STAKEHOLDERS, STAKEHOLDERS, MANAGERS & MANAGERS &

ETHICSETHICS

Organizational Organizational StakeholdersStakeholders

• StakeholdersStakeholders: people who have : people who have an interest, claim, or stake in an an interest, claim, or stake in an organizationorganization

• InducementsInducements: rewards such as : rewards such as money, power, and money, power, and organizational statusorganizational status

• ContributionsContributions: the skills, : the skills, knowledge, and expertise that knowledge, and expertise that organizations require of their organizations require of their members during task members during task performanceperformance

Inside StakeholdersInside Stakeholders• People who are closest to an People who are closest to an

organization and have the strongest organization and have the strongest and most direct claim on and most direct claim on organizational resourcesorganizational resources– Shareholders: Shareholders: the owners of the the owners of the

organization (Mutual Funds)organization (Mutual Funds)– Managers: Managers: the employees who are the employees who are

responsible for coordinating responsible for coordinating organizational resources and ensuring organizational resources and ensuring that an organization’s goals are that an organization’s goals are successfully metsuccessfully met

– The workforce:The workforce: all non-managerial all non-managerial employeesemployees

Outside StakeholdersOutside Stakeholders• People who do not own the organization, People who do not own the organization,

are not employed by it, but do have some are not employed by it, but do have some interest in itinterest in it– Customers: Customers: an organization’s largest an organization’s largest

outside stakeholder group (Southwest outside stakeholder group (Southwest Airlines & Kelleher—Employees and Airlines & Kelleher—Employees and Customers)Customers)

– Suppliers: Suppliers: provide reliable raw materials provide reliable raw materials and component parts to organizations and component parts to organizations (Japanese Automobile)(Japanese Automobile)

– The governmentThe government• Wants companies to obey the rules of fair Wants companies to obey the rules of fair

competitioncompetition• Wants companies to obey rules and laws Wants companies to obey rules and laws

concerning the treatment of employees and other concerning the treatment of employees and other social and economic issues (corporate governance social and economic issues (corporate governance issues of late)issues of late)

Outside Stakeholders Outside Stakeholders (cont.)(cont.)

– Trade unions: Trade unions: relationships with relationships with companies can be one of conflict or companies can be one of conflict or cooperationcooperation

– Local communities:Local communities: their general their general economic well-being is strongly economic well-being is strongly affected by the success or failure of affected by the success or failure of local businesseslocal businesses

– The general publicThe general public• Wants local businesses to do well Wants local businesses to do well

against overseas competitionagainst overseas competition• Wants corporations to act in socially Wants corporations to act in socially

responsible wayresponsible way

Table 2-1: Inducements Table 2-1: Inducements and Contributions of and Contributions of

StakeholdersStakeholders

Organizational Effectiveness: Organizational Effectiveness: Satisfying Stakeholders’ Goals and Satisfying Stakeholders’ Goals and

InterestsInterests• An organization is used An organization is used

simultaneously by various simultaneously by various stakeholders to achieve their goalsstakeholders to achieve their goals– Shareholders:Shareholders: return on their investment return on their investment– Customers:Customers: product reliability and product product reliability and product

valuevalue– Employees:Employees: compensation, working compensation, working

conditions, career prospectsconditions, career prospects

• For an organization to be viable, For an organization to be viable, the dominant coalition of the dominant coalition of stakeholders has to control stakeholders has to control sufficient inducements to obtain the sufficient inducements to obtain the contributions required of other contributions required of other stakeholder groupsstakeholder groups

Competing GoalsCompeting Goals• Organizations exist to satisfy Organizations exist to satisfy

stakeholders’ goalsstakeholders’ goals• But which stakeholder group’s goal is But which stakeholder group’s goal is

most important? most important? • In the U.S., the shareholders have first In the U.S., the shareholders have first

claim in the value created by the claim in the value created by the organizationorganization

• However, managers control organizations However, managers control organizations and may further their own interests and may further their own interests instead of those of shareholdersinstead of those of shareholders

• Goals of managers and shareholders may Goals of managers and shareholders may be incompatiblebe incompatible

Allocating RewardsAllocating Rewards• Managers must decide how to Managers must decide how to

allocate inducements to provide allocate inducements to provide at least minimal satisfaction of at least minimal satisfaction of the various stakeholder groupsthe various stakeholder groups

• Managers must also determine Managers must also determine how to distribute “extra” rewardshow to distribute “extra” rewards

• Inducements offered to Inducements offered to shareholders affect their shareholders affect their motivation to contribute to the motivation to contribute to the organizationorganization

Top Managers and Top Managers and Organizational Organizational

AuthorityAuthority• AuthorityAuthority: the power to hold people : the power to hold people accountable for their actions and to accountable for their actions and to make decisions concerning the use of make decisions concerning the use of organizational resourcesorganizational resources

