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After Megan Jones finished her BS degree in Management at The University of Rhode Island, she landed a great job with the “app” developing company Global App Creations (GAC). In her six months of training in Human Resources (HR) she faced challenges, but enjoyed working with people and solving their problems.

On Monday morning Megan’s boss, Debbie, placed a 20-inch-thick personnel folder on her desk. “Megan, I want you to review these files and by Friday start the process of finding possible ethics violations. Some employees know this is coming, while others don’t have a clue. It’s your job to write them up for ethics violations and suggest whether you think some of them should go to legal as well. I will add my write-up to each one so you won’t be the only one making the decisions. For now, I’ll make the primary decisions, but sooner or later you’ll be in charge of these tasks. If you have any questions, just stop by and we can talk.”

That afternoon Megan began going through the files. Some were straightforward involving theft of office supplies, inappropriate remarks, and tardiness. GAC’s code was straightforward on such matters. Yet other events appeared confusing. One salesperson was getting an official reprimand for using a company car for personal activities. This didn’t make sense because all the salespeople drove company cars they took home after work. According to the file, the person visited a hospital 10 miles away every evening for the past month. Megan realized every GAC car was equipped with a GPS device. While she didn’t think it was illegal for companies to install tracking devices on items they owned, she heard having information about health or religion could become the basis of a lawsuit if the person’s employment was terminated.

The most shocking file Megan reviewed was that of another employee being fired for sharing confidential information with a competitor. The file contained reports on computer activity, cell phone usage, GPS tracking, and included audio and video of personal conversations, dinners, and hotel rooms. On Tuesday Megan went to Jeremy, who worked for the company for several years, and asked him if he knew of employee tracking at the company.

Jeremy responded, “Well, I have heard rumors that managers want to keep track of employees and monitor whether they share confidential information with competitors. I’ve also heard they monitor where each employee goes through the GPS located in the company car.”

Megan felt uneasy. “Jeremy, is what they are doing legal? Can they track and monitor our every move and conversation?”

Jeremy shrugged. “As far as I know it’s legal, but I’ve never looked into the actual laws. I don’t know why a company should track my personal time outside the office. But what are we supposed to do about it? We all need a job, and each one comes with a price.”

On Thursday Megan met with Debbie and expressed her concerns about the information GAC collects through the employee tracking activities. After she finished, Debbie responded. “Don’t be so naive, Megan. You know as well as I do what employees do outside of work could legally hurt the company. It’s also necessary to make sure employees aren’t sharing confidential information with rivals. This is a competitive industry.”

“But what about this employee using the company car to visit his daughter in the hospital? It was outside work hours and I heard his daughter is sick. What about an individual’s right to privacy concerning medical records?”

Debbie brushed her concerns aside. “We don’t have access to anybody’s medical records. We got this from the GPS device in the company-owned car issued to him. We can’t make exceptions for these types of things. Our reputation for ethics is excellent.”

Then Debbie said, “I hope you haven’t spoken to anyone about these cases because that violates confidentiality. Your job is to review the files and suggest appropriate action. All files and communications about the files are confidential.”

Questions | Exercises

1. If tracking employees through technology is not illegal, why should Megan be concerned if she is not involved in any misconduct?

2. At this point, what are Megan’s alternatives to resolve her current dilemma about her involvement and knowledge about GAC’s tracking of employees?

3. Who should have a stake or an interest in how GAC tracks and monitors its employees?

A stakeholder framework identifies the internal stakeholders (employees, boards of directors, and managers) and the external stakeholders (customers, special interest groups, regulators, and other groups) who agree, disagree, collaborate, and engage in normal business transactions. Most ethical issues exist because of conflicts about what is right and wrong among and within stakeholder groups. This framework allows an organization to identify, monitor, and respond to the needs, values, and expectations of different stakeholder groups.

