CHAPTER
iness and Society
:J--1'hews
bjectives
-.. this chapter, you should be able to:
-~-= :.-:e business and society relationship
r... e :hree
sectors covered in this chapter: for-profit, not-for-profit,
difference between corporate social responsibility and
__._-.:-_.:y
4 ·e :erm stakeholders, and identify stakeholder stakes for an
~ a~
and creative thinking and discuss how you can apply your
CTIVITY Case Scenario: Plant Closing
'=- -: ~a plant producing automotive parts in a small town in
,: ::c::: s th e main employer of the small town . You have lived in the
=e, a.,d your father operated the plant until you took over. Your
:-L sr:.ed, an d you are involved in many charities. Your children also
__ ::::-.: ,-:1Ic downturn has been disastrous for your company, and
~ 5:sf' ''icant decl ine in revenue. Despite these losses, you have
,: a:-y e"1ployees. You have been able to survive, mostly be-
-5 , e:2.i:ionshi ps with your customers. You are very reliable and
e:- ,ca1 company, and most customers have stuck with you .
(continued)
15
CHAPTER
Business and Society
Megan Matthews
Learning Objectives _ _ _ _ _ _ _ _ _ _ __
When you finish this chapter, you should be able to:
•
•
•
•
•
discuss the business and society relationship
define the three sectors covered in this chapter: for-profit, not-for-profit,
and public
define the difference between corporate social responsibility and
sustainability
define the term stakeholders, and identify stakeholder stakes for an
organization
define critical and creative thinking and discuss how you can apply your
creativity in business
OPENING ACTIVITY Case Scenario: Plant Closing
in Wisconsin
You are the owner of a plant producing automotive parts in a small town in
Wisconsin. Your plant is the main employer of the small town. You have lived in the
town your whole life, and your father operated the plant until you took over. Your
family is well established, and you are involved in many charities. Your children also
attend the local schools.
Tl1e recent economfc downturn nas been dfsastrous for your company, and
you have suffered a significant decline in revenue. Despite these losses, you have
not yet term\natecl any employees. You nave been able to surv\ve, mostly because of your strong relationships with your customers. You are very re\'iable ancl
have operated a very ethical company, and most customers have stuck with you.
( continued)
16
BUSINESS AND SOCIETY
When you showed up to your office today, your assistant mentioned that the ch e= e
==-- _
officer of a German competitor called you . You call him back, and he proposes to bu
a very attractive price; however, you also learn that, if you sell, the German company
to consolidate operations with another plant they bought in Pennsylvania. You fin d
r:--a, a
:- _
=--
employees will be offered the option to move to the Pennsylvania plant.
What would you do? Would you go ahead with the sale? Who is affected by t he sa e• - :
take into consideration the impact of your actions on the town if you sell (Parboteea- & - -
:: • ::~
=-
:::;·9)?
Introduction
Situations like those in the case study show the importance of business leaders w: ~e-:::: di ng the
changing nature of business and its relationship to society in today's environmen . :-;:e : ·::;a:1ons are
real. They involve real people, real relationships, and real consequences. Students s:_c · -; · usiness
will ultimately have to manage these people, and the relationships they have to an o-ga::·- a,ion, in a
way that achieves organizational goals. Understanding the big picture is essential; bu -· e s leaders
cannot afford to only look inward and consider business processes and cost; they m s: ok at the
world around them and determine how they fit within it and what positive outcomes ·: e · can create
for both the fiscal bottom line and the communities they impact.
Business and Society
As someone who wants to establish a career in business, you need to see how business and society
work together. Business leaders and managers need to see how their own area of expertise fits into
the big picture. It makes sense that businesses today are looking for employees who are willing to
learn about the business and society relationship and how to manage it strategically.
The relationship between business and society goes back to when commerce began: trade routes
impacted where communities grew; merchants and trade guilds helped create a working class; the
industrial revolution changed much of the world from an agricultural economy to a producing one;
and technology has changed the way we work, live, and obtain knowledge. A global economy has
impacted how people work together as well as how goods are manufactured and where they can
be sold.
Not everyone has been in favor of these changes-at every stage in the business and society
relationship, some individuals have benefitted from the changes, while others have not. In addition,
business owners and public leaders have not always concerned themselves with the negative impact
their activities have had on society-the individuals and communities around them (Davis &
Blomstrom, 1966). Many decisions made by business leaders have focused on making money rather
than their long-term effects on people, the planet, and future generations.
