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Chapter 1

The Corporation and


Its Stakeholders
McGraw-Hill/Irwin

Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

Ch. 1: Key Learning Objectives


Understanding the relationship between business and
society, and the ways in which they are part of an
interactive system
Considering the purpose of the modern corporation
Knowing what is a stakeholder and who a corporations
market and nonmarket and internal and external
stakeholders are
Conducting a stakeholder analysis, and understanding
the basis of stakeholder interests and power
Recognizing the diverse ways in which modern
corporations organize internally to interact with various
stakeholders
Analyzing the forces of change that continually reshape
the business and society relationship
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Introduction
The Business and Society Relationship
Business: Any organization that is engaged in making a
product or providing a service for a profit
Society: Human beings and the social structures they
collectively create
Business and society are highly interdependent

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Introduction
The Business and Society Relationship
We borrow General Systems Theory (GST) from
biology to explain this relationship; first introduced in
1940s.
This theory posits that organisms cannot be understood in
isolation, even though they have clear boundaries; they can
only be understood in relationship to their surroundings.

Adapted to management theory means that business


firms are embedded in a broader social environment
with which they constantly interact.
Business and society together form an interactive social
system (shown graphically in the following slide).
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Figure 1.1 Business and Society:


An Interactive System

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Two critical questions:


What is the purpose of the modern corporation?
To whom, or what, should the firm be responsible?

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Two contrasting views:


Ownership Theory of the Firm (also called property or
finance theory).
The firm is seen as the property of its owners (shareholders).
Argues the owners interests are paramount and take
precedence over the interests of others.
The purpose of the firm is to maximize its long-term market
value, that is, to make the most money it can for shareholders.

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Two contrasting views:


cont

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, creates
other kinds of value too such as professional development
for employees and innovative product new products for
customers.
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. For example


managers taken care of quarterly and annual financial performance. In
reality the job of the managers is much more complex than this.

Instrumental

More effective corporate strategy. Studies shown that companies that


behave responsibly toward multiple stakeholder groups perform better
financially over the long run. For example will motivated employees,
satisfied customers, committed suppliers and supportive communities.

Normative

Stakeholder management is the right thing to do. Corporations have


great power and resources however stakeholders contribute something
of value to the corporation. For example and engineer contribute in
terms of his skill has a moral right to some claim on the corporation
rewards.
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The Stakeholder Concept


A stakeholder refers to persons or groups that affect, or are
affected by, an organizations decisions, policies, and
operations.
A stake is an interest inor claim ona business enterprise.
Businesses are embedded in networks that involve many
groups with such a stake.
Each of these participants has a relationship with the firm, based on
ongoing interactions.
Each of them shares, to some degree, in both the risks and rewards of
the firm's activities.
Each has some kind of claim on the firms resources and attention
based on law, moral right or both.
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The Stakeholder Concept:


A Tip for Understanding
Term stakeholder is NOT the same as stockholder.
Words sound similar BUT are not the same.
Stockholders are one of several kinds of stakeholders.

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Different Kinds of Stakeholders


Stakeholder groups can be divided into two
categories:

Market stakeholders

Nonmarket stakeholders

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Market Stakeholders
Market stakeholders are those that engage in
economic transactions with the company as it
carries out its primary purpose of providing society
with goods and services.

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Nonmarket Stakeholders
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.

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Further Distinction
Internal stakeholders are those, such as employees
and managers, who are employed by the firm.
They are inside the firm, in the sense that they contribute
their effort and skill, usually at a company worksite.

External stakeholders are those whoalthough they


may have important transactions with the firmare
not directly employed by it.

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Figure 1.2 The Stakeholders of Business

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Figure 1.3 A Firm and Its Stakeholders

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Stakeholder Analysis
It is part of every managers job to identify relevant
stakeholders and to understand both their interests
and the power they may have to assert these interests.
Process whereby identify relevant stakeholders and
analyze their interest, power, legitimacy and links with
one another.
Asks 4 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?
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Stakeholder Analysis Cont


Question 1: Who are the Relevant Stakeholders?
Answer this question by drawing market and nonmarket
stakeholder maps.

The nature of each groups stake, what are their concerns and what
do they want from their relationship with the firm?
Example shareholders have invested in the firm, they expect to
receive dividends and capital appreciation.
Government and public interest group wish to protect the
environment or assure human rights.

Recognize that not all of groups are relevant to every


situation

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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Stakeholder Analysis Cont


Question 2: What are the interests of each
stakeholder?
Analyzing stakeholder interests includes addressing:
What are the groups concerns?
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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Stakeholder Analysis Cont


Question 3: What is the power of each stakeholder?
Stakeholder power is the ability of a group to use
resources to make an event happen or to secure a
desired outcome.
There are 4 types of stakeholder power:

Voting power
Economic power
Political power
Legal power
Informational power

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Stakeholder Analysis Cont


Question 4: How are stakeholder coalitions likely
to form?
Stakeholder groups often have common interests and will
form temporary alliances to pursue these common interests.
For eg. Customers of fresh fruit and farmworkers who harvest
that fruits in the field may have share interest in reducing the
use of pesticides.
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 Salience and Mapping


Salient stands out from a background, is seen as
important, or draws attention.
Stakeholders stand out (i.e., are salient) to managers when
they have power, legitimacy, and urgency.
Managers can use the salience concept to develop a
stakeholder map a graphical representation of the
relationship of stakeholder salience to a particular issue.
A stakeholder map is a useful tool, because it enables
managers to see quickly how stakeholders feel about an
issue.
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Figure 1.4 Stakeholder Map

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The Corporations
Boundary-Spanning Departments
Boundary-spanning departments (shown graphically in the
following slide) departments or offices within an
organization that reach across the dividing line that
separates the company from groups and people in
society.
Building positive and mutually beneficial relationships
across organizational boundaries is a growing part of
managements role.

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Figure 1.5

The Corporations Boundary Spanning


Departments

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The Dynamic Environment of Business


The external environment of business is dynamic and ever
changing.
The purpose of the firm is not simply to make a profit, but to
create value for all its stakeholders a successful business
must meet both its economic and social objectives.
Six dynamic forces powerfully shape the business and society
relationship:

Changing societal expectations


Growing emphasis on ethical reasoning and actions
Globalization
Evolving government regulations and business response
Dynamic natural environment
Explosion of new technology and innovation
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Figure 1.6 Forces that Shape the Business


and Society Relationship

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Example of stakeholder interest and


complaint
http://timothytiah.com/2015/10/25/i-slammed-this-m
ilk-company-on-social-media-this-is-the-amazing-wa
y-the-ceo-responded-and-won-me-back/

It seemed that I wasnt the only one affected and Farm Fresh Milk was just responding
to it. This was their official response.
Dear valued consumers,
Recently there have been a spate of complaints about our Farm Fresh milk curdling and
turning sour. Initially we had thought the problem was due to less than ideal handling on the
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processing level. We then discovered that a very small amount of our yogurt had somehow
gotten into two of our filling lines. That explains the slight curdling of the milk and the sourish
taste, without the typical spoilt milk smell.
We have since isolated these two filling lines. We truly apologize for the inconvenience
caused and we understand that this has caused some consternation for you, our valued
customers. The curdled product, though it may seem disturbing, was basically an unintended
version of yogurt milk.
We are thankful for your prompt feedback, and we want to assure you that we are constantly
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