Doing Well by Doing Good: Stakeholder Theory

Metropolia Business School International Project Week (IPW) 2013

Dr Denise DollimoreUniversity of Hertfordshire, UK

BP Oil Spill 2010

Following this session students should be able to:

• Discuss Stakeholder theory and its links to business ethics and CSR

• Identify important stakeholders for an organisation and discuss how managers balance the interests of various stakeholders.

• Explain the paradox of profitability vs responsibility and evaluate cases using competing theoretical perspectives

Learning Outcomes

Stakeholder Theory Edward Freeman 1984 Strategic Management: A Stakeholder ApproachDraws on business ethics, from a social justice (deontological) viewpoint, and argues that business actions should be fair. Draws on notion of corporate social responsibility, and argues stakeholder approach is good for businessGood corporate citizenship - a way to differentiate(Readings pp 23-28)

Doing Well by Doing Good

How can CEOs Change company values?How can organizations become good corporate citizens?

Corporate Social Responsibility A perspective which stresses the

responsibilities that corporations have towards society and other stakeholders

(King and Lawley, 2013)

CSR requires two principles*:

1. The charitable principle, where the more fortunate help the less fortunate

2. The stewardship principle, where the rich hold the wealth ‘in trust’ for the rest of society

The belief that these principles, combined with the belief that acting appropriately, result in limited government intervention (rules & regulations) has given CSR considerable credence in business circles (Freeman & Liedtka, 1991)

*Traced back to philanthropists of 1930s

Now widely agreed that business have obligations beyond their legal and economic obligations towards society

Moving beyond compliance with laws to establish new standards

Ethical Capitalism* (AKA stakeholder approach)A business approach which seeks to integrate CSR as central to the purpose and activity of an organization Business benefits include

Enhanced reputation with consumers Improve human rights, workforce welfare and ecological sustainability Improved relationships with governments positive contribution to national economic and social development

CSR, stakeholder theory and ‘ethical capitalism’

*King & Lawley (2013) in Readings

Doing Well by doing Good

Evaluating corporate responsibility using Carroll’s (1991) pyramid [illustrates levels of CSR]

Milton Friedman1970 ‘shareholder values’

Edward Freeman 1984 ‘stakeholder values’

The Organization and its Competitive EnvironmentTraditionally, CEOs and strategy writers see only forces of

competition in operational environment, however… Competitive / operating environment includes numerous

stakeholders (Stakeholder Theory, Freeman 1984) Stakeholders can be become allies (affect & affected by

firm) They can provide information about changes in the broad

environment (social attitudes / trends) They can co-operate in finding new ways forwardand

achieve competitive advantageChallenge for firms is to define stakeholders and decide how much to privilege them

Balancing Stakeholder Interests: The Mendelow Grid

LEVEL OF INTEREST

POWER

LOW HIGH

LOW

HIGH

Least influential

Keep informed

Keep satisfied

Key players

NIKE?BP?Starbucks?Primart?

Key question… Should a business prioritise shareholder value or stakeholder needs?

Shareholders own the business Primarily for financial gain

Stakeholders are affected by the decisions and operational activities of the business Financial, non-financial and personal benefits

Organisations and Ethical Choice

n.b., the ‘social contract’ between business and society is constantly evolving (Waddock 2010)

The Paradox of Profitability and Responsibility

Responsibility

Acting in the interest of others, even when there is no legal imperative.

ProfitabilityTo be an attractive

investment, a firm must earn a higher return on

the shareholders’ equity than could be realized at a bank.

Unilever? Johnson and Johnson?Primart? Starbucks?BP?

Profitability versus Responsibility

The Debate & ReadingsThe shareholder value perspectiveMilton Friedman (1970)*‘The Social Responsibility of Business is to Increase

it Profits’ NYT

The stakeholder values perspectiveEdward Freeman (1984)Strategic Management: A Stakeholder Approach

p. 36 Readings

Stakeholder Approach

Origin Business Ethics and corporate social responsibility View of the Firm

A network of relationships among the firm and its stakeholders

Approach to Strategy FormulationAnalysis of the economic power, political influence, rights and demands of various stakeholders (Mendelow Grid)

Source of Competitive AdvantageThrough superior linkages with stakeholders leading to trust, goodwill, reduced uncertainty, improved business dealings, and ultimately higher firm performance (think Porter’s Value Network analysis)

How can CEOs Change Company Values? Be committed – at top management level Develop a written code of ethics to communicate

values to employees Involve middle managers - establish ethics

committees to settle disputes Ask line managers to train employees Fire people who violate the code Protect whistle-blowers Withdraw from countries or industries where you

cannot act with integrity

Socially ContributiveSocial Enterprise: now recognised as the ‘third sector’

(alongside public sector and private business sector)Voluntary, not-for-profit, charitable organisations

Forum for the Future (UK, USA): help organisations innovate the products, services and business models needed for a sustainable future (‘philosophy of sustainability’) http://www.forumforthefuture.org/about-us

Can find common interests with responsive businesses:◦ those creating more sustainable business models,

e.g. M&S, Unilever ◦ those serving customers in emerging economies

Engaged Ethics @Hotel Chocolat

Angus describes the way he has successfully embedded Engaged Ethics as a core value of his business and used these ethical initiatives as a powerful differentiator to capture the hearts and minds of all those who touch the brand.

Exclusive branded chocolatier, having since become a cocoa grower and built a luxury hotel in St Lucia, CEO, Angus Thirlwell offers insight into how he has achieved growth without compromise of the business’s core values.

A ‘socially contributive’ organization

Freeman, E. 1984. Strategic Management: A Stakeholder Approach. Boston: Pitman. Freeman and Liedtka. 1991. ‘Stockholders and stakeholders: A New Perspective on Corporate Governance’ Reprinted from California Management Review (1982) King and Lawley. 2013. Organizational Behaviour. Oxford.Waddock, S. (2010) ‘The Social Contract of Business in Society’ in Aras and Crowther eds. A Handbook of Corporate Governance and Social Responsibility 2010 pp. 69-82

List of References