Read the Insuring Uber’s App-On Gap case study in your textbook on page 23 (attached). Then, answer the following two questions:
- Which of the stakeholders mentioned do you think has the most salience, and why?
- What do you think Uber should do in response to the bill introduced by Susan Bonilla, and why?
Need 2 pages about with peer-reviewed citations.
2
CHAPTER ONE
The Corporation
and Its Stakeholders
Business corporations have complex relationships with many individuals and organizations in society.
The term stakeholder refers to all those that affect, or are affected by, the actions of the firm. An
important part of management’s role is to identify a firm’s relevant stakeholders and understand the
nature of their interests, power, and alliances with one another. Building positive and mutually beneficial relationships across organizational boundaries can help enhance a company’s reputation and
address critical social and ethical challenges. In a world of fast-paced globalization, shifting public
expectations and government policies, growing ecological concerns, and new technologies, managers face the difficult challenge of achieving economic results while simultaneously creating value for
all of their diverse stakeholders.
This Chapter Focuses on These Key Learning Objectives:
LO 1-1 Understanding the relationship between business and society and the ways in which business and
society are part of an interactive system.
LO 1-2 Considering the purpose of the modern corporation.
LO 1-3 Knowing what a stakeholder is and who a corporation’s market and nonmarket and internal and
external stakeholders are.
LO 1-4 Conducting a stakeholder analysis and understanding the basis of stakeholder interests and power.
LO 1-5 Recognizing the diverse ways in which modern corporations organize internally to interact with
various stakeholders.
LO 1-6 Analyzing the forces of change that continually reshape the business and society relationship.
Chapter 1 The Corporation and Its Stakeholders 3
Amazon—which some have called the “Earth’s biggest store”—is an important part of
many of our lives. We browse on Amazon, watch on Amazon, and buy on Amazon. We
freely disclose to Amazon our wishes, interests, and willingness to pay. You may well have
purchased or rented this textbook from Amazon.
In 2018, Amazon was the largest Internet retailer in the world, measured both by annual
revenue ($178 billion) and market capitalization (more than $800 billion). It was the
second largest private employer in the United States (after Walmart), with more than
540,000 employees (not counting the additional 120,000 or so temporary workers the company brought on each year during the busy holiday season).1
From its start in 1994 as a
scrappy Seattle start-up selling books online, Amazon had grown at an astonishing pace; in
2017, Amazon was responsible for fully 70 percent of all growth in U.S. online commerce.2
By 2018, the company’s founder and CEO, Jeff Bezos, had become the world’s richest
person, with a net worth greater than $100 billion.3
Shareholders in the company had been
richly rewarded; in early 2018, the price of Amazon’s stock was more than 12 times higher
than it had been a decade earlier. The company was enormously popular with consumers,
who turned to Amazon for one-click convenience, free and speedy delivery, and the ability
to compare a seemingly endless assortment of products on the basis of price and reviews.
Small businesses affiliated with Amazon Marketplace were able to tap into the company’s
global e-commerce platform and unrivaled logistics to reach customers they never could
have reached before. No doubt, many had benefited from Amazon’s success.
Yet the company had also become the target of criticism from many quarters, charged
with destroying brick-and-mortar businesses, relentlessly driving their own employees,
unfairly besting competitors, and pressuring communities for concessions. Consider that:
∙ Much of Amazon’s success had come at the expense of brick-and-mortar stores. Iconic
retailers—such as Macy’s, JCPenney, and Target—had shed thousands of jobs as Amazon
attracted ever-larger slices of consumer spending. A leading economist calculated that
the rise of online commerce had caused the cumulative loss of 1.2 million retailing
jobs—positions such as cashiers, salespeople, and stock clerks—in the United States.4
Many of these jobs were held by women and minorities (who made up 60 percent and
40 percent, respectively, of department store employees).5
Traditional retailing, concluded
Scott Galloway, the author of The Four: The Hidden DNA of Amazon, Apple, Facebook,
and Google, had been “ravaged and depopulated by a single player”—Amazon.6
∙ Amazon’s own employees, by some accounts, were subject to an unusually punishing
work culture. An investigative report by The New York Times, based on interviews with
more than 100 current and former white-collar employees, found a pattern of setting
“unreasonably high” performance standards, continually monitoring performance, and
weeding out employees in a “rank and yank” system that one called “purposeful Darwinism.” Turnover rates were among the highest in the Fortune 500. Said one former
marketer, “Amazon is where overachievers go to feel bad about themselves.”7
1
“Amazon Is Now the Size of a Small Country,” Business Insider, January 16, 2018.
2
“U.S. E-Commerce Sales Grow 16.0% in 2017,” Internet Retailer, at www.digitalcommerce360.com, February 16, 2018.
3
“Jeff Bezos Is Now the Richest Person in History,” http://money.cnn.com, January 9, 2018.
4
Michael Feroli, chief U.S. economist at J.P. Morgan, cited in “Amazon to Add 100,000 Jobs as Brick-and-Mortar Retail Crumbles,” The New York Times, January 12, 2017.
5
“The Silent Crisis of Retail Employment,” The Atlantic, April 18, 2017, and “Decline in Retail Jobs Felt Entirely by Women,”
Institute for Women’s Policy Research, December 2017.
6
Scott Galloway, The Four: Scott Galloway, The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google (New York:
Penguin, 2017), Chapter 2.
7
“Inside Amazon: Wrestling Big Ideas in a Bruising Workplace,” The New York Times, August 15, 2015.
4 Part One Business in Society
∙ Amazon’s control of both online and voice-activated search gave it powerful advantages—
leading to what some saw as unfair competition. One study found that under some conditions, products displayed under “customers who bought this item also bought” were
dominated by Amazon’s own private-label brands.8
Alexa, Amazon’s voice-activated
virtual assistant on Echo and other digital devices, also gave the company an edge. The
consulting firm Bain & Company found that Alexa’s recommendations were biased
toward “Amazon’s Choice” and the company’s own private-label products (after products the customer had previously ordered). “The ‘endless aisle’ just got a lot smaller,”
Bain concluded.9
∙ In 2017, Amazon announced it would invest $5 billion to open a second North American headquarters outside Seattle, promising to create 50,000 new jobs paying $100,000
or more. This was a tantalizing prospect, and 238 cities and regions submitted proposals, with at least six offering financial incentives of $1 billion or more. Some public
officials thought this was well worth it, but others thought taxpayer money should not
be used to subsidize such a successful company. “Blindly giving away the farm isn’t our
style,” said the mayor of San Antonio, Texas, which dropped out of the race.10
Amazon’s experience illustrates, on a particularly large scale, the challenges of managing successfully in a complex network of stakeholders. The company’s actions affected not
only itself, but also many other people, groups, and organizations in society. Customers,
employees, business partners and suppliers, competitors, shareholders, creditors, governments, and local communities all had a stake in Amazon’s decisions.
Every modern company, whether small or large, is part of a vast global business system. Whether a firm has 50 employees or, like Amazon, more than half a million—its
links to customers, suppliers, employees, and communities are certain to be numerous,
diverse, and vital to its success. This is why the relationship between business and society
is important for you to understand as both a citizen and a manager.
Business and Society
Business today is arguably the most dominant institution in the world. The term business
refers here to any organization that is engaged in making a product or providing a service for
a profit. Consider that in the United States today there are 6 million businesses, according
to government estimates, and in the world as a whole, there are uncounted millions more.
Of course, these businesses vary greatly in size and impact. They range from a woman who
helps support her family by selling handmade tortillas by the side of the road in Mexico
City for a few pesos, to ExxonMobil, a huge corporation that employs almost 75,000 workers and earns annual revenues approaching $237 billion in almost every nation in the world.