The formal system of business accountability and control of ethical and socially responsible behavior is corporate governance. In theory, the board of directors provides oversight for all decisions and use of resources. Ethical issues relate to the role of the board of directors, relationships with shareholders, internal control, risk management, and executive compensation. Ethical leadership is associated with socially responsible corporate governance.

In this chapter, we first focus on the concept of stakeholders and examine how a stakeholder framework helps us understand organizational ethics. Then we identify stakeholders and the importance of a stakeholder orientation. Using the stakeholder framework, we explore the concept and dimensions of social responsibility. Next, we examine corporate governance as a dimension of social responsibility and ethical decision making to provide an understanding of the importance of stakeholder oversight. Finally, we provide the steps for implementing a stakeholder perspective on social responsibility and ethical decisions in business.

2-1Stakeholders Define Ethical Issues in Business

Many firms experience conflicts with primary stakeholders and consequently can damage their reputations and shareholder confidence. While many threats to reputations stem from uncontrollable events such as economic conditions, ethical misconduct is more difficult to overcome than poor financial performance. Stakeholders most directly affected by negative events experience a corresponding shift in their perceptions of a firm’s reputation. On the other hand, firms sometimes receive negative publicity for misconduct that destroys trust and tarnishes their reputations, making it more difficult to retain existing customers and attract new ones.

Stakeholders provide resources critical to a firm’s long-term success. These resources may be tangible and intangible. Shareholders, for example, supply capital; suppliers offer material resources or intangible knowledge; employees and managers grant expertise, leadership, and commitment; customers generate revenue and provide loyalty with word-of-mouth promotion; local communities provide infrastructure; and the media transmits positive corporate images. In a spirit of reciprocity, stakeholders are anticipated to be fair, loyal, and treat the corporation in a responsible way.

2-1aIdentifying Stakeholders

Given the variety of employees involved in the generation of information about stakeholders, it is essential the information gathered be circulated throughout the firm. The firm must facilitate the communication of information about the nature of relevant stakeholder communities, concerns, and impact of the firm on these issues to all members of the organization. The dissemination of stakeholder intelligence can be formally organized through newsletters and internal information forums.

A stakeholder orientation is not complete without including activities that address stakeholder issues. For example, manufacturers in some countries have been under attack for product quality issues and safety violations. Nonprofit groups attacked Apple for alleged abuse by one of its suppliers. According to the groups, workers at a Chinese factory run by Taiwan-based Catcher Technology Co. handled toxic chemicals without protective gear. The factory was also accused of dumping toxic chemicals into a sewer that leads into a river. As the most powerful member of the supply chain, Apple is expected to promote safety and workers’ rights throughout its distribution network.

A stakeholder orientation can be viewed as a continuum in that firms are likely to adopt the concept to varying degrees. To gauge a firm’s stakeholder orientation, it is necessary to evaluate the extent the firm adopts behaviors that typify the generation and dissemination of stakeholder intelligence and the responsiveness to this intelligence. A given organization may generate and disseminate more intelligence about some stakeholder communities than others and respond accordingly.

Social Responsibility and Business Ethics

Business ethics, as previously defined, comprises principles and values that meet the expectations of stakeholders. Philanthropic responsibility refers to activities that are not required of businesses but that contribute to human welfare or goodwill. Ethics, then, is one dimension of social responsibility. Ethical decisions by individuals and groups drive appropriate decisions and are interrelated with all of the levels of social responsibility. For example, the economic level can have ethical consequences when making managerial decisions.

Reputation is one of organization’s greatest intangible assets with tangible value. The value of a positive reputation is difficult to quantify, but it is important. A single negative incident can influence perceptions of a corporation’s image and reputation instantly and for years afterward. Corporate reputation, image, and brands are more important than ever and are among the most critical aspects of sustaining relationships with constituents including investors, customers, employees, media, and regulators. Although an organization does not control its reputation in a direct sense, its actions, choices, behaviors, and consequences influence stakeholders’ perceptions of it. For instance, employees are likely to perceive their firm’s corporate social responsibility initiatives as authentic if the program appears to fit with the company’s true identity and if they take a leadership role in these initiatives. Employees who feel their firms’ corporate social responsibility programs are authentic are more likely to identify and connect with the organization.