While this was accepted by many cultures for generations, an increase in information and
education, and the resulting awareness of the impact that businesses can have-both positive and
Chapter 2 I Business and Society
gative-has led to higher expectations of business. When you add increasingly complex social
mes and a global economy to the mix, the business and society relationship becomes even more
allenging. It is quite possible that what is viewed positively by one group of individuals, or a culre, is viewed negatively by others. This has led to increased government involvement in running
1sinesses as well as increased social pressure to "do good,"
1ich some view as positive, while others do not. Whatever
THE IRON LAW OF
ur viewpoint, the increased expectations and involvement
RESPONSIBILITY
stakeholders, which are any individual or group who can
" In the long run, those who do
ect or is affected by the actions, decisions, policies, pracnot u·se power in a manner which
es, or goals of the organization" (Freeman, 1984), is a result
society considers responsible will
businesses not considering how their decisions impacted
tend to lose it" (Bowie, 2012).
ople and the environment beyond their own best interests.
:an be considered a result of the iron law of responsibility
)Wie, 2012).
While it is easy to be negative toward business as a whole, given the results of some business
:isions, it is important to realize that businesses operated with intentionality and integrity can
pact society in many positive ways. There are also companies that have made it a priority to do
;iness in a way that protects the environment and life on the planet, while still making a profit.
wever, this must be a conscious choice by the business's leadership. Leaders that make this choice
.st recognize that, while they may not reap the largest profits in the short run, in the long run
y will impact society in a positive way and still make money for owners and shareholders and
ploy a workforce that is effective and efficient.
One example-the business and community-shows this symbiotic relationship. Companies are
king long-term investments with community-based organizations because they realize it helps
m to attract and retain highly skilled workers, improve employee morale, and increase customer
1lty and support. They are also responding to public pressure to address social problems (Svendsen,
8). Businesses need support from the community and local government to build and maintain
·astructure, such as power grids, internet access, roads, police and fire departments, and access
nedical care. The community needs businesses to help develop the economy, provide jobs, pay
!S that fund community services, and serve as good corporate citizens. Businesses that work with
community can improve the quality oflife. Communities that work with business can create
1ortunities for their citizens, receive funds to pay for local services, and maintain their unique
tl culture (Lussier & Sherman, 2014).
11
tree Sectors to Consider
~n we discuss the business and society relationship, our conversation often includes the notion of
i sectors. While there are different uses of the term "three sectors," it is widely used as a way to
gorize organizations that are set up to address public needs in different ways and with different
goals for profits and purpose in mind. While we won't spend a great deal of time investigating
17
Chapter 2
I
Business and Society
negative-has led to higher expectations of business. When you add increasingly complex social
issues and a global economy to the mix, the business and society relationship becomes even more
challenging. It is quite possible that what is viewed positively by one group ofindividuals, or a culture, is viewed negatively by others. This has led to increased government involvement in running
businesses as well as increased social pressure to "do good,"
which some view as positive, while others do not. Whatever
THE IRON LAW OF
your viewpoint, the increased expectations and involvement
RESPONSIBILITY
of stakeholders, which are "any individual or group who can
"In the long run, those who do
affect or is affected by the actions, decisions, policies, pracnot use power in a manner which
tices, or goals of the organization" (Freeman, 1984), is a result
society considers responsible will
of businesses not considering how their decisions impacted
tend to lose it" (Bowie, 2012).
people and the environment beyond their own best interests.
It can be considered a result of the iron law of responsibility
(Bowie, 2012).
While it is easy to be negative toward business as a whole, given the results of some business
decisions, it is important to realize that businesses operated with intentionality and integrity can
impact society in many positive ways. There are also companies that have made it a priority to do
business in a way that protects the environment and life on the planet, while still making a profit.
However, this must be a conscious choice by the business's leadership. Leaders that make this choice
must recognize that, while they may not reap the largest profits in the short run, in the long run
they will impact society in a positive way and still make money for owners and shareholders and
employ a workforce that is effective and efficient.
One example-the business and community-shows this symbiotic relationship. Companies are
making long-term investments with community-based organizations because they realize it helps
them to attract and retain highly skilled workers, improve employee morale, and increase customer
loyalty and support. They are also responding to public pressure to address social problems (Svendsen,
1998). Businesses need support from the community and local government to build and maintain
infrastructure, such as power grids, internet access, roads, police and fire departments, and access
to medical care. The community needs businesses to help develop the economy, provide jobs, pay
taxes that fund community services, and serve as good corporate citizens. Businesses that work with
the community can improve the quality oflife. Communities that work with business can create
opportunities for their citizens, receive funds to pay for local services, and maintain their unique
local culture (Lussier & Sherman, 2014).
