Chapter 2

2-Copyright 2007 Prentice Hall 1

Organizational Theory, Design, and Change

Fifth EditionGareth R. Jones

Chapter 2

Stakeholders, Managers, and

Ethics


Organizational Stakeholders Stakeholders: people who have

an interest, claim, or stake in an organization.

Inducements: rewards such as money, power, and organizational status.

Contributions: the skills, knowledge, and expertise that organizations require of their members during task performance.


Table 2-1: Inducements and Contributions of Stakeholders


Inside StakeholdersPeople who are closest to an

organization and have the strongest and most direct claim on organizational resources Shareholders: the owners of the

organization. The shareholders contribution is to invest

money in it by buying shares or stock. The inducement to invest is the

prospective money that they can earn from their investment in the form of dividends.

Investment is risky because there is no guarantee of return.

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Shareholders who don’t believe that the inducement is enough sell their shares and withdraw their support from organization.

Managers: the employees who are responsible for coordinating organizational resources and ensuring that an organization’s goals are successfully met.

Managers contribution are the skills they use to direct the organizations response to pressures from within and outside the Copyright 2007 Prentice Hall 5

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Organization. Several types of rewards induce

managers to perform their activities: Ex:salaries,bonuses stock options,

psychological satisfaction that they get from controlling the organiztion,exerting power,etc…

The workforce: all non-managerial employees.

Members of the workforce have responsibilities and duties(usually outlines in their job description) that they are responsible of performing.Copyright 2007 Prentice Hall 6


Outside StakeholdersPeople who do not own the

organization, are not employed by it, but do have some interest in it. Customers: an organization’s largest

outside stakeholder group. Customers are induced to select a

product from alternative products relative to what they pay.

The money that they pay is their contribution to the organization.(ex:How southwest Airlines serves its customers).

Suppliers: provide reliable raw materials and component parts to organizations.

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An organization that has high quality inputs Can make high-quality products and attract customers.

As demand for its products increases, the organization demands greater quantities of high-quality inputs from its suppliers.

Ex:One of the reasons why Japanese cars remain so popular with U.S.consumers is that they still require fewer repairs than the average U.S-made vehicle.

Japanese parts suppliers are constantly improving their efficiency.Copyright 2007 Prentice Hall 8

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The government Wants companies to obey the rules of fair

competition Wants companies to obey rules and laws

concerning the treatment of employees and other social and economic issues.

The government makes a contribution to the organization by standardizing regulations so that they apply to all companies.

The government has the right to punish any company that breaks these rules by taking legal actions.

Copyright 2007 Prentice Hall 9

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Local communities: They have a stake in the performance

of organizations because employment, housing and the general economic well being of a community are strongly affected by the success or failure of local business..


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The general public Wants local businesses to do well

against overseas competition Wants corporations to act in socially

responsible way



Organizational Effectiveness: Satisfying Stakeholders’ Goals and InterestsAn organization is used

simultaneously by various stakeholders to achieve their goals. Shareholders: evaluate an organization by

the return they receive from their investment.

Customers: product reliability and product value

Employees: compensation, working conditions, career prospects


Competing Goals Organizations exist to satisfy

stakeholders’ goals But which stakeholder group’s goal is

most important? In the U.S., the shareholders have first

claim in the value created by the organization.

Although in theory managers are the employees of shareholders-because managers have control over organizational resources-this gives them real control over the company even though shareholders do.

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For this reason, goals of managers and shareholders may be incompatible, and the shareholders goals are not the ones most likely to be followed.



Allocating RewardsManagers must decide how to

allocate inducements to provide at least minimal satisfaction of the various stakeholder groups

Managers must also determine how to distribute “extra” rewards

Inducements offered to shareholders affect their motivation to contribute to the organization.

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Examples:In the 1980s,a CEO’s average

salary was about 40 times greater than the average worker.

By the 2000s,the CEO’S salary was 400 times greater,so is this fair?

What are the appropriate rewards for a middle manager who invents a new process that earns the organization millions of dollars?


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The allocation of rewards is an important component of organizational effectiveness.



Top Managers and Organizational Authority Authority: the power to hold people

accountable for their actions and to make decisions concerning the use of organizational resources.

Legally the shareholders own the company and exercise control over it through their representatives-The board of directors.

