Chapter 1

The Corporation and Its

Stakeholders

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 Ch. 1: Key Learning Objectives
1-1 Understanding the relationship between business and
society, and how they form an interactive system.
1-2 Considering the purpose of the modern corporation.
1-3 Knowing what a stakeholder is and who a corporation’s
market and nonmarket and internal and external
stakeholders are.
1-4 Conducting a stakeholder analysis and understanding the
basis of stakeholder interests and power.
1-5 Recognizing the diverse ways in which modern
corporations organize internally to interact with various
stakeholders.
1-6 Analyzing the forces of change that continually reshape
the business and society relationship.

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What is the Business–Government– Society Field?

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How Institutions Support Markets

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Business and society together form an
interactive social system 2

Figure 1.1
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Business and Society: An Interactive System

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 Business and society together form an
interactive social system 3

General Systems Theory (GST):

• Organisms do not exist in
isolation but can only be
understood in relationship to
their surroundings.
• Businesses are embedded in a
broader social environment with
which they constantly interact.

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 Purpose of Business

What is the purpose of

the corporation?
To whom, or what, should
the firm be responsible?

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 Shareholder Theory of the Firm 1

Sees the firm as property of owners

(shareholders).
Owners’ interests take precedence
over interests of others.
The purpose of the firm is to maximize
its long-term market value and money
for its shareholders.

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 Stakeholder Theory of the Firm 2

Corporations serve a broad public

purpose: to create value for
society.
Profit is necessary for survival but
is not the only purpose of the
firm.
Corporations have multiple
obligations and need to consider
all stakeholders.

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Shareholder theory and stakeholder theory
define the purpose of business differently

Shareholder Stakeholder
Purpose Purpose
Owners’Needs and Stakeholders’
Wants Needs and Wants
Share Value

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 Three arguments in support of
the stakeholder theory of the firm

Stakeholder
management is the
right thing to do

Descriptive Normative Instrumental

stakeholder
realistic description consideration key for
of how companies effective corporate
really work strategy

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 Stakeholders

Stakeholders are persons or groups that affect, or

are affected by, a firm’s decisions, policies, and
operations.
A stake is an interest in–or claim on–a business.
Stakeholder is NOT the same as stockholder (or
shareholder).
Shareholders are just one of several kinds of
stakeholders.

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 Stakeholders
 instrumental stakeholder theory: highlighting the
instrumental importance of influential stakeholders
 normative stakeholder theory: highlighting the ethical
importance of all stakeholders
 instrumental stakeholder theory offers no reason for
executives to take into account affected stakeholders who are
not in a position to influence the success of a company
 normative stakeholder theory suggests that executives
should take all affected stakeholders into account, regardless
of whether they are in a position to influence the success of a
company

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Stakeholders

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Stakeholders

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 Two Kinds of Stakeholders:
Market and Nonmarket
Market stakeholders
• Shareholders, suppliers, employees, etc.
• They engage in economic transactions with
the company as it carries out its primary
purpose of providing society with goods and
services.
Shareholder
s

Nonmarket stakeholders
• Community, government, business
support groups, etc.
• People or groups who—although Community Government
they do not engage in direct
economic exchange with the firm—
are affected by or can affect its
actions.
Competitors Environmen
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Internal stakeholders are employed by the firm -
external stakeholders are not

Employees Suppliers

Society

Government
Company
Creditors

Managers Shareholders

Customers

Internal stakeholders External stakeholders

work “inside” the firm and may have important transactions with
contribute their effort and skill to the firm, but are not on its payroll.
everyday operations.

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A Firm and Its Stakeholders
Figure 1.2
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 Stakeholder Analysis
From Figure 1.3

Stakeholder analysis includes the identification of

relevant stakeholders and an analysis of their
interests and power.

• Who are the relevant stakeholders?

• What are the interests of each stakeholder?
• What is the power of each stakeholder?
• How are coalitions likely to form?

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 Stakeholder Analysis Question 1
Who are the relevant stakeholders?

Draw market and nonmarket

stakeholder maps.
Recognize not all groups are relevant to
every situation.
 Examples:
• Some businesses sell directly to the
public and will not have retailers.
• A certain stakeholder may not be
relevant to a particular decision/action.

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 Stakeholder Analysis Question 2
What are the interests of each stakeholder?

What are the groups’ concerns?

What does the group want/expect
from their relationship with the firm?
 Examples:
• Shareholders have an ownership
interest; they expect to receive
dividends and capital appreciation.
• Customers are interested in gaining fair
value and quality in goods and services
they purchase.
• Public interest groups advance broad
social interests.

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 Stakeholder Analysis Question 3
What is the power of each stakeholder?

Stakeholder power is the ability of a group to use

resources to make an event happen or to secure a
desired outcome.

There are 5 types of stakeholder power:

• Voting power.
• Economic power.
• Political power.
• Legal power.
• Informational power.

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 Stakeholder Power Defined
Voting Power
• The legal right to cast a shareholder vote.
Economic Power
• The ability to grant or withhold transactions with the focal
company.
Political Power
• Actions taken through legislation, regulations, or lawsuits.
Legal Power
• Lawsuits filed against the focal company for harm caused by
the firm.
Informational Power
• Having access to valuable data, facts, or details.

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 Stakeholder Analysis Question 4
How are stakeholder coalitions likely to form?

Stakeholder groups often have common interests and

will form temporary alliances to pursue these
common interests.
Coalitions are very dynamic (can change at any time).
Coalitions are increasingly international.
Internet has enabled coalitions to form quickly, across
political boundaries.

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 Stakeholder Mapping

Stakeholder map – a visual representation of the

relationships among stakeholder interests, power, and
coalitions with respect to a particular issue.

A stakeholder map is a useful tool, because it enables

managers to quickly see how stakeholders feel about an
issue, how coalitions are likely to form, how powerful these
coalitions are, and what outcomes are likely.

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Stakeholder Map of SunCal’s Proposed
Development
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Figure 1.4

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 Stakeholder Salience

Salient – stands out from a background, is seen as

important, or draws attention.

Stakeholders stand out (i.e., are salient) to managers when

they have power, legitimacy, and urgency.

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 The Corporation’s
Boundary-Spanning Departments 1

Boundary-spanning departments (shown graphically

in the following slide): departments or offices within
an organization that reach across the dividing line that
separates the company from groups and people in
society.

Building positive and mutually beneficial relationships

across organizational boundaries is a growing part of
management’s role.

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 The Corporation’s
Boundary Spanning Departments 2

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Figure 1.5

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The External Environment of Business is
Dynamic and Ever Changing
The purpose of the firm is not simply to make a
profit, but to create value for all its stakeholders
– a successful business must meet both its
economic and social objectives.
Six dynamic forces powerfully shape the
business and society relationship:
• Changing societal expectations.
• Growing emphasis on ethical reasoning and actions.
• Globalization.
• Evolving government regulations and business
response.
• Dynamic natural environment.
• Explosion of new technology and innovation.

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