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Chapter 3: The Stakeholder Approach to Business, Society,

and Ethics
Business, Society, and Ethics (Boston University)

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Chapter 3: The Stakeholder Approach to Business, Society, and Ethics

Origins of the Stakeholder Concept
- Stake: an interest in or a shark in an undertaking
- Can also be a claim which is a demand for something due or believed to
be due
- Idea of a stake can range from an interest in understanding at one extreme to a
legal claim of ownership at the other
- Legal rights can include the right to fair treatment or the right to privacy
- Stakeholders have a stake in the “value they expect to receive from firms
- Desire utility associated with:
- 1. The actual goods and services companies provide
- 2. Organizational justice (fair treatment)
- 3. Affiliating with companies that exhibit practices consistent with
the things they value
- 4. Getting a good deal from other companies
- Stakeholder: an individual or a group that has one or more of the various kinds
of stakes in the organization
- May be affected by the actions, decisions, policies, or practices of the
business firm - can also affect the organization
- Two-way interaction or exchange of influence
Who Are Business’s Stakeholders?
- Certain individuals have more legitimacy in the eyes of management
- Shareholders, employees, and customers
- Stakeholders include other groups such as the community, competitors,
suppliers, special-interest groups, the media, and society, or the public at large
- Natural environment as stakeholder
- Interest groups that are non profit organization and non-government
organizations (NGOs) are indirect stakeholders and aren’t fully
incorporated into the organization
Three Views of the Firm: Production, Managerial, and Stakeholder
- Production view of the firm: Owners thought of stakeholders as only those
individuals or groups that supplied resources or bought products or services
- Managerial view of the firm: Owners and employees were acknowledged as
stakeholders
- Stakeholder view of the firm: Internal and external changes occured in

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business and its environment so managers changed the way they received the
firm and its multilateral relationship with constituent or stakeholder groups
- Stakeholder map: Charts out a firm’s stakeholders
- Management must perceive the stakeholders not only as those groups
that the management thinks have some stake in the firm but also those
individuals and groups that themselves think or perceive they have a
stake in a firm

Primary social stakeholders Secondary social stakeholders

- Direct stake in the organization and its - Stake in the organization is more indirect
success; most influential or derived, represent legitimate public
- Shareholders and investors concerns or wield significant power
- Employees and managers - Government and regulators
- Customers - Civic institutions
- Local communities - Social pressure/activist groups
- Suppliers and other business - Media and academic commentator
partners - Trade bodies
- Competitors

Primary nonsocial stakeholders Secondary nonsocial stakeholders

- Include the natural environment, future - Include those who represent or speak
generations, and nonhuman species for the primary nonsocial stakeholders
- Natural environment - Include environmental interest
- Future generations groups or animal welfare
- Nonhuman species organizations
- Also been termed non market
players (NMPs) and may include
activists, environmentals, and
NGOs
- Ex: Friends of the Earth,
Greenpeace, Rainforest Alliance,
PETA, ASPCA, Mercy for Animals

Legitimacy: Refers to the perceived validity or appropriateness of a stakeholder’s

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claim to a stake
- Owners, employees, and customers represent a high degree of legitimacy due to
their explicit, formal, and direct relationships with a company
Power: Refers to the ability or capacity of the stakeholders to produce an effect - to
get something done that otherwise may not be done
- Power means stakeholder could affect the business
- “Pressure” in implementing CSR in companies
- The ability and capacity of stakeholders to affect an organization by
influencing its organizational decisions
Urgency: Refers to the degree to which the stakeholder’s claim on the business calls
for the business’s immediate attention or response
- May imply that something is critical or needs to be done immediately
Proximity: The spatial distance between the organization and its stakeholders
- Relevant consideration in evaluating stakeholders’ importance and priority
- May affect or be affected by the organization more than those further away

Strategic: Views stakeholders primarily as factors to be taken into consideration and

managed while the firm pressure profits for its shareholders
Multi Fiduciary: Views staekolers as more than just individuals or groups who can
wield economic or legal power
- Management has a dificuriary responsibility toward stakeholders
Synthesis: preferred because it holds that business does have more responsible to
stakeholders but that they should not be seen as part of a fiduciary obligation

Three Values of the Stakeholder Model:

- Descriptive: Provides language and concepts to describe effectively the
corporation or organization in stakeholder inclusive terms
- Useful in helping us to understand organizations
- Instrumental: Useful in portraying the relationship between the practice of
stakeholder management and the resulting achievement of corporate
performance goal
- Should lead to the achievement of important business goals, such as
profitability, stability, and growth
- Normative: Stakeholders are seen as possessing value irrespective of their

