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C H A P T E R O N E
The Corporation and Its Stakeholders Business corporations have complex relationships with many individuals and organizations in society. 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. Building positive and mutually ben- eficial relationships across organizational boundaries can help enhance a company’s reputation and address critical social and ethical challenges. In a world of fast-paced globalization, shifting public expectations and government policies, growing ecological concerns, and new technologies, manag- ers face the difficult challenge of achieving economic results while simultaneously creating value for all of their diverse stakeholders.
This Chapter Focuses on These Key Learning Objectives:
LO 1-1 Understanding the relationship between business and society and the ways in which business and society are part of an interactive system.
LO 1-2 Considering the purpose of the modern corporation.
LO 1-3 Knowing what a stakeholder is and who a corporation’s market and nonmarket and internal and external stakeholders are.
LO 1-4 Conducting a stakeholder analysis and understanding the basis of stakeholder interests and power.
LO 1-5 Recognizing the diverse ways in which modern corporations organize internally to interact with various stakeholders.
LO 1-6 Analyzing the forces of change that continually reshape the business and society relationship.
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Amazon—which some have called the “Earth’s biggest store”—is an important part of many of our lives. We browse on Amazon, watch on Amazon, and buy on Amazon. We freely disclose to Amazon our wishes, interests, and willingness to pay. You may well have purchased or rented this textbook from Amazon.
In 2018, Amazon was the largest Internet retailer in the world, measured both by annual revenue ($178 billion) and market capitalization (more than $800 billion). It was the second largest private employer in the United States (after Walmart), with more than 540,000 employees (not counting the additional 120,000 or so temporary workers the com- pany brought on each year during the busy holiday season).1 From its start in 1994 as a scrappy Seattle start-up selling books online, Amazon had grown at an astonishing pace; in 2017, Amazon was responsible for fully 70 percent of all growth in U.S. online commerce.2 By 2018, the company’s founder and CEO, Jeff Bezos, had become the world’s richest person, with a net worth greater than $100 billion.3 Shareholders in the company had been richly rewarded; in early 2018, the price of Amazon’s stock was more than 12 times higher than it had been a decade earlier. The company was enormously popular with consumers, who turned to Amazon for one-click convenience, free and speedy delivery, and the ability to compare a seemingly endless assortment of products on the basis of price and reviews. Small businesses affiliated with Amazon Marketplace were able to tap into the company’s global e-commerce platform and unrivaled logistics to reach customers they never could have reached before. No doubt, many had benefited from Amazon’s success.
Yet the company had also become the target of criticism from many quarters, charged with destroying brick-and-mortar businesses, relentlessly driving their own employees, unfairly besting competitors, and pressuring communities for concessions. Consider that:
∙ Much of Amazon’s success had come at the expense of brick-and-mortar stores. Iconic retailers—such as Macy’s, JCPenney, and Target—had shed thousands of jobs as Amazon attracted ever-larger slices of consumer spending. A leading economist calculated that the rise of online commerce had caused the cumulative loss of 1.2 million retailing jobs—positions such as cashiers, salespeople, and stock clerks—in the United States.4 Many of these jobs were held by women and minorities (who made up 60 percent and 40 percent, respectively, of department store employees).5 Traditional retailing, concluded Scott Galloway, the author of The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google, had been “ravaged and depopulated by a single player”—Amazon.6
∙ Amazon’s own employees, by some accounts, were subject to an unusually punishing work culture. An investigative report by The New York Times, based on interviews with more than 100 current and former white-collar employees, found a pattern of setting “unreasonably high” performance standards, continually monitoring performance, and weeding out employees in a “rank and yank” system that one called “purposeful Dar- winism.” Turnover rates were among the highest in the Fortune 500. Said one former marketer, “Amazon is where overachievers go to feel bad about themselves.”7
1 “Amazon Is Now the Size of a Small Country,” Business Insider, January 16, 2018. 2 “U.S. E-Commerce Sales Grow 16.0% in 2017,” Internet Retailer, at www.digitalcommerce360.com, February 16, 2018. 3 “Jeff Bezos Is Now the Richest Person in History,” http://money.cnn.com, January 9, 2018. 4 Michael Feroli, chief U.S. economist at J.P. Morgan, cited in “Amazon to Add 100,000 Jobs as Brick-and-Mortar Retail Crum- bles,” The New York Times, January 12, 2017. 5 “The Silent Crisis of Retail Employment,” The Atlantic, April 18, 2017, and “Decline in Retail Jobs Felt Entirely by Women,” Institute for Women’s Policy Research, December 2017. 6 Scott Galloway, The Four: Scott Galloway, The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google (New York: Penguin, 2017), Chapter 2. 7 “Inside Amazon: Wrestling Big Ideas in a Bruising Workplace,” The New York Times, August 15, 2015.
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∙ Amazon’s control of both online and voice-activated search gave it powerful advantages— leading to what some saw as unfair competition. One study found that under some con- ditions, products displayed under “customers who bought this item also bought” were dominated by Amazon’s own private-label brands.8 Alexa, Amazon’s voice-activated virtual assistant on Echo and other digital devices, also gave the company an edge. The consulting firm Bain & Company found that Alexa’s recommendations were biased toward “Amazon’s Choice” and the company’s own private-label products (after prod- ucts the customer had previously ordered). “The ‘endless aisle’ just got a lot smaller,” Bain concluded.9
∙ In 2017, Amazon announced it would invest $5 billion to open a second North Ameri- can headquarters outside Seattle, promising to create 50,000 new jobs paying $100,000 or more. This was a tantalizing prospect, and 238 cities and regions submitted propos- als, with at least six offering financial incentives of $1 billion or more. Some public officials thought this was well worth it, but others thought taxpayer money should not be used to subsidize such a successful company. “Blindly giving away the farm isn’t our style,” said the mayor of San Antonio, Texas, which dropped out of the race.10
Amazon’s experience illustrates, on a particularly large scale, the challenges of manag- ing successfully in a complex network of stakeholders. The company’s actions affected not only itself, but also many other people, groups, and organizations in society. Customers, employees, business partners and suppliers, competitors, shareholders, creditors, govern- ments, and local communities all had a stake in Amazon’s decisions.