Three Sectors to Consider
When we discuss the business and society relationship, our conversation often includes the notion of
three sectors. While there are different uses of the term "three sectors," it is widely used as a way to
categorize organizations that are set up to address public needs in different ways and with different
end goals for profits and purpose in mind. While we won't spend a great deal of time investigating
17
18
BUSINESS AND SOCIETY
THREE SECTORS IN ONE
INDUSTRY
An industry could have for-profit
businesses, not-for-profit organizations, and public agencies all
working in the same area but with
very different ways of doing business. For example, Broadway has
for-profit theaters in the business
of making as much money as they
can on a show; not-for-profit theaters, which may choose shows
that don't make money but fulfill
their mission; and government
or educational organizations that
make sure individuals have access
to theater through educational
programs or public theater
experiences.
THE RELATIONSHIP
BETWEEN SOCIALAND
FINANCIAL PERFORMANCE
Generally, there are three perspectives that companies can take
when approaching CSR initiatives
(Carroll & Buchholtz, 2018):
•
Perspective 1: Socially
responsible firms are more
financially profitable.
•
Perspective 2: A firm 's
financial performance drives
its soc ial performance.
• Perspective 3: There is an
interactive relationship between corporate social performance (CSP), corporate
financ ial performance (CFP),
and corporate reputation
(CR).
the qualities of each sector, it is important tha:
terms for future conversations. The three se
to addressing public needs are as follows :
•
For-profits: Organizations created to gene a:e ?rofit for
owners or shareholders
•
Not-for-profits (also called nonprofits :
-;=- ·-ations
created to accomplish a charitable purpose
• Public: Educational and governmental a e:::c es cesigned
to serve the public good
All three types of organizations are include
he conversation about business and society. They are- ·:- · -: in that
they all have missions, stakeholders, organizatio, - p:-iorities,
and ethical considerations, and they are all impac:e c. · lobal
events and changes. They are different in how the · - .: their
missions, how they serve their stakeholders, anc. nm•· they
choose and address organizational priorities. In a
on, as
the business environment changes, the lines bet ·ee- -· ,e three
sectors are blurring. For example, we have socia. e:::erprises,
which are for-profit businesses set up to accomp' 'l a public
good, and nonprofits that are very entrepreneurial in h ow
they do business.
We can also consider cross-sector collaborations as we
think about the three sectors. Forrer, Kee, and BoYer 2014)
point out important ways that the interests of the , ree types
of organizations intersect.
For public managers, cross-sector collaborations (C Cs)
allow governments to leverage funds, expertise, and
risk sharing with other sectors that can provide key
ingredients to the successful delivery of public goods
and services. For nonprofit managers, collaborations
allow their organizations to better meet their stated mis sion and possibly expand that mission to related areas
of interest. For private sector managers, collaboration
promises increased profits, enhanced reputation, and
expanded business opportunities.
As we continue to discuss business and society, corporate
social responsibility, stakeholder management, and the impact
of globalization on business, think about how each of the three
sectors might address challenges based on their m issions, stakeholders, and strategic priorities. How would they be similar?
e
n
Chapter 2
I
Business and Society
How would they be different? How could they collaborate to more effectively achieve their unique
organizational missions?
Corporate Social Responsibility, Sustainability
and the Triple Bottom Line
The formal definition of corporate social responsibility (CSR) is "an organization's obligation to maximize its positive impact on stakeholders and minimize its negative impact" (Ferrell et al., 2019). This
definition is broad and can be hard to interpret; individual ethics, viewpoints, and circumstances
make one person's approach to CSR different than someone else's. In addition, CSR efforts can
benefit one person or community and harm another.
Having acknowledged some of the challenges, it is also important to note that more and more
research shows that companies that are committed to CSR efforts are doing better financially. The
payoff may not be immediate, but it does come as a result of stronger relationships and more efficient
production and service systems. This can connect back to the business and community example
we discussed previously.
Corporate social responsibility and sustainability are related, but they are not the same. Sustainability refers to "economic development that generates wealth and meets the needs of the current
generation while preserving the environment and society so that
future generations can meet their needs as well" (Daft, 2018).
A Company to Watch: Lego Is a
Sustainability addresses the future, not just the present, and
Top Company in the Area of CSR
involves long-term gains, not just short-term success.
for 2019
By combining corporate social responsibility and sustainAccording to Forbes, "No company
ability, a business can measure long-term success in terms of
has demonstrated its commitment
its impact on society, the environment, and how it does finanto corporate responsib ility qu ite
cially. This is often called the triple bottom line, or the three
li ke Lego.... Last year, Lego started
P's: people, planet, and profit.
producing pieces made from
There is no doubt that there is a strong relationship between
plant-based polyethylene, the first
corporate social responsibility, sustainability, and ethics.