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instrumental use to management

- Considered the moral or ethical view because it emphasizes how
stakeholders should be treated
- Stakeholder theory is managerial in that it not only describes or presdicts but
also recommends attitudes, structures, and practice that constitute effective
stakeholder management

Stakeholder Management: Five Key Questions

- Stakeholder management: Challenge to see to it that while the firm’s primary
stakeholders achieve their objectives, the other stakeholders are dealt with
ethically and are also relatively satisfied
1. Who are our organization's stakeholders?
2. What are our stakeholder’s stakes?
3. What opportunities and challenges do our stakeholders present to the firm?
4. What responsibilities (economic, legal, ethical, and philanthropic) does that firm
has to its stakeholders?
5. What strategies or actions should the firm take to best address stakeholder
challenges and opportunities?
- Who Are the Organization’s Stakeholders?
- McDonald’s Continuing Experience
- PETA vs. McDonald’s
- Applied pressure tactics and escalated it through ads and
campaigns
- McDonald’s had to deal with the stakeholders and PETA had great
power and urgency
- Wool Industry under Fire
- PETA takes on whole industries as well
- Began attacking the wool companies and putting out ads
- What Are our Stakeholder’s Stakes?
- Nature of Legitimacy of a Groups Stakes:
- 1. Institutional owners (trusts, foundations, pension funds,
churches, universities)
- 2. Large mutual fund organization (Fidelity, Vanguard, Pax World)
- 3. Board of director members who own shares
- 4. Members of management who own shares

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- 5. Millions of small, individual shareholders

- The nature of stakeholder claims on this corporation is ownership
- Power of a Group’s Stakes
- When power is considered, significant differences become
apparent
- Powerful stakeholders are: institutional owners and mutual funds
organizations and the board of management shareholders because
of investments and dual roles of ownership and management
(control)
- Subgroups within a Generic group
- 1. Residents living within a 25-mile radius of the plant
- 2. Other residents in the city
- 3. Residents who live in the path of the jet stream hundreds of
miles away (some in Canada) who are being impacted by acid rain
- 4. Environmental Protection Agency (federal government)
- 5. Ohio’s Environmental Protection Division (state government)
- 6. Sierra Club (environmental activist group)
- 7. Ohio Environmental Council (special interest group)
- Would require some degree of time and care to identify the
nature, legitimacy ,power, and urgency of yacht oher these
specific groups - needs to be done if they want to better engage
and manage stakeholders
- Opportunities are for business to build devent, productive working
relationships with stakeholders
- Challenges usually prevent themselves in such a way that the firm must
handle the stakeholders acceptably or be hurt in some way - financially
or in terms of its public image or reputation in the communication.
- Typically in the form of varying degrees of expectations, demands,
boycotts, or threats
- PETA conflicts and RAN
- Potential for Cooperation or Threat
- Enable managers strategies for dealing with stakeholders
- Potential for threat: manages need to consider stakeholders’
relatie power and its relevance to a particular issue facing the
organization

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- Potential for cooperation: firm needs to be sensitive to the

possibility of joining forces with stakeholders for the advantage of
all parties involved
What Responsibilities Does a Firm Have Toward its Stakeholders?
- Shareholders - good return on their investment
- Employee - fair pay and good working conditions
- Customers - fair prices and safe products
- Local community - jobs and minimal disruption
- Suppliers - regular business and prompt payment
- Stakeholders responsibility matrix: management faces to assess the firm’s
responsibilities to stakeholders
- May be seen as template to systematically think through its various
responsibilities to each stakeholder
What Strategies or Actions Should Management Take?
- Do we deal directly or indirectly with stakeholders?
- Do we take the offense or the defense in dealing with tatholders?
- Do we accommodate, negotiation, manipulate, or resist stakeholder overtures?
- Do we employ a combination of the aforementioned strategies or pursue a
singular course of action?
- Type 1: Supportive Stakeholders
- High on potential for cooperation and low on potential for threat
- Ideal stakeholder
- Might include board of directors, managers, employees, and loyal
customers
- Strategy is one of involvement
- Type 2: Marginal Stakeholder
- Low on both potential threat and potential for corporations
- Might include professional associations of employees, inactive consumer
interest groups, or shareholder s- especially those that hold few shares
and are not organization
- Type 3: Non Supportive Stakeholder
- High on potential for threat but low on potential for cooperation
- Could be competition organizations, unions, or federal or other levels of
government, and the media
- Special-interest groups or NGOs