Every modern company, whether small or large, is part of a vast global business sys- tem. Whether a firm has 50 employees or, like Amazon, more than half a million—its links to customers, suppliers, employees, and communities are certain to be numerous, diverse, and vital to its success. This is why the relationship between business and society is important for you to understand as both a citizen and a manager.
Business and Society
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. Consider that in the United States today there are 6 million businesses, according to government estimates, and in the world as a whole, there are uncounted millions more. Of course, these businesses vary greatly in size and impact. They range from a woman who helps support her family by selling handmade tortillas by the side of the road in Mexico City for a few pesos, to ExxonMobil, a huge corporation that employs almost 75,000 work- ers and earns annual revenues approaching $237 billion in almost every nation in the world.
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
8 “The Antitrust Case Against Facebook, Google, and Amazon,” The Wall Street Journal, January 16, 2018, and “How Amazon Steers Shoppers to Its Own Products,” The Wall Street Journal, June 23, 2018; see also Galloway, op. cit. 9 “Dreaming of an Amazon Christmas?” Bain & Company, November 9, 2017. 10 “Amazon Just Revealed the Top Cities for HQ2—Here Are the Ones Throwing Hundreds of Millions to Land It,” Business Insider, January 18, 2018, and “As Cities Woo Amazon to Build Second Headquarters, Incentives Are Key,” The Wall Street Journal, October 19, 2017.
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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 relation- ship between business and society. A simple diagram of the relationship between the two appears in Figure 1.1.
As the Amazon example that opened this chapter illustrates, 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.
A Systems Perspective General systems theory, first introduced in the 1940s, argues that all organisms are open to, and interact with, their external environments. Although most organisms have clear bound- aries, they cannot be understood in isolation, but only in relationship to their surroundings. This simple but powerful idea can be applied to many disciplines. For example, in botany, the growth of a plant cannot be explained without reference to soil, light, oxygen, moisture, and other characteristics of its environment. As applied to management theory, the systems concept implies that business firms (social organisms) are embedded in a broader social structure (external environment) with which they constantly interact. Corporations have ongoing boundary exchanges with customers, governments, competitors, suppliers, com- munities, and many other individuals and groups. Just as good soil, water, and light help a plant grow, positive interactions with society benefit a business firm.
Like biological organisms, moreover, businesses must adapt to changes in the environ- ment. Plants growing in low-moisture environments must develop survival strategies, like the cactus that evolves to store water in its leaves. Similarly, a telecommunications com- pany in a newly deregulated market must learn to compete by changing the products and services it offers. The key to business survival is often this ability to adapt effectively to changing conditions. In business, systems theory provides a powerful tool to help managers conceptualize the relationship between their companies and their external environments.
FIGURE 1.1 Business and Society: An Interactive System Society
Business
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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 Stakeholder Theory of the Firm
What is the purpose of the modern corporation? To whom, or what, should the firm be respon- sible?11 No question is more central to the relationship between business and society.
In the shareholder theory of the firm (sometimes also called the ownership 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’ inter- ests 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, corpora- tions 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 perspective was well expressed by Laurence Fink, the CEO of BlackRock, a global firm that manages more than $5 trillion worth of assets for its clients. In his 2018 letter to CEOs, Fink stated that “. . . every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”12
Supporters of the stakeholder theory of the firm make three core arguments for their position: descriptive, instrumental, and normative.13
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 man- aging 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 pro- ducing high-quality and innovative products and services for their customers, attracting
11 For summaries of contrasting theories of the purpose of the firm, see Margaret M. Blair, “Whose Interests Should Corpora- tions Serve,” in Margaret M. Blair and Bruce K. MacLaury, Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century (Washington, DC: Brookings Institution, 1995), Ch. 6, pp. 202–34; and James E. Post, Lee E. Preston, and Sybille Sachs, Redefining the Corporation: Stakeholder Management and Organizational Wealth (Palo Alto, CA: Stanford University Press, 2002). 12 “Larry Fink’s Annual [2018] Letter to CEOs: A Sense of Purpose,” at www.blackrock.com. 13 The descriptive, instrumental, and normative arguments are summarized in Thomas Donaldson and Lee E. Preston, “The Stakeholder Theory of the Corporation: Concepts, Evidence and Implications,” Academy of Management Review 20, no. 1 (1995), pp. 65–71. See also, Post, Preston, and Sachs, Redefining the Corporation, Ch. 1.
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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.
In what became known as the “dollar store wars,” two companies made competing bids to buy Family Dollar, a U.S. discount retail chain based in Charlotte, North Carolina—each with very different consequences for stakeholders. One suitor, Dollar Tree, offered $76.50 per share for the company, while the other, Dollar General, offered $80—seemingly a better deal for shareholders. But the Dollar General deal faced likely government antitrust scrutiny and would probably have required the closure of thousands of stores, throwing employees out of work and depriving low-income communities of access to a discount store. In the end, after considering the impact on all stakeholders, Family Dollar’s management recommended the lower-priced offer, and three-quarters of its shareholders agreed.14
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 respon- sibly toward multiple stakeholder groups perform better financially, over the long run, than those that do not. (This empirical evidence is further explored in Chapter 3.) 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 moti- vated employees, satisfied customers, committed suppliers, 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 stakehold- ers, 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.15
A basis for both the shareholder 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 shareholders) and have an obligation to run the business in their interest. These legal concepts are clearly consistent with the shareholder theory of the firm. How- ever, 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. (Benefit corporations, firms with a special legal status that obligates them to do so, are further discussed in Chapter 3.)