Society, in its broadest sense, refers to human beings and to the social structures they
collectively create. In a more specific sense, the term is used to refer to segments of
humankind, such as members of a particular community, nation, or interest group. As a set
of organizations created by humans, business is clearly a part of society. At the same time,
it is also a distinct entity, separated from the rest of society by clear boundaries. Business
8
“The Antitrust Case Against Facebook, Google, and Amazon,” The Wall Street Journal, January 16, 2018, and “How
Amazon Steers Shoppers to Its Own Products,” The Wall Street Journal, June 23, 2018; see also Galloway, op. cit.
9
“Dreaming of an Amazon Christmas?” Bain & Company, November 9, 2017.
10 “Amazon Just Revealed the Top Cities for HQ2—Here Are the Ones Throwing Hundreds of Millions to Land It,” Business
Insider, January 18, 2018, and “As Cities Woo Amazon to Build Second Headquarters, Incentives Are Key,” The Wall Street
Journal, October 19, 2017.
Chapter 1 The Corporation and Its Stakeholders 5
is engaged in ongoing exchanges with its external environment across these dividing lines.
For example, businesses recruit workers, buy supplies, and borrow money; they also sell
products, donate time, and pay taxes. This book is broadly concerned with the relationship between business and society. A simple diagram of the relationship between the two
appears in Figure 1.1.
As the Amazon example that opened this chapter illustrates, business and society are
highly interdependent. Business activities impact other activities in society, and actions
by various social actors and governments continuously affect business. To manage these
interdependencies, managers need an understanding of their company’s key relationships
and how the social and economic system of which they are a part affects, and is affected
by, their decisions.
A Systems Perspective
General systems theory, first introduced in the 1940s, argues that all organisms are open to,
and interact with, their external environments. Although most organisms have clear boundaries, they cannot be understood in isolation, but only in relationship to their surroundings.
This simple but powerful idea can be applied to many disciplines. For example, in botany,
the growth of a plant cannot be explained without reference to soil, light, oxygen, moisture,
and other characteristics of its environment. As applied to management theory, the systems
concept implies that business firms (social organisms) are embedded in a broader social
structure (external environment) with which they constantly interact. Corporations have
ongoing boundary exchanges with customers, governments, competitors, suppliers, communities, and many other individuals and groups. Just as good soil, water, and light help a
plant grow, positive interactions with society benefit a business firm.
Like biological organisms, moreover, businesses must adapt to changes in the environment. Plants growing in low-moisture environments must develop survival strategies, like
the cactus that evolves to store water in its leaves. Similarly, a telecommunications company in a newly deregulated market must learn to compete by changing the products and
services it offers. The key to business survival is often this ability to adapt effectively to
changing conditions. In business, systems theory provides a powerful tool to help managers
conceptualize the relationship between their companies and their external environments.
FIGURE 1.1
Business and Society:
An Interactive
System Society
Business
6 Part One Business in Society
Systems theory helps us understand how business and society, taken together, form
an interactive social system. Each needs the other, and each influences the other. They
are entwined so completely that any action taken by one will surely affect the other.
They are both separate and connected. Business is part of society, and society penetrates
far and often into business decisions. In a world where global communication is rapidly
expanding, the connections are closer than ever before. Throughout this book we discuss
examples of organizations and people that are grappling with the challenges of, and
helping to shape, business–society relationships.
The Stakeholder Theory of the Firm
What is the purpose of the modern corporation? To whom, or what, should the firm be responsible?11 No question is more central to the relationship between business and society.
In the shareholder theory of the firm (sometimes also called the ownership theory), the
firm is seen as the property of its owners. The purpose of the firm is to maximize its longterm market value, that is, to make the most money it can for shareholders who own stock
in the company. Managers and boards of directors are agents of shareholders and have no
obligations to others, other than those directly specified by law. In this view, owners’ interests are paramount and take precedence over the interests of others.
A contrasting view, called the stakeholder theory of the firm, argues that corporations
serve a broad public purpose: to create value for society. All companies must make a profit
for their owners; indeed, if they did not, they would not long survive. However, corporations create many other kinds of value as well, such as professional development for their
employees and innovative new products for their customers. In this view, corporations
have multiple obligations, and all stakeholders’ interests must be taken into account. This
perspective was well expressed by Laurence Fink, the CEO of BlackRock, a global firm
that manages more than $5 trillion worth of assets for its clients. In his 2018 letter to
CEOs, Fink stated that “. . . every company must not only deliver financial performance,
but also show how it makes a positive contribution to society. Companies must benefit all
of their stakeholders, including shareholders, employees, customers, and the communities
in which they operate.”12
Supporters of the stakeholder theory of the firm make three core arguments for their
position: descriptive, instrumental, and normative.13
The descriptive argument says that the stakeholder view is simply a more realistic
description of how companies really work. Managers have to pay keen attention, of course,
to their quarterly and annual financial performance. Keeping Wall Street satisfied by managing for growth—thereby attracting more investors and increasing the stock price—is
a core part of any top manager’s job. But the job of management is much more complex
than this. In order to produce consistent results, managers have to be concerned with producing high-quality and innovative products and services for their customers, attracting
11 For summaries of contrasting theories of the purpose of the firm, see Margaret M. Blair, “Whose Interests Should Corporations Serve,” in Margaret M. Blair and Bruce K. MacLaury, Ownership and Control: Rethinking Corporate Governance for the
Twenty-First Century (Washington, DC: Brookings Institution, 1995), Ch. 6, pp. 202–34; and James E. Post, Lee E. Preston,
and Sybille Sachs, Redefining the Corporation: Stakeholder Management and Organizational Wealth (Palo Alto, CA: Stanford
University Press, 2002).
12 “Larry Fink’s Annual [2018] Letter to CEOs: A Sense of Purpose,” at www.blackrock.com.
13 The descriptive, instrumental, and normative arguments are summarized in Thomas Donaldson and Lee E. Preston, “The
Stakeholder Theory of the Corporation: Concepts, Evidence and Implications,” Academy of Management Review 20, no. 1
(1995), pp. 65–71. See also, Post, Preston, and Sachs, Redefining the Corporation, Ch. 1.
Chapter 1 The Corporation and Its Stakeholders 7
and retaining talented employees, and complying with a plethora of complex government
regulations. As a practical matter, managers direct their energies toward all stakeholders,
not just owners.
In what became known as the “dollar store wars,” two companies made
competing bids to buy Family Dollar, a U.S. discount retail chain based in
Charlotte, North Carolina—each with very different consequences for
stakeholders. One suitor, Dollar Tree, offered $76.50 per share for the company,
while the other, Dollar General, offered $80—seemingly a better deal for
shareholders. But the Dollar General deal faced likely government antitrust
scrutiny and would probably have required the closure of thousands of stores,
throwing employees out of work and depriving low-income communities of
access to a discount store. In the end, after considering the impact on all
stakeholders, Family Dollar’s management recommended the lower-priced offer,
and three-quarters of its shareholders agreed.14
The instrumental argument says that stakeholder management is more effective as a
corporate strategy. A wide range of studies have shown that companies that behave responsibly toward multiple stakeholder groups perform better financially, over the long run,
than those that do not. (This empirical evidence is further explored in Chapter 3.) These
findings make sense, because good relationships with stakeholders are themselves a source
of value for the firm. Attention to stakeholders’ rights and concerns can help produce motivated employees, satisfied customers, committed suppliers, and supportive communities,
all good for the company’s bottom line.
The normative argument says that stakeholder management is simply the right thing to
do. Corporations have great power and control vast resources; these privileges carry with
them a duty toward all those affected by a corporation’s actions. Moreover, all stakeholders, not just owners, contribute something of value to the corporation. A skilled engineer
at Microsoft who applies his or her creativity to solving a difficult programming problem
has made a kind of investment in the company, even if it is not a monetary investment. Any
individual or group who makes a contribution, or takes a risk, has a moral right to some
claim on the corporation’s rewards.15
A basis for both the shareholder and stakeholder theories of the firm exists in law. The
legal term fiduciary means a person who exercises power on behalf of another, that is, who
acts as the other’s agent. In U.S. law, managers are considered fiduciaries of the owners
of the firm (its shareholders) and have an obligation to run the business in their interest.
