MORAL REASONING AND ETHICAL THEORY 1.1

Do you know that ethical problems are truly complex when it comes to the management of an organisation? These problems are complex because of the following attributing characteristics (which will be elaborated further in Topic 3):

Extended consequences

Multiple alternatives

Mixed outcomes

Uncertain occurrences

Personal implications

Ethical problems are also pervasive because managers make decisions and take actions that affect other people. Managerial decisions and actions need to be addressed and require some degree of moral analysis when:

It affects other people negatively, or

It harms or hurts other people in ways beyond their individual control

In the following sections, you will be given the definition of ethics, business ethics and professional ethics. You will also find out why business should be ethical and the formation of individual ethics.

The Meaning of Ethics 1.1.1

What is ethics?

Ethics can generally be defined as the principles of morally acceptable conduct of individuals. Ethics also means an individual’s personal beliefs about right and wrong behaviours.

Although this simple definition communicates the essence of ethics, three implications warrant additional consideration:

a. Ethics is individually defined. People have ethics, whereas organisations do not have it;

b. What constitutes ethical behaviour can vary from one person to another; and

c. Ethics is relative; it is not absolute. This means that although what constitutes ethical behaviour is in the eye of the beholder, it usually conforms to generally acceptable social norms.

d. The Meaning of Business Ethics 1.1.2e. While ethics generally refers to the conception of right and wrong (Lawrence & Weber,

2011), business ethics refers to the application of ethical values and ideas on issues that

arise in the business context. It is not different from ethics in general. For example, if we consider lying to be unethical, then anyone in business who lies about his products or financial performance of his company to his stakeholders is acting unethically as well.

The Meaning of Professional Ethics 1.1.3

Do you know what professional ethics is? Let us refer below to know its meaning.

Professional ethics indicates the moral values that a group of similarly trained people develop to control their task performance or their use of resources.

People internalise the rules and values of their professional culture just as they do those of their society. They reflexively adhere to professional rules and values when deciding on how to behave.

Some organisations have many groups of professional employees such as nurses, lawyers, researchers, doctors and accountants, whose behaviour is governed by professional ethics. Professional ethics help to shape the organisation’s culture and determine the values of its members in their dealings with other stakeholders. Most professional groups are allowed to enforce the ethical standards of their profession. Professional groups, such as doctors and lawyers, can be banned from practising if they violate their professional rules.

ACTIVITY 1.1

Answer the following questions on ethics.

a. How do you define the term “ethics?”

b. How does ethics affect your life? Give several examples.

Why Should Businesses be Ethical? 1.1.4

Ethics plays a prominent role in business as it is required in any kind of business conduct. Businesses should be ethical for these two main reasons:

a. Significant Influence on Environment and StakeholdersBusiness actions can affect the natural environment and the organisation’s various stakeholders such as its customers, employees and the community. Since businesses can have an enormous influence on its stakeholders, the organisation has to be responsible and ethical  in its actions.

b. Enhance the Business PerformanceBusiness ethics enhances the organisation’s business performance. Businesses recognise that ethical actions can directly affect their organisation’s bottom line (Lawrence & Weber, 2011). On the other hand, being unethical can have detrimental effects on an organisation as shown below.

A study conducted by the University of Washington found that companies which had misstated their accounting information lost 41 percent of their market value after their misdeed was discovered. This is because dishonest firms tend to lose their customers and face higher financing costs.

Source: Institute for Global Ethics (2006)

The Formation of Individual Ethics 1.1.5

What makes some individuals ethical and some unethical? Why are some people honest, while others are dishonest? Various factors are instrumental in the formation of individual ethics, as shown in Figure 1.1:

Figure 1.1: Factors that form individual ethics

a. Family InfluencesIndividuals start to form their ethical standards since their childhood period in response to their perception of their parents’ behaviours. Children are more likely to adopt high ethical standards if they see that their family members adhere to high standards (such as being truthful) and if they receive rewards for conforming, and punishment for not conforming, to these standards.

However, if family members engage in unethical behaviours (such as being untruthful) and allow their children to do the same, then the latter is likely to develop lower ethical standards.

b. Peer InfluencesWhen children enter school, they are influenced by peers with whom they interact every day. For example, if a child’s friends engage in shoplifting, vandalism or drug abuse, the child too, may decide to do the same. Conversely, if the child’s peers have higher ethical standards and reject the said behaviours, he is likely to adopt these standards.

c. Life ExperiencesDozens of important events, both positive and negative, shape people’s lives and influence their ethical beliefs and behaviour. These events are a part of growing up and maturing.