2-3Issues in Social Responsibility

Social responsibility rests on a stakeholder orientation. The realities of global warming, obesity, consumer protection, and other issues are causing companies to look at a broader, more inclusive stakeholder orientation. In other words, a broader view of social responsibility looks beyond pragmatic and firm-centric interests and considers the long-term welfare of society. Each stakeholder is given due consideration. There needs to be a movement away from self-serving “co-optation” and a narrow focus on profit maximization.

Social issues are associated with the common good. The common good is the idea that because people live in a community, social rules should benefit the community. This supports the premise that all people have the right to try and obtain the basic necessities of life.

Social issues may encompass events such as jobs lost through outsourcing, health issues, gun rights, and poverty. While these issues may be indirectly related to business, there is a need to reflect on them in developing strategies in certain cases. Issues that directly relate to business include obesity, smoking, and exploiting vulnerable or impoverished populations, as well as a number of other issues. For example, marketers are increasingly targeting food advertising to children through websites. One study found approximately 85 percent of food brands have websites with content targeted toward children.

The second major issue is consumer protection, which often occurs in the form of laws passed to protect consumers from unfair and deceptive business practices. Issues involving consumer protection usually have an immediate impact on the consumer after a purchase. Major areas of concern include advertising, environmental hazards, financial practices, and product safety. Because consumers are less knowledgeable about certain products or business practices, it is the responsibility of companies to take precautions to prevent consumers from being harmed by their products. For instance, businesses marketing products that could potentially be harmful have the responsibility to put warning labels on their products. The Federal Trade Commission and the Consumer Financial Protection Bureau are intent on enforcing consumer protection laws and pursuing violations.

Deceptive advertising has been a hot topic in the consumer protection area. For instance, covert marketing occurs when companies use promotional tools to make consumers believe the promotion is coming from an independent third party rather than from the company.

2-5Corporate Governance Provides Formalized Responsibility to Stakeholders

Most businesses, and often many subjects taught in business schools, operate under the assumption that the purpose of business is to maximize profits for shareholders—an assumption manifest, for example, in the 1919 decision of the Michigan Supreme Court. In Dodge v. Ford Motor Co.,

Directors are not generally held responsible for negative outcomes if they have been informed and diligent in their decision making. Board members have an obligation to request information, conduct research, use accountants and attorneys, and obtain the services of ethical compliance consultants to ensure the corporations in which they have an interest are run in an ethical manner. The National Association of Corporate Directors, a board of directors’ trade group, has helped formulate a guide for boards to help them do a better job of governing corporate America.

Directors share a duty of loyalty, which means all their decisions should be in the best interests of the corporation and its stakeholders. Conflicts of interest exist when a director uses the position to obtain personal gain, usually at the expense of the organization. For example, before the passage of the Sarbanes–Oxley Act in 2002, directors could give themselves and their officers interest-free loans. Scandals at Tyco, Kmart, and WorldCom are all associated with officers receiving personal loans that damaged the corporation.

Officer compensation packages present a challenge for directors, especially those on the board who are not independent. Directors have an opportunity to vote for others’ compensation in return for their own increased compensation. Following the global financial crisis, many top executives at failed firms received multimillion dollar bonuses in spite of the fact their companies required huge government bailouts simply to stay afloat. This has led to a greater amount of shareholder activism regarding the issue of executive pay. Directors now find shareholders want to vote on executive officers’ compensation, and although their votes are not binding in the United States, investor pressure has increased the shareholder role in deciding executive compensation. For example, BP’s shareholders rejected a proposal to give the CEO, Bob Dudley, a 20 percent pay hike. Dudley’s pay and benefit package was almost $20 million. The proposed pay hike came during a time of poor financial performance, losing $5.2 billion and plans to lay off 7,000 employees.

