Lecture 2 (based on Chapter 2)

Stakeholder Relationships,
Social Responsibility, and
Corporate Governance

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
Edited by Achinto
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Learning Objectives
By the end of this chapter, you should be able to:
• Identify stakeholders’ roles in business ethics
• Define social responsibility
• Examine the relationship between stakeholder orientation and
social responsibility
• Delineate a stakeholder orientation in creating corporate social responsibility
• Explore the role of corporate governance in structuring ethics and social
responsibility in business
• List the steps involved in implementing a stakeholder perspective in social
responsibility and business ethics

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Icebreaker
• What does the term “stakeholder” mean to you?
• Social responsibility is an organization’s obligation to maximize its positive
impact on stakeholders and minimize its negative impact. Can you think of
any companies that are socially responsible?

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 2-1
Stakeholders Define Ethical Issues in Business

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
Edited by Achinto
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Stakeholders Define Ethical Issues in Business 1 of 6
• Stakeholders – Those who have a “stake” or claim in some aspect of a
company’s products, operations, markets, industry, and outcomes

Customers Shareholders Employees

Government
Suppliers Communities
Agencies

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Stakeholders Define Ethical Issues in Business 2 of 6

• Normative – Identifies ethical guidelines that dictate how firms should treat
stakeholders
• Descriptive – Focuses on the firm’s behavior; addresses how decisions are
made for stakeholder relationships
• Instrumental – Describes what happens if firms behave in a particular way

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 FIGURE 2-1 The Impact of a
Strong Organizational Culture

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Stakeholders Define Ethical Issues in Business 3 of 6
Identifying Stakeholders
• Primary stakeholders – Those whose continued association and resources
are absolutely necessary for a firm’s survival
– Employees, customers, and shareholders, as well as the governments and communities
that provide necessary infrastructure

• Secondary stakeholders – Stakeholders who do not typically engage directly

in transactions with a company and are therefore not essential to its survival
– Media, trade associations, and special interest groups

• Stakeholder interaction model – This approach recognizes other

stakeholders and explicitly acknowledges that dialogue exists between a firm’s
internal and external environments.

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
FIGURE 2-2 Interactions Between a Company and
Its Primary and Secondary Stakeholders

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Stakeholders Define Ethical Issues in Business 4 of 6
A Stakeholder Orientation
• Stakeholder orientation – The degree to which a firm understands and
addresses stakeholder demands
• Activities that address stakeholder demands include:
– Organization-wide generation of data about stakeholder groups and assessment of the
firm’s effects on these groups
– Distribution of this information throughout the firm
– Responsiveness of the organization as a whole to this information

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Stakeholders Define Ethical Issues in Business 5 of 6
• To generate data about stakeholders:

Identify
Evaluate their
concerns about
impact on the
the business
Identify issues of
that are
relevant importance to
relevant to
stakeholders the various
each
stakeholders
stakeholder
identified
group

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Stakeholders Define Ethical Issues in Business 6 of 6
• It is essential for information gathered to be circulated throughout the firm.
• A stakeholder orientation is not complete without including activities that
address stakeholder issues.
– Activities are likely specific to a particular stakeholder group or issue.

• Firms are likely to adopt a stakeholder orientation to varying degrees.

– To gauge a firm’s stakeholder orientation, evaluate:
• The extent the firm adopts behaviors that typify the generation and dissemination of
stakeholder intelligence
• The responsiveness to this intelligence

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Knowledge Check
Question: Shareholders are what type of stakeholders?

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 2-2
Social Responsibility and Business Ethics

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
Edited by Achinto
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Social Responsibility and Business Ethics 1 of 2
• Ethics and social responsibility are not the same but are interrelated.
– Social responsibility is an organization’s obligation to maximize its positive impact on
stakeholders and minimize its negative impact.

