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Chapter 2:
                                    Stakeholder Relationships,
                                    Social Responsibility, and
                                    Corporate Governance

                                                Part One:
                                                An Overview of Business Ethics




© 2013 Cengage Learning. All Rights Reserved.                                    1
Relationships and Business
                            Building relationships is one of the most
                            important areas of business today
                                        Strong relationships associated with organizational
                                         success
                             Stakeholder framework
                                        Helps identify internal and external stakeholders
                                        Helps monitor and respond to needs, values, and
                                         expectations of stakeholder groups
                                       Corporate governance: The formal system
                                       of accountability and control of ethical and
                                       socially responsible behavior
© 2013 Cengage Learning. All Rights Reserved.                                                  2
Stakeholders Define Ethical Issues
                                           in Business
                            Stakeholders: Those who have a stake or
                            claim in some aspect of a company’s
                            products, operations, markets, industry, and
                            outcomes
                                                Customers             Investors
                                                Employees             Suppliers
                                                Government agencies   Communities
                                       Stakeholders can influence and are
                                       influenced by businesses

© 2013 Cengage Learning. All Rights Reserved.                                       3
Identifying Stakeholders


                             Primary stakeholders: Those whose continued
                              association is necessary for a firm’s survival
                                        Employees, customers, investors, governments, and
                                         communities
                             Secondary stakeholders: Are not essential to a
                              company’s survival
                                        Media, trade associations, and special interest
                                         groups



© 2013 Cengage Learning. All Rights Reserved.                                                4
The Stakeholder Interaction Model




© 2013 Cengage Learning. All Rights Reserved.                    5
A Stakeholder Orientation


                            The degree to which a firm understands
                            and addresses stakeholder demands
                             Three activities
                                        Generation of data about stakeholder groups
                                        Distribution of the information throughout the firm
                                        Organization’s responsiveness to this intelligence




© 2013 Cengage Learning. All Rights Reserved.                                                  6
Best Corporate Citizens




© 2013 Cengage Learning. All Rights Reserved.                             7
Social Responsibility

                            An organization’s obligation to maximize its
                            positive impact on stakeholders and
                            minimize its negative impact
                             Four levels of social responsibility
                                               Economic
                                               Legal
                                               Ethical
                                               Philanthropic


© 2013 Cengage Learning. All Rights Reserved.                              8
The Importance of a Stakeholder
                                                     Orientation

                            Social responsibility cannot be reactive
                                        Must be part of business strategy
                             Is associated with
                                        Increased profits
                                        Increased employee commitment
                                        Greater customer loyalty
                                       Business ethics involves carefully thought-
                                       out rules of conduct that guide decision
                                       making

© 2013 Cengage Learning. All Rights Reserved.                                        9
The Steps of Social Responsibility




© 2013 Cengage Learning. All Rights Reserved.                        10
Corporate Citizenship

                            The extent to which businesses strategically
                            meet their economic, legal, ethical, and
                            philanthropic responsibilities
                             Four interrelated dimensions
                                               Strong sustained economic performance
                                               Rigorous compliance
                                               Ethical actions beyond what is legally required
                                               Voluntary contributions to advance reputation and
                                                stakeholder commitment

© 2013 Cengage Learning. All Rights Reserved.                                                       11
Reputation



                            Reputation is one of an organization’s
                            greatest intangible assets with tangible
                            value
                             Difficult to quantify
                             Very important



© 2013 Cengage Learning. All Rights Reserved.                          12
The World’s Most Ethical Companies

                                            Trader Joe’s                                  Aflac
                                            Xerox                                         General Mills
                                            Nike                                          Best Buy
                                            Dow Corning                                   Starbucks
                                            Corporation
                                            Ford Motor Company                            Target
                                            General Electric                              Salesforce.com, Inc.
                                            PepsiCo                                       Barrett Jackson
                                                                                          Auction Co.
                                            Whole Foods Market                            Patagonia
                                                      Source: “2010 World’s Most Ethical Companies,” Ethisphere, Q4, 30–31.