14 “Family Dollar Shareholders Approve Sale to Dollar Tree,” Charlotte Observer, January 22, 2015. 15 Abe Zakhem and Daniel E. Palmer, “Normative Stakeholder Theory,” in David M. Wasieleski and James Weber (eds.), Stakeholder Management, Business and Society 360: Volume 1, pages 49–74 (Bingley, United Kingdom: Emerald Publishing Ltd., 2017). Another formulation of this point has been offered by Robert Phillips, who argues for a principle of stakeholder fairness. This states that “when people are engaged in a cooperative effort and the benefits of this cooperative effort are accepted, obligations are created on the part of the group accepting the benefit” [i.e., the business firm]. Robert Phillips, Stakeholder Theory and Organizational Ethics (San Francisco: Berrett-Koehler, 2003), p. 9 and Ch. 5.
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In addition, many federal laws extend specific protections to various groups of stakehold- ers, such as those that prohibit discrimination against employees or grant consumers the right to sue if harmed by a product.
In other nations, the legal rights of nonowner stakeholders are often more fully devel- oped than in the United States. For example, a number of European countries—including Germany, Norway, Austria, Denmark, Finland, and Sweden—require public companies to include employee members on their boards of directors, so that their interests will be explicitly represented. Under the European Union’s so-called harmonization statutes, man- agers are specifically permitted to take into account the interests of customers, employees, creditors, and others.
In short, while the law requires managers to act on behalf of shareholders, it also gives them wide discretion—and in some instances requires them—to manage on behalf of the full range of stakeholder groups. The next section provides a more formal definition and an expanded discussion of the stakeholder concept.
The Stakeholder Concept The term stakeholder refers to persons and groups that affect, or are affected by, an organi- zation’s decisions, policies, and operations.16 The word stake originally meant a pointed stick or post. The word later became used as a verb, as when a person was said to mark territory with a stake to assert ownership—that is, to stake a claim.17 In the context of man- agement theory, stake is used more abstractly to mean an interest in—or claim on—a busi- ness enterprise. Those with a stake in the firm’s actions include such diverse groups as customers, employees, shareholders (also called stockholders), governments, suppliers, professional and trade associations, social and environmental activists, and nongovern- mental organizations. The term stakeholder is not the same as stockholder, although the words sound similar. Stockholders—individuals or organizations that own shares of a com- pany’s stock—are one of several kinds of stakeholders.
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 Amazon example illustrates.
Managers make good decisions when they pay attention to the effects of their deci- sions 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.
16 The term stakeholder was first introduced in 1963 but was not widely used in the management literature until the pub- lication of R. Edward Freeman’s Strategic Management: A Stakeholder Approach (Marshfield, MA: Pitman, 1984). For a comprehensive review of the stakeholder management literature, see Samantha Miles, “Stakeholder Theory Classification, Definitions and Essential Contestability,” in David M. Wasieleski and James Weber (eds.) Stakeholder Management, Business and Society 360: Volume 1, pages 21–48 (Bingley, United Kingdom: Emerald Publishing Limited, 2017). 17 “Origin and Meaning of Stake,” Online Etymology Dictionary, at www.etymonline.com.
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Different Kinds of Stakeholders Business interacts with society in many diverse ways, and a company’s relationships with various stakeholders differ.
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. Shareholders 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, bene- fits, and the opportunity for personal satisfaction and professional development. In return for payment, suppliers provide raw materials, energy, services, finished products, 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.
The puzzling question of whether or not managers should be classified as stakeholders along with other employees is discussed in Exhibit 1.A.
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, 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. On the contrary, interactions with such groups can be critical to a firm’s success or failure, as shown in the following example.
In late 2017, a company called Energy Management Inc. (EMI) said it would finally call off its sixteen-year effort to build a wind farm off the shore of Cape Cod, Massachusetts, to supply clean, renewable power to New England customers. The project, called Cape Wind, had generated intense opposition from residents of Cape
Are Managers Stakeholders?
Are managers, especially top executives, stakeholders? This has been a contentious issue in stakeholder theory. On one hand, the answer clearly 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, as shown in Chapter 13. 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 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 as representatives of the firm itself, rather than as one of its stakeholders. 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 too often they act primarily for themselves. Consider, for example, the many top executives of Lehman Brothers, MF Global, and Merrrill Lynch, who enriched them- selves personally at the expense of shareholders, employees, customers, and other stakeholders. The chal- lenge of persuading top managers to act in the firm’s best interest is further discussed in Chapter 13.
Exhibit 1.A
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Cod and nearby islands, who were concerned that its 130 wind turbines would spoil the view and get in the way of boats. A nonprofit group called Save Our Sound filed dozens of lawsuits, charging possible harm to wildlife, increased electricity rates, and danger to aircraft. Local utilities had withdrawn their commitments to buy power from the wind farm, and state regulators had denied permission for a power line connection to the mainland. “We were kept in a repeated sudden death period,” said the company’s discouraged owner, using a football analogy. “And the goal posts kept moving.”18
In this instance, various stakeholders were able to block the company’s plans completely— even though many did not have a market relationship with it.
Theorists also distinguish between internal stakeholders and external 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, usu- ally at a company worksite. External stakeholders, by contrast, are those who—although they may have important transactions with the firm—are not directly employed by it.
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, business support groups, such as the Chamber of Commerce, are normally con- sidered a nonmarket stakeholder. However, companies may support the Chamber of Com- merce with their membership dues—a market exchange. 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 com- plex web of stakeholders, many of which have independent relationships with each other.19 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
18 “Now It’s Official: Cape Wind Project Dead,” Boston Globe, December 1, 2017, and “After 16 Years, Hopes for Cape Cod Wind Farm Float Away,” The New York Times, December 19, 2017. The story of the opposition to Cape Wind is told in Robert Whitcomb and Wendy Williams, Cape Wind: Money, Celebrity, Energy, Class, Politics, and the Battle for Our Energy Future (New York: PublicAffairs, 2008). 19 Timothy J. Rowley, “The Power of and in Stakeholder Networks,” in David M. Wasieleski and James Weber (eds.) Stake- holder Management, Business and Society 360: Volume 1, pp. 101–122 (Bingley, United Kingdom: Emerald Publishing Limited, 2017).