These legal concepts are clearly consistent with the shareholder theory of the firm. However, other laws and court cases have given managers broad latitude in the exercise of
their fiduciary duties. In the United States (where corporations are chartered not by the
federal government but by the states), most states have passed laws that permit managers
to take into consideration a wide range of other stakeholders’ interests, including those of
employees, customers, creditors, suppliers, and communities. (Benefit corporations, firms
with a special legal status that obligates them to do so, are further discussed in Chapter 3.)
14 “Family Dollar Shareholders Approve Sale to Dollar Tree,” Charlotte Observer, January 22, 2015.
15 Abe Zakhem and Daniel E. Palmer, “Normative Stakeholder Theory,” in David M. Wasieleski and James Weber (eds.),
Stakeholder Management, Business and Society 360: Volume 1, pages 49–74 (Bingley, United Kingdom: Emerald Publishing
Ltd., 2017). Another formulation of this point has been offered by Robert Phillips, who argues for a principle of stakeholder
fairness. This states that “when people are engaged in a cooperative effort and the benefits of this cooperative effort are
accepted, obligations are created on the part of the group accepting the benefit” [i.e., the business firm]. Robert Phillips,
Stakeholder Theory and Organizational Ethics (San Francisco: Berrett-Koehler, 2003), p. 9 and Ch. 5.
8 Part One Business in Society
In addition, many federal laws extend specific protections to various groups of stakeholders, such as those that prohibit discrimination against employees or grant consumers the
right to sue if harmed by a product.
In other nations, the legal rights of nonowner stakeholders are often more fully developed than in the United States. For example, a number of European countries—including
Germany, Norway, Austria, Denmark, Finland, and Sweden—require public companies
to include employee members on their boards of directors, so that their interests will be
explicitly represented. Under the European Union’s so-called harmonization statutes, managers are specifically permitted to take into account the interests of customers, employees,
creditors, and others.
In short, while the law requires managers to act on behalf of shareholders, it also gives
them wide discretion—and in some instances requires them—to manage on behalf of the
full range of stakeholder groups. The next section provides a more formal definition and an
expanded discussion of the stakeholder concept.
The Stakeholder Concept
The term stakeholder refers to persons and groups that affect, or are affected by, an organization’s decisions, policies, and operations.16 The word stake originally meant a pointed
stick or post. The word later became used as a verb, as when a person was said to mark
territory with a stake to assert ownership—that is, to stake a claim.17 In the context of management theory, stake is used more abstractly to mean an interest in—or claim on—a business enterprise. Those with a stake in the firm’s actions include such diverse groups as
customers, employees, shareholders (also called stockholders), governments, suppliers,
professional and trade associations, social and environmental activists, and nongovernmental organizations. The term stakeholder is not the same as stockholder, although the
words sound similar. Stockholders—individuals or organizations that own shares of a company’s stock—are one of several kinds of stakeholders.
Business organizations are embedded in networks involving many participants. Each
of these participants has a relationship with the firm, based on ongoing interactions. Each
of them shares, to some degree, in both the risks and rewards of the firm’s activities. And
each has some kind of claim on the firm’s resources and attention, based on law, moral
right, or both. The number of these stakeholders and the variety of their interests can be
large, making a company’s decisions very complex, as the Amazon example illustrates.
Managers make good decisions when they pay attention to the effects of their decisions on stakeholders, as well as stakeholders’ effects on the company. On the positive
side, strong relationships between a corporation and its stakeholders are an asset that adds
value. On the negative side, some companies disregard stakeholders’ interests, either out
of the belief that the stakeholder is wrong or out of the misguided notion that an unhappy
customer, employee, or regulator does not matter. Such attitudes often prove costly to the
company involved. Today, for example, companies know that they cannot locate a factory
or store in a community that strongly objects. They also know that making a product that is
perceived as unsafe invites lawsuits and jeopardizes market share.
16 The term stakeholder was first introduced in 1963 but was not widely used in the management literature until the publication of R. Edward Freeman’s Strategic Management: A Stakeholder Approach (Marshfield, MA: Pitman, 1984). For a
comprehensive review of the stakeholder management literature, see Samantha Miles, “Stakeholder Theory Classification,
Definitions and Essential Contestability,” in David M. Wasieleski and James Weber (eds.) Stakeholder Management, Business
and Society 360: Volume 1, pages 21–48 (Bingley, United Kingdom: Emerald Publishing Limited, 2017).
17 “Origin and Meaning of Stake,” Online Etymology Dictionary, at www.etymonline.com.
9
Different Kinds of Stakeholders
Business interacts with society in many diverse ways, and a company’s relationships with
various stakeholders differ.
Market stakeholders are those that engage in economic transactions with the company
as it carries out its purpose of providing society with goods and services. Each relationship
between a business and one of its market stakeholders is based on a unique transaction, or
two-way exchange. Shareholders invest in the firm and in return receive the potential for
dividends and capital gains. Creditors loan money and collect payments of interest and
principal. Employees contribute their skills and knowledge in exchange for wages, benefits, and the opportunity for personal satisfaction and professional development. In return
for payment, suppliers provide raw materials, energy, services, finished products, and other
inputs; and wholesalers, distributors, and retailers engage in market transactions with the
firm as they help move the product from plant to sales outlets to customers. All businesses
need customers who are willing to buy their products or services.
The puzzling question of whether or not managers should be classified as stakeholders
along with other employees is discussed in Exhibit 1.A.
Nonmarket stakeholders, by contrast, are people and groups who—although they do
not engage in direct economic exchange with the firm—are nonetheless affected by or
can affect its actions. Nonmarket stakeholders include the community, various levels of
government, nongovernmental organizations, business support groups, competitors, and
the general public. Nonmarket stakeholders are not necessarily less important than others,
simply because they do not engage in direct economic exchange with a business. On the
contrary, interactions with such groups can be critical to a firm’s success or failure, as
shown in the following example.
In late 2017, a company called Energy Management Inc. (EMI) said it would finally
call off its sixteen-year effort to build a wind farm off the shore of Cape Cod,
Massachusetts, to supply clean, renewable power to New England customers. The
project, called Cape Wind, had generated intense opposition from residents of Cape
Are Managers Stakeholders?
Are managers, especially top executives, stakeholders? This has been a contentious issue in stakeholder
theory.
On one hand, the answer clearly is “yes” Like other stakeholders, managers are impacted by the firm’s
decisions. As employees of the firm, managers receive compensation—often very generous compensation,
as shown in Chapter 13. Their managerial roles confer opportunities for professional advancement, social
status, and power over others. Managers benefit from the company’s success and are hurt by its failure. For
these reasons, they might properly be classified as employees.
On the other hand, top executives are agents of the firm and are responsible for acting on its behalf. In
the stakeholder theory of the firm, their role is to integrate stakeholder interests, rather than to promote their
own more narrow, selfish goals. For these reasons, they might properly be classified as representatives of the
firm itself, rather than as one of its stakeholders.
Management theory has long recognized that these two roles of managers potentially conflict. The main
job of executives is to act for the company, but all too often they act primarily for themselves. Consider, for
example, the many top executives of Lehman Brothers, MF Global, and Merrrill Lynch, who enriched themselves personally at the expense of shareholders, employees, customers, and other stakeholders. The challenge of persuading top managers to act in the firm’s best interest is further discussed in Chapter 13.