For example, a person who steals something and does not get caught may feel no remorse and continue to steal. However, a person who is caught stealing may feel guilty enough to change his ethical standards and make it a point not to steal in the future.

d. Personal Values and MoralsValues and morals also influence a person’s ethical standards. For instance, a person who places financial gain and personal advancement as a top priority will adopt a personal code of ethics that promotes the pursuit of wealth.

Thus, he may be ruthless in attempting to gain these rewards regardless of the cost to others. A person who gives priority to his family will adopt a different ethical standard.

e. Situational FactorsThe final determinant of an individual’s ethics is situational factors. Sometimes, people unexpectedly find themselves in situations that cause them to act against their better judgement.

For example, some people who cheat on their expenses accounts do so because of personal financial difficulties. Although this does not justify their dishonesty, it does provide some context for understanding why people may sometimes behave unethically if they have no other choice.

ACTIVITY 1.2

Which of the above-mentioned factors have been most influential on the formation of your ethics? Give some examples.

ETHICAL PRINCIPLES 1.3

The universal recognition that we owe something to other people within our society, and that we are bound by a concept of right and wrong in our behaviour to those people, has to be made operational. We have to establish some consistent analytical methods of classifying our action as “right” or “wrong.”

If we cannot, it is not due to lack of trying. As indicated earlier, intellectual history over the past 2,400 years is filled with attempts to justify moral standards and to establish ethical systems. None of it is perfect but there are at least five major systems that do have a direct relevance to managerial decisions. Figure 1.2 shows the five major systems.

Figure 1.2: Five major systems that do have a direct relevance to managerial decisions

Let us look at the explanations provided for these systems in the following sections.

NORMATIVE PHILOSOPHY AND ETHICAL RELATIVISM 1.2

Moral reasoning requires an understanding of normative philosophy. Philosophy is the study of thought and conduct. Therefore, normative philosophy is the study of proper thought and conduct; that is, how we should behave.

Normative philosophers have been looking at the issue of normative philosophy for more than 2,400 years ago; since the time of Plato. They have attempted to establish a logical thought process based upon an indisputable principle that would determine whether an act is labelled as the following:

a. “Right” or “Wrong”; or

b. “Good” or “Evil”; or

c. “Fair” or “Unfair”.

The next issue to be addressed in this description of the techniques of moral reasoning concerns ethical relativism. The question here is very basic. Are there objective universal principles upon which one can construct an ethical system of belief that is applicable to all groups, in all cultures and at all times? Moral standards of behaviour differ between groups within a single culture, between cultures and between times. This is obvious. For example, in contemporary Malaysia,

moral standards for decisions on product safety differ between leaders of consumer interest groups and executives of major industrial corporations. It is also probable that these standards of product safety would differ even more greatly between Malaysia and the United States, or between the contemporary period and the late 19th century.

SELF-CHECK 1.1

Explain briefly on the following terms:

a. Normative philosophy; and

b.Ethical relativism.

c. ETHICAL PRINCIPLES 1.3d. The universal recognition that we owe something to other people within our society, and

that we are bound by a concept of right and wrong in our behaviour to those people, has to be made operational. We have to establish some consistent analytical methods of classifying our action as “right” or “wrong.”

e. If we cannot, it is not due to lack of trying. As indicated earlier, intellectual history over the past 2,400 years is filled with attempts to justify moral standards and to establish ethical systems. None of it is perfect but there are at least five major systems that do have a direct relevance to managerial decisions. Figure 1.2 shows the five major systems.

f. Figure 1.2: Five major systems that do have a direct relevance to managerial decisions

g. Let us look at the explanations provided for these systems in the following sections.h. Eternal Law 1.3.1

i. Many religious leaders and some philosophers such as Thomas Aquinas and Thomas Jefferson believe that there is an Eternal Law (also known as “Natural Law”) incorporated in the mind of God. The law is apparent in the state of nature and revealed in the “Holy Scripture”. It would be immediately obvious to any man or woman who will take time to study either nature or the scripture. Thomas Jefferson, the first of the secular humanists, believed that the truths of this law were “self-evident.” In his famous phrase shown below, the rights were “inalienable” and duties could easily be derived from these rights.

j. If people have the right to “life, liberty and the pursuit of happiness,” then they also have the obligation to ensure the same right to others. Religious leaders tend to emphasise the revealed source of the truth more than the reasoned nature. However, they also believe that the state of the Law is unchanging, and that the rights and duties are obvious: if we are loved, then we must love others. This reciprocal exchange is summarised in Christian theology by the Golden Rule: Do unto others as you would have others do unto you.

k. What is wrong with Eternal Law or Natural Law (interpreted by either religious leaders or normative philosophers) being the basis for an ethical system in management? Nothing, except for the number of interpretations. No two Natural Law theorists and very few religious writers have been able to agree on the exact provisions of the revealed or reasoned truth. Each religion provides moral standards for their members and many of the members observe those standards in daily life. However, the standards differ between groups, and there is no infallible way to determine which one is “right” or “best” or “proper” for society. Even the Golden Rule, that simple, elegant, sensible guide to life, cannot be applied universally at all times

Classical Teleological Ethical Theory: Utilitarianism 1.3.2

Did you realise that the teleological approach to managerial ethics places complete emphasis on the outcome and not on the intent of individual actions? “Teleology” is derived from the Greek term which means “outcome” or “result”.

