Social Responsibility and Stakeholder Perspective Dr. Gordon Liu

Who are Stakeholders?

Stakeholders A stakeholder in an organisation is any group or individual who can affect, or is affected by, the achievement of the organisation’s objective A corporation has the obligation not to violate the right of others Corporations are responsible for the effects of their actions on others

Stakeholder Approaches: International Business Perspective International Investors Domestic Boundary International Activists Foreign Financial Community Shareholders Interest Group Creditors International Consumes Foreign Government Government Customers Business Units Suppliers Overseas Subsidiaries Foreign Suppliers Firms Competitors Employees Foreign Competitors Community Nonprofits Overseas Employee Group Functional Departments Globe Community Foreign Nonprofits International Scope International NGOs

Why Stakeholders Matter Milton Friedman – Businesses should only be run in the interests of their owners Reasons why other groups also have a legitimate claim on the corporation Legal perspective Legally binding contracts Economic perspective Externalities No contractual relations Agency problem

Stakeholder Theory Stakeholder theorists view the organisation as a collection of internal and external groups who have the legitimacy and power to affect the operation of organisation The major theme of stakeholder theory is to study an organisation’s behaviours towards identified stakeholders and its strategy to manage the relationship (both voluntary and involuntary) with them this concept can use to explain organisational behaviour because organisation, under stakeholder theorists’ impression, bounds to make managerial choices for its operation to meet its stakeholders’ demands for maintaining its legitimacy

Organisational Legitimacy Its central premise is that organisations—firms in this context—can maintain their operations only to the extent that they have the support of the community. The expectations that society has with regard to how a firm or other institution should act are embedded in the social contract between firms and the relevant social group. The theory proposes that an organisation’s financial success and long-term survival will be threatened if society perceives that a firm has breached its social contract

Descriptive Aspect of Theory Used to describe, and sometimes to explain, specific corporate characteristics and behaviour This concept takes for granted that managers should bear in mind of stakeholder interests about the behaviour of the organisation Organisation identity Best understood as contested and negotiated through iterative interactions between managers and stakeholders managers’ and stakeholders’ reflection on the meaning of organisational events, policies, and actions

Instrumental Aspect of Theory Used to identify the connections, or lack of connections between stakeholder management and the achievement of traditional corporate objectives Attempts to explore the relationship between the performances of organisation in associate to its stakeholder management It can simply put as “if X, then Y”, where X is an instrument for achieving Y, this kind of cause and consequence relationship If firm contracts (through their manager) with their stakeholders on the basis of mutual trust and co-operation, they will have a competitive advantage over the firms that do not.

Normative Aspect of Theory Used to interpret the function of the corporation, including the identification of moral or philosophical guidelines for the operation and management of a corporation. Can be considered as the forms of duty that managers are owed to the stakeholder: positive duties, duties to groups and duties to stakeholder equality. Legitimacy balancing stakeholders’ interests will make the organisation more morally appealing.

What are Business Ethics?

Business Ethics Business ethics covers the study of business situations, activities and decisions where issues of right and wrong are addressed

Why are Business Ethics Important?

This is important because…. Power and influence of business in society Potential to inflict harm Increasing demands from stakeholders Lack of business ethics education or training Continued occurrence of ethical infractions Evaluating different ways of managing business ethics Interesting and rewarding

Globalisation and Business Ethics Culture issues Legal issues Accountability issues Globalization can affect all stakeholders of the corporation

Sustainability Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs Sustainability refers to the long-term maintenance of systems according to environmental, economic and social consideration

Triple Bottom Line Bottom line thinking suggests sustainability as a goal Three dimensions Environmental perspectives Economics perspectives Social perspectives

What is a Corporation?

Corporations A corporatation is essentially defined in terms of legal status and the ownership of assets Corporations are typically regarded as “artificial persons” in the eyes of the law Corporations are notionally “owned” by shareholders, but exist independently of them Managers and directors have a “fiduciary” responsibility to protect the investment of shareholders

Can a Company Have Social Responsibilities?

Arguments…. Milton Friedman 1970 classic article “The social responsibility of business is to increase its profits” Main arguments: Only human beings have a moral responsibility for their actions It is managers’ responsibility to act solely in the interests of shareholder Social issues and problems are the proper province of state rather than corporate manager

Reasons…. Business reasons Moral reasons Extra and/or more satisfied customers Employees may be more attracted/committed Forestall legislation Long-term investment which benefits corporation Moral reasons Corporations cause social problems Corporate should use their power and resources responsibly All corporate activities have social impacts of one sort or another Corporations rely on the contribution of a wide set of stakeholders in society rather than just shareholders

Pyramid of CSR Philanthropic Responsibilities Be a good corporate citizen. Ethical Responsibilities Be ethical. Legal Responsibilities Obey the law. Economic Responsibilities Be profitable. Source: Archie B. Carroll, “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders,” Business Horizons (July-August 1981). © 1991 by the Foundation for the School of Business at Indiana University. Used with permission.

