Chapter : 2

STAKEHOLDER RELATIONSHIPS, SOCIAL

RESPONSIBILITY, AND CORPORATE
GOVERNANCE
 Stakeholders define ethical issues in
business
Stakeholders
In a business context, customers, shareholders, employees, suppliers,
government agencies, communities, and many others who have a “stake”
or concern in some aspect of a company’s products, operations, and
outcomes are known as stakeholders.
The relationship between companies and their stakeholders is two-way
street.
Ethical issues in business
• The ethical crisis in corporate America has demonstrated how
employees and investors can suffer extremely serious consequences as a
result of unethical corporate practices.
• Stakeholders apply their values and standards to many diverse issues
working conditions, consumer rights, environmental conservation,
product safety, and proper information disclosure.
• Stakeholders provide resources to company may be both tangible and
intangible.
• Supply capital, employees and managers grant expertise, customer
generate revenue and positive word of mouth promotion, local
communities provide infrastructure, and media transmits positive
corporate image.
• Identifying Stakeholders
Primary stakeholders are those whose continued association is
absolutely necessary for firm’s survival; these include employees,
customers, investors, and shareholders, as well as the governments and
communities that provide necessary infrastructure.

Secondary stakeholders do not typically engage in transactions with a

company and thus are not essential for its survival; these include the
media, trade associations, competitors, and special-interest groups.
• Stakeholder Orientation
The degree to which a firm understands and addresses stakeholder
demands.
This orientation comprises 3 set of activities
1. The organization-wide generation of data about stakeholder groups
and assessment of the firm’s effects on these groups
2. The distribution of this information throughout the firm
3. The organization’s responsiveness as a whole to this intelligence.
This information can be derived from formal research, including
surveys, internet searches.
• Employees and Managers can also generate this information
informally as they carry out their daily activities.
• For example: purchasing manager know about supplier’s demands,
public relations executives about media, financial executives about
investors, sales representatives about customers, and human resources
advisers about employees.
• Social Responsibility And The Importance Of A Stakeholder Orientation
Social responsibility:
Obligation of business towards various groups in the society
Consider interests of society on whole
Business ethics embodies standards, norms that reflect a concern of major
stakeholders, including consumers, employees, shareholders, suppliers,
competitors, and the community.
Kinds:
 Economic responsibility: Produce goods and services needed by society
 Legal responsibility: Operate within laws of land
 Ethical responsibility: behavior expected from firm but not defined in
law
• Milton Friedman has been quoted as saying that “ the basic mission is
thus to produce goods and services at a profit, and in doing this,
business is making its maximum contribution to society and in fact
being socially responsible.

• Relationship Between Social Responsibility and Profitability

Much evidence shows that social responsibility, including business
ethics, is associated with increased profits.
The study also found that social responsibility contributes to employee
commitment and customer loyalty, it is a vital concern of any firm
trying to increase profits.
Social Responsibility and Ethics
Social responsibility can be viewed as a contract with society, whereas
business ethics involves carefully thought-out rules of business conduct
that guide decision making.
 There are 4 levels of social responsibility
 Economic: maximizing stakeholder wealth
 Legal: abiding by laws and government regulations
 Ethical: following standards of acceptable behavior
 Philanthropic: giving back to society
• Corporate citizenships: when businesses strategically meet the
economic, legal, ethical and philanthropic responsibilities placed on
them by their various stakeholders.
• It has four dimensions: strong sustained economic performance,
rigorous compliance, ethical actions that advance the reputation and
stakeholder commitment of the organization.
• Reputations
It is one of an organization’s greatest intangible assets.
A single negative incident can influence corporation’s image and
reputation instantly.
Corporate Governance Provides Formalized Responsibility To
Stakeholders
Corporate governance:
Most companies have developed formal systems of
accountability, oversight, and control.
Accountability: refers to how closely workplace decisions are aligned
with a firm’s stated strategic direction.
Oversight: provide a system of checks and balance that prevent
unethical and illegal activities
Control: is the process of auditing and improving organizational
decisions and actions
• Directors have a duty to avoid ethical misconduct in their director role
and to provide leadership in decisions to prevent ethical misconduct
in the organization.
• The duty of loyalty means that all decisions should be in the interest
of the corporation and its stakeholders.
• Conflict of interest exist when director uses the position to obtain
personal gain usually at the expense of the organization.
Implementing a stakeholder perspective
Step 1: Assessing the Corporate Culture
To enhance organizational fit, a social responsibility program must align
with the corporate culture of the organization.
The purpose of this first step is to identify the organizational mission,
values, and norms that are likely to have implications for social
responsibility.
Step 2: Identify Stakeholder Groups
Managers can identify relevant stakeholders who may be affected by or
may influence the development of organizational policy.
Stakeholders have some level of power over a business because they
are in the position to withhold, or at least threaten to withhold,
organizational resources.
Step 3 : Identifying Stakeholder Issues
In step 3, we should understand the nature of the main issues of
concern to these stakeholders.
Conditions for collaboration exist when problems are so complex that
multiple stakeholders are required to resolve the issue and weaknesses
of adversarial approaches are understood.

Step 4: Assessing Organizational Commitment to Social Responsibility

In this step, it will be evaluated the current practices of organization
and to select concrete social responsibility initiatives.
Step 5: Identifying Resources and Determining Urgency
Two main criteria can be considered:
• First is the levels of financial and organizational investments required
by different actions
• Second is the urgency when prioritizing social responsibility
challenges.
When the challenge under consideration is viewed as significant, then
the challenge can be considered as urgent.
Step 6: Gaining Stakeholder Feedback
• Stakeholder’s general assessment of the firm and its practices can be
obtained through satisfaction or reputation surveys.
• Gauge stakeholder’s perceptions of the firm’s contributions to specific
issues.
• More formal research may be conducted using focus groups,
observation , and surveys.