Some of the most influential philosophers in the Western tradition such as Jeremy Bentham and J. S. Mill hold that the moral worth of personal conduct can be determined solely by the consequences of that behaviour. That is, an act or decision is “right” if it benefits people. Conversely, it is “wrong” if it leads to damage or harm. The objective, obviously, is to create the greatest degree of benefits for the largest number of people while incurring the least amount of damage or harm.

There is more to life than the acquisition of material benefits alone. Friendships, knowledge, health and other satisfactions we find in life should be taken into consideration as well. The aggregate satisfactions or benefits for everyone within society have to be considered. However, the benefits are not all positive. There are negative costs and adverse outcomes associated with each action, and they have to be considered to establish a balance. The negative costs and adverse outcomes (refer to Figure 1.3) include pain, sickness, death, ignorance, isolation and unhappiness. The aggregate harm or costs have to be considered, and then a balance of the net consequences can be computed.

 Figure 1.3: Adverse outcomes (a) Isolation (b) UnhappinessSource (a): http://www.pharmacyescrow.com/blog/index.php/2010/10/25/loneliness-and-isolation/ Source (b): http://ilovemyself.net/wp-content/uploads/2010/11/unhappiness.jpg

This teleological ethical system which focuses on net consequences rather than individual intentions is termed as Utilitarianism. Utilitarianism is commonly associated with Jeremy Bentham (1748 – 1832), a British thinker. The name of the philosophy is derived from the word utility which, in the eighteenth century, referred to the degree of usefulness of a household object or domestic animal. In microeconomic theory, it measures our degree of preference for a given good or service relative to price. In Utilitarian theory, the term refers to our perception of the net benefits and costs associated with a given act.

Utilitarianism differs from the economic concept of cost/benefit analysis in that the distribution of the costs and benefits has to be included as well. That is, these are net benefits to society, and each individual within the society has to be considered and treated equally in the distribution as shown below.

“The greatest good for the greatest number” takes precedence in Utilitarian theory over “The greatest good for a smaller, more elite number.”

What is wrong with Utilitarianism? Not much, except for the possibility of exploitation. In the vast majority of cases, where no one is going to be hurt badly, and particularly where it is possible to use financial equivalents for both the costs and the benefits, it is a familiar and useful form of analysis. However, there is always the possibility of justifying benefits for the great majority of the population by imposing sacrifices or penalties on a small minority.

Utilitarianism fails because of these factors:

a. In reality, it is about these two principles: “the greatest good” and “the greatest number”. At some point in our decision-making on important matters, these two principles come into conflict. Then, we have no single means of determining what is the “right” or “proper” act.

b. We can probably agree that there are some actions that are simply wrong, despite great apparent net benefits for a huge majority. For example, killing an innocent child for the benefit of bringing happiness for the whole human race. No one should ever have to accept that kind of cruel act.

c. It is impossible to balance the benefits of the majority against the sacrifices of a minority.

Classical Deontological Ethical Theory: Universalism 1.3.3

Do you know that the word “deontology” is a Greek term referring to the duties or obligations of an individual? The deontological approach (as shown below) to managerial ethics is, in essence, the opposite of teleological theory.

The deontological theory states that the moral worth of an action cannot be dependent upon the outcome because these  outcomes are so indefinite and uncertain at the time of the decision to act is made. The moral worth of an action has to instead depend upon the intentions of the person making the decision or performing the act.

If you wish the best for others, then your moral actions are praiseworthy, even though you happen to be an unimpressive and clumsy individual who always seems to be doing the wrong thing. Therefore, these good intentions will normally result in beneficial outcomes.

Personal intentions can be translated into personal duties or obligations because if we truly wish the best for others, then we will always act in certain ways to ensure beneficial results. Those ways become duties that are compulsory upon us rather than choices that are open to us. Our personal duties are universal, applicable to everyone and consequently much of deontological theory is also termed as Universalism. The first duty of Universalism is to treat others as ends and not as means. Other people should be seen as valuable ends in themselves, worthy of dignity and respect, and not as impersonal means to achieve our own means. No action can be considered “right” in accordance with personal duty if it disregards the ultimate moral worth of any other human being.