Exhibit 1.A
10 Part One Business in Society
Cod and nearby islands, who were concerned that its 130 wind turbines would spoil
the view and get in the way of boats. A nonprofit group called Save Our Sound filed
dozens of lawsuits, charging possible harm to wildlife, increased electricity rates,
and danger to aircraft. Local utilities had withdrawn their commitments to buy
power from the wind farm, and state regulators had denied permission for a power
line connection to the mainland. “We were kept in a repeated sudden death period,”
said the company’s discouraged owner, using a football analogy. “And the goal
posts kept moving.”18
In this instance, various stakeholders were able to block the company’s plans completely—
even though many did not have a market relationship with it.
Theorists also distinguish between internal stakeholders and external stakeholders.
Internal stakeholders are those, such as employees and managers, who are employed by the
firm. They are “inside” the firm, in the sense that they contribute their effort and skill, usually at a company worksite. External stakeholders, by contrast, are those who—although
they may have important transactions with the firm—are not directly employed by it.
The classification of government as a nonmarket stakeholder has been controversial
in stakeholder theory. Most theorists say that government is a nonmarket stakeholder (as
does this book) because it does not normally conduct any direct market exchanges (buying
and selling) with business. However, money often flows from business to government in
the form of taxes and fees, and sometimes from government to business in the form of
subsidies or incentives. Moreover, some businesses—defense contractors for example—do
sell directly to the government and receive payment for goods and services rendered. For
this reason, a few theorists have called government a market stakeholder of business. And,
in a few cases, the government may take a direct ownership stake in a company—as the
U.S. government did after the financial crisis of 2008–09 when it invested in several banks
and auto companies, becoming a shareholder of these firms. Government also has special
influence over business because of its ability to charter and tax corporations, as well as
make laws that regulate their activities. The unique relationship between government and
business is discussed throughout this book.
Other stakeholders also have some market and some nonmarket characteristics. For
example, business support groups, such as the Chamber of Commerce, are normally considered a nonmarket stakeholder. However, companies may support the Chamber of Commerce with their membership dues—a market exchange. Communities are a nonmarket
stakeholder, but receive taxes, philanthropic contributions, and other monetary benefits
from businesses. These subtleties are further explored in later chapters.
Modern stakeholder theory recognizes that most business firms are embedded in a complex web of stakeholders, many of which have independent relationships with each other.19
In this view, a business firm and its stakeholders are best visualized as an interconnected
network. Imagine, for example, an electronics company, based in the United States, that
produces smartphones, tablets, and music players. The firm employs people to design,
engineer, and market its devices to customers in many countries. Shares in the company
18 “Now It’s Official: Cape Wind Project Dead,” Boston Globe, December 1, 2017, and “After 16 Years, Hopes for Cape Cod
Wind Farm Float Away,” The New York Times, December 19, 2017. The story of the opposition to Cape Wind is told in Robert
Whitcomb and Wendy Williams, Cape Wind: Money, Celebrity, Energy, Class, Politics, and the Battle for Our Energy Future
(New York: PublicAffairs, 2008).
19 Timothy J. Rowley, “The Power of and in Stakeholder Networks,” in David M. Wasieleski and James Weber (eds.) Stakeholder Management, Business and Society 360: Volume 1, pp. 101–122 (Bingley, United Kingdom: Emerald Publishing
Limited, 2017).
Chapter 1 The Corporation and Its Stakeholders 11
are owned by investors around the world, including many of its own employees and managers. Production is carried out by suppliers in Asia. Banks provide credit to the company,
as well as to other companies. Competing firms sell their products to some of the same
customers, and also contract production to some of the same Asian suppliers. Nongovernmental organizations may seek to lobby the government concerning the firm’s practices,
and may count some employees among their members. A visual representation of this
company and its stakeholders is shown in Figure 1.2.
As Figure 1.2 suggests, some individuals or groups may play multiple stakeholder roles.
Some theorists use the term role sets to refer to this phenomenon. For example, a person
may work at a company, but also live in the surrounding community, own shares of company stock in his or her 401(k) retirement account, and even purchase the company’s products from time to time. This person has several stakes in a company’s actions.
Later sections of this book (especially Chapters 13 through 19) will discuss in more
detail the relationship between business and its various stakeholders.
Stakeholder Analysis
An important part of the modern manager’s job is to identify relevant stakeholders and to
understand both their interests and the power they may have to assert these interests. This
process is called stakeholder analysis. The organization from whose perspective the analysis is conducted is called the focal organization.
FIGURE 1.2
A Firm and its
Stakeholders
Business
Firm
Governments
Customers
Shareholders
Employees
Creditors
Competitors
Suppliers
Nongovernmental
organizations
12 Part One Business in Society
The first step of a stakeholder analysis is for managers of the focal organization to
identify the issue at hand. For example, in the Cape Wind situation discussed earlier in this
chapter, Energy Management Inc. had to analyze how to win regulatory approval for the
construction of its wind farm. Once the issue is determined, managers must ask four key
questions, as discussed below and summarized in Figure 1.3.
Who are the relevant stakeholders?
The first question requires management to identify and map the relevant stakeholders.
Exhibit 1.B, which appears later in this chapter, provides a guide. However, not all stakeholders listed will be relevant in every management situation. For example, a privately held
firm will not have shareholders. Some businesses sell directly to customers online, and
therefore will not have retailers. In other situations, a firm may have a stakeholder—say,
a creditor that has loaned money—but this group is not relevant to a particular issue that
management faces.
But stakeholder analysis involves more than simply identifying stakeholders; it also
involves understanding the nature of their interests, power, legitimacy, and links with one
another.
Stakeholder Interests
What are the interests of each stakeholder?
Each stakeholder has a unique relationship to the organization, and managers must respond
accordingly. Stakeholder interests are, essentially, the nature of each group’s stake. What
are their concerns, and what do they want from their relationship with the firm?20
Shareholders, for their part, have an ownership interest in the firm. In exchange for their
investment, shareholders expect to receive dividends and, over time, capital appreciation.
The economic health of the corporation affects these people financially; their personal
wealth—and often, their retirement security—is at stake. They may also seek to achieve
social objectives through their choice of investments. Customers, for their part, are most
20 A full discussion of the interests of stakeholders may be found in R. Edward Freeman, Ethical Theory and Business
(Englewood Cliffs, NJ: Prentice Hall, 1994).
FIGURE 1.3
The Four Key
Questions of
Stakeholder Analysis
Who are the relevant stakeholders?
What are the interests of each stakeholder?
What is the power of each stakeholder?
How are coalitions likely to form?
Chapter 1 The Corporation and Its Stakeholders 13
interested in gaining fair value and quality in exchange for the purchase price of goods and
services. Suppliers wish to obtain profitable orders, use their capacity efficiently, and build
stable relationships with their business customers. Employees, in exchange for their time
and effort, want to receive fair compensation and an opportunity to develop their job skills.
Governments, public interest groups, and local communities have another sort of relationship with the company. In general, their stake is broader than the financial stake of owners,
customers, and suppliers. They may wish to protect the environment, assure human rights,
or advance other broad social interests. Managers need to understand these complex and
often intersecting stakeholder interests.
Stakeholder Power
What is the power of each stakeholder?
Stakeholder power means the ability to use resources to make an event happen or to secure
a desired outcome. Stakeholders have five different kinds of power: voting power, economic power, political power, legal power, and informational power.
Voting power means that the stakeholder has a legitimate right to cast a vote. Shareholders typically have voting power proportionate to the percentage of the company’s stock
they own. They typically have an opportunity to vote on such major decisions as mergers
and acquisitions, the composition of the board of directors, and other issues that may come
before the annual meeting. (Shareholder voting power should be distinguished from the
voting power exercised by citizens, which is discussed below.)
