CHAPTER 2
Stakeholder Relationships, Social Responsibility,
and Corporate Governance
SUMMARY
In this chapter, first we identify stakeholders’ different roles in business ethics. We examine the relationships
between businesses and various stakeholder groups and examine how a stakeholder framework can help us
understand organizational ethics. Then we define social responsibility and examine the relationships between
having a stakeholder orientation and social responsibility. Next, we delineate how a stakeholder orientation
helps to create corporate social responsibility. We then examine corporate governance as a dimension of
social responsibility and its role in structuring ethics and social responsibility in business. The ethical decision
making process is covered in order to provide an understanding of the importance of oversight in responding
to stakeholders. Finally, we provide the steps for implementing a stakeholder perspective in creating both
social responsibility and ethical decisions in business.
INSTRUCTOR NOTES FOR “AN ETHICAL DILEMMA”
Megan’s dilemma is her involvement and knowledge of GAC’s tracking of employees and whether to report
this to higher authorities. GAC tracked one employee traveling ten miles to an area hospital every night after
work and planned to reprimand the employee for using the company car for personal use. According to the
company, GAC can legally place GPS devices in its company cars. Also, according to corporate policy,
company cars should only be used for business activities, and any personal needs should be done with the
employee’s own personal car. The instructor may want to ask students their opinion on how appropriate the
punishment is to the violation. The instructor could push the issue with questions such as what if this is the
employee’s first offense and he is otherwise a very productive worker? Could the company simply give the
employee a warning?
A second case involved GAC’s plans to fire another employee for sharing company secrets. Company
evidence included computer activity, cell phone usage, GPS tracking, audio and video of personal
conversations, dinners, and even hotel rooms. The instructor may want to ask students if GAC is within the
law when obtaining this evidence. Has GAC overstepped its bounds in tracking personal conversations?
Could the fired employee sue GAC for wrongful dismissal? Would it be different if the employee leaked
national secrets instead of company secrets concerning an app? The company has an established ethical
reputation, so one rogue employee should not tarnish that reputation if the company acts responsibly in how it
handles the employee. Megan’s boss brushes aside her concerns and reminds Megan how competitive the
industry is and how necessary it is to make sure employees are not sharing confidential information with
rivals. Megan is also reminded her job is simply to suggest appropriate action. Should Megan suggest what
she really thinks? Should she ‘suggest’ what she knows her boss wants to hear?
LECTURE OUTLINE
I. Stakeholders Define Ethical Issues in Business
A. Building effective relationships is considered one of the more important areas of business today. A
stakeholder framework helps identify the internal stakeholders such as employees, boards of
directors, and managers as well as external stakeholders such as customers, special interest groups,
regulators, and others who agree, collaborate, and have confrontations on ethical issues.
Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance 9
B. In a business context, customers, investors and shareholders, employees, suppliers, government
agencies, communities, and others who have a “stake” or claim in some aspect of a company’s
products, operations, markets, industry, and outcomes are known as stakeholders.
1. The survival and performance of any organization is a function of its ability to create value for
all primary stakeholders. There are three approaches to stakeholder theory: normative,
descriptive, and instrumental.
a. The normative approach identifies ethical guidelines that dictate how firms ought to treat
stakeholders. Principles and values provide direction.
b. The descriptive approach focuses on the actual behavior of the firm and usually addresses
how decisions and strategies are made for stakeholder relationships.
c. The instrumental approach describes what will happen if firms behave in a particular way.
2. The relationship between companies and their stakeholders is a two-way street. Stakeholders are
influenced by business, but they also have the ability to affect businesses.
a. Stakeholders apply their values and standards to many diverse issues—working conditions,
consumer rights, environmental conservation, product safety, and proper information
disclosure—that may or may not directly affect an individual stakeholder’s own welfare.
b. Stakeholders provide both tangible and intangible resources that can be critical to a firm’s
long-term success.
3. When individual stakeholders share similar expectations about desirable business conduct, they
may choose to organize into communities.
4. Ethical misconduct can damage a firm’s reputation, causing stakeholders to withdraw valuable
resources. This gives stakeholders power over businesses.