• The board of directorsThe board of directors: monitors : monitors corporate managers’ activities and corporate managers’ activities and rewards corporate managers who pursue rewards corporate managers who pursue activities that satisfy stakeholder goalsactivities that satisfy stakeholder goals– Inside directorsInside directors: hold offices in a : hold offices in a

company’s formal hierarchycompany’s formal hierarchy– Outside directorsOutside directors: not full-time employees: not full-time employees

• May hold positions on the board of many May hold positions on the board of many companiescompanies

Top Managers and Top Managers and Organizational Organizational

Authority Authority (cont.)(cont.)• Corporate-level managementCorporate-level management: :

the inside stakeholder group that the inside stakeholder group that has ultimate responsibility for has ultimate responsibility for setting company goals and setting company goals and allocating organizational allocating organizational resourcesresources– Chain of commandChain of command: the system of : the system of

hierarchical reporting relationships hierarchical reporting relationships in an organizationin an organization

– HierarchyHierarchy: a vertical ordering or : a vertical ordering or organizational roles according to organizational roles according to their relative authoritytheir relative authority

The Chief Executive Officer’s The Chief Executive Officer’s (CEO) Role in Influencing (CEO) Role in Influencing

EffectivenessEffectiveness• Responsible for setting Responsible for setting

organizational goals and organizational goals and designing its structuredesigning its structure

• Selects key executives to occupy Selects key executives to occupy the topmost levels of the the topmost levels of the managerial hierarchymanagerial hierarchy

• Determines top management’s Determines top management’s rewards and incentivesrewards and incentives

The CEO’s role in The CEO’s role in influencing organizational influencing organizational

effectiveness (cont.)effectiveness (cont.)• Controls the allocation of scarce Controls the allocation of scarce

resources such as money and decision-resources such as money and decision-making power among the making power among the organization’s functional areas or organization’s functional areas or business divisionsbusiness divisions

• The CEO’s actions and reputation have The CEO’s actions and reputation have a major impact on inside and outside a major impact on inside and outside stakeholders’ views of the organization stakeholders’ views of the organization and affect the organization’s ability to and affect the organization’s ability to attract resources from its environmentattract resources from its environment

The Top-Management The Top-Management TeamTeam

• Line-roleLine-role: managers who have : managers who have direct responsibility for the direct responsibility for the production of goods and servicesproduction of goods and services

• Staff-roleStaff-role: managers who are in : managers who are in charge of a specific charge of a specific organizational function such as organizational function such as sales or research and sales or research and development (R&D)development (R&D)– Are advisory onlyAre advisory only

The Top-Management The Top-Management Team (cont.)Team (cont.)

• Top-management teamTop-management team: a group of : a group of managers who report to the CEO managers who report to the CEO and COO and help the CEO set the and COO and help the CEO set the company’s strategy and its long-term company’s strategy and its long-term goals and objectivesgoals and objectives

• Corporate managersCorporate managers: the members : the members of top-management team whose of top-management team whose responsibility is to set strategy for responsibility is to set strategy for the corporation as a wholethe corporation as a whole

Other ManagersOther Managers

• Divisional managersDivisional managers: managers : managers who set policy only for the division who set policy only for the division they headthey head

• Functional managersFunctional managers: managers : managers who are responsible for developing who are responsible for developing the functional skills and capabilities the functional skills and capabilities that collectively provide the core that collectively provide the core competences that give the competences that give the organization its competitive organization its competitive advantageadvantage

The Top-Management The Top-Management HierarchyHierarchy

An Agency Theory An Agency Theory PerspectivePerspective

• Agency problemAgency problem: a problem in : a problem in determining managerial determining managerial accountability which arises when accountability which arises when delegating authority to managersdelegating authority to managers

• Shareholders are at information Shareholders are at information disadvantage compared to top disadvantage compared to top managersmanagers

• Top managers and shareholders Top managers and shareholders may have different goalsmay have different goals

The Moral Hazard The Moral Hazard ProblemProblem

• Two conditions create the moral Two conditions create the moral hazard problemhazard problem

– Very difficult to evaluate how well the Very difficult to evaluate how well the agent has performed because the agent has performed because the agent possesses an information agent possesses an information advantageadvantage

– The agent has an incentive to pursue The agent has an incentive to pursue goals and objectives that are different goals and objectives that are different from the principal’sfrom the principal’s

Solving the Agency Solving the Agency ProblemProblem

• Use governance mechanisms: Use governance mechanisms: – The forms of control which align the The forms of control which align the

interests of principal and agent so that interests of principal and agent so that both parties have the incentive to work both parties have the incentive to work together to maximize organizational together to maximize organizational effectivenesseffectiveness