For example, Starboard Value LP, a New York-based hedge fund, used its voting
power as a shareholder to force change in a company it had invested in. Starboard
bought more than 10 percent of the shares of Mellanox Technologies, an Israeli
semiconductor company, and called for radical change, slamming management for
“weak execution,” “excessive spending,” and “missed growth opportunities.” When
Mellanox did not respond aggressively enough, in 2018 Starboard and its allies
fielded their own slate of nominees in the election for the board of directors and
organized support from other voting shareholders. The company eventually compromised with Starboard, agreeing to add two of the activists’ nominees to the
board and a third if performance goals were not met. In recent years, activist investors like Starboard Value have won one board seat for every two board election
campaigns they have waged.21
Suppliers, customers, employees, and other stakeholders have economic power with the
company. Suppliers, for example, can withhold supplies or refuse to fill orders if a company fails to meet its contractual responsibilities. Customers may refuse to buy a company’s products or services if the company acts improperly. They can boycott products if they
believe the goods are too expensive, poorly made, or unsafe. Employees, for their part, can
refuse to work under certain conditions, a form of economic power known as a strike or
slowdown. Economic power often depends on how well organized a stakeholder group is.
For example, workers who are organized into unions usually have more economic power
than do workers who try to negotiate individually with their employers.
Governments exercise political power through legislation, regulations, or lawsuits.
While government agencies act directly, other stakeholders use their political power
21 “Mellanox, Starboard Settle on New Board Members,” Reuters, June 19, 2018; “Starboard Value to Launch Proxy Fight for
Entire Board at Mellanox,” The Wall Street Journal, January 17, 2018; and “Review and Analysis of 2017 U.S. Shareholder
Activism,” Sullivan & Cromwell LLP, March 26, 2018.
14 Part One Business in Society
indirectly by urging government to use its powers by passing new laws or enacting regulations. Citizens may also vote for candidates that support their views with respect to government laws and regulations affecting business, a different kind of voting power than the one
discussed above. Stakeholders may also exercise political power directly, as when social,
environmental, or community activists organize to protest a particular corporate action.
Stakeholders have legal power when they bring suit against a company for damages,
based on harm caused by the firm; for instance, lawsuits brought by customers for damages
caused by defective products, brought by employees for damages caused by workplace
injury, or brought by environmentalists for damages caused by pollution or harm to species
or habitat. After the mortgage lender Countrywide collapsed, many institutional shareholders, such as state pension funds, sued Bank of America (which had acquired Countrywide) to recoup some of their losses.
Finally, stakeholders have informational power when they have access to valuable data,
facts, or details and are able to bring their own information and perspectives to the attention of the public or key decision makers. With the explosive growth of technologies that
facilitate the sharing of information, this kind of stakeholder power has become increasingly important.
Consumers’ ability to use social networks to express their views about businesses
they like—and do not like—has given them power they did not previously have.
For example, Yelp Inc. operates a website where people can search for local
businesses, post reviews, and read others’ comments. In 2016, a dozen years after
its launch, Yelp attracted 145 million unique visitors every month. Its reviewers
collectively have gained considerable influence. Restaurants, cultural venues,
hair salons, and other establishments can attract customers with five-star ratings
and “People Love Us on Yelp” stickers in their windows—but, by the same
token, can be badly hurt when reviews turn nasty. A Harvard Business School
study reported that a one-star increase in an independent restaurant’s Yelp rating
led to a 5 to 9 percent increase in revenue. Some businesses have complained that
Yelp reviewers have too much power. “My business just died,” said the sole
proprietor of a housecleaning business. “Once they locked me into the 3.5 stars, I
wasn’t getting any calls.”22
Activists often try to use all of these kinds of power when they want to change a company’s policy. For example, human rights activists wanted to bring pressure on Unocal Corporation to change its practices in Burma (Myanmar), where it had entered into a joint venture
with the government to build a gas pipeline. Critics charged that many human rights violations occurred during this project, including forced labor and relocations. In an effort to
pressure Unocal to change its behavior, activists organized protests at shareholder meetings
(voting power), called for boycotts of Unocal products (economic power), promoted local
ordinances prohibiting cities from buying from Unocal (political power), brought a lawsuit
for damages on behalf of Burmese villagers (legal power), and gathered information about
government abuses by interviewing Burmese refugees and publicizing the results online
(informational power). These activists increased their chances of success by mobilizing
many kinds of power. This combination of tactics eventually forced Unocal to pay compensation to people whose rights had been violated and to fund education and health care
projects in the pipeline region.23
22 Michael Luca, “Reviews, Reputation, and Revenue: The Case of Yelp.Com,” Harvard Business School NOM Unit Working
Paper No. 12-016, March 16, 2016; and “Is Yelp Fair to Businesses?” PC World, November 15, 2011.
23 Further information about the campaign against Unocal is available at www.earthrights.org/unocal.
Chapter 1 The Corporation and Its Stakeholders 15
Exhibit 1.B provides a schematic summary of some of the main interests and powers of
both market and nonmarket stakeholders.
Stakeholder Coalitions
An understanding of stakeholder interests and power enables managers to answer the final
question of stakeholder analysis regarding coalitions.
How are coalitions likely to form?
Not surprisingly, stakeholder interests often coincide. For example, consumers of fresh
fruit and farmworkers who harvest that fruit in the field may have a shared interest in
reducing the use of pesticides, because of possible adverse health effects from exposure to
chemicals. When their interests are similar, stakeholders may form coalitions, temporary
alliances to pursue a common interest. Companies may be both opposed and supported by
stakeholder coalitions, as shown in the example of the controversial Keystone XL pipeline.
TransCanada, a major North American energy company, sought approval to build a
pipeline from Alberta, Canada, to Steele City, Nebraska, where it would connect to
existing pipelines running to refineries and ports along the Gulf Coast. In opposing
the Keystone XL pipeline, environmentalists argued it would enable the export of
oil extracted from Canadian tar sands, an energy-intensive and dirty process. When
burned, the tar sands oil would release carbon dioxide, contributing to further climate change, and spills from the pipeline could foul water supplies. They were
joined in coalition by other groups, such as ranchers, farmers, and Native Americans whose land would be crossed by the pipeline. On the other side, construction
unions, many local governments, and business groups supported the pipeline, saying that it would create jobs, reduce U.S. dependence on foreign oil, and provide a
safer method of transport than trains or tanker trucks. In 2018, debate still raged,
and construction on the project had not begun.24
Stakeholder coalitions are not static. Groups that are highly involved with a company
today may be less involved tomorrow. Issues that are controversial at one time may be
uncontroversial later; stakeholders that are dependent on an organization at one time may
be less so at another. To make matters more complicated, the process of shifting coalitions does not occur uniformly in all parts of a large corporation. Stakeholders involved
with one part of a large company often have little or nothing to do with other parts of the
organization.
The discussion case at the end of this chapter describes the coalitions that developed in
favor of and opposition to new regulations that would require the ride-hailing start-up Uber
to insure drivers logged onto its system to look for customers.
Another variation of stakeholder analysis focuses on stakeholder salience. Some scholars have suggested that managers pay the most attention to stakeholders possessing greater
salience. (Something is salient when it stands out from a background, is seen as important,
or draws attention.) Stakeholders stand out to managers when they have power, legitimacy,
and urgency. This section has already discussed various forms of stakeholder power. Legitimacy refers to the extent to which a stakeholder’s actions are seen as proper or appropriate
by the broader society, because they are clearly affected by the company’s actions. Urgency
refers to the time-sensitivity of a stakeholder’s claim, that is, the extent to which it demands
24 “Keystone XL Pipeline Has Enough Oil Suppliers, Will be Built, TransCanada Says,” Inside Climate News, January 18, 2018;
“Keystone Pipeline Pros, Cons and Steps to a Final Decision,” The New York Times, November 18, 2014.