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are owned by investors around the world, including many of its own employees and man- agers. 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. Nongovern- mental organizations may seek to lobby the government concerning the firm’s practices, and may count some employees among their members. A visual representation of this company and its stakeholders is shown in Figure 1.2.
As Figure 1.2 suggests, some individuals or groups may play multiple stakeholder roles. Some theorists use the term role sets to refer to this phenomenon. For example, a person may work at a company, but also live in the surrounding community, own shares of com- pany stock in his or her 401(k) retirement account, and even purchase the company’s prod- ucts from time to time. This person has several stakes in a company’s actions.
Later sections of this book (especially Chapters 13 through 19) will discuss in more detail the relationship between business and its various stakeholders.
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. The organization from whose perspective the analy- sis is conducted is called the focal organization.
FIGURE 1.2 A Firm and its Stakeholders
Business Firm
Governments
Customers
Shareholders
Employees
Creditors
Competitors
Suppliers
Non- governmental organizations
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The first step of a stakeholder analysis is for managers of the focal organization to identify the issue at hand. For example, in the Cape Wind situation discussed earlier in this chapter, Energy Management Inc. had to analyze how to win regulatory approval for the construction of its wind farm. Once the issue is determined, managers must ask four key questions, as discussed below and summarized in Figure 1.3.
Who are the relevant stakeholders?
The first question requires management to identify and map the relevant stakeholders. Exhibit 1.B, which appears later in this chapter, provides a guide. However, not all stake- holders listed will be relevant in every management situation. For example, a privately held firm will not have shareholders. 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 issue that management faces.
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 What are the interests of each stakeholder?
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?20
Shareholders, for their part, have an ownership interest in the firm. In exchange for their investment, shareholders 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 to achieve social objectives through their choice of investments. Customers, for their part, are most
20 A full discussion of the interests of stakeholders may be found in R. Edward Freeman, Ethical Theory and Business (Englewood Cliffs, NJ: Prentice Hall, 1994).
FIGURE 1.3 The Four Key Questions of Stakeholder Analysis
Who are the relevant stakeholders?
What are the interests of each stakeholder?
What is the power of each stakeholder?
How are coalitions likely to form?
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interested in gaining fair value and quality in exchange for the purchase price of goods and services. Suppliers wish to obtain profitable orders, use their capacity efficiently, and build stable relationships with their business customers. 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 relation- ship 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 What is the power of each stakeholder?
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, eco- nomic power, political power, legal power, and informational power.
Voting power means that the stakeholder has a legitimate right to cast a vote. Share- holders typically have voting power proportionate to the percentage of the company’s stock they own. They 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. (Shareholder voting power should be distinguished from the voting power exercised by citizens, which is discussed below.)
For example, Starboard Value LP, a New York-based hedge fund, used its voting power as a shareholder to force change in a company it had invested in. Starboard bought more than 10 percent of the shares of Mellanox Technologies, an Israeli semiconductor company, and called for radical change, slamming management for “weak execution,” “excessive spending,” and “missed growth opportunities.” When Mellanox did not respond aggressively enough, in 2018 Starboard and its allies fielded their own slate of nominees in the election for the board of directors and organized support from other voting shareholders. The company eventually com- promised with Starboard, agreeing to add two of the activists’ nominees to the board and a third if performance goals were not met. In recent years, activist inves- tors like Starboard Value have won one board seat for every two board election campaigns they have waged.21
Suppliers, customers, employees, and other stakeholders have economic power with the company. Suppliers, for example, can withhold supplies or refuse to fill orders if a com- pany fails to meet its contractual responsibilities. Customers may refuse to buy a compa- ny’s products or services if the company acts improperly. They 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
21 “Mellanox, Starboard Settle on New Board Members,” Reuters, June 19, 2018; “Starboard Value to Launch Proxy Fight for Entire Board at Mellanox,” The Wall Street Journal, January 17, 2018; and “Review and Analysis of 2017 U.S. Shareholder Activism,” Sullivan & Cromwell LLP, March 26, 2018.
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indirectly by urging government to use its powers by passing new laws or enacting regula- tions. Citizens may also vote for candidates that support their views with respect to govern- ment 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 share- holders, such as state pension funds, sued Bank of America (which had acquired Country- wide) to recoup some of their losses.
Finally, stakeholders have informational power when they have access to valuable data, facts, or details and are able to bring their own information and perspectives to the atten- tion of the public or key decision makers. With the explosive growth of technologies that facilitate the sharing of information, this kind of stakeholder power has become increas- ingly important.
Consumers’ ability to use social networks to express their views about businesses they like—and do not like—has given them power they did not previously have. For example, Yelp Inc. operates a website where people can search for local businesses, post reviews, and read others’ comments. In 2016, a dozen years after its launch, Yelp attracted 145 million unique visitors every month. Its reviewers collectively have gained considerable influence. Restaurants, cultural venues, hair salons, and other establishments can attract customers with five-star ratings and “People Love Us on Yelp” stickers in their windows—but, by the same token, can be badly hurt when reviews turn nasty. A Harvard Business School study reported that a one-star increase in an independent restaurant’s Yelp rating led to a 5 to 9 percent increase in revenue. Some businesses have complained that Yelp reviewers have too much power. “My business just died,” said the sole proprietor of a housecleaning business. “Once they locked me into the 3.5 stars, I wasn’t getting any calls.”22
Activists often try to use all of these kinds of power when they want to change a compa- ny’s policy. For example, human rights activists wanted to bring pressure on Unocal Corpo- ration to change its practices in Burma (Myanmar), where it had entered into a joint venture with the government to build a gas pipeline. Critics charged that many human rights vio- lations occurred during this project, including forced labor and relocations. In an effort to pressure Unocal to change its behavior, activists organized protests at shareholder meetings (voting power), called for boycotts of Unocal products (economic power), promoted local ordinances prohibiting cities from buying from Unocal (political power), brought a lawsuit for damages on behalf of Burmese villagers (legal power), and gathered information about government abuses by interviewing Burmese refugees and publicizing the results online (informational power). These activists increased their chances of success by mobilizing many kinds of power. This combination of tactics eventually forced Unocal to pay com- pensation to people whose rights had been violated and to fund education and health care projects in the pipeline region.23
22 Michael Luca, “Reviews, Reputation, and Revenue: The Case of Yelp.Com,” Harvard Business School NOM Unit Working Paper No. 12-016, March 16, 2016; and “Is Yelp Fair to Businesses?” PC World, November 15, 2011. 23 Further information about the campaign against Unocal is available at www.earthrights.org/unocal.