• Use appropriate incentives to align the Use appropriate incentives to align the interests of managers and shareholdersinterests of managers and shareholders– Stock-based compensation schemes that Stock-based compensation schemes that

are linked to the company’s performanceare linked to the company’s performance

• Promotion tournaments and career Promotion tournaments and career pathspaths

Top Managers and Top Managers and Organizational EthicsOrganizational Ethics

• Ethical dilemma:Ethical dilemma: decisions that decisions that involve conflicting interests of involve conflicting interests of partiesparties

• EthicsEthics: moral principles and beliefs : moral principles and beliefs about what is right or wrong about what is right or wrong (utilitarian, rights & justice)(utilitarian, rights & justice)

• There are no indisputable rules or There are no indisputable rules or principles that determine whether principles that determine whether an action is ethicalan action is ethical

Ethics and the LawEthics and the Law

• Laws specify what people and Laws specify what people and organizations can and cannot doorganizations can and cannot do

• Laws specify sanctions when laws Laws specify sanctions when laws are brokenare broken

• Ethics and laws are Ethics and laws are relativerelative– No absolute or unvarying standards No absolute or unvarying standards

exist to determine how people exist to determine how people should behaveshould behave

Sources of Sources of Organizational EthicsOrganizational Ethics

• Societal ethicsSocietal ethics: codified in a society’s : codified in a society’s legal system, in its customs and practices, legal system, in its customs and practices, and in the unwritten norms and values that and in the unwritten norms and values that people use to interact with each otherpeople use to interact with each other

• Professional ethicsProfessional ethics: the moral rules and : the moral rules and values that a group of people uses to values that a group of people uses to control the way they perform a task or use control the way they perform a task or use resourcesresources

• Individual ethicsIndividual ethics: the personal and moral : the personal and moral standards used by individuals to structure standards used by individuals to structure their interactions with other peopletheir interactions with other people

Why Do Ethical Rules Why Do Ethical Rules Develop?Develop?

• Ethical rules and laws emerge to Ethical rules and laws emerge to control self-interested behavior by control self-interested behavior by individuals and organizations that individuals and organizations that threaten the society’s collective threaten the society’s collective interestsinterests

• Ethical rules reduce transaction Ethical rules reduce transaction costs, that is the costs of costs, that is the costs of monitoring, negotiating, and monitoring, negotiating, and enforcing agreements between enforcing agreements between peoplepeople– Reputation effect:Reputation effect: Transaction costs: Transaction costs:

• Are higher for organizations with a Are higher for organizations with a reputation for illegalityreputation for illegality

• Are lower for organizations with a Are lower for organizations with a reputation for honest dealingsreputation for honest dealings

Why Does Unethical Why Does Unethical Behavior Occur?Behavior Occur?

• Personal ethics:Personal ethics: ethics developed as ethics developed as part of the upbringing and educationpart of the upbringing and education

• Self-interest:Self-interest: weighing our own weighing our own personal interests against the effects personal interests against the effects of our actions on othersof our actions on others

• Outside pressure:Outside pressure: pressures from pressures from the reward systems, industry and the reward systems, industry and other forcesother forces

Creating an Ethical Creating an Ethical OrganizationOrganization

• An organization is ethical if its An organization is ethical if its members behave ethicallymembers behave ethically

• Put in place incentives to Put in place incentives to encourage ethical behavior and encourage ethical behavior and punishments to discourage punishments to discourage unethical behaviorsunethical behaviors

• Managers can lead by setting Managers can lead by setting ethical examplesethical examples

• Managers should communicate Managers should communicate the ethical values to all inside and the ethical values to all inside and outside stakeholdersoutside stakeholders

Designing an Ethical Designing an Ethical Structure and Control Structure and Control

SystemSystem• Design an organizational structure Design an organizational structure

that reduces incentives to act that reduces incentives to act unethicallyunethically

• Take steps to encourage whistle-Take steps to encourage whistle-blowing – encourage employees to blowing – encourage employees to inform about an organization’s inform about an organization’s unethical actionsunethical actions

• Establish position of ethics officer Establish position of ethics officer and create ethics committeeand create ethics committee

Creating an Ethical Creating an Ethical CultureCulture

• Values, rules, and norms that define Values, rules, and norms that define an organization’s ethical position are an organization’s ethical position are part of its culturepart of its culture

• Behaviors of top managers are a Behaviors of top managers are a strong influence on the corporate strong influence on the corporate cultureculture

• Creation of an ethical corporate Creation of an ethical corporate culture requires commitment from all culture requires commitment from all levelslevels

Supporting the Supporting the Interests of Interests of

Stakeholder GroupsStakeholder Groups• Find ways to satisfy the needs of Find ways to satisfy the needs of

various stakeholder groupsvarious stakeholder groups• Pressure from outside stakeholders Pressure from outside stakeholders

can also promote ethical behaviorcan also promote ethical behavior• The government and its agencies, The government and its agencies,

industry councils, regulatory industry councils, regulatory bodies, and consumer watchdogs bodies, and consumer watchdogs all play critical roles in establishing all play critical roles in establishing ethical rulesethical rules