BUS SOC Chapter 1:

The Corporation and Its Stakeholders

Stakeholders: The term stakeholder refers to all those that affect, or are affected by, the actions
of the firm.

An important part of management’s role is to identify a firm’s relevant stakeholders and

understand the nature of their interests, power, and alliances with one another.

Business: Business today is arguably the most dominant institution in the world. The term
business refers here to any organization that is engaged in making a product or providing a
service for a profit.

Society: Society, in its broadest sense, refers to human beings and to the social structures they
collectively create.

In a more specific sense, the term is used to refer to segments of humankind, such as members
of a particular community, nation, or interest group.

As a set of organizations created by humans, business is clearly a part of society. At the same
time, it is also a distinct entity, separated from the rest of society by clear boundaries.

Business is engaged in ongoing exchanges with its external environment across these dividing
lines.

For example, businesses recruit workers, buy supplies, and borrow money; they also sell
products, donate time, and pay taxes. This book is broadly concerned with the relationship
between business and society.

Business and society are highly interdependent. Business activities impact other activities in
society, and actions by various social actors and governments continuously affect business. To
manage these interdependencies, managers need an understanding of their company’s key
relationships and how the social and economic system of which they are a part affects, and is
affected by, their decisions.
General systems theory , first introduced in the 1940s, argues that all organisms are open to,
and interact with, their external environments. Systems theory helps us understand how business
and society, taken together, form an interactive social system. Each needs the other, and each
influences the other. They are entwined so completely that any action taken by one will surely
affect the other. They are both separate and connected. Business is part of society, and society
penetrates far and often into business decisions. In a world where global communication is
rapidly expanding, the connections are closer than ever before. Throughout this book we discuss
examples of organizations and people that are grappling with the challenges of, and helping to
shape, business–society relationships.

The ownership theory of the firm & The stakeholder theory of the firm:
In the ownership theory of the firm (sometimes also called property or finance theory), the
firm is seen as the property of its owners. The purpose of the firm is to maximize its long-term
market value, that is, to make the most money it can for shareholders who own stock in the
company. Managers and boards of directors are agents of shareholders and have no obligations
to others, other than those directly specified by law. In this view, owners’ interests are paramount
and take precedence over the interests of others.

A contrasting view, called the stakeholder theory of the firm, argues that corporations serve a
broad public purpose: to create value for society. All companies must make a profit for their
owners; indeed, if they did not, they would not long survive. However, corporations create many
other kinds of value as well, such as professional development for their employees and
innovative new products for their customers. In this view, corporations have multiple
obligations, and all stakeholders’ interests must be taken into account. This approach has been
expressed well by the pharmaceutical company Novartis, which states in its code of conduct that
it “places a premium on dealing fairly with employees, commercial partners, government
authorities, and the public. Success in its business ventures depends upon maintaining the trust of
these essential stakeholders.”

Supporters of the stakeholder theory of the firm make three core arguments for their position:

 descriptive
 instrumental and
 Normative.
The descriptive argument says that the stakeholder view is simply a more realistic description
of how companies really work. Managers have to pay keen attention, of course, to their quarterly
and annual financial performance. Keeping Wall Street satisfied by managing for growth—
thereby attracting more investors and increasing the stock price—is a core part of any top
manager’s job. But the job of management is much more complex than this. In order to produce
consistent results, managers have to be concerned with producing highquality and innovative
products and services for their customers, attracting and retaining talented employees, and
complying with a plethora of complex government regulations. As a practical matter, managers
direct their energies toward all stakeholders, not just owners.

The instrumental argument says that stakeholder management is more effective as a corporate
strategy. A wide range of studies have shown that companies that behave responsibly toward
multiple stakeholder groups perform better financially, over the long run, than those that do not.
(This empirical evidence is further explored in Chapters 3 and 4.) These findings make sense,
because good relationships with stakeholders are themselves a source of value for the firm.
Attention to stakeholders’ rights and concerns can help produce motivated employees, satisfied
customers, and supportive communities, all good for the company’s bottom line.

The normative argument says that stakeholder management is simply the right thing to do.
Corporations have great power and control vast resources; these privileges carry with them a
duty toward all those affected by a corporation’s actions. Moreover, all stakeholders, not just
owners, contribute something of value to the corporation. A skilled engineer at Microsoft who
applies his or her creativity to solving a difficult programming problem has made a kind of
investment in the company, even if it is not a monetary investment. Any individual or group
who makes a contribution, or takes a risk, has a moral right to some claim on the corporation’s
rewards.