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Exhibit 1.B provides a schematic summary of some of the main interests and powers of both market and nonmarket stakeholders.
Stakeholder Coalitions An understanding of stakeholder interests and power enables managers to answer the final question of stakeholder analysis regarding coalitions.
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. Companies may be both opposed and supported by stakeholder coalitions, as shown in the example of the controversial Keystone XL pipeline.
TransCanada, a major North American energy company, sought approval to build a pipeline from Alberta, Canada, to Steele City, Nebraska, where it would connect to existing pipelines running to refineries and ports along the Gulf Coast. In opposing the Keystone XL pipeline, environmentalists argued it would enable the export of oil extracted from Canadian tar sands, an energy-intensive and dirty process. When burned, the tar sands oil would release carbon dioxide, contributing to further cli- mate change, and spills from the pipeline could foul water supplies. They were joined in coalition by other groups, such as ranchers, farmers, and Native Ameri- cans whose land would be crossed by the pipeline. On the other side, construction unions, many local governments, and business groups supported the pipeline, say- ing that it would create jobs, reduce U.S. dependence on foreign oil, and provide a safer method of transport than trains or tanker trucks. In 2018, debate still raged, and construction on the project had not begun.24
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 coali- tions 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.
The discussion case at the end of this chapter describes the coalitions that developed in favor of and opposition to new regulations that would require the ride-hailing start-up Uber to insure drivers logged onto its system to look for customers.
Another variation of stakeholder analysis focuses on stakeholder salience. Some schol- ars have suggested that managers pay the most attention to stakeholders possessing greater salience. (Something is salient when it stands out from a background, is seen as important, or draws attention.) Stakeholders stand out to managers when they have power, legitimacy, and urgency. This section has already discussed various forms of stakeholder power. Legit- imacy refers to the extent to which a stakeholder’s actions are seen as proper or appropriate by the broader society, because they are clearly affected by the company’s actions. Urgency refers to the time-sensitivity of a stakeholder’s claim, that is, the extent to which it demands
24 “Keystone XL Pipeline Has Enough Oil Suppliers, Will be Built, TransCanada Says,” Inside Climate News, January 18, 2018; “Keystone Pipeline Pros, Cons and Steps to a Final Decision,” The New York Times, November 18, 2014.
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Stakeholders: Nature of Interest and PowerExhibit 1.B
Stakeholder Nature of Interest— Stakeholder Wishes To:
Nature of Power—Stakeholder Influences Company By:
Market Stakeholders
Employees ■ Maintain stable employment in firm ■ Receive fair pay for work and mandated
benefits ■ Work in safe, comfortable environment
■ Union bargaining power ■ Work actions or strikes ■ Publicity
Shareholders ■ Receive a satisfactory return on investments (dividends)
■ Realize appreciation in stock value over time
■ Exercising voting rights based on share ownership
■ Exercising rights to inspect company books and records
Customers ■ Receive fair exchange: value and quality for money spent
■ Receive safe, reliable products ■ Receive accurate information ■ Be able to voice concerns
■ Purchasing goods from competitors ■ Boycotting companies whose products
are unsatisfactory or whose policies are unacceptable
Suppliers ■ Receive regular orders for goods ■ Be paid promptly for supplies delivered ■ Use capacity efficiently ■ Build stable relationships with business
customers ■ Be treated ethically
■ Refusing to meet orders if conditions of contract are breached
■ Supplying to competitors
Retailers, Wholesalers ■ Receive quality goods in a timely fashion at reasonable cost
■ Offer reliable products that consumers trust and value
■ Buying from other suppliers if terms of contract are unsatisfactory
■ Boycotting companies whose goods or policies are unsatisfactory
Creditors ■ Receive repayment of loans ■ Collect debts and interest
■ Calling in loans if payments are not made ■ Utilizing legal authorities to repossess or
take over property if loan payments are severely delinquent
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.25
Stakeholder Mapping Once managers have conducted a stakeholder analysis, they can use it to develop a stakeholder map, a visual representation of the relationships among stakeholder inter- ests, power, and coalitions with respect to a particular issue.26 (A stakeholder map can
25 Ronald K. Mitchell, Bradley R. Agle, and Donna J. Wood, “Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who and What Really Counts,” Academy of Management Review 22, no. 4 (1997), pp. 853–86. 26 For two alternative approaches to stakeholder mapping, see David Saiia and Vananh Le, “A Map Leading to Less Waste,” Proceedings of the International Association for Business and Society 20: 302–13 (2009); and Robert Boutilier, Stakeholder Pol- itics: Social Capital, Sustainable Development, and the Corporation (Sheffield, UK: Greenleaf Publishing, 2009), Chs. 6 and 7.