What is wrong with Universalism?

a. It is a useful method of moral reasoning but there are no priorities and no degrees.

b. It is difficult to treat others as ends and not as means all the time, particularly when many serve as means to our personal ends. Storekeepers are means of procuring our groceries; customers are our means of earning our livelihoods; employees are the means of staffing our factories.

Classical Deontological Ethical Theory: Universalism 1.3.3

Do you know that the word “deontology” is a Greek term referring to the duties or obligations of an individual? The deontological approach (as shown below) to managerial ethics is, in essence, the opposite of teleological theory.

The deontological theory states that the moral worth of an action cannot be dependent upon the outcome because these  outcomes are so indefinite and uncertain at the time of the decision to act is made. The moral worth of an action has to instead depend upon the intentions of the person making the decision or performing the act.

If you wish the best for others, then your moral actions are praiseworthy, even though you happen to be an unimpressive and clumsy individual who always seems to be doing the wrong thing. Therefore, these good intentions will normally result in beneficial outcomes.

Personal intentions can be translated into personal duties or obligations because if we truly wish the best for others, then we will always act in certain ways to ensure beneficial results. Those ways become duties that are compulsory upon us rather than choices that are open to us. Our personal duties are universal, applicable to everyone and consequently much of deontological theory is also termed as Universalism. The first duty of Universalism is to treat others as ends and not as means. Other people should be seen as valuable ends in themselves, worthy of dignity and respect, and not as impersonal means to achieve our own means. No action can be considered “right” in accordance with personal duty if it disregards the ultimate moral worth of any other human being.

What is wrong with Universalism?

a. It is a useful method of moral reasoning but there are no priorities and no degrees.

b. It is difficult to treat others as ends and not as means all the time, particularly when many serve as means to our personal ends. Storekeepers are means of procuring our groceries; customers are our means of earning our livelihoods; employees are the means of staffing our factories.

Distributive Justice Theory 1.3.4

Neither of the two classical theories mentioned above, Utilitarianism or Universalism, can be used to judge all moral actions under all circumstances. Consequently, two modern ethical systems have been developed that are based upon values rather than principles.

The first of these, the theory of Distributive Justice, was proposed by John Rawls and is explicitly based upon the primacy of a single value:justice.

Justice is felt to be the first virtue of social institutions, just as truth is the first virtue of systems of thought.

John Rawls proposes that society and the institutions within it are marked by these two elements:

a. CollaborationCollaboration comes about since individuals recognise that joint actions generate much greater benefits than solitary efforts.

b. ConflictConflict is inevitable because people are concerned with the just distribution of gained benefits. Each person prefers a greater to a lesser share, as well as a system of distribution that ensures the greater share to himself. These distributive systems can have very different bases to each person equally, or to each according to his need, effort, contribution or competence.

Most modern economic systems make use of all five principles: equal, need, effort, contribution and competence. For instance, public education is, theoretically speaking, distributed equally, welfare payments on the basis of need, sales commissions on effort, public honours on contribution, and managerial salaries on competence.

People would not normally select absolute equality in the distribution of benefits. This is because they recognise that some of them would put forth greater effort, have higher skills and so on. They would also not agree to absolute inequality based upon effort, skill or competence because they would not know who among them have those qualities and consequently who among them should receive more or less benefits. Instead, they would develop a concept of conditional inequality, where differences in benefits have to be justified. They would propose a rule to ensure that these differences in benefits be justified only if they are shown to result in compensating benefits for everyone, particularly the most disadvantaged members of their society.

What are the problems with distributive justice? It is entirely dependent upon the acceptance of the proposition that social cooperation provides the basis for all economic and social benefits. Individual effort is downplayed, if not ignored.

Personal Liberty Theory 1.3.5

The theory of Personal Liberty is an ethical system proposed by Robert Nozick. This system is based upon the primacy of a single value rather than a single principle: liberty. Liberty is thought to be the first requirement of society. An institution or law that violates individual liberty has to be rejected even if it may result in greater happiness and increased benefits for others.

Nozick agrees that society is an association of individuals, and that cooperation between these individuals is necessary for economic gains. The holdings of each individual (in income, wealth and the other bases of self-respect) are derived from other people in exchange for goods or services, or received as gifts. An existing pattern of holdings may have come about through application of any of the principles of distribution (to each equally, or to each according to need, effort, contribution, or competence). However, these patterns will be changed by transfers. These transfers, by exchange or gift, can be considered “just” as long as they are voluntary.