of many steps toward achieving
Because of past ethical abuses and lack of attention to corporate
its mission of making all bricks
social responsibility, there is often a public attitude that busisustainable by 2030. The company
nesses don't care about the environment or stakeholders; they
also came within seven percentage points of reaching its goal of
only care about making money. As a result, businesses must be
recycling 100% of its operational
intentional about making decisions, taking actions, and creating
by 2025. It also was ahead
waste
an ethical corporate culture that gives employees the knowledge
of schedule in meeting its target
and tools to make ethical decisions on behalf of the company.
of
generating as much renewable
Business leaders will inevitably encounter ethical dilemmas
energy as its business consumesthat challenge their personal ethics and force them to make
doing so by means of investments
decisions that have no easy answer. This is another reason you
in offshore wind farms in Germany
should study the business and society relationship and all its
and the United Kingdom" (Valet,
nuances; you need to prepare yourself for the challenges and
2019) .
opportunities you will face.
19
20
BUSINESS AND SOCIETY
Principles for Responsible Mana gen nt
Education (PRME)
In response to the increased focus on sustainability, the Umte.-: . -a ions created the Principles for
Responsible Management Education with a focus on sustainabi'. :"Ta.-.: environmental issues (Greenberg et al., 2017). Member states of the United Nations adop ec a:'~-: o "end extreme poverty, fight
inequality and injustice, and protect our planet" with 17 Sus·-·-a e Development Goals (SDGs)
and related targets to address economic, social, environme~:= · - - governance challenges (The
SDGs: Background, 2020). PRME was created as a platform: -= ·-e the profile of sustainability in
schools around the world and to equip today's business studen:: .:.- ·:ie ability to balance economic
and sustainability goals. PRME has become a strong conne · - -e,' -een the United Nations and
management schools in higher education.
Antonio Guterres, the United Nations Secretary-Genera. -·a:es "The PRME initiative was
launched to nurture responsible leaders of the future. Never - .::.: · s task been more important.
Bold leadership and innovative thinking are needed to achien! .-..e .:::_::ainable Development Goals"
(United Nations PRME, 2017). Business schools across the · - - nave made a commitment to
support PRME in their curriculum because of the importance ·· =- -tainability, the environment,
and ethical behavior in business.
Schools that sign on to the PRME initiative agree to furthe- ·-e: owing six principles:
•
Purpose: To develop the capabilities of students to be ge- e:a:ors of sustainable value for
business and society at large and to work for an inclusi ·e --.:: :ustainable global economy
• Values: To incorporate the values of global social res - - :: -: that are part of the United
Nations Global Compact into academic activities and c~ _ ,. .n1
• Method: To create educational frameworks and envi: :-.:::.e:::..: :.½at enable effective learning
experiences for responsible leadership
• Research: To enga_,e ·- :"'::-e?:ual and empirical research
that advances understa; · -,; :· ·ne role and impact that corporations have in crea -g : : =•.iable social, environmental,
CRITICAL THINKING
and economic value
REFLECTION
• Partnership: To ime-a:- ·· managers of business corList three areas where PRME's
porations to increase a.-: - .:e:-s:anding of their challenges in
purpose and values could be
meeting social and ennr----e:-:~ responsibilities and to find
reflected in your business classes.
effective ways to meet • - : "' :- -··enges
How will you be able to apply
these concepts while studying
• Dialogue: To facil::a.:e - = .:-..:;e and debate among educabusiness or after earning your
tors, students, business g ··e::::::::.e:::.: and other stakeholders on
degree?
issues critical to global
-e:::- nsibility and sustainability
In considering the g. -~ : -::ext of PRME it is worth
taking a moment to rec ;- -=- ::2: the world is increasingly
interconnected, and business leaders need to consider ho, · g :: - -· n impacts everything they
do. Even small, local businesses are impacted by global eve,..,::;:_:.,,...::" of supply chains, changing
20
BUSINESS AND SOCIETY
Principles for Responsible Management
Education (PRlv1E)
In response to the increased focus on sustainability, the United Nations created the Principles fo r
Responsible Management Education with a focus on sustainability and environmental issues (Greenberg et al., 2017). Member states of the United Nations adopted a plan to "end extreme poverty, fight
inequality and injustice, and protect our planet" with 17 Sustainable Development Goals (SDGs)
and related targets to address economic, social, environmental and governance challenges (The
SD Gs: Background, 2020). PRME was created as a platform to raise the profile of sustainability in
schools around the world and to equip today's business students with the ability to balance economic
and sustainability goals. PRME has become a strong connector between the United ations and
management schools in higher education.
Antonio Guterres, the United Nations Secretary-General, states, "The PRME initiative was
launched to nurture responsible leaders of the future. Never has this task been more important.