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Stakeholder Nature of Interest— Stakeholder Wishes To:
Nature of Power—Stakeholder Influences Company By:
Nonmarket Stakeholders
Communities ■ Employ local residents in the company ■ Ensure that the local environment is
protected ■ Ensure that the local area is developed
■ Refusing to extend additional credit ■ Issuing or restricting operating licenses
and permits ■ Lobbying government for regulation of
the company’s policies or methods of land use and waste disposal
Nongovernmental organizations
■ Monitor company actions and policies to ensure that they conform to legal and ethical standards
■ Promote social and economic development
■ Gaining broad public support through publicizing the issue
■ Lobbying government for regulation of the company
Business support groups (e.g., trade associations)
■ Provide research and information which will help the company or industry perform in a changing environment
■ Using its staff and resources to assist company in business endeavors and development efforts
■ Providing legal or “group” political support beyond that which an individual company can provide for itself
Governments ■ Promote economic development ■ Encourage social improvements ■ Raise revenues through taxes
■ Adopting regulations and laws ■ Issuing licenses and permits ■ Allowing or disallowing commercial activity
The general public ■ Protect social values ■ Minimize risks ■ Achieve prosperity for society ■ Receive fair and honest communication
■ Networking with other stakeholders ■ Pressing government to act ■ Condemning or praising individual
companies
Competitors ■ Compete fairly ■ Cooperate on industry-wide or
community issues ■ Seek new customers
■ Pressing government for fair competition policies
■ Suing companies that compete unfairly
also be used to represent stakeholder salience, to help a firm identify which stakeholders may require more of their attention.) Consider the following example:
In Anaheim, California, a real estate developer called SunCal purchased a large lot near to the Disneyland theme park. SunCal planned to build condominiums, with 15 percent of the units set aside for below-market-rate rental apartments. Because the site was in the resort district, the developer required special permission from the city council to proceed. Affordable housing advocates quickly backed SunCal’s plans. Some unions representing Disney employees also supported the idea, as did environmentalists drawn by the prospect of reducing long commutes, a contributor to the region’s air pollution. Disney, however, strenuously opposed SunCal’s plan, arguing that the land should be used only for tourism-related development such as hotels and restaurants; the company was supported by the chamber of commerce and various businesses in the resort district. The city council itself was split.
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If SunCal conducted a stakeholder analysis of this situation, it would conclude that the interests of relevant stakeholders were divided. Some, including Disney and vari- ous local businesses and some politicians, opposed its plan. But others, including some unions, affordable housing advocates, environmentalists, and other politicians, supported it. An analysis of coalitions would show how these stakeholders were likely to ally with one another. An analysis of power would show that Disney had enormous clout in Ana- heim, because it was the city’s major employer and taxpayer, with power far exceeding that of other relevant stakeholders. SunCal would no doubt conclude from this analysis that it was unlikely to succeed in building on this site. A stakeholder map of this situa- tion is shown in Figure 1.4. On the vertical axis, it shows various stakeholders’ level of power; on the horizontal axis, it shows their position on the issue of SunCal’s proposed development.
A stakeholder map is a useful tool, because it enables managers to see quickly how stakeholders feel about an issue. It helps them see how stakeholder coalitions are likely to form, how powerful these coalitions will be, and what outcomes are likely. The stakeholder map depicted in Figure 1.4 shows, for example, than the coalition in quadrant 4—Disney, local businesses, and some members of the City Council—is more powerful that the coa- lition in quadrant 2—unions, affordable housing activists, environmental groups, and other City Council members. An additional benefit of stakeholder analysis is that it can illuminate options that managers may not have initially noticed. In this example, SunCal might have realized that Disney (high opposition, high power) very much wanted to block the proposed development, but also had significant resources. Therefore, Disney might be willing to purchase the lot itself, providing funds for SunCal to use to purchase and develop another site, with support from unions, housing activists, and others. In short, stakeholder analysis and mapping can help managers “think outside the box.”
FIGURE 1.4 Stakeholder Map of SunCal’s Proposed Development
Source: Graphic design by Colorbox Industries. © 2018. All rights reserved. Used by permission.
Disney
Local Businesses
City Council
Unions
A�ordable Housing
Environmental Groups
COALITION IN OPPOSITION
COALITION IN SUPPORT
LOW POWER
SUPPORT
HIGH POWER
OPPOSE
4 1
3 2
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The Corporation’s Boundary-Spanning Departments
How do corporations organize internally to respond to and interact with stakeholders? 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 soci- ety. Building positive and mutually beneficial relationships across organizational boundar- ies is a growing part of management’s role.
Figure 1.5 presents a list of the corporation’s market and nonmarket stakeholders, along- side the corporate departments that typically have responsibility for engaging with them. As the figure suggests, the organization of the corporation’s boundary-spanning functions
FIGURE 1.5 The Corporation’s Boundary-Spanning Departments
G ov
er nm
en t
C om
m unity
Customers Shareholders
Customer Relations
• Customer service • Total quality management • Liability lawsuit defense • Recall management
Shareholder Relations, Investor Relations
• External and internal audit • SEC filings, compliance • Communications • Proxy election managementPublic A�airs,
Governmental A�airs, Government Relations
• Public policy • Lobbying • Political action • Trade associations • Advocacy ads • Grassroots mobilization
Human Resources, Labor Relations
• Communications • Union negotiations • OSHA, EEOC, and labor law compliance • Diversity and family–work programs • Healthcare
Environment, Health & Safety, Sustainability
• EPA and state environmental compliance • Internal environmental auditing • Recycling, take-back
Community Relations, Corporate Citizenship
• Corporate philanthropy • Partners with community- based organizations • Volunteerism, employee time contributions
Public Relations, Media Relations, Corporate Communications
• Public relations • Brand management • Image advertising • Crisis management
Corporation Corporate Relations, Corporate Citizenship, Corporate Responsibility, External A�airs
• Environmental scanning • Stakeholder engagement • Social reporting and auditing
Environment General public
N G
O s,
s up
pl ie
rsEm ployees
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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 shareholders; human resources with employees; customer relations with cus- tomers; and community relations with the community. Specialized departments of envi- ronment, health, and safety may deal with environmental compliance and worker health and safety, and public relations or corporate communications. Many of these specific departments will be discussed in more detail in later chapters.