16
Stakeholders: Nature of Interest
Exhibit 1.B and Power
Stakeholder
Nature of Interest—
Stakeholder Wishes To:
Nature of Power—Stakeholder
Influences Company By:
Market Stakeholders
Employees ■ Maintain stable employment in firm
■ Receive fair pay for work and mandated
benefits
■ Work in safe, comfortable environment
■ Union bargaining power
■ Work actions or strikes
■ Publicity
Shareholders ■ Receive a satisfactory return on
investments (dividends)
■ Realize appreciation in stock value over
time
■ Exercising voting rights based on share
ownership
■ Exercising rights to inspect company
books and records
Customers ■ Receive fair exchange: value and quality
for money spent
■ Receive safe, reliable products
■ Receive accurate information
■ Be able to voice concerns
■ Purchasing goods from competitors
■ Boycotting companies whose products
are unsatisfactory or whose policies are
unacceptable
Suppliers ■ Receive regular orders for goods
■ Be paid promptly for supplies delivered
■ Use capacity efficiently
■ Build stable relationships with business
customers
■ Be treated ethically
■ Refusing to meet orders if conditions of
contract are breached
■ Supplying to competitors
Retailers, Wholesalers ■ Receive quality goods in a timely fashion
at reasonable cost
■ Offer reliable products that consumers
trust and value
■ Buying from other suppliers if terms of
contract are unsatisfactory
■ Boycotting companies whose goods or
policies are unsatisfactory
Creditors ■ Receive repayment of loans
■ Collect debts and interest
■ Calling in loans if payments are not made
■ Utilizing legal authorities to repossess or
take over property if loan payments are
severely delinquent
immediate action. The more of these three attributes a stakeholder possesses, the greater
the stakeholder’s salience and the more likely that managers will notice and respond.25
Stakeholder Mapping
Once managers have conducted a stakeholder analysis, they can use it to develop a
stakeholder map, a visual representation of the relationships among stakeholder interests, power, and coalitions with respect to a particular issue.26 (A stakeholder map can
25 Ronald K. Mitchell, Bradley R. Agle, and Donna J. Wood, “Toward a Theory of Stakeholder Identification and Salience: Defining
the Principle of Who and What Really Counts,” Academy of Management Review 22, no. 4 (1997), pp. 853–86.
26 For two alternative approaches to stakeholder mapping, see David Saiia and Vananh Le, “A Map Leading to Less Waste,”
Proceedings of the International Association for Business and Society 20: 302–13 (2009); and Robert Boutilier, Stakeholder Politics: Social Capital, Sustainable Development, and the Corporation (Sheffield, UK: Greenleaf Publishing, 2009), Chs. 6 and 7.
17
Stakeholder
Nature of Interest—
Stakeholder Wishes To:
Nature of Power—Stakeholder
Influences Company By:
Nonmarket Stakeholders
Communities ■ Employ local residents in the company
■ Ensure that the local environment is
protected
■ Ensure that the local area is developed
■ Refusing to extend additional credit
■ Issuing or restricting operating licenses
and permits
■ Lobbying government for regulation of
the company’s policies or methods of
land use and waste disposal
Nongovernmental
organizations
■ Monitor company actions and policies
to ensure that they conform to legal and
ethical standards
■ Promote social and economic development
■ Gaining broad public support through
publicizing the issue
■ Lobbying government for regulation of
the company
Business support
groups (e.g., trade
associations)
■ Provide research and information
which will help the company or industry
perform in a changing environment
■ Using its staff and resources to assist
company in business endeavors and
development efforts
■ Providing legal or “group” political
support beyond that which an individual
company can provide for itself
Governments ■ Promote economic development
■ Encourage social improvements
■ Raise revenues through taxes
■ Adopting regulations and laws
■ Issuing licenses and permits
■ Allowing or disallowing commercial activity
The general public ■ Protect social values
■ Minimize risks
■ Achieve prosperity for society
■ Receive fair and honest communication
■ Networking with other stakeholders
■ Pressing government to act
■ Condemning or praising individual
companies
Competitors ■ Compete fairly
■ Cooperate on industry-wide or
community issues
■ Seek new customers
■ Pressing government for fair competition
policies
■ Suing companies that compete unfairly
also be used to represent stakeholder salience, to help a firm identify which stakeholders
may require more of their attention.) Consider the following example:
In Anaheim, California, a real estate developer called SunCal purchased a large lot
near to the Disneyland theme park. SunCal planned to build condominiums, with
15 percent of the units set aside for below-market-rate rental apartments. Because
the site was in the resort district, the developer required special permission from
the city council to proceed. Affordable housing advocates quickly backed SunCal’s
plans. Some unions representing Disney employees also supported the idea, as did
environmentalists drawn by the prospect of reducing long commutes, a contributor
to the region’s air pollution. Disney, however, strenuously opposed SunCal’s plan,
arguing that the land should be used only for tourism-related development such as
hotels and restaurants; the company was supported by the chamber of commerce
and various businesses in the resort district. The city council itself was split.
18 Part One Business in Society
If SunCal conducted a stakeholder analysis of this situation, it would conclude that
the interests of relevant stakeholders were divided. Some, including Disney and various local businesses and some politicians, opposed its plan. But others, including some
unions, affordable housing advocates, environmentalists, and other politicians, supported
it. An analysis of coalitions would show how these stakeholders were likely to ally with
one another. An analysis of power would show that Disney had enormous clout in Anaheim, because it was the city’s major employer and taxpayer, with power far exceeding
that of other relevant stakeholders. SunCal would no doubt conclude from this analysis
that it was unlikely to succeed in building on this site. A stakeholder map of this situation is shown in Figure 1.4. On the vertical axis, it shows various stakeholders’ level of
power; on the horizontal axis, it shows their position on the issue of SunCal’s proposed
development.
A stakeholder map is a useful tool, because it enables managers to see quickly how
stakeholders feel about an issue. It helps them see how stakeholder coalitions are likely to
form, how powerful these coalitions will be, and what outcomes are likely. The stakeholder
map depicted in Figure 1.4 shows, for example, than the coalition in quadrant 4—Disney,
local businesses, and some members of the City Council—is more powerful that the coalition in quadrant 2—unions, affordable housing activists, environmental groups, and
other City Council members. An additional benefit of stakeholder analysis is that it can
illuminate options that managers may not have initially noticed. In this example, SunCal
might have realized that Disney (high opposition, high power) very much wanted to block
the proposed development, but also had significant resources. Therefore, Disney might
be willing to purchase the lot itself, providing funds for SunCal to use to purchase and
develop another site, with support from unions, housing activists, and others. In short,
stakeholder analysis and mapping can help managers “think outside the box.”
FIGURE 1.4
Stakeholder Map of
SunCal’s Proposed
Development
Source: Graphic design by
Colorbox Industries. © 2018.
All rights reserved. Used by
permission.
Disney
Local
Businesses
City
Council
Unions
Aordable
Housing
Environmental
Groups
COALITION
IN OPPOSITION
COALITION
IN SUPPORT
LOW POWER
SUPPORT
HIGH POWER
OPPOSE
4 1
3 2
Chapter 1 The Corporation and Its Stakeholders 19
The Corporation’s Boundary-Spanning Departments
How do corporations organize internally to respond to and interact with stakeholders?
Boundary-spanning departments are departments, or offices, within an organization that
reach across the dividing line that separates the company from groups and people in society. Building positive and mutually beneficial relationships across organizational boundaries is a growing part of management’s role.
Figure 1.5 presents a list of the corporation’s market and nonmarket stakeholders, alongside the corporate departments that typically have responsibility for engaging with them.