Bold leadership and innovative thinking are needed to achieve the Sustainable Development Goals"
(United Nations PRME, 2017). Business schools across the world have made a commitment to
support PRME in their curriculum because of the importance of sustainability, the environment,
and ethical behavior in business.
Schools that sign on to the PRME initiative agree to further the following six principles:
•
Purpose: To develop the capabilities of students to be generators of sustaina e Yalue for
business and society at large and to work for an inclusive and sustainable glob ec nomy
• Values: To incorporate the values of global social responsibility that are part o·· • e ·nited
Nations Global Compact into academic activities and curriculum
• Method: To create educational frameworks and environments that enable eEec· ·e earning
experiences for responsible leadership
• Research: To engage in conceptual and em:-·:-·.:- -e:earch
that advances understanding of the role and ~;:-a.:: at cor1nental,
porations have in creating sustainable socia:
CRITICAL THINKING
and economic value
REFLECTION
• Partnership: To interact with managers :· : :- _: -:ess corList three areas where PRME's
porations to increase an understanding oi -~e: :- = e:1 es in
purpose and values cou ld be
meeting social and environmental respons::-· · e.: --.:: to fi nd
reflected in your business classes.
How will you be able to app ly
effective ways to meet those challenges
these concepts while studying
• Dialogue: To facilitate dialogue and · e:-- e - -~ educabusiness or after earning your
tors, students, business, government, and · - =- :- =- . ers on
degree?
issues critical to global social responsibili. ; ;ui:.: _:· - · :iability
In considering the global context : . .: .:::: ·: ·- worth
taking a moment to recognize that the
- ~ -easingly
interconnected, and business leaders need to consider how globalization in:::-.:..:-· - _ -'1.ing they
do. Even small, local businesses are impacted by global events because of ---~::- .: -hanging
Chapter 2
I Business and Society
demographics in their customer base, new needs of employees, and global politics. Business leaders
who are prepared to work in the global environment will need these characteristics (Weiss, 2014):
•
•
•
•
•
•
•
openness to other cultures
flexibility
awareness of verbal and nonverbal differences in communication between cultures
awareness of differences in the management and leadership approaches between cultures
awareness of cultural influences on employee behavior and needs
adaptability as well as loyalty, honesty, and ethically sound decision-making
muliidiscu;linary 1ters1tectives for 1troblem-solvffiSb
The significant challenge is to make globalization an instrument of opportunity and inclusion
not anxiety. A strong business and society relationship wiH be key to addressing that challenge.
The Stakeholder Approach
FIGURE 2.1 Business and Stakeholder Relationships
Stakeholders
Now that we've defined stakeholders as individuals or groups who can affect or be affected by a
company's actions, can you think of organizations where you are a stakeholder? Companies you
buy products from? The university you attend? The community you live in?
In the past, businesses were most concerned with addressing the interests of shareholders and
owners; these were the only stakeholders that impacted decision-making. Then, businesses started
paying attention to employees, consumers, and suppliers, and ultimately realized that the idea of a
stakeholder could be much broader than those organizations or individuals directly involved with
the day-to-day operations of running a business. That is what led to the idea of stakeholder management. But first, a few terms.
21
22
BUSINESS AND SOCIETY
Stakeholder Groups
There are different ways to define stakeholder groups when you are considering how to work with
them. In the big picture, they are as follows (Carroll et al., 2018):
•
•
•
•
Primary social: People and organizations that are directly involved with the business. This
group would include employees, customers, suppliers, and shareholders; these would be of
primary concern to business leaders when considering management strategies.
Secondary social: People and organizations that are not directly involved in day-to-day
operations but are impacted by or impact decisions and actions taken by a business. This
group would include the government, competitors, and the media; these would be of secondary concern to business leaders when considering management strategies.
Primary nonsocial: Animals, the environment, future generations (note that not all
stakeholder management theories include this category); if these are considered in stakeholder management, they would likely be of less concern than primary or secondary
social stakeholders.
Secondary nonsocial: People or organizations that represent the primary nonsocial stakeholders. This could include individual activists, environmental and animal welfare organizations,
and non governmental organizations (NGOs).
It is important to know that, using this set of categories, a stakeholder can move from secondary,
which would usually get less attention, to primary very quickly. For instance, an environmental
group could be in the secondary category until a business causes or experiences an environmental
tragedy; the environmental group could then become a primary stakeholder able to easily impact
the business in either a positive or negative way.
A third way to categorize stakeholders is as follows (Chandler, 2015):
•
•
•
Organizational stakeholders: This group would include employees and managers and
should be of primary concern to business leaders.
Economic stakeholders: This group would include shareholders, consumers/customers,
creditors, and competitors, and many provide a company with the economic capital to
survive. They are impacted by a business's financial decisions and are of concern after
organizational stakeholders.