Corporate Responsibility Economic approach The business case of CSR Managerial approach Getting along with stakeholders Ethical approach Doing the right thing Political approach Being a good corporate citizen

Why Citizenship? Citizenship addresses issues of power and responsibility in society More commercial opportunities for corporations Creation of new markets Increase in cross border activities Wider debates on role of corporations in societal governance Citizenship provides established and legitimate framework for thinking about Status Entitlements Process

Accountability Corporate accountability refers to whether a corporation is answerable in some way for the consequences of its actions Firms have begun to take on the role of “political actors” – taken up many of the functions previous undertaken by government because: Governmental failure Increasing power and influence of corporations

Issues Central question is who controls corporations and to whom are corporations accountable Transparency is the degree to which corporate decisions, polices, activities and impacts are acknowledged and made visible to relevant stakeholders

Consumers and CSR

Consumers as Stakeholders Commonplace argument that businesses are best served by treating their customers well Consumer rights rest upon the assumption that consumer dignity should be respected and that producers have a duty to treat consumers as ends in themselves, and not only as means to the ends of producer

Ethical Issues in Marketing Management – Product policy At the most basic level, consumers have a right to products and services which are safe, efficacious, and fit for the purpose for which they are intended Manufacturers ought to exercise due care in establishing that all reasonable steps are taken to ensure that their products are free from defects and safe to use Consumers right to a safe products is not an unlimited right Safety also a function of the consumer and their actions and precautions

Ethical Issues in Marketing Management – Marketing Communication Criticisms of advertising broken down into 2 levels Individual  Concerned with misleading or deceptive practices that seek to create false beliefs about specific products or companies in the individual’s consumers’ mind Social  concerned with the aggregate social and cultural impacts, such as promoting materialism

Ethical Issues in Marketing Management - Pricing Pricing issues are central to the notion of a fair exchange between the two parties, and the right to a fair prices Fours types of pricing practices where ethical problems my arises: Excessive pricing Price fixing Predatory pricing Deceptive pricing

Ethical Issues in Marketing Strategy Criticisms when there is a perceived violation of the consumers right to be treated fairly (duty of care) Targeting vulnerable customers Vulnerable customers are: Lack sufficient education or information to use products safely or to fully understand the consequences of their action Are easily confused or manipulated due to old age and senility Are in exceptional physical or emotional need due to illness, bereavement, or some other unfortunate circumstance Lack the necessary income to competently maintain a reasonable quality of life for themselves and their dependents Are too young to make competent independent decision

Cause-Related Marketing

Cause-Related Marketing Cause-Related Marketing is about using marketing money, techniques and strategies to support worthwhile causes at the same time building the business. A company promotes its image, products and services in conjunction with a good cause, raising money for the cause at the same time: Enhancing its reputation Demonstrating its values, Enlisting consumer loyalty and purchase of its own products and services

What is Cause-Related Marketing? Corporation Cause Cause Business in the Community Establish in 1982 to against high level of unemployment In 1985 Prince of Wales accepted the presidency of BITC since then Member of 700 UK top companies Further 1600 companies participate in the program and event Goal – improve the positive business image in the society Corporate self-interest Mutual Benefit (Corporation and Non-profit) Marketing Purpose Looking for Return on Investment Capitalize on Corporate social performance Increases corporate reputation and employee performance Overall, CRM is the partnership between the corporation and non-profit organization Adkins, Sue (1999) “Cause Related Marketing: Who Cares Wins” Director of Business in the Community’s Cause Related Marketing Campaign Public Public Public

Why corporations want to use CRM? Motives?

Sales Promotion, Voucher Donation Motives Sales / Revenue Sales Promotion, Voucher Donation Corporate Reputation Sponsorship, Social Advertising Employee Performance Volunteer, Community Service There are five motives in the summary of literature review Profitability Sale promotion type Long run view Corporate Image Sponsorship Advertising Employee Performance Volunteer Customer Relation Donation Stakeholder Connection Donation to local community Improve the community facility Customer Relation Public Relation, Donation Community Connection Community Service, Facility

What Types of CRM Do Enterprise Tend to Use?