Directors’ knowledge about the investments, business ventures, and stock market information of a company creates issues that could violate their duty of loyalty. Insider trading of a firm’s stock has specific rules, and violations should result in serious punishment. The obligations of directors and officers for legal and ethical responsibility interface and fit together based on their fiduciary relationships. Ethical values should guide decisions and buffer the possibility of illegal conduct. With increased pressure on directors to provide oversight for organizational ethics, there is a trend toward directors receiving training to increase their competency in ethics programs development, as well as other areas. As issues increase, more pressure is placed on the board’s audit committee to address anything related to risk. While their primary role has been financial reporting, today boards are responsible for issues such as whistle-blower claims, cybersecurity, and bribery.

A clear delineation of accountability helps employees, customers, investors, government regulators, and other stakeholders understand why and how the organization identifies and achieves its goals. Corporate governance establishes fundamental systems and processes for preventing and detecting misconduct, for investigating and disciplining, and for recovery and continuous improvement. Effective corporate governance creates a compliance and ethics culture so employees feel integrity is at the core of competitiveness.

2-5aViews of Corporate Governance

To better understand the role of corporate governance in business today, we must consider how it relates to fundamental beliefs about the purpose of business. Some organizations take the view that as long as they are maximizing shareholder wealth and profitability, they are fulfilling their core responsibilities. Other firms, however, believe that a business is an important member, even a citizen, of society, and therefore must assume broad responsibilities that include complying with social norms and expectations. From these assumptions, we can derive two major approaches to corporate governance: the shareholder model and the stakeholder model.

2-5cGreater Demands for Accountability and Transparency

Just as improved ethical decision making requires more of employees and executives, boards of directors are also experiencing a greater demand for accountability and transparency. In the past, board members were often retired company executives or friends of current executives, but the trend today is toward “outside directors” who have little vested interest in the firm before assuming the director role. Inside directors are corporate officers, consultants, major shareholders, and others who benefit directly from the success of the organization. Directors today are increasingly chosen for their expertise, competence, and ability to bring diverse perspectives to strategic discussions. Outside directors are also thought to bring independence to the monitoring function because they are not bound by past allegiances, friendships, a current role in the company, or some other issue that creates a conflict of interest.

Many of the corporate scandals uncovered in recent years might not have occurred if the companies’ boards of directors were better qualified, knowledgeable, and less biased. Diversity of board members, especially in age and gender, has been associated with improved social performance.

Stakeholders have a level of power over a business because they are in the position to withhold organizational resources to some extent. Stakeholders have the most power when their own survival is not affected by the success of the organization and when they have access to vital organizational resources. Companies can be transparent or can use various avenues including technology to avoid communication and interaction. For example, some investors are upset when corporations hold only online participation in annual shareholder meetings. They feel managers have too much control over the meeting.

2-6cStep 3: Identifying Stakeholder Issues

This chapter provides a good overview of the issues, conflicts, and opportunities of understanding more about stakeholder relationships. The stakeholder framework recognizes issues, identifies stakeholders, and examines the role of boards of directors and managers in promoting ethics and social responsibility. A stakeholder perspective creates a more ethical and reputable organization.

Chapter Review

2-8aSummary

Business ethics, issues, and conflicts revolve around relationships. Customers, investors and shareholders, employees, suppliers, government agencies, communities, and many others who have a stake or claim in an aspect of a company’s products, operations, markets, industry, and outcomes are known as stakeholders. Stakeholders are influenced by and have the ability to affect businesses. Stakeholders provide both tangible and intangible resources that are critical to a firm’s long-term success, and their relative ability to withdraw these resources gives them power. Stakeholders define significant ethical issues in business.

Primary stakeholders are those whose continued association is absolutely necessary for a firm’s survival. Secondary stakeholders do not typically engage in transactions with a company and are not essential to its survival. The stakeholder interaction model suggests there are reciprocal relationships between a firm and a host of stakeholders. The degree to which a firm understands and addresses stakeholder demands is expressed as a stakeholder orientation and includes three sets of activities:

1. the generation of data about its stakeholder groups and the assessment of the firm’s effects on these groups,

2. the distribution of this information throughout the company, and

3. the responsiveness of every level of the business to this intelligence.

