is the right thing to do


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The Stakeholder Concept

A stakeholderrefers to persons or groups that affect,or are affected by, an organizations decisions, policies, and

operations

A stake is an interest in or claim to a businessenterprise

Businesses are embedded in networks that involve many

groups with such a stake


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The Stakeholder Concept

A Tip for Understanding

Term stakeholderis NOT the same as stockholder

Words sound similar BUT are not the same

Stockholders are one of several kinds ofstakeholders


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Market and Nonmarket Stakeholders

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Stakeholder groups can be divided in to two categories:1. Market stakeholders

2. Nonmarket stakeholders

Market stakeholders are those that engage in economictransactions with the company as it carries out itsprimary purpose of providing society with goods andservices

Sometimes referred to as primary stakeholders


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Stakeholder Maps

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Drawing maps of stakeholder systems, with the

business firm in the center, is one way to visualize

the relationship between the firm and its

stakeholders

Each relationship is based on a unique transaction or

two-way exchange


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Figure

1.2

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Market Stakeholder Map


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Nonmarket Stakeholders

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Nonmarket stakeholders are people or groups who

although they do not engage in direct economic

exchange with the firmare affected by or can affect its

actions Sometimes called secondary stakeholders


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Figure

1.3

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Nonmarket Stakeholder Map


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Issues: Market and Nonmarket

Stakeholders

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Should government be a nonmarket or marketstakeholder? Normally governments do not have direct exchange with

businesses, but in some industries there is such anexchange

Should the natural environment be a nonmarketstakeholder?

Not a social group, generally considered to be representedby activist groups

Should managers be classified as stakeholders? Addressed in Exhibit 1.A on next slide


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Are Managers Stakeholders?

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On one hand, the answer is yes. Like other stakeholders, managers areimpacted by the firms decisions. As employees of the firm, managers receivecompensation often very generous compensation. Their managerial rolesconfer opportunities for professional advancement, social status, and powerover others. Managers benefit from the companys success and are hurt by its

failure. For these reasons, they might properly be classified as employees on theperimeter of the stakeholder wheel, as shown in Figure 1.2.

On the other hand, top executives are agents of the firm and are responsible foracting on its behalf. In the stakeholder theory of the firm, their role is tointegrate stakeholder interests, rather than to promote their own more narrow,selfish goals. For these reasons, they might properly be classified in the centerof the stakeholder wheel, as representatives of the firm.

Management theory has long recognized that these two roles of managerspotentially conflict. The main job of executives is to act for the company, but allto often they act primarily for themselves.

Exhibit 1.A

excerpt


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Issues: Market and Nonmarket

Stakeholders

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Are stakeholder maps the best way to visualize the

business/stakeholder relationship?

Network may be more appropriate depiction, givenrelationships often exist among stakeholder themselves

See Figure 1.4 on next slide


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A Stakeholder Network

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Figure 1.4


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Stakeholder Analysis

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It is part of every managers job

Process whereby identify relevant stakeholders and analyze theirinterest and power

Asks 4 Questions:1. Who are the relevant stakeholders?2. What are the interests of each stakeholder?3. What is the power of each stakeholder?4. How/what are coalitions likely to form?


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Stakeholder Analysis Question 1

Who are the Relevant Stakeholders?

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Answer this question by drawing market and nonmarket stakeholder maps

Use Figures 1.2 and 1.3 as guides

Recognize that not all of these groups are relevant to every situation;examples: Some businesses sell directly to the public and will not have retailers A certain stakeholder may not be relevant to a particular decision/action


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What are the Interests of each Stakeholder?

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Analyzing stakeholder interests includes addressing: What are the groups concerns?, and What does the group want/expect from their relationship with the firm?

Examples: Stockholders have an ownership interest, they expect to receive dividends

and capital appreciation Customers are interested in gaining fair value and quality in goods and

services they purchase Public interest groups advance broad social interests


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N k t St k h ld


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Nonmarket Stakeholders:

Nature of Interest and Power

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Exhibit 1.Bcont.


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What is the Power of each Stakeholder?

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Stakeholder power is the ability of a group to use resourcesto make an event happen or to secure a desired outcome

There are 4 types of stakeholder power:1. Voting power2. Economic power3. Political power4. Legal power


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What is the Power of each Stakeholder?

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Alternative concept called stakeholder salience, meaningsomething that stands out from its background

Stakeholder salience is determined by each groupspower, legitimacy, and urgency attributes

The greater the stakeholder groups salience, the moreattention a manager should pay to that group

Groups that have all 3 attributes are called definitivestakeholders

Groups that have 2 attributes are called expectantstakeholders


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How are Stakeholder Coalitions Likely to Form?

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Stakeholder groups often have common interests and willform temporary alliances to pursue these common interests

Coalitions are very dynamic (can change at any time) Coalitions are increasing international Internet has enabled coalitions to form quickly, across

political boundaries International alliances, coupled with media interest, can be a

very powerful strategic force for companies


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Stakeholder Engagement

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The action component following stakeholder analysis: Once you know who your stakeholders are, their interests, power,

and any coalitions, do you take action to engage with these

groups?

Companies tend to follow a progression of stages instakeholder engagement: Inactive (lowest level) to interactive (highest level) continuum

shown on next slide The cases throughout the text demonstrate companies at different

points on the continuum


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The Stakeholder Engagement Model

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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


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Stakeholder Dialogue

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Tool used by firms at higher stages of stakeholderengagement

Involves face-to-face meetings between corporate

representatives and representatives of theirstakeholder groups to discuss issues of mutualconcern

Steps in dialogue

1. Each group describes their core issues & concerns

2. Together groups reach common definition ofproblem/s

3. Together groups invent innovative solutions thatinvolve mutual gain

4. Together establish procedures for implementingsolutions


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Stakeholder Engagement and

DialogueBenefits

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Helps companies learn about societal expectations

Generates creative solutions to problems

Helps win stakeholder support for implementing

solutions

Can neutralize critics

Can improve corporate reputation for takingconstructive action


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Conclusion Chapter 1

Core Arguments in Your Text

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1. The external environment of business is dynamic andever changing Six such forces identified in Figure 1.5 on next slide

2. A successful business must meet both its economic andsocial objectives

3. The purpose of the firm is not simply to make a profit,but to create value for all its stakeholders


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Figure

1.5

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Forces that Shape the

Business and Society Relationship

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