The board of directors: monitors corporate managers’ activities, accept the authority and responsibility from shareholders, and rewards corporate managers who pursue activities that satisfy stakeholder goals

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Corporate –level management: Is the inside stakeholder group

that has ultimate responsibility for setting company goals and objectives, for allocating organizational resources to achieve objectives., and design organizational structure.


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Figure 2.1 shows the typical hierarchy of management titles and the chain of command.

It is the system of heirarchical reporting relationships of a large corporation.

A hierarchy is a vertical ordering of organizational roles according to their relative authority.



The Chief Executive Officer’s (CEO) Role in Influencing EffectivenessResponsible for setting

organizational goals and designing its structure:

The CEO allocates authority and task responsibilities, so that resources are coordinated and motivated to achieve organizational goals.

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Selects key executives to occupy the topmost levels of the managerial hierarchy:

This sort of staffing is a vital part of the CEO’s job because the quality of decision making is directly affected by the abilities of the organizations top managers.

Determines top management’s rewards and incentives.



The CEO’s role in influencing organizational effectiveness (cont.)

Controls the allocation of scarce resources such as money and decision-making power among the organization’s functional areas or business divisions:

For example: this control gives the CEO enormous power to influence the direction of the organization’s future value-creation activities,as well as the kinds of products the company will make, and the market in which it will compete.

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The CEO’s actions and reputation have a major impact on inside and outside stakeholders’ views of the organization and affect the organization’s ability to attract resources from its environment.

Ex:A CEO’S personality and charisma can influence an organization’s ability to obtain money from banks and shareholders,thus influence customer’s desire to buy a company’s product.Copyright 200 7 Prentice Hall 24


The Top-Management TeamLine-role: managers who have

direct responsibility for the production of goods and services

Staff-role: managers who are in charge of a specific organizational function such as sales or research and development (R&D) Are advisory only


The Top-Management Team (cont.)Top-management team: a

group of managers who report to the CEO and COO and help the CEO set the company’s strategy and its long-term goals and objectives.

The COO directly reports to the the CEO,and together they share the principal responsibility for managing the business.

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The CEO has primary responsibility for managing the organization’s relationship with external stake holders, and planning for long term strategic objectives.

The COO, has primary responsibility for managing the organizations internal operations to make sure that the organization is meeting its objectives.


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At the next level of top management are the executive vice presidents.

They have a responsibility for overseeing and managing a company’s most significant line and staff responsibilities.


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The CEO, COO,and the executive vice presidents are at the top of an organizations chain of command.

Corporate managers: the members of top-management team whose responsibility is to set strategy for the corporation as a whole



Other ManagersDivisional managers: managers

who set policy only for the division they head.(Ex:inside Ford,the divisional managers are responsible for the operation of each of its carmaking divisions or units.)

Functional managers: managers who are responsible for developing the functional skills and capabilities that collectively provide the core competences that give the organization its competitive advantage


Figure 2-1: The Top-Management Hierarchy


An Agency Theory Perspective Agency problem: a problem in

determining managerial accountability which arises when delegating authority to managers

Shareholders are at information disadvantage compared to top managers, because the results of the managers performance can be evaluated only after considerable time has elapsed.

Top managers and shareholders may have different goals.


The Moral Hazard Problem

Shareholders felt that top managers were avoiding confronting the hard issues and they begin to demand:

A change in the direction of goals.

More financial information to reduce their information disadvantage.


Solving the Agency Problem

Use governance mechanisms: The forms of control which align the

interests of principal and agent so that both parties have the incentive to work together to maximize organizational effectiveness.

First, the principal role of the board of directors is to monitor top managers activities, question their decision making, and intervene when necessary.

Second,Use appropriate incentives to align the interests of managers and shareholders.


Top Managers and Organizational Ethics Ethical dilemma: Is the quandary people find

themselves in when they have to decide if they should act in a way that might help another person or group even though doing so might go against their own self-interest.

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A dilemma may also arise when a person has to decide between two different courses of action, knowing that whichever course he/she chooses will result in harm to one person or group even while it may benefit another.


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Ethics: moral principles and beliefs about what is right or wrong

The essential problem in dealing with ethical issues, and solving moral dilemmas is that there are no rules to decide if an action is ethical or not.