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 con- trary, most companies operate in a swirl of social, ethical, global, political, ecological, and technological change that produces both opportunities and threats. Figure 1.6 diagrams the six dynamic forces that powerfully shape the business and society relationship. Each of these forces is introduced briefly below and will be discussed in more detail later in this book.
Changing societal expectations. Everywhere around the world, society’s expec- tations of business are rising. 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 stakehold- ers. Modern businesses are increasingly exploring opportunities to act in ways that balance numerous stakeholders’ needs with their multiple obligations. These changes in society’s expectations of business, and how managers have responded, are described in Chapters 2 and 3.
FIGURE 1.6 Forces That Shape the Business and Society Relationship
Explosion of
New Technology
Dynamic Natural
Environment
Evolving Government Regulation of Business
GlobalizationGrowing Emphasis on Ethical Values
Changing Societal
Expectations
Business and Its
Stakeholders
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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 Ebola, the movement for gender equality, or the demands of citizens everywhere for full access to the Internet—also cut across national boundaries. Chapter 4 addresses the challenges of globalization.
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. The ethical challenges faced by business, both domestically and abroad—and business’s response—are discussed in Chapters 5 and 6.
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 advances and then retreats, much as a pendulum swings back and forth. Because of the dynamic nature of this force, business has developed various strategies to influ- ence elected officials and government regulators at federal, state, and local levels. Companies may seek to be active participants in the political process, and in recent years the courts have given them more opportunities to do so. The changing role of government, its impact, and business’s response are explored in Chapters 7 and 8.
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 replen- ished. 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 nat- ural environment powerfully impact the business–society relationship. These issues are explored in Chapters 9 and 10.
Explosion of new technology and innovation. Technology is one of the most dra- matic and powerful forces affecting business and society. It has led to the world appearing to be smaller and more connected. New technological innovations har- ness 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 scientific break- throughs in medicine to autonomous vehicles and artificial intelligence, change keeps coming. The extent and pace of technological innovation pose massive chal- lenges for business, and sometimes government, as they seek to manage various privacy, security, and intellectual property issues embedded in this dynamic force.
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As discussed in Chapters 11 and 12, new technologies often force managers and organizations to examine seriously the ethical implications of their use.
Creating Value in a Dynamic Environment
These powerful and dynamic forces—fast-paced changes in societal and ethical expec- tations, 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, as discussed in Chapters 13 to 19. This means that the relation- ship between business and society is continuously changing in new and often unpredict- able 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 busi- ness 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.
∙ Business firms are organizations that are engaged in making a product or providing a service for a profit. Society, in its broadest sense, refers to human beings and to the social structures they collectively create. Business is part of society and engages in ongoing exchanges with its external environment. Together, business and society form an interactive social system in which the actions of each profoundly influence the other.
∙ According to the stakeholder theory of the firm, the purpose of the modern corporation is to create value for all of its stakeholders. To survive, all companies must make a profit for their owners. However, they also create many other kinds of value as well for their employees, customers, suppliers, communities, and others. For both practical and ethical reasons, corporations must take all stakeholders’ interests into account.
∙ Every business firm has economic and social relationships with others in society. Some are intended, some unintended; some are positive, others negative. Stakeholders are all those who affect, or are affected by, the actions of the firm. Some have a market relationship with the company, and others have a nonmarket relationship with it; some stakeholders are internal, and others are external.
∙ Stakeholders often have multiple interests and can exercise their economic, political, and other powers in ways that benefit or challenge the organization. Stakeholders may also act independently or create coalitions to influence the company. Stakeholder mapping is a technique for visually representing stakeholders’ relationship to an issue facing a firm.
∙ Modern corporations have developed a range of boundary-crossing departments and offices to manage interactions with market and nonmarket stakeholders. The organi- zation of the corporation’s boundary-spanning functions is complex. Most companies have many departments specifically charged with interacting with stakeholders.
∙ A number of broad forces shape the relationship between business and society. These include changing societal and ethical expectations; a dynamic global economy; redefini- tion of the role of government; ecological and natural resource concerns; and the trans- formational role of technology and innovation. To deal effectively with these changes, corporate strategy must address the expectations of all of the company’s stakeholders.
Summary
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Chapter 1 The Corporation and Its Stakeholders 23
Discussion Case: Insuring Uber’s App-On Gap
At around 8 p.m. on a New Year’s Eve, a mother and her two young children were walking home in San Francisco. At a busy intersection, the family waited for the “walk” signal and then started across the street. Just then, an SUV made a right turn, striking all three members of the family in the crosswalk. The mother and her 5-year-old son were seriously injured. Her 6-year-old daughter was killed. The man behind the wheel of the SUV identi- fied himself as a driver for the ride-hailing service Uber.
Uber immediately distanced itself from the tragedy, saying that the driver was “not providing services on the Uber system at the time of the accident.” The family’s attorney contested this, saying that the driver was logged onto the Uber application, appeared on the system as available to accept a rider, and was interacting with his device when he struck the mother and children.
In other words, the tragic incident had apparently occurred during the app-on gap—the driver was on the road with his Uber application activated, but had not yet connected with or picked up a rider. So, who was responsible, the driver or the ride-hailing service?
Uber was, in the words of a New York Times columnist, “the hottest, most valuable tech- nology startup on the planet.” The company was founded in 2009 as “everyone’s private driver,” providing a premium town car service that could be summoned online. In 2012, it rolled out UberX, a service that enabled nonprofessional drivers to use their own vehicles to transport riders. Customers could use the Uber app to hail a car, connect with a willing driver, watch the vehicle approach on a map, pay their fare, and receive a receipt, all on their smartphone. Uber provided the technology and took a commission on each transaction.