C. Identifying Stakeholders
1. Stakeholders can be divided into two categories.
a. Primary stakeholders are those whose continued association is necessary for a firm’s
survival (employees, customers, investors, and stockholders, governments and
communities that provide necessary infrastructure).
b. Secondary stakeholders do not typically engage in transactions and are not essential for
its survival (the media, trade associations, and special-interest groups).
c. Although primary groups may present more day-to-day concerns, secondary groups cannot
5. Responsiveness processes may involve the participation of the concerned stakeholder groups. A
10 Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance
2. Business ethics involves carefully thought-out rules or heuristics of business conduct that guide
1. Corporate citizenship has four interrelated dimensions:
a. Strong sustained economic performance
b. Rigorous compliance
1. Companies are looking at broader issues that consider the long-term welfare of society; each
1. Social issues are associated with the common good and deal with concerns that affect large
segments of society and the welfare of our entire society.
2. Consumer protection often occurs in the form of laws passed to protect consumers from unfair
and deceptive business practices; these issues usually have an immediate impact on the
consumer after a purchase.
a. Major areas of concern include advertising, disclosure, financial practices, and product
safety
Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance 11
4. Corporate governance involves the development of formal systems of accountability, oversight
and control. Strong corporate governance mechanisms help remove the possibility for
2. Adam Smith, one of the founders of capitalism, established expectations for motives and
behaviors in his invisible hand theory. Smith distinguished justice as consisting of perfect or
inalienable rights, from beneficence, consisting of imperfect rights that should be performed but
12 Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance
1. The shareholder model of corporate governance is founded in classic economic precepts,
2. The stakeholder model of corporate governance adopts a broader view of the purpose of
4. Greater Demands for Accountability and Transparency
a. Directors are chosen for their expertise, competence, and ability to bring diverse
5. Executive Compensation
a. Many boards spend more time discussing compensation than they do ensuring the integrity
of the firm’s financial reporting systems.
b. How executives are compensated has become a controversial topic, with many people
believing no executive is worth millions of dollars in annual salary and stock options, while
others argue that because executives assume so much risk, they deserve the rewards.
c. The topic of executive compensation is important to boards because it receives much
attention in the media, sparks shareholder concern, and is hotly debated in discussions of
Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance 13
5. Step 5: Identifying Resources and Determining Urgency
6. Step 6: Gaining Stakeholder Feedback
a. Stakeholder feedback can be generated through a variety of means.
i. Satisfaction or reputation surveys
ii. Assessment of stakeholder-generated media (blogs, websites, podcasts, and
newsletters)
iii. Formal research using focus groups, observation, and surveys
VII. Contributions of a Stakeholder Perspective
A. Balancing stakeholder interests requires good judgment because broader societal interests can create
conflicts.
B. This chapter provides a good overview of the issues, conflicts, and opportunities of understanding
more about stakeholder relationships. The stakeholder framework helps recognize issues, identify
stakeholders, and examine the role of boards of directors and managers in promoting ethics and
social responsibility.
DEBATE ISSUE: TAKE A STAND
Have your students split into two teams. One team will argue for the first point, and the other will argue for
the opposing view. The purpose is to get students to realize that there are no easy answers to many of these
issues. This particular issue deals with whether a socially irresponsible product—in this case, a product that
promotes adultery—should be sold if it is legal. Students on the first team could argue that as long as the
product is legal and allows for freedom of choice, there should be no barriers to selling it. Students on the
14 Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance
other team could argue that the product causes emotional harm to people. Since it is a detriment to society, it
should be banned. The instructor might also want to bring up the hacking attack that ended up revealing the
real names of customers because Ashley Madison refused to shut down. It would be interesting for students
who believe Ashley Madison is morally wrong to discuss whether the hackers were also wrong in what they
did.
“RESOLVING ETHICAL BUSINESS CHALLENGES” NOTES
In this case, Demarco has to balance various stakeholder interests in his daily job while his employer is
asking him to exploit a vulnerable population. Xeon Natural Resources Incorporated hired Demarco right out
of college due to his heritage and strong language skills. Xeon plans to mine niobium in a Brazilian rainforest
and Demarco’s job, along with a small group of other employees, is to explain to the local indigenous tribes
how Xeon wants to strip mine their government issued land. The reader learns how manufacturers use
niobium and how much ($5 billion over 20 years) Xeon plans to make in profits.
Demarco soon learns his assigned indigenous tribe is one of the few left unaltered by western culture, but that
will soon change once Xeon begins strip mining. His boss agrees their culture will change forever but urges
him to think instead of the increase in the standard of living for the tribe. Demarco still feels uneasy and
believes the tribal elders are being steamrolled and do not understand the impact this mining will have on
their community. His boss says she too is worried about the interests of the various stakeholders, but the time
to move is now and the company is depending on these mining rights.
Instructors may ask students to name the various stakeholders and describe their interest in the project.