Types Transactions-Base Event Sponsorship Joint Advertising/Promotion Sales Promotion, Give as You Earn, Voucher, Percentage Club Event Sponsorship Handout for the 4 types section Event Sponsorship Special Olympic London Marathon Local Fundraising Transaction-Base Tesco Computer to school HSBC Art Credit Card Joint Promotion Drinking and Driving No Smoking Donation in Kind Employee Volunteer Products Donation Donate a Building Joint Advertising/Promotion In-Kind Contribution Fundraising, Sport, Art, Community Event Licensing, Advertising, Public Relation Volunteer, Product, Service, Facilities

How do Enterprise Select Causes?

Selection Image / Reputation Product / Service Strategy Fitting, Improve Reputation Product / Service Relation to Business Strategy In literature there five major ways to select the charity Mission/Strategy Expend to a new location Image Improve the image, against bad corporate image Product/Service Product or Service Relate Employee Membership Employee or management who has a membership in it Local Community Business location Marketing, International Expansion Employee Membership Employee Involvement Local Community Business Location

Case Study: Retail Industry

Who are a retail store’s stakeholders? Class Exercise Who are a retail store’s stakeholders?

Regulatory Authorities Retail Stakeholders One provides source of capital under the assumption the business will return principal and interest These groups represent the interest of their members and may have influence on particular issue Individuals or companies legally own part of business ownership Shareholders Individual or households that purchase goods and service Interest Group Creditors Government agency that regulates an area of business activity by codifying and enforcing rules and regulations Regulatory Authorities Customers One supplies , distributes or transports the retail products to the store NGOs Suppliers a legally constituted organization created by private persons or organizations with no participation or representation of any government Firms Competitors Employees Contributes labour and expertise to an endeavor Community Activist Landlords Direct and indirect opponents in business One tries to persuade organization to change its behavior directly or indirectly, by raising the awareness on particular issue A group of interacting people and organizations live in a common environment or location Owner of real estate which rented or leased to the business

Primary Stakeholders Business stakeholders One without whose continuing participation the corporation cannot survive as a going concern Failure to retain the participation of a primary stakeholder group will result in the failure of that corporation system Typically are comprised of investors (shareholders and creditors), employees, customers and suppliers

Regulatory Authorities Retail Stakeholders One provides source of capital under the assumption the business will return principal and interest Individuals or companies legally own part of business ownership Shareholders Individual or households that purchase goods and service Interest Group Creditors Regulatory Authorities Customers One supplies , distributes or transports the retail products to the store NGOs Suppliers Firms Competitors Employees Contributes labour and expertise to an endeavor Community Activist Landlords Direct and indirect opponents in business Owner of real estate which rented or leased to the business

Secondary Stakeholders Public stakeholders As those who influence of affect, or are influenced or affected by, the corporation, but they are not engaged in transactions with the corporation and are not essential for its survival Political Stakeholders Governments* (central or local), regulatory authorities, political activists, NGOs and so on. Social Stakeholders Community, charities, social activists and so on

Regulatory Authorities Retail Stakeholders These groups represent the interest of their members and may have influence on particular issue Shareholders Interest Group Creditors Government agency that regulates an area of business activity by codifying and enforcing rules and regulations Regulatory Authorities Customers NGOs Suppliers a legally constituted organization created by private persons or organizations with no participation or representation of any government Firms Competitors Employees Community Activist Landlords Direct and indirect opponents in business One tries to persuade organization to change its behavior directly or indirectly, by raising the awareness on particular issue A group of interacting people and organizations live in a common environment or location

Integrated Stakeholder Strategy Corporate Legitimacy Legitimacy Gap: Lack of correspondence between how society believes an organization should act and how it is seen to act. A legitimacy gap may appear when: A firm or the media discloses information about the firm that changes (for the worse) how society perceives it Society’s expectations changes A firm fails to show (through disclosure) how it is complying with society’s expectations. Management Standpoint Stakeholders’ Expectation Integrated Stakeholder Strategy

References Adkins, S. (1999), Cause Related Marketing: Who Cares Wins, London: Elsevier Ltd. Benioff, M. and Adler, C. (2007), The Business of Changing the World: 20 Great Leaders on Strategic Corporation Philanthropy, New York: McGraw-Hill Branson, R. (2008), Business Stripped Bare: Adventure of Global Entrepreneur, London: Virgin Books Crane, A. and Matten, D. (2004), Business Ethics: A European Perspective, Oxford: Oxford Press Wickham, P. A. (2006), Strategic Entrepreneurship 4th Ed., Harlow, Essex: Pearson Education