A basis for both the ownership and stakeholder theories of the firm exists in law. The legal term
fiduciary means a person who exercises power on behalf of another, that is, who acts as the
other’s agent. In U.S. law, managers are considered fiduciaries of the owners of the firm (its
stockholders) and have an obligation to run the business in their interest. These legal concepts
are clearly consistent with the ownership theory of the firm. However, other laws and court
cases have given managers broad latitude in the exercise of their fiduciary duties. In the United
States (where corporations are chartered not by the federal government but by the states), most
states have passed laws that permit managers to take into consideration a wide range of other
stakeholders’ interests, including those of employees, customers, creditors, suppliers, and
communities. In addition, many federal laws extend specific protections to various groups of
stakeholders, such as those that prohibit discrimination against employees or grant consumers
the right to sue if harmed by a product.

The Stakeholder Concept:

Stakeholder: The term stakeholder refers to persons and groups that affect, or are affected by,
an organization’s decisions, policies, and operations.

Those with a stake in the firm’s actions include such diverse groups as customers, employees,
stockholders, the media, governments, professional and trade associations, social and
environmental activists, and nongovernmental organizations.

Business organizations are embedded in networks involving many participants. 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. And each has some kind of
claim on the firm’s resources and attention, based on law, moral right, or both. The number of
these stakeholders and the variety of their interests can be large, making a company’s decisions
very complex, as the Walmart example illustrates.

Managers make good decisions when they pay attention to the effects of their decisions on
stakeholders, as well as stakeholders’ effects on the company. On the positive side, strong
relationships between a corporation and its stakeholders are an asset that adds value. On the
negative side, some companies disregard stakeholders’ interests, either out of the belief that the
stakeholder is wrong or out of the misguided notion that an unhappy customer, employee, or
regulator does not matter. Such attitudes often prove costly to the company involved. Today, for
example, companies know that they cannot locate a factory or store in a community that strongly
objects. They also know that making a product that is perceived as unsafe invites lawsuits and
jeopardizes market share.

Different Kinds of Stakeholders

Business interacts with society in many diverse ways, and a company’s relationships with
various stakeholders differ.

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

Each relationship between a business and one of its market stakeholders is based on a unique
transaction, or two-way exchange. Stockholders invest in the firm and in return receive the
potential for dividends and capital gains. Creditors loan money and collect payments of interest
and principal. Employees contribute their skills and knowledge in exchange for wages, benefits,
and the opportunity for personal satisfaction and professional development. In return for
payment, suppliers provide raw materials, energy, services, and other inputs; and wholesalers,
distributors, and retailers engage in market transactions with the firm as they help move the
product from plant to sales outlets to customers. All businesses need customers who are willing
to buy their products or services.

Nonmarket stakeholders: Nonmarket stakeholders, by contrast, are people and groups who—
although they do not engage in direct economic exchange with the firm—are nonetheless
affected by or can affect its actions.

Nonmarket stakeholders include the community, various levels of government,

nongovernmental organizations, the media, business support groups, competitors, and the
general public. Nonmarket stakeholders are not necessarily less important than others, simply
because they do not engage in direct economic exchange with a business.

Theorists also distinguish between internal stakeholders and external stakeholders.

1. Internal Stakeholders
2. External Stakeholders

Internal Stakeholders: 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: External stakeholders, by contrast, are those who—although they may
have important transactions with the firm—are not directly employed by it.
 Market Stakeholders Non Market Stakeholders
Internal Employees
Stakeholders Managers
External Stockholders Governments
stakeholders Customers Communities
Creditors Nongovernmental
Suppliers Organizations
Wholesalers and Retailers Business Support Groups
Media
Competitors

The classification of government as a nonmarket stakeholder has been controversial in

stakeholder theory. Most theorists say that government is a nonmarket stakeholder (as does this
book) because it does not normally conduct any direct market exchanges (buying and selling)
with business. However, money often flows from business to government in the form of taxes
and fees, and sometimes from government to business in the form of subsidies or incentives.
Moreover, some businesses—defense contractors for example— do sell directly to the
government and receive payment for goods and services rendered. For this reason, a few
theorists have called government a market stakeholder of business. And, in a few cases, the
government may take a direct ownership stake in a company—as the U.S. government did after
the financial crisis of 2008–09 when it invested in several banks and auto companies, becoming a
shareholder of these firms. Government also has special influence over business because of its
ability to charter and tax corporations, as well as make laws that regulate their activities. The
unique relationship between government and business is discussed throughout this book.