Personal Liberty can be expanded from a market system for the exchange of holdings to an ethical system for the evaluation of behaviour. Individuals must be allowed to make informed choices among alternative courses of action leading towards their own welfare. These choices would be considered just, right or proper as long as the same opportunities for informed choices

are extended to others. Justice depends upon equal opportunities for choice and exchange, not upon equal allocations of wealth and income.

What is lacking in this concept of liberty?  It is based on a very narrow definition of liberty which is limited to the negative right not to suffer from the intrusion of others. The right to life, for instance, is the right not to be killed by others. However, it may also include the right to continue living through access to some minimal level of food, shelter, clothing and medical assistance, which come from personal initiative, rather than social cooperation.

SELF-CHECK 1.2

Using a mind map, summarise these five ethical systems:

a. Eternal law theory (Natural law);

b.Classical teleological ethical theory: Utilitarianism;

c. Classical deontological ethical theory: Universalism;

d.Distributive justice theory; and

e. Personal liberty theory.

Complete the following exercises to check your understanding.

EXERCISE 1.1

1. Compare and contrast some of the features of Utilitarianism and Universalism in respect of ethical theory.

2. Discuss some of the weaknesses of each ethical theory that you have studied.

CONCLUSION ON NORMATIVE PHILOSOPHY AS THE BASIS FOR MORAL CHOICE 1.4

As elaborated earlier, there are five major ethical systems. Although they do not outwardly conflict with each other, they cannot be reconciled into a logically consistent whole. Each system expresses only a portion of the truth; and each is incomplete or inadequate as a means of judging the moral content of individual actions or decisions.

What does this mean to managers?The major implication for managers is that there is no single system of belief, with rationally derived standards of moral behaviour or methods of moral reasoning, that can fully guide them in reaching difficult ethical decisions.

What should we do?Instead of using just one ethical system, we should incorporate all five systems and think through the consequences of our actions. Moral reasoning, which utilises all five ethical systems, is not simple or easy, but it does work, especially when combined with economic and legal analysis.

We have looked at all the major systems, now, let us shift our attention to the following two significant ethical perspectives:

Golden rule

Kantian rights

Golden Rule 1.4.1 The Golden Rule is a Christian principle based on verse in the bible “Do unto others as

you would have them do unto you”. This principle can also be found in most, if not all, world religions. It requires identifying various courses of action and choosing the one that treats others the way you would want to be treated. In terms of business organisation, the “others” refers to the organisation’s stakeholders. Stakeholders include the organisation’s investors, partners, employees, unions, customers, suppliers and governments.

Kantian Rights 1.4.2

Derived from the view of philosopher, Immanuel Kant, this perspective assumes that in a moral universe, every person has certain basic rights, as shown in Table 1.2:

Table 1.2: Kantian Rights

Rights Explanation

Free consent People have the right to be treated only as they knowingly and willingly want to be treated.

Privacy People have the right to do what they want in their private lives, and they have the right to reveal the extent of their private activities.

Freedom of conscience

People have the right to refuse to do what violates their moral beliefs as these beliefs reflect commonly accepted norms.

Freedom of criticising

People have the right to conscientiously criticise an organisation’s ethics, as long as their criticisms do not violate the rights of individuals in the organisation.

Fairness If people believe their rights are being violated, they have the right to a fair and impartial hearing.

Under this view of ethics, the morally correct action is the one that minimises violations of these rights. To resolve an ethical dilemma from this viewpoint, one would have to consider which stakeholders are affected by the action and to what extent their rights may be violated.

ACTIVITY 1.3

In your view, are the personal rights expounded by Kant upheld in your organisation? Discuss with your coursemates. 

EXERCISE 1.2

1. What are ethics? How is individual ethics formed?

2. Elaborate on some of the personal rights as indicated by Immanuel Kant.

3. Do you agree with the Golden Rule? How does it contrast with Islamic teaching?

4. In your opinion, what is the most important factor that influences the formation of individual ethics?

5. Read this case study:

You are a senior analyst in a corporation that evaluates companies for possible mergers and acquisitions. If you juggled the figures on a certain company’s financial statement, it would look like the company has the potential for a takeover. Your firm would receive a hefty fee from the acquiring company and your own outlook for increased salary and advancement would improve significantly.

Here are some key points of the good and bad consequences to be weighed:

o Your company’s profits will be enhanced, allowing it to pay higher salaries to employees and higher dividends to shareholders.

o Your own financial and career interests will be enhanced.

o The acquiring company may find itself with a company that is not financially viable and may incur severe losses as a result.

o Your company’s reputation and long-term prospects would be affected if your deception became known.

o Your own personal reputation and future would be jeopardised as well.

By applying any relevant ethical theories that you have studied in this topic, how would you go about evaluating and deciding on this case?