A stakeholder orientation can be viewed as a continuum in that firms are likely to adopt the concept to varying degrees.

Although the terms ethics and social responsibility are often used interchangeably, they have distinct meanings. Social responsibility in business refers to an organization’s obligation to maximize its positive impact and minimize its negative impact on society. There are four levels of social responsibility—economic, legal, ethical, and philanthropic—and they can be viewed as a pyramid. The term corporate citizenship is used to communicate the extent businesses strategically meet the economic, legal, ethical, and philanthropic responsibilities placed on them by their stakeholders.

Issues in social responsibility include social issues, consumer protection issues, sustainability, and corporate governance. Social issues are associated with the common good and include such issues as childhood obesity and Internet privacy. Consumer protection often occurs in the form of laws passed to protect consumers from unfair and deceptive business practices. Sustainability is the potential for the long-term well-being of the natural environment, including all biological entities, as well as the mutually beneficial interactions among nature and individuals, organizations, and business strategies. Corporate governance involves the development of formal systems of accountability, oversight, and control.

Most businesses operate under the assumption that the main purpose of business is to maximize profits for shareholders. The stakeholder model places the board of directors in the position of balancing the interests and conflicts of various constituencies. Both directors and officers of corporations are fiduciaries for the shareholders. Directors have a duty to avoid ethical misconduct and provide leadership in decisions to prevent ethical misconduct in their organizations. To remove the opportunity for employees to make unethical decisions, most companies develop formal systems of accountability, oversight, and control known as corporate governance. Accountability refers to how closely workplace decisions are aligned with a firm’s stated strategic direction and its compliance with ethical and legal considerations. Oversight provides a system of checks and balances that limit employees’ and managers’ opportunities to deviate from policies and strategies intended to prevent unethical and illegal activities. Control is the process of auditing and improving organizational decisions and actions.

There are two perceptions of corporate governance that can be viewed as a continuum. The shareholder model is founded in classic economic precepts, including the maximization of wealth for investors and owners. The stakeholder model adopts a broader view of the purpose of business that includes satisfying the concerns of other stakeholders, from employees, suppliers, and government regulators to communities and special interest groups.

Two major elements of corporate governance that relate to ethical decision making are the role of the board of directors and executive compensation. The members of a public corporation’s board of directors assume legal responsibility for the firm’s resources and decisions. Important issues related to boards of directors include accountability, transparency, and independence. Boards of directors are also responsible for appointing top executive officers and determining their compensation. Concerns about executive pay center on the often-disproportionate relationship between executive pay and median employee wages in the company.

An organization that develops effective corporate governance and understands the importance of business ethics and social responsibility in achieving success should develop a process for managing these important concerns. Although there are different approaches, steps have been identified that have been found effective in utilizing the stakeholder framework to manage responsibility and business ethics. These steps are

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, and

6. gaining stakeholder feedback.

Chapter Review

2-8cResolving Ethical Business Challenges

Demarco just graduated from Texas University and had been snatched up by Xeon Natural Resources Incorporated, one of the top natural resource extraction companies in the world. Because he was Brazilian, bilingual, and spoke several specific Brazilian dialects, his stationing in Brazil was a no-brainer. Xeon was deeply involved with a project within the Brazilian rain forests in mining an extremely valuable element called niobium. Niobium is a rare earth element essential for micro-alloying steel as well as other products such as jet engines, rocket subassemblies, superconducting magnets, and super alloys. Brazil accounts for 92 percent of all niobium mined, and Xeon Natural mines much of the element in Brazil. Xeon discovered a large niobium deposit and estimates the corporation could make an additional $5 billion in profits over the next two decades.