Other stakeholders also have some market and some nonmarket characteristics. For example, the
media is normally considered a nonmarket stakeholder. However, business buys advertising time
on television and radio and in newspapers—a market transaction. Similarly, companies may pay
dues to support groups, such as the Chamber of Commerce. Communities are a nonmarket
stakeholder, but receive taxes, philanthropic contributions, and other monetary benefits from
businesses. These subtleties are further explored in later chapters.

Modern stakeholder theory recognizes that most business firms are embedded in a complex web
of stakeholders, many of which have independent relationships with each other. 18 In this view,
a business firm and its stakeholders are best visualized as an interconnected network. Imagine,
for example, an electronics company, based in the United States, that produces smartphones,
tablets, and music players. The firm employs people to design, engineer, and market its devices
to customers in many countries. Shares in the company are owned by investors around the world,
including many of its own employees and managers. Production is carried out by suppliers in
Asia. Banks provide credit to the company, as well as to other companies. Competing firms sell
their products to some of the same customers
and also contract production to some of the same Asian suppliers. Nongovernmental
organizations may seek to lobby the government concerning the firm’s practices and may count
some employees among their members.

Stakeholder Analysis:

An important part of the modern manager’s job is to identify relevant stakeholders and to
understand both their interests and the power they may have to assert these interests. This
process is called stakeholder analysis.

Focal Organization: The organization from whose perspective the analysis is conducted is
called the focal organization.

Stakeholder analysis asks four key questions, as follows.

1. Who are the relevant stakeholders?

2. What are the interests of each stakeholder?
3. What is the power of each stakeholder?
4. How are coalitions likely to form?

Relevant stakeholders: Relevant stakeholders are identified among the suppliers of inputs to,
the users of outputs from, and the performers of the activities in the process. Once the relevant
stakeholders are identified, the appropriate level of their involvement in process activities is
planned. The first question requires management to identify and map the relevant stakeholders.

However, not all stakeholders listed will be relevant in every management situation. For
example, a privately held firm will not have stockholders. Some businesses sell directly to
customers online and therefore will not have retailers. In other situations, a firm may have a
stakeholder—say, a creditor that has loaned money—but this group is not relevant to a particular
decision or action that management must take.

But stakeholder analysis involves more than simply identifying stakeholders; it also involves
understanding the nature of their interests, power, legitimacy, and links with one another.
Stakeholder Interests:
Each stakeholder has a unique relationship to the organization, and managers must respond
accordingly. Stakeholder interests are, essentially, the nature of each group’s stake. What are
their concerns, and what do they want from their relationship with the firm?

Stockholders, for their part, have an ownership interest in the firm. In exchange for their
investment, stockholders expect to receive dividends and, over time, capital appreciation. The
economic health of the corporation affects these people financially; their personal wealth—and
often, their retirement security—is at stake. They may also seek social objectives through their
choice of investments. Customers, for their part, are most interested in gaining fair value and
quality in exchange for the purchase price of goods and services. Suppliers, likewise, wish to
receive fair compensation for products and services they provide. Employees, in exchange for
their time and effort, want to receive fair compensation and an opportunity to develop their job
skills. Governments, public interest groups, and local communities have another sort of
relationship with the company. In general, their stake is broader than the financial stake of
owners, customers, and suppliers. They may wish to protect the environment, assure human
rights, or advance other broad social interests.

Managers need to understand these complex and often intersecting stakeholder interests.

Stakeholder Power:
Stakeholder power means the ability to use resources to make an event happen or to secure a
desired outcome. Stakeholders have five different kinds of power: voting power, economic
power, political power, legal power, and informational power.

Voting power means that the stakeholder has a legitimate right to cast a vote. Stockholders
typically have voting power proportionate to the percentage of the company’s stock they own.

Stockholders typically have an opportunity to vote on such major decisions as mergers and
acquisitions, the composition of the board of directors, and other issues that may come before the
annual meeting. (Stockholder voting power should be distinguished from the voting power
exercised by citizens, which is discussed below.)