As the figure suggests, the organization of the corporation’s boundary-spanning functions
FIGURE 1.5 The Corporation’s Boundary-Spanning Departments
Government
Community
Customers
Shareholders
Customer Relations
• Customer service
• Total quality management
• Liability lawsuit defense
• Recall management
Shareholder Relations,
Investor Relations
• External and internal
audit
• SEC filings, compliance
• Communications
• Proxy election
management Public Aairs,
Governmental Aairs,
Government Relations
• Public policy
• Lobbying
• Political action
• Trade associations
• Advocacy ads
• Grassroots mobilization
Human Resources, Labor Relations
• Communications
• Union negotiations
• OSHA, EEOC, and labor
law compliance
• Diversity and family–work
programs
• Healthcare
Environment,
Health & Safety,
Sustainability
• EPA and state
environmental
compliance
• Internal environmental
auditing
• Recycling, take-back
Community Relations,
Corporate Citizenship
• Corporate philanthropy
• Partners with community-
based organizations
• Volunteerism, employee
time contributions
Public Relations,
Media Relations,
Corporate Communications
• Public relations
• Brand management
• Image advertising
• Crisis management
Corporation Corporate Relations,
Corporate Citizenship, Corporate
Responsibility, External Aairs
• Environmental scanning
• Stakeholder engagement
• Social reporting and auditing
Environment
General public
NGOs, suppliers
Employees
20 Part One Business in Society
is complex. For example, in many companies, departments of public affairs or government
relations interact with elected officials and regulators. Departments of investor relations
interact with shareholders; human resources with employees; customer relations with customers; and community relations with the community. Specialized departments of environment, health, and safety may deal with environmental compliance and worker health
and safety, and public relations or corporate communications. Many of these specific
departments will be discussed in more detail in later chapters.
The Dynamic Environment of Business
A core argument of this book is that the external environment of business is dynamic and
ever changing. Businesses and their stakeholders do not interact in a vacuum. On the contrary, most companies operate in a swirl of social, ethical, global, political, ecological, and
technological change that produces both opportunities and threats. Figure 1.6 diagrams the
six dynamic forces that powerfully shape the business and society relationship. Each of these
forces is introduced briefly below and will be discussed in more detail later in this book.
Changing societal expectations. Everywhere around the world, society’s expectations of business are rising. People increasingly expect business to be more
responsible, believing companies should pay close attention to social issues and act
as good citizens in society. New public issues constantly arise that require action.
Increasingly, business is faced with the daunting task of balancing its social, legal,
and economic obligations, seeking to meet its commitments to multiple stakeholders. Modern businesses are increasingly exploring opportunities to act in ways
that balance numerous stakeholders’ needs with their multiple obligations. These
changes in society’s expectations of business, and how managers have responded,
are described in Chapters 2 and 3.
FIGURE 1.6
Forces That Shape
the Business and
Society Relationship
Explosion
of
New
Technology
Dynamic
Natural
Environment
Evolving
Government
Regulation
of Business
Growing Globalization
Emphasis on
Ethical Values
Changing
Societal
Expectations
Business
and Its
Stakeholders
Chapter 1 The Corporation and Its Stakeholders 21
Globalization. We live in an increasingly integrated world economy, characterized
by the unceasing movement of goods, services, and capital across national borders.
Large transnational corporations do business in scores of countries. Products and
services people buy every day in the United States or Germany may have come from
Indonesia, Haiti, or Mexico. Today, economic forces truly play out on a global stage.
A financial crisis on Wall Street can quickly impact economies around the world.
Societal issues—such as the race to find a cure for Ebola, the movement for gender
equality, or the demands of citizens everywhere for full access to the Internet—also
cut across national boundaries. Chapter 4 addresses the challenges of globalization.
Growing emphasis on ethical reasoning and actions. The public also expects business
to be ethical and wants corporate managers to apply ethical principles or values—in
other words, guidelines about what is right and wrong, fair and unfair, and morally
correct—when they make business decisions. Fair employment practices, concern
for consumer safety, contribution to the welfare of the community, and human rights
protection around the world have become more prominent and important. Business has
created ethics programs to help ensure that employees are aware of these issues and act
in accordance with ethical standards. The ethical challenges faced by business, both
domestically and abroad—and business’s response—are discussed in Chapters 5 and 6.
Evolving government regulations and business response. The role of government
has changed dramatically in many nations in recent decades. Governments around
the world have enacted a myriad of new policies that have profoundly constrained
how business is allowed to operate. Government regulation of business periodically
advances and then retreats, much as a pendulum swings back and forth. Because of
the dynamic nature of this force, business has developed various strategies to influence elected officials and government regulators at federal, state, and local levels.
Companies may seek to be active participants in the political process, and in recent
years the courts have given them more opportunities to do so. The changing role of
government, its impact, and business’s response are explored in Chapters 7 and 8.
Dynamic natural environment. All interactions between business and society occur
within a finite natural ecosystem. Humans share a single planet, and many of our
resources—oil, coal, and gas, for example—are nonrenewable. Once used, they are
gone forever. Other resources, like clean water, timber, and fish, are renewable, but
only if humans use them sustainably, not taking more than can be naturally replenished. Climate change now threatens all nations. The relentless demands of human
society, in many arenas, have already exceeded the carrying capacity of the Earth’s
ecosystem. The state of the Earth’s resources and changing attitudes about the natural environment powerfully impact the business–society relationship. These issues
are explored in Chapters 9 and 10.
Explosion of new technology and innovation. Technology is one of the most dramatic and powerful forces affecting business and society. It has led to the world
appearing to be smaller and more connected. New technological innovations harness the human imagination to create new machines, processes, and software that
address the needs, problems, and concerns of modern society. In recent years, the
pace of technological change has increased enormously. From scientific breakthroughs in medicine to autonomous vehicles and artificial intelligence, change
keeps coming. The extent and pace of technological innovation pose massive challenges for business, and sometimes government, as they seek to manage various
privacy, security, and intellectual property issues embedded in this dynamic force.
22 Part One Business in Society
As discussed in Chapters 11 and 12, new technologies often force managers and
organizations to examine seriously the ethical implications of their use.
Creating Value in a Dynamic Environment
These powerful and dynamic forces—fast-paced changes in societal and ethical expectations, the global economy, government policies, the natural environment, and new
technology—establish the context in which businesses interact with their many market and
nonmarket stakeholders, as discussed in Chapters 13 to 19. This means that the relationship between business and society is continuously changing in new and often unpredictable ways. Environments, people, and organizations change; inevitably, new issues will
arise and challenge managers to develop new solutions. To be effective, corporations must
meet the reasonable expectations of stakeholders and society in general. A successful business must meet all of its economic, social, and environmental objectives. A core argument
of this book is that the purpose of the firm is not simply to make a profit, but to create value
for all its stakeholders. Ultimately, business success is judged not simply by a company’s
financial performance but by how well it serves broad social interests.
∙ Business firms are organizations that are engaged in making a product or providing
a service for a profit. Society, in its broadest sense, refers to human beings and to the
social structures they collectively create. Business is part of society and engages in
ongoing exchanges with its external environment. Together, business and society form
an interactive social system in which the actions of each profoundly influence the other.
∙ According to the stakeholder theory of the firm, the purpose of the modern corporation
is to create value for all of its stakeholders. To survive, all companies must make a
profit for their owners. However, they also create many other kinds of value as well for
their employees, customers, suppliers, communities, and others. For both practical and
ethical reasons, corporations must take all stakeholders’ interests into account.
∙ Every business firm has economic and social relationships with others in society. Some
are intended, some unintended; some are positive, others negative. Stakeholders are
all those who affect, or are affected by, the actions of the firm. Some have a market
relationship with the company, and others have a nonmarket relationship with it; some
stakeholders are internal, and others are external.
∙ Stakeholders often have multiple interests and can exercise their economic, political, and
other powers in ways that benefit or challenge the organization. Stakeholders may also
act independently or create coalitions to influence the company. Stakeholder mapping is
a technique for visually representing stakeholders’ relationship to an issue facing a firm.
∙ Modern corporations have developed a range of boundary-crossing departments and
offices to manage interactions with market and nonmarket stakeholders. The organization of the corporation’s boundary-spanning functions is complex. Most companies
have many departments specifically charged with interacting with stakeholders.