SUMMARY

Ethics refers to an individual’s personal beliefs about right and wrong behaviour.

An individual’s ethics is shaped by a combination of factors such as influences of family and peers, life experiences, personal values and morals and situational factors.

Moral reasoning provides reasons and grounds for determining whether an action is morally right or wrong. Some theorists argue that there is one universal moral standard for everyone (moral absolutism), while others argue that no such standard exists (moral relativism).

Some moralists hold that certain actions are wrong in themselves. Others believe that no action can be judged immoral in itself since circumstances and social conditions play the decisive role in determining whether or not a given action is right or wrong.

Utilitarianism states that the outcome of a decision or actionis of prime importance and that it is the results that truly matter in our treatment of other people. The principle to be followed is that of beneficiency: a decision or act is right, proper and good only if it generates the greatest amount of benefit for the largest number of people at the lowest cost or harm to others.

Meanwhile, Universalism states that it is the intent behind a decision or actionthat is important, for we can never accurately foresee and evaluate all possible results. The principle to be followed is that of consistency: a decision or act is right, proper and good only if we can convince everyone facing the same set of circumstances to make the same decision or perform the same act.

Distributive Justice is based upon the primacy of a single value (justice) rather than a single principle. Belief in the primacy of justice will lead us to make decisions and take actions that are expected to result in compensating benefits for all, especially the least advantaged members of our society.

Personal Liberty is also based upon the primacy of a single value (liberty) rather than a single principle. Belief in the primacy of liberty will lead us to make decisions and take actions that will result in greater happiness and increased benefits for all.

The Eternal Law refers to moral standards that are revealed in scripture or nature to religious leaders or human philosophers. The belief is that law is unchanging and valid for all times.

STAKEHOLDER RELATIONSHIPS TOPIC 2

LEARNING OUTCOMES

By the end of this topic, you should be able to:

1. Identify stakeholders, primary stakeholders and secondary stakeholders;

2.Discuss why organisations should subscribe to the stakeholders view based on the normative, instrumental and descriptive arguments;

3.Discuss the concept of stakeholder management;

4. Identify a firm’s relevant stakeholder based on three elements; and

5.Explain the organisations responsibilities towards its stakeholders.

INTRODUCTION

In this topic, we will discuss the concept of stakeholders. We will also touch on the concept of stakeholder management and management of stakeholder relationships.

THE STAKEHOLDER CONCEPT 2.1

Before we delve into the definition and concept of stakeholders, let us first understand the definition of a “stake”. A stake is an interest, claim or share in an undertaking or enterprise. A large organisation has many stakeholders. In business term, the definition given for stakeholders is as shown below:

“Individuals or groups who can affect or is affected by the actions, decisions, policies, practices or goals of an organisation”.

(Freeman, 1984)

Classification of Stakeholders 2.1.1

Generally, there are two categories of stakeholders based on the nature of their relationship with the organisation. Wheeler and Sillanpaa (1997) have categorised stakeholders into:

Market; and

Non-market stakeholders.

Let us now look into each category in more details.

a. Market Stakeholders/Primary Stakeholders

“Market stakeholders are individuals or groups which have a direct interest in the organisation as well as engaged in economic transactions with the organisation as it produces its goods and services”.

(Lawrence & Weber, 2011)

Primary stakeholders include customers, shareholders, suppliers, creditors and employers. For example, a shareholder as a primary stakeholder contributes capital to an organisation in the form of investment in exchange for dividends. The shareholder can also influence the organisation’s policies as the shareholder can elect members of a firm’s board of directors. They also have the right to vote on firm’s decisions such as mergers and acquisitions.

b. Non-market Stakeholders/Secondary Stakeholders

“Non-market stakeholders include individuals and groups who are not engaged in a direct economic transaction with the organisation but are affected by or can affect its actions”.

(Lawrence & Weber, 2011)

Secondary stakeholders include communities, the media, business support groups, the government and the general public. The media can affect the organisation through news that a newspaper or magazine publishes. While for the community, it can also be affected by the organisation’s policies and decisions.

For example, the health of a community can be at stake when a firm decides to dump its toxic waste into the rivers and streams that the community uses. On the other hand, the community can also affect the organisation’s operations when the community does not welcome an organisation and object to its plans to set up operations in the community’s neighbourhood.

Let us now look at Table 2.1 which shows the examples of an organisation’s market and non-market stakeholders.

Table 2.1: Organisation’s Market and Non-Market Stakeholders

Market Stakeholders Non-Market Stakeholders

Employees Local communities

Owners/Stockholders/Shareholder Social activists

Customers Media

Suppliers Business support groups (e.g. trade associations)

Competitors Government

Retailers/Wholesalers Federal, state and local governments

Creditors General public

SELF-CHECK 2.1

Answer the following questions.