Customers, suppliers, and retailers have economic power with the company. Suppliers can
withhold supplies or refuse to fill orders if a company fails to meet its contractual
responsibilities.

Customers may refuse to buy a company’s products or services if the company acts improperly.
Customers can boycott products if they believe the goods are too expensive, poorly made, or
unsafe. Employees, for their part, can refuse to work under certain conditions, a form of
economic power known as a strike or slowdown. Economic power often depends on how well
organized a stakeholder group is. For example, workers who are organized into unions usually
have more economic power than do workers who try to negotiate individually with their
employers.

Governments exercise political power through legislation, regulations, or lawsuits. While

government agencies act directly, other stakeholders use their political power. indirectly by
urging government to use its powers by passing new laws or enacting regulations. Citizens may
also vote for candidates that support their views with respect to government laws and regulations
affecting business, a different kind of voting power than the one discussed above. Stakeholders
may also exercise political power directly, as when social, environmental, or community activists
organize to protest a particular corporate action.

Stakeholders have legal power when they bring suit against a company for damages, based on
harm caused by the firm; for instance, lawsuits brought by customers for damages caused by
defective products, brought by employees for damages caused by workplace injury, or brought
by environmentalists for damages caused by pollution or harm to species or habitat. After the
mortgage lender Countrywide collapsed, many institutional shareholders, such as state pension
funds, sued Bank of America (which had acquired Countrywide) to recoup some of their losses.

Finally, stakeholders have informational power when they have access to valuable data, facts, or
details. The disclosure (or nondisclosure) of information can be used to persuade, mobilize, or
threaten others. With the explosive growth of technologies that facilitate the sharing of
information, this kind of stakeholder power has become increasingly important.

Stakeholder Coalitions:
An understanding of stakeholder interests and power enables managers to answer the final
question of stakeholder analysis.

Book: page 14 important box

 How are coalitions likely to form?

Not surprisingly, stakeholder interests often coincide. For example, consumers of fresh fruit and
farmworkers who harvest that fruit in the field may have a shared interest in reducing the use of
pesticides, because of possible adverse health effects from exposure to chemicals. When their
interests are similar, stakeholders may form coalitions, temporary alliances to pursue a common
interest. Stakeholder coalitions are not static. Groups that are highly involved with a company
today may be less involved tomorrow. Issues that are controversial at one time may be
uncontroversial later; stakeholders that are dependent on an organization at one time may be less
so at another. To make matters more complicated, the process of shifting coalitions does not
occur uniformly in all parts of a large corporation.

Stakeholders involved with one part of a large company often have little or nothing to do with
other parts of the organization.

In recent years, coalitions of stakeholders have become increasingly international in scope.

Communications technology has enabled like-minded people to come together quickly, even
across political boundaries and many miles of separation. Smartphones, blogs, e-mail, faxes, and
social networking sites have become powerful tools in the hands of groups that monitor how
multinational businesses are operating in different locations around the world.

Stakeholder Salience and Mapping:

Some scholars have suggested that managers pay the most attention to stakeholders possessing
greater salience.

Stakeholders stand out to managers when they have power, legitimacy, and urgency. The
previous section discussed various forms of stakeholder power. Legitimacy refers to the extent to
which a stakeholder’s actions are seen as proper or appropriate by the broader society. Urgency
refers to the time-sensitivity of a stakeholder’s claim, that is, the extent to which it demands
immediate action. The more of these three attributes a stakeholder possesses, the greater the
stakeholder’s salience and the more likely that managers will notice and respond.

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 and whether salient stakeholders tend to be in favor or opposed. It also helps
managers see how stakeholder coalitions are likely to form and what outcomes are likely.

Stakeholder maps can represent network ties among stakeholders, the size of stakeholder
groups, and the degree of consensus within stakeholder groups.

The Corporation’s Boundary-Spanning Departments

Boundary-spanning departments are 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 management’s role.
The organization of the corporation’s boundary-spanning functions is complex. For example, in
many companies, departments of public affairs or government relations interact with elected
officials and regulators. Departments of investor relations interact with stockholders; human
resources with employees; customer relations with customers; and community relations with the
community. Specialized departments of environment, health, and safety may deal with
environmental compliance and worker health and safety, and public relations or corporate
communications with the media.