Societal stakeholders: This group would include government agencies, media, communities
in which the business operates, and activist groups and can provide legitimacy and longterm validity for businesses to survive over the long term. They would be ofless immediate
importance in terms of day-to-day operations.
You can see that businesses can choose to categorize stakeholders in different ways and that
stakeholders can change in importance depending on the situation. The key is identifying a list
of stakeholders and thinking about how they relate to the business. Businesses also need to think
about what each stakeholder's stake is.
f
Chapter 2
I
Business and Society
TABLE 2,1 Another way to categorize stakeholder groups
Private sector
Listed companies
Small, medium, and large
organizations
Business associations
Professional societies
Business leaders
. F.io'1ociPJ. io:;tii1~tino~
Public sector
Central government-ministers and
director generals (executive advisors)
Public servants (bureaucracy)
Members of parliament (elected
representatives or legislature)
Judiciary (constitutional, high, and
, ,,;ogru,<;\!;t;Y"l.COl 'tJy'
Political parties
Local government (municipalities and
town councils)
Military
International bodies such as the World
Bank and the United Nations
Public healthcare
Public schools
Organized society
Media
Trade unions
National nongovernmental
organizations (NGOs)
International NGOs
Pressure groups and advocates
r,J!nyroos-movemenr~
Private institutions for
education and health
Source: (Strong, 2014).
Stakeholders' Stakes
Stakes are generally grouped into three categories (Carroll, Brown & Buchholtz, 2018):
•
•
•
An interest: A stakeholder can be impacted by a decision that is made. You may be impacted
if a business decides to support (or not to support) a community need that addresses your
personal situation.
A right: A stakeholder can have a legal or moral right that is impacted by actions the business
takes. Employees who have worked at a company for many years may have a legal or moral
right to keep their pensions even if the company goes bankrupt.
Ownership: A stakeholder can own part of the company or some asset or property the
business owns. Shareholders and owners definitely have a stake in how well a company does
financially. Think about employee-owned companies; would these types of companies create
additional challenges in managing stakeholders?
Stakeholder Attributes
In categorizing stakeholders, we can also analyze stakeholder attributes. The three that businesses
most often consider are legitimacy, power, and urgency. Legitimacy addresses the validity ofa stakeholder's claim. Owners, employees, and customers often have a high degree oflegitimacy because
they have a direct relationship with the company. Power considers the ability or capacity of the
stakeholder to affect the company, whether positively or negatively. Legitimacy and power are not
the same thing; a stakeholder could not have a direct relationship with the company, but they could
have the power to influence an organization's leadership decisions. For example, consider advocacy
organizations and how they can influence an organization's CSR policies. Urgency refers to how
critical a stakeholder's claim is and whether it needs immediate attention. A union may decide to
pursue a strike, or consumers may threaten to boycott a company. These actions would require an
organization's immediate attention.
23
24
BUSINESS AND SOCIETY
CRITICAL THINKING QUESTION
A management group may see a potential union strike, a consumer boycott, or a case of product contamination as urgent. With social media, a secondary stakeholder may
move to primary status within
hours if they mount a successful media campaign that impacts public perception, customer satisfaction,
or emp.loyee safety Th.ink aboi..•t how quick,~' a gmap that o's .:..·nhappy wi'th a company's CSR efforts can
share their displeasure publicly and get a response from customers, stockholders, and other media
(Carroll et al., 2018). Can you think of an example where this happened? As an exercise in critical thinking, develop a list that provides evidence showing how global pandemics and supply chain issues change
the level of urgency a group of stakeholders has and describe how companies need to respond.
Responsibilities to Stakeholders
What can stakeholders expect from the organization? Shareholders can expect a good return on
investment, employees can expect fair pay and good working conditions, customers can expect
safe products, local communities can expect positive economic impact, and the list can go on
and on. However, each of these stakes can be addressed within a corporate social responsibility
framework, including economic, legal, ethical, and philanthropic responsibilities. A business
needs to be economically responsible, follow the law, be ethical in its dealings with stakeholders,
and support stakeholders through philanthropic efforts and positive community interactions
(Carroll et al., 2018).
Philanthropic Responsibility
4
Stakeholders de§ire that org'llllizations will be
good corporate citizens.
Ethical Responsibility
3
Stakeholders expect businesses to make ethical
decisions.
Legal Responsibility
-.------t
Stakeholders require companies to obey the law.
Economic Responsibility
Profitability is necessary to remain in business.
FIGURE 2.2 The CSR Framework for Managing Stakeholders
Chapter 2
I
Business and Society
Managing Stakeholders
Effective business leaders consider stakeholder management a priority. They take the time to determine who their stakeholders are, what their stakes are, and how to manage those relationships.