Ethics and the LawLaws specify what people and

organizations can and cannot do.There are many types of behavior-

such as theft, sale of unsafe product which are all considered to be illegal.

Ethics and laws are relative. No absolute or unvarying standards exist

to determine how people should behave. Ex:some managers encouraged members

of their company’s board of directors to behave unethically and divert millions of

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dollars of company capital for their own personal use.

Lets discuss organizational insight 2.4(the use of animals in cosmetic testing).

Organizational insight 2.5” Is it right to use child labor?”



Sources of Organizational Ethics

Societal ethics: codified in a society’s legal system, in its customs and practices.

Many ethical norms and values are followed automatically by people in a society because people have internalized society’s values.(ex: Is it right to use child labor?)

Professional ethics: the moral rules and values that a group of people uses to control the way they perform a task or use resources.(ex:doctors are expected to not to perform unnecessary medical procedures and to act in the patients interest.)

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Individual ethics: the personal and moral standards used by individuals to structure their interactions with other people.



Why Do Ethical Rules Develop?

Ethical rules and laws emerge to control self-interested behavior by individuals and organizations that threaten the society’s collective interests.

Ethical rules protect people and reduce costs people have to bear to decide what’s right or appropriate.

Ethical rules reduce transaction costs, that is the costs of monitoring, negotiating, and enforcing agreements between people.

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Reputation effect: Transaction costs:

Are higher for organizations with a reputation for illegality

Are lower for organizations with a reputation for honest dealings.



Why Does Unethical Behavior Occur?

Personal ethics: ethics developed as part of the upbringing and education.

Self-interest: weighing our own personal interests against the effects of our actions on others.(ex:suppose you know you’ll get a promotion to vice president if you can secure $100 million contract,but to get the contract you must bribe the contract-giver with $1 million,so what would you do?)

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Outside pressure: pressures from the reward systems, industry and other forces.(ex:top managers can feel themselves under pressure from shareholders if the company’s performance isn’t good, so under the threat of losing their jobs, they may engage in unethical behaviors to satisfy shareholders.)



Creating an Ethical OrganizationAn organization is ethical if its

members behave ethicallyPut in place incentives to

encourage ethical behavior and punishments to discourage unethical behaviors

Managers can lead by setting ethical examples

Managers should communicate the ethical values to all inside and outside stakeholders


Designing an Ethical Structure and Control SystemDesign an organizational structure

that reduces incentives to act unethically

Take steps to encourage whistle-blowing – encourage employees to inform about an organization’s unethical actions

Establish position of ethics officer and create ethics committee


Creating an Ethical Culture

Values, rules, and norms that define an organization’s ethical position are part of its culture

Behaviors of top managers are a strong influence on the corporate culture

Creation of an ethical corporate culture requires commitment from all levels


Supporting the Interests of Stakeholder GroupsFind ways to satisfy the needs of

various stakeholder groupsPressure from outside stakeholders

can also promote ethical behaviorThe government and its agencies,

industry councils, regulatory bodies, and consumer watchdogs all play critical roles in establishing ethical rules

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Exercise in class-

Page 54(case analysis-Ethical stances at Johnson and Johnson.


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CHECKING YOUR KNOWLEDGE.

When employees feel that contributions exceed inducements, they are likely to withdraw their support for the organization.

True False

The stakeholder group with the ultimate authority over the organization’s resources is the employees.

True False

All stakeholder groups are equally important. True False


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The rewards that stakeholders receive for participating in an organization are called ____.

inducements contributions kickbacks payoffs

Stakeholders will generally participate in an organization if:

contributions exceed inducements. inducements exceed contributions payments exceed contributions. inducements exceed kickbacks.


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Which of the following is an outside stakeholder group? Shareholders Unions Managers The workforce


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Which of the following would be considered to be the lowest level of management?

Divisional managers Functional managers Line managers Vice presidents

To create an ethical organization,: a company should use a bottom-up approach. a company should offer employees lifetime employment. top management should promote moral values and behave ethically. a company should use socialization tactics that lead to an

institutionalized role orientation.


Chapter 2

Documents

prentice hall shareholders

organization s goals

shareholders goals

goals of managers

organization s largest

employees of shareholders

shareholders contribution

managers contribution