The Dynamic Environment of Business

A core argument of this book is that the external environment of business is dynamic and ever
changing. Businesses and their stakeholders do not interact in a vacuum. On the contrary, most
companies operate in a swirl of social, ethical, global, political, ecological, and technological
change that produces both opportunities and threats.

1. Changing societal expectations

2. Growing emphasis on ethical reasoning and actions
3. Globalization
4. Evolving government regulations and business response
5. Dynamic natural environment
6. Explosion of new technology and innovation

Changing societal expectations: Everywhere around the world, society’s expectations of

business are changing. People increasingly expect business to be more responsible, believing
companies should pay close attention to social issues and act as good citizens in society. New
public issues constantly arise that require action. Increasingly, business is faced with the
daunting task of balancing its social, legal, and economic obligations, seeking to meet its
commitments to multiple stakeholders. Modern businesses are increasingly exploring
opportunities to act as social entrepreneurs often by focusing on those at the bottom of the
pyramid.

Growing emphasis on ethical reasoning and actions: The public also expects business to be
ethical and wants corporate managers to apply ethical principles or values—in other words,
guidelines about what is right and wrong, fair and unfair, and morally correct—when they make
business decisions. Fair employment practices, concern for consumer safety, contribution to the
welfare of the community, and human rights protection around the world have become more
prominent and important. Business has created ethics programs to help ensure that employees are
aware of these issues and act in accordance with ethical standards.
Globalization: We live in an increasingly integrated world economy, characterized by the
unceasing movement of goods, services, and capital across national borders. Large transnational
corporations do business in scores of countries. Products and services people buy every day in
the United States or Germany may have come from Indonesia, Haiti, or Mexico. Today,
economic forces truly play out on a global stage. A financial crisis on Wall Street can quickly
impact economies around the world. Societal issues—such as the race to find a cure for
HIV/AIDS, the movement for women’s equality, or the demands of citizens everywhere for full
access to the Internet—also cut across national boundaries. Environmental issues, such as ozone
depletion and species extinction, affect all communities. Globalization challenges business to
integrate their financial, social, and environmental performance.

Evolving government regulations and business response: The role of government has
changed dramatically in many nations in recent decades. Governments around the world have
enacted a myriad of new policies that have profoundly constrained how business is allowed to
operate. Government regulation of business periodically becomes tighter, then looser, much as a
pendulum swings back and forth. Because of the dynamic nature of this force, business has
developed various strategies to influence elected officials and government regulators at federal,
state, and local levels. Business managers understand the opportunities that may arise from
active participation in the political process.

Dynamic natural environment: All interactions between business and society occur within a
finite natural ecosystem. Humans share a single planet, and many of our resources—oil, coal,
and gas, for example—are nonrenewable. Once used, they are gone forever. Other resources, like
clean water, timber, and fish, are renewable, but only if humans use them sustainably, not taking
more than can be naturally replenished. Climate change now threatens all nations. The relentless
demands of human society, in many arenas, have already exceeded the carrying capacity of the
Earth’s ecosystem. The state of the Earth’s resources and changing attitudes about the natural
environment powerfully impact the business–society relationship.

Explosion of new technology and innovation: Technology is one of the most dramatic and
powerful forces affecting business and society. New technological innovations harness the
human imagination to create new machines, processes, and software that address the needs,
problems, and concerns of modern society. In recent years, the pace of technological change has
increased enormously. From genetically modified foods to social networking via the Internet,
from nanotechnology to wireless communications, change keeps coming. The extent and pace of
technological innovation pose massive challenges for business, and sometimes government, as
they seek to manage various privacy, security, and intellectual property issues embedded in this
dynamic force.

Creating Value in a Dynamic Environment

These powerful and dynamic forces—fast-paced changes in societal and ethical expectations, the
global economy, government policies, the natural environment, and new technology— establish
the context in which businesses interact with their many market and nonmarket stakeholders.
This means that the relationship between business and society is continuously changing in new
and often unpredictable ways. Environments, people, and organizations change; inevitably, new
issues will arise and challenge managers to develop new solutions. To be effective, corporations
must meet the reasonable expectations of stakeholders and society in general. A successful
business must meet all of its economic, social, and environmental objectives. A core argument of
this book is that the purpose of the firm is not simply to make a profit, but to create value for all
its stakeholders. Ultimately, business success is judged not simply by a company’s financial
performance but by how well it serves broad social interests.