Corporation & Society

9/9/10
Perspective of Business & Society
Dr. Thierry Rakotobe
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 high interdependent

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Introduction –
The Business and Society Relationship
 “General Systems Theory (GST)” from Biology to explain
this relationship; first introduced in 1940’s
 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)
Figure 1.1 Business and Society: An Interactive System
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 precedence
over all others
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, creates
other kinds of value too
 Corporations have multiple obligations, all “stakeholder”
groups must be taken into account
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
The Stakeholder Concept
 A stakeholder refers to persons or groups that affect,
or are affected by, an organization’s decisions, policies, and
operations

 A stake is an interest in – or claim to – a business

enterprise

 Businesses are embedded in networks that involve many

groups with such a stake
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

Market and Nonmarket Stakeholders

 Stakeholder groups can be divided in to two categories:

1. Market stakeholders
2. Nonmarket 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
 Sometimes referred to as primary stakeholders

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Stakeholder “Maps”

 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 Market Stakeholder Map
1.2

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Nonmarket Stakeholders

 Nonmarket stakeholders are people or groups who—

although they do not engage in direct economic
exchange with the firm—are affected by or can affect its
actions
 Sometimes called secondary stakeholders

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 Figure Nonmarket Stakeholder Map
1.3

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Issues: Market and Nonmarket
Stakeholders

 Should government be a nonmarket or market

stakeholder?
 Normally governments do not have direct exchange with
businesses, but in some industries there is such an
exchange

 Should the natural environment be a nonmarket

stakeholder?
 Not a social group, generally considered to be represented
by activist groups

 Should managers be classified as stakeholders?

 Addressed in Exhibit 1.A on next slide
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Exhibit 1.A
excerpt
Are Managers Stakeholders?
 On one hand, the answer is “yes.” Like other stakeholders, managers are
impacted by the firm’s decisions. As employees of the firm, managers receive
compensation – often very generous compensation. Their managerial roles
confer opportunities for professional advancement, social status, and power
over others. Managers benefit from the company’s success and are hurt by its
failure. For these reasons, they might properly be classified as employees on the
perimeter of the stakeholder wheel, as shown in Figure 1.2.
 On the other hand, top executives are agents of the firm and are responsible for
acting on its behalf. In the stakeholder theory of the firm, their role is to
integrate stakeholder interests, rather than to promote their own more narrow,
selfish goals. For these reasons, they might properly be classified in the center
of the stakeholder wheel, as representatives of the firm.
 Management theory has long recognized that these two roles of managers
potentially conflict. The main job of executives is to act for the company, but all
to often they act primarily for themselves.

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Issues: Market and Nonmarket
Stakeholders

 Are stakeholder maps the best way to visualize the

business/stakeholder relationship?
 Network may be more appropriate depiction, given
relationships often exist among stakeholder themselves
 See Figure 1.4 on next slide

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 Figure 1.4
A Stakeholder Network

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Stakeholder Analysis
 It is part of every manager’s job

 Process whereby identify relevant stakeholders and analyze their

interest 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?
 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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Stakeholder Analysis – Question 2
What are the Interests of each Stakeholder?
 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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 Nonmarket Stakeholders:
Exhibit 1.B
cont. Nature of Interest and Power

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Stakeholder Analysis – 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:
1. Voting power
2. Economic power
3. Political power
4. Legal power

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Stakeholder Analysis – Question 3
What is the Power of each Stakeholder?
 Alternative concept called stakeholder salience, meaning
something that stands out from its background
 Stakeholder salience is determined by each group’s
power, legitimacy, and urgency attributes
 The greater the stakeholder group’s salience, the more
attention a manager should pay to that group
 Groups that have all 3 attributes are called definitive
stakeholders
 Groups that have 2 attributes are called expectant
stakeholders

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Stakeholder Analysis – 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
 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
 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 in

stakeholder 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
 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
 Tool used by firms at higher stages of stakeholder
engagement
 Involves face-to-face meetings between corporate
representatives and representatives of their
stakeholder groups to discuss issues of mutual
concern
 Steps in dialogue
1. Each group describes their core issues & concerns
2. Together groups reach common definition of
problem/s
3. Together groups invent innovative solutions that
involve mutual gain
1 - 294. Together establish procedures for implementing
solutions
Stakeholder Engagement and
Dialogue
Benefits
 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 taking
constructive action

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Conclusion – Chapter 1
Core Arguments in Your Text
1. The external environment of business is dynamic and
ever changing
 Six such forces identified in Figure 1.5 on next slide

2. A successful business must meet both its economic and

social 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 Forces that Shape the
1.5 Business and Society Relationship

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