© 2013 Cengage Learning. All Rights Reserved.                                                                                 13
Corporate Governance
                            Formal systems of accountability, oversight,
                            and control
                             Accountability
                                        How closely workplace decisions align with a firm’s
                                         strategic direction
                             Oversight
                                        A system of checks and balances to minimize
                                         opportunities for misconduct
                             Control
                                        The process of auditing and improving
                                         organizational decisions and actions
© 2013 Cengage Learning. All Rights Reserved.                                                  14
Corporate Governance Topics



                       Source: “Corporate Alert: Top 10 Topics for Directors in 2011,” December 6, 2010,
                       http://




                                  Source: www.corpgov.deloitte.com/binary/com.epicentric.contentmanagement.servlet.ContentDeliveryServlet/USEng/Documents/
                                  Board%20Governance/Top%2010%20Topics%20for%20Directors%20in%202011_Akin_120610.pdf
                                  (accessed February 15, 2011).




© 2013 Cengage Learning. All Rights Reserved.                                                                                                                15
Corporate Governance Models


                             Shareholder model
                                        Founded in classic economic precepts
                                        The maximization of wealth for investors and
                                         owners
                             Stakeholder model
                                        A broader view of the purpose of business
                                        Includes satisfying concerns of stakeholders



© 2013 Cengage Learning. All Rights Reserved.                                           16
Board of Directors

                            Holds final responsibility for its firm’s
                            success, failure, and ethicality of actions
                             Increased demands for accountability/
                              transparency
                             Trend toward “outside directors” chosen for
                              expertise, competence, and strategic decision
                              making
                             Executive compensation is a growing concern

© 2013 Cengage Learning. All Rights Reserved.                                 17
Demands for Accountability and
                                            Transparency
                            Stakeholders demand that boards are
                            answerable for their actions and
                            transparent
                             Directors chosen for expertise, competence,
                              and diverse perspectives
                             Qualified, knowledgeable, unbiased boards can
                              prevent misconduct
                                       Interlocking directorate: Board members
                                       linked to more than one company

© 2013 Cengage Learning. All Rights Reserved.                                    18
Executive Compensation

                            Many boards spend more time discussing
                            compensation than ensuring integrity of
                            financial reporting systems
                             How closely linked is executive compensation
                              to company performance?
                             Does performance-linked compensation
                              encourage executives to focus on short-term
                              performance at the expense of long-term
                              growth?

© 2013 Cengage Learning. All Rights Reserved                                 19
Changes in Corporate Governance




© 2013 Cengage Learning. All Rights Reserved.                    20
Implementing a Stakeholder Perspective



                            1. Assessing the corporate culture
                            2. Identifying stakeholder groups
                            3. Identifying stakeholder issues
                            4. Assessing organizational commitment to social
                               responsibility
                            5. Identifying resources and determining urgency
                            6. Gaining stakeholder feedback


© 2013 Cengage Learning. All Rights Reserved.                                  21

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ARC MGMT 374 Week 2 Presentation