• There are four levels of social responsibility:

Economic Legal Ethical Philanthropic

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Social Responsibility and Business Ethics 2 of 2
• Corporate citizenship – The extent to which businesses strategically meet
the economic, legal, ethical, and philanthropic responsibilities placed on
them by various stakeholders
• Four interrelated dimensions:
– Strong sustained economic performance
– Rigorous compliance
– Ethical actions beyond what the law requires
– Voluntary contributions that advance the reputation and stakeholder commitment of the
organization

• Reputation – A corporation’s image and an intangible asset with tangible

value
O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 2-3
Issues in Social Responsibility

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
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 Issues in Social Responsibility 1 of 2
• Social responsibility rests on a stakeholder orientation.
– Each stakeholder is given due consideration.
– Long-term relationships with stakeholders develop trust, loyalty, and the performance
necessary to maintain profitability.

• Social issues are associated with the common good.

– These can relate directly or indirectly to business.

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Issues in Social Responsibility 2 of 2
• Major issues today include data privacy, consumer protection, sustainability,
and corporate governance.
– Corporate governance – The development of formal systems of accountability,
oversight, and control
o Strong corporate governance mechanisms remove the opportunity for employees to make unethical
decisions.

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 2-4
Social Responsibility and the Importance
of a Stakeholder Orientation

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
Edited by Achinto
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Social Responsibility and the Importance
of a Stakeholder Orientation 1 of 1
• Legal and economic responsibilities are generally accepted as the most
important determinants of performance.
• Economist Milton Friedman suggests the market is a better deterrent to
wrongdoing than new laws and regulations.
• Adam Smith, founder of capitalism, said each individual has to produce for
the common good.
– Smith established normative expectations for motives and behaviors in his theories
about the invisible hand.

• Evidence suggests caring about the well-being of stakeholders leads to

increased profits.

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Debate Issue: Take a Stand
• Is it acceptable to promote a socially irresponsible—but legal—product to
stakeholders?
– For example, Ashley Madison, a dating website, encourages married individuals to
have an affair. With the motto “Life Is Short. Have an Affair,” the website has had more
than 60 million members worldwide over its lifetime.

• Take a stand:
1. There is nothing wrong in providing a legal service many people desire.
2. From a stakeholder perspective, it is wrong to provide socially
irresponsible services.

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 2-5
Corporate Governance Provides Formalized
Responsibility to Stakeholders

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
Edited by Achinto
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 Corporate Governance Provides Formalized
Responsibility to Stakeholders 1 of 8
• Most businesses operate under the assumption that the purpose of business
is to maximize profits for shareholders.
• The stakeholder model places the board of directors in the position of
balancing the interests and conflicts of a company’s various constituencies.
• External control of a corporation resides with government regulators and key
stakeholders (e.g., employees, consumers, and communities).
– Stakeholders exert pressure on the organization for responsible conduct.

• Social responsibility activities have a positive impact on consumer

identification with an attitude toward the brand.

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
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 Corporate Governance Provides Formalized
Responsibility to Stakeholders 2 of 8
• Fiduciaries are persons placed in positions of trust that act on behalf of the
best interests of the organization (e.g., directors and officers of
corporations).
– Directors are not generally held responsible for negative outcomes if they have been
informed and are diligent in their decision making.

• Duty of care (duty of diligence) – The legal obligation of an individual or

organization to make informed and prudent decisions and avoid behavior
that could cause harm to others
• Duty of loyalty – The obligation of individuals to make decisions that are
in the best interest of the corporation and its stakeholders

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Corporate Governance Provides Formalized
Responsibility to Stakeholders 3 of 8
• Accountability – How closely workplace decisions align with a firm’s stated
strategic direction and its compliance with ethical and legal considerations
• Oversight – Provides a system of checks and balances that limit employees’
and managers’ opportunities to deviate from policies and strategies aimed at
preventing unethical and illegal activities
• Control – Process of auditing, improving organizational decisions and
actions

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Corporate Governance Provides Formalized
Responsibility to Stakeholders 4 of 8
• Corporate governance establishes fundamental systems and processes for:
– Preventing and detecting misconduct
– Investigating and disciplining
– Recovery and continuous improvement

• The development of a stakeholder orientation should interface with the

corporation’s governance structure.
• Corporate governance normally involves strategic decisions and actions by
boards of directors, business owners, top executives, and other managers
with high levels of authority and accountability.