Demarco soon discovered he was one of several employees assigned to explain to the indigenous population that Xeon wanted to extract the niobium from the lands given to the tribes by the Brazilian government. The land was, by decree, compensation for native minorities. Having spent several months with various tribes, Demarco learned they were communities that had not been altered by Western culture. It was obvious to Demarco if Xeon began strip mining the area, thousands of “outsiders” would be brought in and would impact the cultural heritage of the indigenous populations.

Demarco discussed this with his boss, Barbara. “Yes, I understand all you are saying, and I agree this will change their lives as well as their children and grandchildren’s lives,” Barbara said. “But think of it this way, their standard of living will be greatly enhanced. Schools will be built, hospitals will be available, and there will be more employment opportunities.”

Demarco responded, “While the tribal leaders want a better life for their people, I feel they are being steam-rolled into accepting something they don’t understand. I’ve talked to some of the tribal leaders, and I am positive they have no idea of the impact this will have on their culture. We have many stakeholders involved in this decision, including Xeon’s employees, the tribes, the Brazilian government, and even communities beyond the tribal lands. I think we need to reevaluate the impact on all of these stakeholders before proceeding.”

Barbara sighed. “I think you make some good points, and I am concerned about these different stakeholders. But you should understand we already have buy-in from the key decision makers, and our business depends upon being able to mine niobium. We’ve got to continue this project.”

Demarco returned to the camp. The other specialists questioned him about Barbara’s reaction. As he spoke, some of the specialists became concerned about their jobs. A few admitted they heard the local and national media were raising awareness about the negative impact mining this mineral could have on the indigenous populations.

A few days later, Demarco heard that some of the tribal leaders had new concerns about the project and were organizing meetings to obtain feedback from members. Demarco approached one of the mining specialists who studied the potential impact of strip mining the land. The specialist said that while he understood stakeholder interests, he felt the extraction methods Xeon used were environmentally friendly. While creating a temporary disruption in the ecosystem of the rainforest, Xeon’s strip mining methods provided an opportunity for restoration. In fact, strip mining that was done in the United States before there were any regulations provides a good example of how the forest can recover and grow back to its original condition.

Demarco knew despite the potential benefits, there would still likely be opposition from the tribal community. Additionally, no method of strip mining is entirely environmentally friendly. Demarco realized even with restoration, the lives of the indigenous tribes would be forever altered.

Demarco was to meet with tribal elders the next day to discuss their concerns. He understood that whatever the decision, it would negatively impact some stakeholders. On the one hand, the tribal members might compromise their traditional way of life and the environment would be harmed if the strip mining project began. On the other hand, Xeon’s future and the future of its employees depended upon being able to mine the niobium. It could also benefit the tribes economically. He was not sure what he should tell the tribal leaders.

Questions | Exercises

1. How should Demarco approach this issue when he meets with the tribal leaders?

2. What should be the priorities in balancing the various stakeholder interests?

3. Can the CEO and board of directors of Xeon continue operations and maintain a stakeholder orientation?

Chapter Review

2-8dCheck Your EQ

Check your EQ, or Ethics Quotient, by completing the following. Assess your performance to evaluate your overall understanding of the chapter material.

1. Social responsibility in business refers to maximizing the visibility of social involvement.

Answer

Yes

No

Rationale

Social responsibility refers to an organization’s obligation to maximize its positive impact on society and minimize its negative impact.

2. Stakeholders provide resources that are more or less critical to a firm’s long-term success.

Answer

Yes

No

Rationale

These resources are both tangible and intangible.

3. Three primary stakeholders are customers, special interest groups, and the media.

Answer

Yes

No

Rationale

Although customers are primary stakeholders, special interest groups and the media are usually considered secondary stakeholders.

4. The most significant influence on ethical behavior in an organization is the opportunity to engage in unethical behavior.

Answer

Yes

No

Other influences such as corporate culture have more impact on ethical decisions within an organization.

5. The stakeholder perspective is useful in managing social responsibility and business ethics.

Answer

Yes

No