Chapter 1

The Corporation and

Its Stakeholders
McGraw-Hill/Irwin

Copyright 2008 The McGraw-Hill Companies, All Rights Reserved.

Ch. 1: Key Learning Objectives

Understanding the relationship between business and
society, and the ways in which they are part of an
interactive system
Considering the purpose of the modern corporation
Knowing what is a stakeholder, and who are a
corporations market and nonmarket stakeholders
Conducting a stakeholder analysis, and
understanding how it can be used to build
collaborative relationships
Analyzing the forces of change that continually
reshape the business and society relationship
1-2

Introduction
The Business and Society Relationship
Business: Any organization that is engaged in making a product or
providing a service for a profit
Government: the organization, machinery or agency through which a
political unit exercises authority and performs functions
Society: Human beings and the social structures they collectively create
Business and Society and Government are highly interdependent

1-3

Introduction
The Business and Society Relationship
We borrow General Systems Theory (GST) from
Biology to explain this relationship; first introduced in
1940s
Theory posits that organisms cannot be understood in
isolation, even though they have clear boundaries; they can
only be understood in relationship to their surroundings

Adapted to management theory means that business

firms are embedded in a broader social environment
with which they constantly interact
Business and society together form an interactive social
system (shown graphically in the following slide)
1-4

Figure 1.1 Business and Society and Government: An

Interactive System

1-5

Introduction
The Stakeholder Theory of the Firm
Two critical questions:
1. What is the purpose of the modern corporation?
2. To whom, or what, should the firm be responsible?

Traditional view: Ownership Theory of the Firm

Firm is the property of its owners

Purpose is to maximize returns to shareholders
Shareholders interests are paramount and take precedence over
all others

1-6

Introduction
Stakeholder Theory of the Firm
Contrasting view: Stakeholder Theory of the Firm

Argues the corporation serves a broader purpose, to create

value for society
Must make profit for owners to survive, however, creates
other kinds of value too
Corporations have multiple obligations, all stakeholder
groups must be taken into account

1-7

Core Arguments for

Stakeholder Theory of the Firm
Descriptive

More realistic description of how companies really work

Instrumental

More effective corporate strategy

Normative

Stakeholder management is the right thing to do

1-8

The Stakeholder Concept

A stakeholder refers to persons or groups that affect,
or are affected by, an organizations decisions,
policies, and operations
A stake is an interest in or claim to a business
enterprise
Businesses are embedded in networks that involve
many groups with such a stake
1-9

The Stakeholder Concept

A Tip for Understanding
Term stakeholder is NOT the same as stockholder
Words sound similar BUT are not the same
Stockholders are one of several kinds of
stakeholders

1 - 10

Market and Nonmarket Stakeholders

Stakeholder groups can be divided in to two categories:
1. Market stakeholders
2. Nonmarket stakeholders

Market stakeholders are those that engage in economic

transactions with the company as it carries out its primary
purpose of providing society with goods and services

Sometimes referred to as primary stakeholders

1 - 11

Figure 1.2

Market Stakeholder Map

1 - 12

Nonmarket Stakeholders
Nonmarket stakeholders are people or groups who
although they do not engage in direct economic
exchange with the firmare affected by or can affect
its actions

Sometimes called secondary stakeholders

1 - 13

Figure 1.3

Nonmarket Stakeholder Map

1 - 14

Further Distinction
Internal stakeholders are those, such as employees
and managers, who are employed by the firm
They are inside the firm, in the sense that they contribute
their effort and skill, usually at a company worksite

External stakeholders are those whoalthough they

may have important transactions with the firmare
not directly employed by it

1-15

Figure 1.2 The Stakeholders of Business

1-16

Stakeholder Maps
Drawing maps of stakeholder systems, with the
business firm in the center, is one way to visualize
the relationship between the firm and its
stakeholders
Each relationship is based on a unique transaction
or two-way exchange

1 - 17

Issues: Market and Nonmarket Stakeholders

Should government be a nonmarket or market
stakeholder?
Normally governments do not have direct exchange with
businesses, but in some industries there is such an
exchange

Should the natural environment be a nonmarket

stakeholder?
Not a social group, generally considered to be represented
by activist groups

Should managers be classified as stakeholders?

Addressed in Exhibit 1.A on next slide
1 - 18

Exhibit 1.A
excerpt

Are Managers Stakeholders?