1. What is the definition for the term “stakeholder”?

2. Identify the two types of stakeholders.

Support for the Stakeholder Concept 2.1.2

Donaldson and Preston (1995) identified three arguments for the stakeholder concept. Organisations should follow the stakeholder concept based on these three stakeholder theory arguments:

a. Descriptive Argument

“The descriptive argument describes how organisations manage and interact with its stakeholders”.

(Donaldson & Preston, 1995)

Although an organisation’s financial performance is important, an organisation still needs to be concerned about these aspects:

i. Producing safe and innovative products to its customers;

ii. Providing a safe and healthy work environment to its employees; and

iii. Comply with the government’s regulations.

b. Normative Argument

“The normative argument says that taking care of its stakeholders is simply the right thing for organisations to do. As organisations have vast power and resources, they have a duty toward all those affected by the organisation’s actions”.

(Lawrence & Weber, 2011)

c. Instrumental Argument

“The instrumental argument says that stakeholder theory is an effective corporate strategy. Companies that take into consideration the rights and concerns of their stakeholders tend to perform better in the long run over those who do not”.

(Lawrence & Weber, 2011)

ACTIVITY 2.1

Discuss why organisations should subscribe to the stakeholder view based on these arguments:

a. Descriptive;

b.Normative; and

c. Instrumental.

EXERCISE 2.1

1. What is the difference between a market stakeholder and a non-market stakeholder?

2. Read the following situation.

You are a fruit juice manufacturer. You just learned that a few customers have become sick from drinking your product. You suspect that the juice was not properly pasteurised. You need to ensure this incident causes minimal damage to your reputation.

Identify the stakeholders affected by this incidence.

STAKEHOLDER MANAGEMENT 2.2

Do you know that an organisation has many stakeholders whom it is accountable to? Managers have to manage their relationships well with their organisation’s stakeholder. Failing to address the concerns of their stakeholders can damage a firm’s reputation and ultimately affect its bottom line. Hence, stakeholder management has become increasingly important as managers discover that their organisation stakeholder groups have to be relatively satisfied for the firm to meet its objectives (Carroll & Buchholtz, 2006).

Do you know the meaning for the term “stakeholder management”? Let us look below to know its meaning.

Stakeholder management refers to the process of managing the expectations of the individuals and groups who have an interest in your organisation or will be affected by the organisation’s activities.

Organisations that want to implement a stakeholder management must first identify the firm’s relevant stakeholders. We will discuss this issue in the next section.

EXERCISE 2.2

Do you think it is important for an organisation to engage in stakeholder management? Provide reasons for your answer.

Identifying the Firm’s Relevant Stakeholders 2.2.1

An organisation must identify its relevant stakeholders. We have discussed earlier of the two main types of stakeholders. However, not all stakeholders are relevant to an organisation.

For example, a company like Amazon or Dell which sells its products directly to its customers would not have retailers or distributors. However, distributors would be an important stakeholder for a company like Nestle which sells its products mainly through supermarkets and sundry shops.

In order to identify stakeholders who are relevant to an organisation, managers must understand the characteristics of their stakeholders. A manager may identify a firm’s relevant stakeholder based on these elements:

Stakeholder power

Stakeholder legitimacy

Stakeholder urgency

Stakeholder Power 2.2.2

What is the meaning of the term “stakeholder power”?

“Stakeholder power refers to the ability to use resources to make an event happen or to secure a desired outcome”.

(Lawrence & Weber, 2011)

Stakeholders may have coercive, utilitarian or symbolic power over the organisation.

a. Coercive Power

“Coercive power involves the use of physical force or violence”.

(Thorne, Ferrell, & Ferrell, 2008)

Stakeholder groups such as environmental activists can have coercive power when they protest against an organisation’s policy or action and destroy the organisation’s facilities during their protest.

Figure 2.1 shows some environmentalists gathering support for the cause of the planet.

Figure 2.1: Environmentalists gathering support for a causeSource: http://static.guim.co.uk/sysimages/Environment/Pix/columnists/2010/6/11/1276265770877/Environmental-activits-at-005.jpg

b. Utilitarian Power

“Stakeholders can have utilitarian power when they have the power to control the organisation resources such as financial or materials”.

(Thorne et al., 2008)

c. Symbolic Power

“Stakeholders can possess symbolic power when they have access to or are able to use symbols or prestige”.

(Thorne et al., 2008)

For example, a letter written by a minister on a ministry letter head would have symbolic power compared to a plain letter. The Internet can also be a form of symbolic power when it is able to command the attention of the media or government.