  • 1. Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance Part One: An Overview of Business Ethics © 2013 Cengage Learning. All Rights Reserved. 1
  • 2. Relationships and Business Building relationships is one of the most important areas of business today  Strong relationships associated with organizational success  Stakeholder framework  Helps identify internal and external stakeholders  Helps monitor and respond to needs, values, and expectations of stakeholder groups Corporate governance: The formal system of accountability and control of ethical and socially responsible behavior © 2013 Cengage Learning. All Rights Reserved. 2
  • 3. Stakeholders Define Ethical Issues in Business Stakeholders: Those who have a stake or claim in some aspect of a company’s products, operations, markets, industry, and outcomes Customers Investors Employees Suppliers Government agencies Communities Stakeholders can influence and are influenced by businesses © 2013 Cengage Learning. All Rights Reserved. 3
  • 4. Identifying Stakeholders  Primary stakeholders: Those whose continued association is necessary for a firm’s survival  Employees, customers, investors, governments, and communities  Secondary stakeholders: Are not essential to a company’s survival  Media, trade associations, and special interest groups © 2013 Cengage Learning. All Rights Reserved. 4
  • 5. The Stakeholder Interaction Model © 2013 Cengage Learning. All Rights Reserved. 5
  • 6. A Stakeholder Orientation The degree to which a firm understands and addresses stakeholder demands  Three activities  Generation of data about stakeholder groups  Distribution of the information throughout the firm  Organization’s responsiveness to this intelligence © 2013 Cengage Learning. All Rights Reserved. 6
  • 7. Best Corporate Citizens © 2013 Cengage Learning. All Rights Reserved. 7
  • 8. Social Responsibility An organization’s obligation to maximize its positive impact on stakeholders and minimize its negative impact  Four levels of social responsibility  Economic  Legal  Ethical  Philanthropic © 2013 Cengage Learning. All Rights Reserved. 8
  • 9. The Importance of a Stakeholder Orientation Social responsibility cannot be reactive  Must be part of business strategy  Is associated with  Increased profits  Increased employee commitment  Greater customer loyalty Business ethics involves carefully thought- out rules of conduct that guide decision making © 2013 Cengage Learning. All Rights Reserved. 9
  • 10. The Steps of Social Responsibility © 2013 Cengage Learning. All Rights Reserved. 10
  • 11. Corporate Citizenship The extent to which businesses strategically meet their economic, legal, ethical, and philanthropic responsibilities  Four interrelated dimensions  Strong sustained economic performance  Rigorous compliance  Ethical actions beyond what is legally required  Voluntary contributions to advance reputation and stakeholder commitment © 2013 Cengage Learning. All Rights Reserved. 11
  • 12. Reputation Reputation is one of an organization’s greatest intangible assets with tangible value  Difficult to quantify  Very important © 2013 Cengage Learning. All Rights Reserved. 12
  • 13. The World’s Most Ethical Companies Trader Joe’s Aflac Xerox General Mills Nike Best Buy Dow Corning Starbucks Corporation Ford Motor Company Target General Electric Salesforce.com, Inc. PepsiCo Barrett Jackson Auction Co. Whole Foods Market Patagonia Source: “2010 World’s Most Ethical Companies,” Ethisphere, Q4, 30–31. © 2013 Cengage Learning. All Rights Reserved. 13
  • 14. Corporate Governance Formal systems of accountability, oversight, and control  Accountability  How closely workplace decisions align with a firm’s strategic direction  Oversight  A system of checks and balances to minimize opportunities for misconduct  Control  The process of auditing and improving organizational decisions and actions © 2013 Cengage Learning. All Rights Reserved. 14
  • 15. Corporate Governance Topics Source: “Corporate Alert: Top 10 Topics for Directors in 2011,” December 6, 2010, http:// Source: www.corpgov.deloitte.com/binary/com.epicentric.contentmanagement.servlet.ContentDeliveryServlet/USEng/Documents/ Board%20Governance/Top%2010%20Topics%20for%20Directors%20in%202011_Akin_120610.pdf (accessed February 15, 2011). © 2013 Cengage Learning. All Rights Reserved. 15
  • 16. Corporate Governance Models  Shareholder model  Founded in classic economic precepts  The maximization of wealth for investors and owners  Stakeholder model  A broader view of the purpose of business  Includes satisfying concerns of stakeholders © 2013 Cengage Learning. All Rights Reserved. 16
  • 17. Board of Directors Holds final responsibility for its firm’s success, failure, and ethicality of actions  Increased demands for accountability/ transparency  Trend toward “outside directors” chosen for expertise, competence, and strategic decision making  Executive compensation is a growing concern © 2013 Cengage Learning. All Rights Reserved. 17
  • 18. Demands for Accountability and Transparency Stakeholders demand that boards are answerable for their actions and transparent  Directors chosen for expertise, competence, and diverse perspectives  Qualified, knowledgeable, unbiased boards can prevent misconduct Interlocking directorate: Board members linked to more than one company © 2013 Cengage Learning. All Rights Reserved. 18
  • 19. Executive Compensation Many boards spend more time discussing compensation than ensuring integrity of financial reporting systems  How closely linked is executive compensation to company performance?  Does performance-linked compensation encourage executives to focus on short-term performance at the expense of long-term growth? © 2013 Cengage Learning. All Rights Reserved 19
  • 20. Changes in Corporate Governance © 2013 Cengage Learning. All Rights Reserved. 20
  • 21. Implementing a Stakeholder Perspective 1. Assessing the corporate culture 2. Identifying stakeholder groups 3. Identifying stakeholder issues 4. Assessing organizational commitment to social responsibility 5. Identifying resources and determining urgency 6. Gaining stakeholder feedback © 2013 Cengage Learning. All Rights Reserved. 21