∙ A number of broad forces shape the relationship between business and society. These
include changing societal and ethical expectations; a dynamic global economy; redefinition of the role of government; ecological and natural resource concerns; and the transformational role of technology and innovation. To deal effectively with these changes,
corporate strategy must address the expectations of all of the company’s stakeholders.
Summary
Chapter 1 The Corporation and Its Stakeholders 23
Discussion Case: Insuring Uber’s App-On Gap
At around 8 p.m. on a New Year’s Eve, a mother and her two young children were walking
home in San Francisco. At a busy intersection, the family waited for the “walk” signal
and then started across the street. Just then, an SUV made a right turn, striking all three
members of the family in the crosswalk. The mother and her 5-year-old son were seriously
injured. Her 6-year-old daughter was killed. The man behind the wheel of the SUV identified himself as a driver for the ride-hailing service Uber.
Uber immediately distanced itself from the tragedy, saying that the driver was “not
providing services on the Uber system at the time of the accident.” The family’s attorney
contested this, saying that the driver was logged onto the Uber application, appeared on the
system as available to accept a rider, and was interacting with his device when he struck
the mother and children.
In other words, the tragic incident had apparently occurred during the app-on gap—the
driver was on the road with his Uber application activated, but had not yet connected with
or picked up a rider. So, who was responsible, the driver or the ride-hailing service?
Uber was, in the words of a New York Times columnist, “the hottest, most valuable technology startup on the planet.” The company was founded in 2009 as “everyone’s private
driver,” providing a premium town car service that could be summoned online. In 2012, it
rolled out UberX, a service that enabled nonprofessional drivers to use their own vehicles
to transport riders. Customers could use the Uber app to hail a car, connect with a willing
driver, watch the vehicle approach on a map, pay their fare, and receive a receipt, all on their
smartphone. Uber provided the technology and took a commission on each transaction.
Uber’s disruptive business model caught on rapidly. By 2014, Uber’s ride-sharing service
had spread to more than 120 cities in 36 countries. In the United States, the service could reach
137 million people with an average pickup time of less than 10 minutes. Demand was growing
so fast that Uber was scrambling to recruit 20,000 new drivers, whom Uber called “transportation entrepreneurs,” every month. Private investors were enthusiastic about the company’s
prospects: Uber had attracted $1.2 billion in funding and was valued at $18.2 billion.
Key Terms stakeholder (nonmarket), 9
stakeholder map, 16
stakeholder power, 13
stakeholder salience, 15
stakeholder theory of the
firm, 6
boundary-spanning
departments, 19
business, 4
external stakeholder, 10
focal organization, 11
general systems theory, 5
interactive social system, 6
internal stakeholder, 10
shareholder theory of the
firm, 6
society, 4
stakeholder, 8
stakeholder analysis, 11
stakeholder coalitions, 15
stakeholder interests, 12
stakeholder (market), 9
Internet
Resources
www.economist.com The Economist
www.fortune.com Fortune
www.nytimes.com The New York Times
www.wsj.com The Wall Street Journal
www.bloomberg.com Bloomberg
www.ft.com Financial Times (London)
www.cnnmoney.com CNN Money
24 Part One Business in Society
Drivers who partnered with Uber had the flexibility to drive when and as much as they
wished. They could also make a decent living; the median annual income for its full-time
drivers in San Francisco, for example, was about $74,000. But they also assumed risk. In the
event of an accident, Uber instructed its drivers to submit a claim to their personal insurance
carrier first. If it was denied, Uber’s backup commercial liability insurance would go into
effect, but only after the driver had been summoned by a customer or had one in the vehicle.
Traditional taxicab companies did not welcome competition from Uber. Cabdrivers in
many cities across the world protested the entry of Uber into their markets, conducting
strikes and “rolling rallies” charging Uber with unfair practices. Uber drivers did not have
to comply with many of the rules that applied to taxicabs, such as those requiring commercial driver’s licenses, regular mechanical inspections, and commercial liability insurance.
Governments at city, state, and national levels had become involved, with some imposing
restrictions and others even banning Uber outright.
In the wake of the 6-year-old’s death in San Francisco, California legislator
Susan Bonilla introduced a bill that would require Uber and other ride-hailing companies
to provide commercial liability insurance from when the driver turned on the app to when
the customer got out of the car, thus filling the app-on gap.
The American Insurance Association, representing insurance companies, supported the
legislation, saying that personal auto policies should not be expected to cover ride-hailing
drivers once they signaled availability. “This is not someone commuting to work or going
to the grocery store or stopping to pick their children up from school,” a spokesperson said.
The family of the girl killed on New Year’s Eve also supported Bonilla’s bill, as did consumer attorneys and the California App-Based Drivers Association.
But others lined up in opposition. Uber and other ride-hailing companies strenuously
objected to the bill, as did trade associations representing high-technology and Internet-based
firms, apparently concerned about increases in their costs of doing business. The bill, said
an Uber spokesperson, was “an example of what happens when special interest groups distract lawmakers from the best interests of consumers and small businesses.”
Sources: “Deadly Pedestrian Accident Driver Claimed He Drove for Uber,” January 1, 2014, www.abclocal.go.com; “Uber
and a Child’s Death,” The New York Times, January 27, 2014; “An Uber Impact: 20,000 Jobs Created on the Uber Platform
Every Month,” Uber press release, May 27, 2014; “With Uber, Less Reason to Own a Car,” The New York Times, June 11,
2014; “Uber and Airbnb’s Incredible Growth in 4 Charts,” VB News, June 19, 2014, online at www.venturebeat.com; “In Uber
vs. Taxi Companies, Local Governments Play Referee,” Christian Science Monitor, July 7, 2014; “The Company Cities Love
to Hate,” Bloomberg Businessweek, July 7, 2014; “Uber, Lyft, Sidecar Fight to Block New California Regulations,” San Jose
Mercury News, August 13, 2014; “The Question of Coverage for Ride Service Drivers,” The New York Times, September 5,
2014; and private correspondence with the office of Assemblywoman Susan Bonilla.
Discussion
Questions
1. Who are Uber’s relevant market and nonmarket stakeholders in this situation?
2. What are the various stakeholders’ interests? Please indicate if each stakeholder would
likely support, or oppose, a requirement that Uber extend its insurance to cover the
app-on gap.
3. What sources of power do the relevant stakeholders have?
4. Based on the information you have, draw a stakeholder map of this case showing each
stakeholder’s position on the issue, its degree of power, and likely coalitions. What conclusions can you draw from the stakeholder map?
5. Which of the stakeholders mentioned do you think has the most salience, and why?
6. Based on your stakeholder analysis and map, what do you think Uber should do in
response to the bill introduced by Susan Bonilla, and why?
25
CHAPTER TWO
Managing Public
Issues and Stakeholder
Relationships
Businesses today operate in an ever-changing external environment, where effective management
requires anticipating emerging public issues and engaging positively with a wide range of stakeholders. Whether the issue is growing concerns about climate change, health care, safety at work
or in our schools, social equality, or consumer safety, managers must respond to the opportunities
and risks it presents. To do so effectively often requires building relationships across organizational
boundaries, learning from external stakeholders, and altering practices in response. Effective management of public issues and stakeholder relationships builds value for the firm.
This Chapter Focuses on These Key Learning Objectives:
LO 2-1 Identifying public issues and analyzing gaps between corporate performance and stakeholder
expectations.
LO 2-2 Applying available tools or techniques to scan an organization’s multiple environments and assessing stakeholder materiality.
LO 2-3 Describing the steps in the issue management process and determining how to make the process
most effective.
LO 2-4 Identifying the managerial skills required to respond to emerging issues effectively.
LO 2-5 Understanding the various stages through which businesses can engage with stakeholders, what
drives this engagement, and the role social media can play.
LO 2-6 Recognizing the value of creating stakeholder dialogue and networks.