EXERCISE 2.3

Identify at least five stakeholders in your organisation. Explain the types of power these stakeholders have over your organisation.

Stakeholder Legitimacy 2.2.3

Do you know the meaning for this term “stakeholder legitimacy”? Let us refer below to know its meaning.

“Stakeholder legitimacy refers to whether the stakeholder’s claims are justified or proper within a given context. A stakeholder’s claim can be considered legitimate when their claims are judged to be reasonable by other stakeholders and society.”

(Thorne et al., 2008)

For example, it would be legitimate for consumers to expect an organisation to produce safe products for their consumption. Therefore, an organisation would want to address the consumers’ concerns if they are faced with criticism of unhealthy food. Shareholders, institutional investors and board of director members who own shares all have legitimate claims of ownership because they are all owners of the organisation.

Stakeholder Urgency 2.2.4

Urgency refers to how fast the organisation responds to their stakeholders’ needs. The more powerful the stakeholder and the higher the legitimacy of the stakeholder issue, the faster the organisation needs to respond to the particular issue at hand.

According to Mitchell, Agle and Wood (1997), the urgency of an issue will depend on these factors:

a. Time SensitivityTime sensitivity refers to the degree to which managerial delay in attending to the claim or relationship of the stakeholder.

b. CriticalityCriticality refers to the importance of the claim or the relationship to the stakeholder.

SELF-CHECK 2.2

Briefly explain on the following elements:

a. Stakeholder power;

b.Stakeholder legitimacy; and

c. Stakeholder urgency.

d. RESPONSIBILITIES OF THE FIRM TOWARD ITS STAKEHOLDERS 2.3e. When the manager has identified the organisation’s relevant stakeholders, the next logical

question asked would be this:f. What are my firm’s responsibilities to these stakeholders?g. The organisation’s responsibilities toward its stakeholders can be thought of as the company’s

corporate social responsibility (CSR) which will be discussed in Topic 6. An organisation’s social responsibility includes its economic, legal, ethical and philanthropic responsibilities as shown in Table 2.2 below.

Table 2.2: Organisation’s Responsibilities toward its Stakeholders

Responsibilities Explanation

Economic Be profitable; maximise sales and minimise costs. Provide investors with adequate and attractive returns for their investments.

Legal Obey all laws and regulations such as environmental, employment and consumer laws.

Ethical Do what is right, fair and just. Assert ethical leadership in the organisation. Operate the minimum legal requirement.

Philanthropic Be a good corporate citizen; engage in volunteerism. Give support to the community by providing education programmes, healthcare services, cultural and arts programmes.

h. Source: Carroll & Buchholtz (2006)i.

ACTIVITY 2.2j.

Imagine that you have your own firm. Explain your organisation’s responsibilities towards its stakeholders. Provide some examples to support your explanation.

MANAGING STAKEHOLDER RELATIONSHIPS 2.4

Carroll and Buchholtz (2006) identified three strategic steps that can lead organisations to manage their stakeholder relationships successfully and they are:

a. Integrate stakeholder management into the firm’s philosophy, values and visionIdentify your organisation’s missions, values and norms. Then, specify which stakeholder groups and issues are relevant to your organisation.

b. Create vision statements or value statements that include stakeholdersReinforce your organisation’s commitment to its stakeholders in a public statement.

c. Implement a stakeholder performance measurement systemSuch a system should be auditable, integrated and monitored as stakeholder relations are improved. Measurement indicates that there is serious intent to achieve results and the

presence of such a system will ensure the stakeholder’s sustainable commitment to the organisation.

SUMMARY

Stakeholders are individuals or groups who can affect or is affected by the actions, decisions, policies, practices or goals of an organisation.

Stakeholders can be categorised into two: market stakeholders and non-market stakeholders.

Organisations should follow the stakeholder concept based on these three stakeholder theory arguments: descriptive argument, normative argument and instrumental argument.

Managers have to be in good terms with their organisation’s stakeholder. Failure in meeting the needs of their stakeholders can damage the firm’s reputation and ultimately affect its bottom line.

An organisation must clearly identify its relevant stakeholders in order to ensure the continuity of the organisation.

A manager may identify a firm’s relevant stakeholder based on these elements: stakeholder power, stakeholder legitimacy and stakeholder urgency.

The organisation’s responsibilities toward its stakeholders include the following: economic, legal, ethical and philanthropy responsibilities.

The strategic steps that can lead organisations to manage their stakeholder relationships successfully are:

i. Integrate stakeholder management into the firm’s philosophy, values and vision;

ii. Create vision statements or value statements that include stakeholders; and

iii. Implement a stakeholder performance measurement system.