Uber’s disruptive business model caught on rapidly. By 2014, Uber’s ride-sharing service had spread to more than 120 cities in 36 countries. In the United States, the service could reach 137 million people with an average pickup time of less than 10 minutes. Demand was growing so fast that Uber was scrambling to recruit 20,000 new drivers, whom Uber called “transpor- tation entrepreneurs,” every month. Private investors were enthusiastic about the company’s prospects: Uber had attracted $1.2 billion in funding and was valued at $18.2 billion.
Key Terms stakeholder (nonmarket), 9 stakeholder map, 16 stakeholder power, 13 stakeholder salience, 15 stakeholder theory of the firm, 6
boundary-spanning departments, 19 business, 4 external stakeholder, 10 focal organization, 11 general systems theory, 5 interactive social system, 6 internal stakeholder, 10
shareholder theory of the firm, 6 society, 4 stakeholder, 8 stakeholder analysis, 11 stakeholder coalitions, 15 stakeholder interests, 12 stakeholder (market), 9
Internet Resources
www.economist.com The Economist www.fortune.com Fortune www.nytimes.com The New York Times www.wsj.com The Wall Street Journal www.bloomberg.com Bloomberg www.ft.com Financial Times (London) www.cnnmoney.com CNN Money
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Drivers who partnered with Uber had the flexibility to drive when and as much as they wished. They could also make a decent living; the median annual income for its full-time drivers in San Francisco, for example, was about $74,000. But they also assumed risk. In the event of an accident, Uber instructed its drivers to submit a claim to their personal insurance carrier first. If it was denied, Uber’s backup commercial liability insurance would go into effect, but only after the driver had been summoned by a customer or had one in the vehicle.
Traditional taxicab companies did not welcome competition from Uber. Cabdrivers in many cities across the world protested the entry of Uber into their markets, conducting strikes and “rolling rallies” charging Uber with unfair practices. Uber drivers did not have to comply with many of the rules that applied to taxicabs, such as those requiring commer- cial driver’s licenses, regular mechanical inspections, and commercial liability insurance. Governments at city, state, and national levels had become involved, with some imposing restrictions and others even banning Uber outright.
In the wake of the 6-year-old’s death in San Francisco, California legislator Susan Bonilla introduced a bill that would require Uber and other ride-hailing companies to provide commercial liability insurance from when the driver turned on the app to when the customer got out of the car, thus filling the app-on gap.
The American Insurance Association, representing insurance companies, supported the legislation, saying that personal auto policies should not be expected to cover ride-hailing drivers once they signaled availability. “This is not someone commuting to work or going to the grocery store or stopping to pick their children up from school,” a spokesperson said. The family of the girl killed on New Year’s Eve also supported Bonilla’s bill, as did con- sumer attorneys and the California App-Based Drivers Association.
But others lined up in opposition. Uber and other ride-hailing companies strenuously objected to the bill, as did trade associations representing high-technology and Internet-based firms, apparently concerned about increases in their costs of doing business. The bill, said an Uber spokesperson, was “an example of what happens when special interest groups dis- tract lawmakers from the best interests of consumers and small businesses.”
Sources: “Deadly Pedestrian Accident Driver Claimed He Drove for Uber,” January 1, 2014, www.abclocal.go.com; “Uber and a Child’s Death,” The New York Times, January 27, 2014; “An Uber Impact: 20,000 Jobs Created on the Uber Platform Every Month,” Uber press release, May 27, 2014; “With Uber, Less Reason to Own a Car,” The New York Times, June 11, 2014; “Uber and Airbnb’s Incredible Growth in 4 Charts,” VB News, June 19, 2014, online at www.venturebeat.com; “In Uber vs. Taxi Companies, Local Governments Play Referee,” Christian Science Monitor, July 7, 2014; “The Company Cities Love to Hate,” Bloomberg Businessweek, July 7, 2014; “Uber, Lyft, Sidecar Fight to Block New California Regulations,” San Jose Mercury News, August 13, 2014; “The Question of Coverage for Ride Service Drivers,” The New York Times, September 5, 2014; and private correspondence with the office of Assemblywoman Susan Bonilla.
Discussion Questions
1. Who are Uber’s relevant market and nonmarket stakeholders in this situation? 2. What are the various stakeholders’ interests? Please indicate if each stakeholder would
likely support, or oppose, a requirement that Uber extend its insurance to cover the app-on gap.
3. What sources of power do the relevant stakeholders have? 4. Based on the information you have, draw a stakeholder map of this case showing each
stakeholder’s position on the issue, its degree of power, and likely coalitions. What con- clusions can you draw from the stakeholder map?
5. Which of the stakeholders mentioned do you think has the most salience, and why? 6. Based on your stakeholder analysis and map, what do you think Uber should do in
response to the bill introduced by Susan Bonilla, and why?
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C H A P T E R T W O
Managing Public Issues and Stakeholder Relationships Businesses today operate in an ever-changing external environment, where effective management requires anticipating emerging public issues and engaging positively with a wide range of stake- holders. Whether the issue is growing concerns about climate change, health care, safety at work or in our schools, social equality, or consumer safety, managers must respond to the opportunities and risks it presents. To do so effectively often requires building relationships across organizational boundaries, learning from external stakeholders, and altering practices in response. Effective man- agement of public issues and stakeholder relationships builds value for the firm.
This Chapter Focuses on These Key Learning Objectives:
LO 2-1 Identifying public issues and analyzing gaps between corporate performance and stakeholder expectations.
LO 2-2 Applying available tools or techniques to scan an organization’s multiple environments and assess- ing stakeholder materiality.
LO 2-3 Describing the steps in the issue management process and determining how to make the process most effective.
LO 2-4 Identifying the managerial skills required to respond to emerging issues effectively.
LO 2-5 Understanding the various stages through which businesses can engage with stakeholders, what drives this engagement, and the role social media can play.
LO 2-6 Recognizing the value of creating stakeholder dialogue and networks.
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