On one hand, the answer is yes. Like other stakeholders, managers

are impacted by the firms decisions. As employees of the firm,
managers receive compensation often very generous compensation.
Their managerial roles confer opportunities for professional
advancement, social status, and power over others. Managers benefit
from the companys success and are hurt by its failure. For these
reasons, they might properly be classified as employees on the
perimeter of the stakeholder wheel, as shown in Figure 1.2.
On the other hand, top executives are agents of the firm and are
responsible for acting on its behalf. In the stakeholder theory of the
firm, their role is to integrate stakeholder interests, rather than to
promote their own more narrow, selfish goals. For these reasons, they
might properly be classified in the center of the stakeholder wheel, as
representatives of the firm.
Management theory has long recognized that these two roles of
managers potentially conflict. The main job of executives is to act for
the company, but all to often they act primarily for themselves.
1 - 19

Issues: Market and Nonmarket Stakeholders

Are stakeholder maps the best way to visualize the
business/stakeholder relationship?
Network may be more appropriate depiction, given
relationships often exist among stakeholder themselves
See Figure 1.4 on next slide

1 - 20

Figure 1.4

A Stakeholder Network

1 - 21

Stakeholder Analysis
It is part of every managers job
Process whereby identify relevant stakeholders and analyze their interest
and power
Asks 4 Questions:
1.
2.
3.
4.

Who are the relevant stakeholders?

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

1 - 22

Stakeholder Analysis Question 1

Who are the Relevant Stakeholders?
Answer this question by drawing market and nonmarket stakeholder maps
Use Figures 1.2 and 1.3 as guides
Recognize that not all of these 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

1 - 23

Stakeholder Analysis Question 2

What are the Interests of each Stakeholder?
Analyzing stakeholder interests includes addressing:
What are the groups concerns?, and
What does the group want/expect from their relationship with the firm?

Examples:
Stockholders 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

1 - 24

1 - 25

Exhibit 1.B
cont.

Nonmarket Stakeholders:
Nature of Interest and Power

1 - 26

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 4 types of stakeholder power:
1.
2.
3.
4.

Voting power
Economic power
Political power
Legal power

1 - 27

Stakeholder Analysis Question 3

What is the Power of each Stakeholder?
Alternative concept called stakeholder salience,
meaning something that stands out from its background
Stakeholder salience is determined by each groups
power, legitimacy, and urgency attributes
The greater the stakeholder groups salience, the more
attention a manager should pay to that group
Groups that have all 3 attributes are called definitive
stakeholders
Groups that have 2 attributes are called expectant
stakeholders
1 - 28

Figure 1.4 Stakeholder Map

1-29

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 increasing international
Internet has enabled coalitions to form quickly, across political
boundaries
International alliances, coupled with media interest, can be a very
powerful strategic force for companies

1 - 30

Stakeholder Engagement
The action component following stakeholder analysis:
Once you know who your stakeholders are, their interests, power, and any
coalitions, do you take action to engage with these groups?

Companies tend to follow a progression of stages in stakeholder

engagement:
Inactive (lowest level) to interactive (highest level) continuum shown on next slide
The cases throughout the text demonstrate companies at different points on the
continuum

1 - 31

The Stakeholder Engagement Model

Inactive
Companies ignore stakeholder concerns

Reactive
Companies act only when forced to do so

Proactive
Companies try to anticipate stakeholder concerns

Interactive
Companies actively engage with stakeholders in an ongoing
relationship of mutual respect, openness, and trust

1 - 32

Stakeholder Dialogue
Tool used by firms at higher stages of stakeholder
engagement
Involves face-to-face meetings between corporate
representatives and representatives of their stakeholder
groups to discuss issues of mutual concern
Steps in dialogue
1. Each group describes their core issues & concerns
2. Together groups reach common definition of problem/s
3. Together groups invent innovative solutions that involve mutual
gain
4. Together establish procedures for implementing solutions

1 - 33

Stakeholder Engagement and Dialogue

Benefits
Helps companies learn about societal
expectations
Generates creative solutions to problems
Helps win stakeholder support for implementing
solutions
Can neutralize critics
Can improve corporate reputation for taking
constructive action
1 - 34

Figure 1.5 The Corporations Boundary

Spanning Departments

1-35

Conclusion Chapter 1
Core Arguments in Your Text
1. The external environment of business is dynamic and ever
changing

Six such forces identified in Figure 1.5 on next slide

2. A successful business must meet both its economic and social

objectives
3. The purpose of the firm is not simply to make a profit, but to create
value for all its stakeholders

1 - 36

Figure 1.5

Forces that Shape the

Business and Society Relationship

1 - 37