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- Ex: Earth Liberation Front (ELF)

- Type 4: Mixed-Blessing Stakeholder
- High on both potential for threat and potential for cooperation
- Include employees who are in short supply, client or customer
- Could become a supportive or non-supportive stakeholder
- Strategy: Collaborate with them
- Managers should attempt to satisfy minimally the needs of marginal stakeholders
and to satisfy maximally the needs of supportive and mixed blessing stakeholders,
enhancing the ladders' support for the organization
- Tapping Expertise of Stakhoers
- Managers can turn “gadflies into allies”, especially with “supportive”
stakeholders
- Non-profit special-interest groups

Stakeholder Thinking:
- Undergirds stakeholder management and is the process of always reasoning in
stakeholder terms throughout the management process, and especially when
organizations’ decisions and actions have important implications for others
- Aligned with a stakeholder mindset whereby managers look at the world
if they start with a stakeholder “script” to create value for a wide array of
stakeholders within their value chain
Developing a Stakeholder Culture:
- A major factor supporting successful stakeholder management
- Embraces the beliefs, values, and practices that organizations have
developed for addressing stakeholder issues and relationships
- Five categories:
- Agency culture: not concerned with others
- Corporate efforts and instrumentalist: focus mostly on firm’s
shareholders as the important stakeholders
- Moralist and altruistic: morally based and provide the broadest concern
for stakeholders
- Morally based and provide the broadest concern for stakeholders
Stakeholder Management Capability (SMC):
- Describes an organization's integration of stakeholder thinking into its
processes and it may reside at one of three levels of increasing sophistication:

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- Rational: entails the company identifying who their stakeholders are and
what their stakes happen to be
- Enable management to create a basic stakeholder map
- Process: Developed and implemented processes - approached,
procedures, policies, and practices - by which the firm may scan the
environment and father pertinent information about stakeholders, which
is then used for decision-making process
- Planning integrativeness
- Transactional; highest and most developed; extent to which managers
actually engage in transactions (relationships) with stakeholders
- Transformation of the business and society relationships occurs
- Management must take initiative in meeting stakeholders
- Communication level: communication probativeness,
interactiveness, genuineness, frequency, satisfaction, and
resource adequacy
Stakeholder Engagement:
- Approach by which companies successfully implement the transactional level of
strategic management capacity. ability
- Ladder of Stakeholder Engagement:
- Lower level: informing and explaining
- Middle level: communicating byu way of formats such as conferences,
social media, mass emails, newsletters, or surveys
- Higher level: active or responsible attempts to involve stakeholders in
company decisions manager
- Involvement, collaboration, partnership, or joint venture
- Transparency:
- “Environmental engagement” and “stakeholder engagement”
- Calls for an open operating environment: sustainable ecosystem,
peace, order, and good public governance
- Open enterprises to put resources and effort into reviewing,
managing, recasting, and strengthening relationships with
stakeholders
- Engaging on Sustainability:
- Involve stakeholders such as social media, consumers, NGOs, and
communities as early as possible on sustainability developments and

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initiatives
- Ex: Coca-Cola
- Bottle partners: Day-to-day interactions with business partners,
joint projects, participation in Global Environment Council
- Consumers: hotlines, consumer Websites, plant tours, surveys,
focus groups
- Communities: Meetings, plant visits, partnerships on common
issues, sponsorships
- Employees: surveys, meetings, individual development plans,
employees well-being plans
- Stakeholder Dialogue:
- Focused on exchanging communication with stakeholder groups and
thus it is one form of engagement
- The Stakeholder Corporation
- Ultimate form or goal of the stakeholder approach or stakeholder
management
- Stakeholder inclusiveness
- Stakeholder symbiosis: recognizes that all stakeholders depend on each
other for their success and financial well-being
- Principles of Stakeholder Management
- Known as Clarkson Principles
- Intended to provide managers with guiding precepts regarding
how stakeholders should be treated
- Acknowledge, monitor, listenm, communicate, adopt,
recognize, work, avoid, and acknowledge potential conflicts
- Strategic Steps toward Global Stakeholder Management
- 1. Governing Philosophy: Integrating stakeholder management into the
firm’s governing philosophy
- 2. Values Statement: Create a stakeholder-include “values statement”
- 3. Measurement System: implement a stakeholder performance
measurement system
- Ex: Walmart and worldwide sustainability index

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