In a business context, customers, shareholders, employees, suppliers, government agencies, communities, and many others who have a “stake” or claim in some aspect of a company’s products, operations, markets, industry, and outcomes are known as stakeholders . Businesses engage and influence these groups, but these groups also have the ability to engage and influence businesses; thus, the relationship between companies and their stakeholders is a two-way street. Sometimes activities and negative press generated by special interest groups force a company to change its practices. Google is developing robust profiles of users to target its advertising especially in Europe. Consumer interest groups and even competitors such as Oracle are communicating to regulators that Google’s so-called super profiles can harm users and is unfair competition. This provides an example of how consumer groups and even competitors can engage businesses through regulators.
There are three approaches to stakeholder theory: normative, descriptive, and instrumental approaches. The normative approach identifies ethical guidelines that dictate how firms should treat stakeholders. Normative stakeholder theory affirms that stakeholders have legitimacy and a right to engage organizations. Principles and values provide direction for normative decisions. The descriptive approach focuses on the firm’s behavior and usually addresses how decisions and strategies are made for stakeholder relationships. The instrumental approach to stakeholder theory describes what happens if firms behave in a particular way. This approach is useful because it examines relationships involved in the management of stakeholders including the processes, structures, and practices that implement stakeholder relationships within an organization. The survival and performance of any organization is a function of its ability to create value for all primary stakeholders and its attempt to do this fairly, not favoring one group over the others.
Many firms experience conflicts with primary stakeholders and consequently can damage their reputations and shareholder confidence. While many threats to reputations stem from uncontrollable events such as economic conditions, ethical misconduct is more difficult to overcome than poor financial performance. Stakeholders most directly affected by negative events experience a corresponding shift in their perceptions of a firm’s reputation. On the other hand, firms sometimes receive negative publicity for misconduct that destroys trust and tarnishes their reputations, making it more difficult to retain existing customers and attract new ones. To maintain the trust and confidence of its stakeholders, CEOs and other top managers are expected to act in a transparent and responsible manner. Executives who are involved in misconduct create negative perceptions of their companies. Dov Charney, founder and former CEO of American Apparel, was fired for allegedly misusing funds and violating sexual harassment policies. Providing untruthful or deceptive information to stakeholders is, if not illegal, certainly unethical and can result in a loss of trust.
Ethical misconduct and decisions that damage stakeholders generally impact the company’s reputation in terms of both investor and consumer confidence. As investor perceptions and decisions begin to take their toll, shareholder value drops, exposing the company to consumer scrutiny that can increase the damage. According to a recent Edelman Trust Survey, the three industries with the lowest level of trust were energy, pharmaceuticals, and financial services. The most trusted industries were technology, food and beverage, and consumer package goods. Reputation is a factor in consumers’ perceptions of product attributes and corporate image also can lead to consumer willingness to purchase goods and services at profitable prices. Perceived wrongdoing or questionable behavior may lead to boycotts and aggressive campaigns to dampen sales and earnings. A petition placed on the website Change.org demanding that Old Navy stop charging more for plus-sized women’s clothing garnered more than 16,000 signatures. Consumers became angry when they learned that plus-sized clothing for women was more expensive than smaller sizes and plus-sized men’s clothing. They felt that it was discriminatory to charge more for plus-sized women’s clothing than plus-sized men’s clothing since they both use more fabric. Old Navy defended its practice by claiming that plus-sized women’s clothing costs more due to curve-enhancing and other features that men’s clothing does not have. Even if its claims are legitimate, the perceived discrepancy caused a public relations snafu for Old Navy. This example illustrates how stakeholders can be subject to the risks and costs resulting from business decisions that are not regulated. The more democratic involvement of various stakeholders is one solution to resolve legitimacy deficits.
New reforms intended to improve corporate accountability and transparency suggest that stakeholders, including regulatory agencies, local communities, attorneys, and public accounting firms, play a major role in fostering responsible decision making. Stakeholders apply their values and standards to diverse issues, including 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. We can assess the level of social responsibility an organization bears by scrutinizing its effects on the issues of concern to its primary and secondary stakeholders.
Stakeholders provide resources critical to a firm’s long-term success. These resources may be tangible and intangible. Shareholders, for example, supply capital; suppliers offer material resources or intangible knowledge; employees and managers grant expertise, leadership, and commitment; customers generate revenue and provide loyalty with word-of-mouth promotion; local communities provide infrastructure; and the media transmits positive corporate images. In a spirit of reciprocity, stakeholders are anticipated to be fair, loyal, and treat the corporation in a responsible way. When individual stakeholders share expectations about desirable business conduct, they may choose to establish or join formal communities dedicated to defining and advocating these values and expectations. Stakeholders’ abilities to withdraw these needed resources gives them power over businesses. For instance, Google had to deal with controversy over placing ads on inappropriate content. Advertisers including the U.K. government, Marks & Spencer PLC, as well as others suspended advertising from Google. This illustrated the power of stakeholders to withdraw resources.
2-1aIdentifying Stakeholders
We can identify two types of stakeholders. Primary stakeholders are those whose continued association and resources are absolutely necessary for a firm’s survival. These include employees, customers, and shareholders, as well as the governments and communities that provide necessary infrastructure. Figure 2-1 indicates that strong ethical corporate cultures are on the rise. There are many positive aspects of maintaining an ethical organizational culture. First, Ethisphere Magazine has a process for selecting the world’s most ethical companies each year. Companies selected for this honor outperform the S&P 500 by 3.3 percent. Noting its importance, almost 50 percent of professionals cite the goal of their training programs is to create a culture of “ethics and respect.” In addition, nearly a third of employees quit an organization because they do not agree with a company’s ethical standards, representing an ongoing opportunity to improve the organizational culture. Ethical corporate cultures are important because they are linked to positive relationships with stakeholders. By the same token, concern for stakeholders’ needs and expectations is necessary to avoid ethical conflicts.
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