They will also investigate the relationships stakeholders have among themselves. Then they will
create an organizational culture where employees can learn about and work with all stakeholders
in a strategic, ethical way.
vv nen you are cauea to manage stakeholder relationships, you should ask yourself the following
questions (Carroll et al., 2018; Strong 2014):
•
•
•
•
•
•
•
•
Who are our organization's stakeholders?
What are our stakeholders' stakes?
What opportunities and challenges do our stakeholders present?
What responsibilities do we have to our stakeholders?
What strategies should we take?
How much power do our stakeholders hold?
How interested are the stakeholders in what we
are doing?
What kind of relationships do our stakeholders
have with each other?
Depending on these answers, you will decide
whether you want to closely involve a stakeholder in
your organization or simply keep them informed. You
might also decide to research a great deal about what
they are doing or only monitor their activities from afar.
FIGURE 2.3 Managing Stakeholders
Limits to Stakeholder Theory
It is worth mentioning that some researchers feel that stakeholder theory has become too broad to
be helpful in leading a business. One question is: If just about everybody is a stakeholder, how do
you manage them all? Other questions include (Phillips, 2003): What stakeholder group ultimately
gets priority? Who gets to choose what an organization's priority is? What kind oflegal and moral
obligations do businesses really have to stakeholders?
Benefits to Stakeholder Theory
There is some validity to the criticisms and questions about stakeholder theory; nonetheless, it is
valuable for an organization to recognize the relationships it has with people and other organizations
and to think about how to handle them strategically. Research indicates that businesses that walk
through the stakeholder management process and are intentional about building and managing
relationships ultimately do better financially.
For example, Sandra Waddock and Samuel Graves (1997) looked at how stakeholder relations,
quality of management, and financial performance worked together. Their research showed that
building positive stakeholder relationships enhances other areas of business; they found that solid
25
26
BUSINESS AND SOCIETY
financial performance was supported by good treatment of stakeholders. In addition, John Kotter
and James Heskett (1998) in their book, Corporate Culture and Performance, share results of their
study, which found that companies that responded to stakeholder needs showed "four times the
growth in sales and eight times the growth in employment of companies that focused solely on
shareholder needs."
Other benefits of effective stakeholder management include creating trust and commitment
with suppliers, increasing employee learning, and enhancing community goodwill. In addition, a
positive relationship with one stakeholder group can have an impact on others. Finally, consider
that "[c]ompared with SO years ago, when assets were machines and other hard assets, today over
60% of a company's value is tied up in intangibles like employee knowhow, reputation and trusting
relationships with suppliers" (Svendsen, 1998).
Given these benefits, you can see that "establishing a good reputation, trusting relationships with
suppliers, strong community linkages, and responsible environmental practices will help ensure the
long-term profitability and sustainability of your company" (Svendsen, 1998).
Creative Thinking and Business
Since we have determined that the business environment you will be moving into will be complex,
varied, changing, and require a strong strategy, it is worth discussing the idea of critical thinking
and creativity in business. We covered critical thinking in the first chapter, and we will expand
on that idea here, focusing on creativity. Creativity and creative problem-solving can definitely be
an outcome of critical thinking, which is a key skill in business strategy. Encouraging creativity in
employees contributes to a company's competitive advantage.
According to the World Economic Forum, the top three skills that employees-and leaders-will
need are: a) complex problem-solving; b) critical thinking; and c) creativity (2016). In addition,
the 2010 IBM Global CEO Study selected creativity as
the most crucial factor for future success. This survey of
more than 1,500 chief executive officers from 60 countries
WHAT IS CREATIVITY?
and 33 industries worldwide concluded that "successfully
According to the University of Michigan
navigating an increasingly complex world will require
(Critical and creative thinking, n.d.),
creativity" (Runco & Pritzker, 2020).
creative thinking "involves calling into
This may cause concern for students, who sometimes
question the assumptions underlying
don't think of themselves as creative and don't underour customary, habitual ways of thinkstand what critical thinking is. However, a study done in
ing and acting, and then being ready to
1968 to test the creativity ofl,600 children from the ages
think and act differently on the basis
of 3 to 5 showed that 98% of the 5-year-olds tested as
of ... critical questioning." Creativity is
innovative. The researcher, George Land, used the same
the ability to generate something new,
creativity test on these children as the one devised for
whether it be a product, a technique, or
NASA to help select innovative engineers and scientists.
a way to bring reality into focus (CastilloVergara et al., 2018).