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Corporate Governance Provides Formalized
Responsibility to Stakeholders 5 of 8
Views of Corporate Governance
• Shareholder model of corporate governance – Founded in classic
economic precepts, including the goal of maximizing wealth for investors and
owners
– For publicly traded firms, corporate governance focuses on developing and improving
the formal system for maintaining performance accountability between top management
and the firm’s shareholders.

• Stakeholder model of corporate governance – A broader view of the

purpose of business that considers stakeholder welfare in tandem with
corporate needs and interests

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Corporate Governance Provides Formalized
Responsibility to Stakeholders 6 of 8
The Role of Boards of Directors
• Boards of directors hold the ultimate responsibility for their firms’ success or
failure, as well as the ethics of their actions.
– FSGO holds them accountable for creating an ethical culture that provides leadership,
values, and compliance.
– Assume legal responsibility for the firm’s resources and decision
– Responsible for appointing top executive officers

• There is a new emphasis on accountability for board members.

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Corporate Governance Provides Formalized
Responsibility to Stakeholders 7 of 8
Greater Demand for Accountability and Transparency
• Directors are increasingly chosen for their expertise, competence, and ability
to bring diverse perspectives to strategic discussions.
• Outside directors do not have a vested interest.
• Interlocking directorate — The concept of board members being linked to
more than one company
– Legal unless it involves a direct competitor

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Corporate Governance Provides Formalized
Responsibility to Stakeholders 8 of 8
Executive Compensation
• Executive compensation – How executives are compensated for their
leadership, organizational service, and performance
• Was influenced by internal equity (how executive pay relates to employee pay)
• Shifted to a system of external equity (what CEOs at other companies are paid)
– Caused executive compensation to increase

• Ratio of the salaries of the highest-paid executives to the median employee

wage should be less
• Stakeholders support a high level of compensation only when it is linked to
strong company performance
O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Discussion Activity

• What are current topics in governance?

• What areas do you think should or will become hot topics in the near future?

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Discussion Activity Debrief

Are the topics you discussed listed below? What would you add to this list?

• Environmental, social, and governance oversight

• Human capital management
• Audit committee oversight of internal controls
• Corporate culture
• Whistle-blower protections
• Board diversity
• Representation of women on boards
• Hedging policy disclosure rules

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 2-6
Implementing a Stakeholder Perspective

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
Edited by Achinto
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 Implementing a Stakeholder Perspective 1 of 3

• Step 1: Assessing the Corporate Culture

– Identify the organizational mission, values, norms, and behavior likely to have
implications for social responsibility

• Step 2: Identifying Stakeholder Groups

– Recognize stakeholder needs, wants, and desires

• Step 3: Identifying Stakeholder Issues

– Level of stakeholders’ power and legitimacy determines degree of urgency

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Implementing a Stakeholder Perspective 2 of 3

• Step 4: Assessing Organizational Commitment to Stakeholders and Social

Responsibility
– Used to evaluate current practices and to select concrete social responsibility initiatives
– Social responsibility disclosures in company annual reports are directly related to the
quality of corporate governance.

• Step 5: Identifying Resources and Determining Urgency

– Two main criteria: (1) Level of financial and organizational investments required by
different actions and (2) urgency when prioritizing social responsibility challenges
– When the challenge under consideration is viewed as significant and stakeholder
pressures on the issue can be expected, the challenge is considered urgent.

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Implementing a Stakeholder Perspective 3 of 3

• Step 6: Gaining Stakeholder Feedback

– A general assessment of a firm and its practices can be obtained through satisfaction or
reputation surveys.
– To gauge stakeholders’ perceptions of a firm’s contributions to specific issues,
stakeholder-generated media such as blogs, websites, podcasts, and newsletters can be
assessed.
– Formal research may be conducted using focus groups, observation, and surveys.

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 2-7
Contributions of a
Stakeholder Perspective

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
Edited by Achinto
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 Contributions of a Stakeholder Perspective

• While we provide a framework for implementing a stakeholder perspective,

balancing stakeholder interests requires information and good judgment.
• When businesses attempt to provide what consumers want, broader societal
interests can create conflicts.
• Balancing stakeholder interests can be a challenging process.

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.