These same students were tested again at 10 years old
and 15 years old; by the time they were 15, only 12% of
Chapter 2
I
Business and Society
The CE Os Speak
er
1r
Expect to 1al :e mi ,, b
their strategies.
s ,, ,del char :es to realize
e
n
n ,it~ di Jpt 11, nno, tio, , encourage others to drop outdated
approaches and take balanced risks.
it
Consider previously unheard-of ways to drastically changic h,
n ·p1
for the better, setting the stage for innovation that helps them
engage more effectively.
a
r
r
g
h
e
Creative
Leaders
'E ,r, rt, ,bl wi
business models.
umb,E 1r:y and experiment to create new
Seo, rr J :h htgh, •r on nnovat1on as a crucial capability, and
more of them expect to change their business models.
Which includes CE Os and their teams-are courageous and visionary
enough to make decisions that alte, hes, :us o 10.
Will
1
ven1 new business models based on entirely different assumptions.
In surveying more than 1,500 Chief Executive Officers from around the world, the IBM 2010
Global CEO Study found that chief executives believe successfully navigating an increasing
complex world will require creativity.
FIGURE 2.4 An illustration of how obstacles can be overcome by instilling
"creativity" throughout an organization and what CEOs are looking for in
creative leaders.
them tested as innovative. The conclusion? Noncreative behavior is learned (Creativity at Work,
2012; Land &Jarman, 1993).
Another thought is to consider who you are comparing yourself to if you think you aren't
creative. If you compare yourself to people who are famously creative and realize you don't
have the same abilities, you may conclude you aren't creative. However, several theories support
the idea that individuals have a "personal creativity" that can be practiced and strengthened
(Hayden, 2017).
We can all think critically if we take the time to test our assumptions and practice the art of
critical thinking. We also all have a way to be creative-the trick is to figure out how to use your
creativity and critical thinking in a way that helps your career, your business, and your community.
What Have We Learned?
The complex relationship between business, and the society in which it operates, impacts how a business handles its finances, supply chains, marketing, IT, human resources, and more. When you add the
global economy and diverse cultures into the mix, the challenges-and rewards-are even greater. The
business and society relationship impacts not only the business but its stakeholders-individuals, the
government, the environment, and future generations.
27
28
BUS I NESS AND SOCIETY
Corporate social responsibility and sustainability are related but not identical. Businesses have to be
intentional about their work in these areas and are rewarded by achieving effective relationships with
their stakeholders, better efficiency, and often long-term financial gain.
Stakeholder management is a process that businesses use to understand who their stakeholders
are, what their stakes are, how stakeholders relate to each other, and how to manage relationships in a
way that achieves the organization's mission.
Unethical decisions and actions taken by businesses in the past have caused suspicion, which makes
it hard to work in today's environment. Business leaders study ethics because it is inevitable that they
will face an ethical dilemma at some point in their career-this means you will too. You need to know
how you will approach ethical decision-making before you are faced with such a situation. Businesses
that operate with intentionality and integrity, which create an ethical corporate culture, will reap the
benefits.
With the global environment in which we live and do business, it is necessary for business leaders
to be open to other cultures and be aware of their own assumptions about how a business should be
run. Globalization offers great rewards for businesses that are intentional and strategic about how they
handle ethical concerns, and it creates a corporate culture that provides opportunity and inclusion.
Critical and creative thinking is a key skill for today's business environment. It is what business
leaders are looking for in new employees and, ultimately, new leadership. Both kinds of thinking can
be practiced and strengthened, and it is important for you to work on them, so you are prepared for a
career after graduation.
Key Terms and Concepts
Business and society: the rising expectations of business by society, and how business relates to society today
Corporate social responsibility (CSR): an organi-
Stakeholders: any group or individual that can affect
or is affected by the achievement of an organization's
objectives
zation's obligation to maximize its positive impact on
Stakeholders• stakes: stakeholders' interests, rights,
stakeholders and minimize its negative impact
or ownership in a business
Principles for Responsible Management Education
Sustainability: addresses the future, not just the pres-
(PRME): a United Nations initiative to emphasize sus-
ent, and involves long-term gains, not just short-term
tainability goals in business school students' education
success
Stakeholder attributes: how stakeholders are ana-
The three sectors: for-profit, which are organizations
lyzed and prioritized when considering how to manage
created to generate profit for owners or shareholders.
stakeholder relationships. Three attributes are legitimacy,
Not-for-profit (also called nonprofits), which are orga-
power, and urgency.
nizations created to accomplish a charitable purpose.
Stakeholder groups: often categorized as primary,
secondary, social, nonsocial, organizational, economic,
or societal
Stakeholder management: intentional actions taken
by business leaders to create an organizational culture
that learns about and works with all stakeholders in a
strategic, ethical way
Public, which are educational and governmental agencies,
designed to serve the public good.