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Ethics & Governance

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3. Corporations practicing stakeholder management will be more sustainable. Discuss.

Over the years, social and ethical concerns have brought attention to the community that caused much bitter conflict to the relationship between business and society. As people become better educated and more affluent, rising expectations naturally follow for major institutions and these developed a backdrop against which criticisms towards businesses have grown. Therefore, these created the need for them to assume greater societal responsibilities rather than mere ruthless pursuit of own profits.

Many businesses today share the same viewpoint that making profit for profit’s sake no longer leads to sustainable performance, stakeholder management has become an increasingly important aspect of a business’ operation integrating traditional economic considerations with environmental and social concerns (Jones 2012). While doing well and doing good are no longer seen to be mutually exclusive, corporations practicing stakeholder management is highly debated to be sustainable to a large extent. With all the benefits that it brings, this approach however also has its fair share of limitations to be discussed later in this essay.

Outlining the term ‘sustainability’

Sustainability is the capacity to endure. One of the best known general definitions about sustainable development was expressed as “meeting the needs of the present without compromising the ability of future generations to meet their own needs” (United Nations 1987). Increasing attempts at definition are also recognizing the needs interdependence between economic, environmental and social systems that thus considered them in an integrated way.

Soyka (2012) put forward that sustainability encompasses three major elements namely economic propensity, environmental protection and social equity. Corporations have to make profit to provide support for its shareholders and employees and contribute to their long-term wellbeing. It must produce surpluses to carry through tough times and afford funds for growth, and at the same time innovate in minimizing environmental pressures and offer benefits to its community of consumers. The root of this idea is that all systems, both human and natural ones, need to be balanced and regenerative in order to last.

Why stakeholder management?

Therefore, as sustainability is defined as involving the different aspects of a business operation, the fundamentals of stakeholder management come into place. At the core of stakeholder theory is the notion that the long-term sustainability of business depends on acquiring the cooperation of various constituents, including but not restricted to shareholders (Donaldson & Preston 1995). Stakeholders include shareholders, employees, customers, suppliers, government and the community at large.

Caroll and Buchholtz (2000) proposed that pluralism exists within society where there is a wide decentralization of power among many groups and organizations. This implies an exchange, or rather an interdependent relationship between corporations and its society as decisions made by either party can impact the achievement of individual objectives. For example, stakeholders provide capital to the firm and expect maximum returns on their investment. As managers and employees put in their time and commitments, they demand reasonable income and satisfactory working conditions. If whichever way is unsatisfied, the party may withdraw and affect the progress of the other. This interrelationship results in a strategic reason for corporations to leverage on stakeholder management in meeting expectations that ultimately strengthens their competitiveness.

Hence, there exists a two-way understanding between them reflecting mutual expectations on each other’s roles, responsibilities and ethics. Donaldson and Dunfee (1994) identified this as a “social contract” which addresses universally understood expectations that are not formally spelled out, implying corporations’ indirect obligations towards society. Thus it is also the pragmatic rationale behind that corporations must assess the changing needs of stakeholders and act defensively to protect their name and viability. Especially with the increasing presence of social media such as YouTube and Facebook, Jones (2012) highlighted that even small stakeholder groups can quickly voice out their concerns and have a huge impact on corporations.

Not forgetting a more proactive, ethical reason for stakeholder management is that corporations being a part of the society have a liability to behave ethically. As their operational activities impact on the society, either in a positive or negative way, Solomon (1997) argued that it is ethical for them to be responsible and take its stakeholders into consideration. An ethical corporation will see that its internal organizational ethics overlaps with external social responsibilities as both rely on a concrete set of ethical values and the right organizational culture (Trevino & Nelson 2011).

Corporations practicing stakeholder management

Target Corporation is a good example with high stakeholder management profile that is clearly manifested in its corporate social responsibility initiatives. Corresponding to its environmental and social duties, Target engages in community giving and environmental projects that includes suppliers and employees into its corporate responsibility make-up. These are covered in four areas namely education, environment, team member well-being and volunteerism (Target 2012). Such goals were designed to give education opportunities to American children, decrease impact on the environment, expand community service, and help Target employees and their families live wholesome, well-adjusted lifestyles.

A standard of giving was established in 1946 that marked Target’s commitment in contributing five percent of its taxable income to support the abovementioned activities. As profit is a vital source in sustaining its corporate social responsibility activities, it is important to note that Target values its economic responsibilities as much as the other two.

Integrating agency theory into stakeholder management

Now the matter of feasibility comes into picture, questioning the possibility of corporation’s management in achieving the different responsibilities to please all stakeholders simultaneously. Stakeholder management remains unclear concerning its foundations and presents few limitations to its approach (Manderson, 2006; Osorio et al., 2005; Gladwin et al., 1995). It assumes a relational account of the corporation based on complete contracts and supposes that conflicting interests can be solved by maximizing every group interests, which however may eventually end up with loose ends everywhere. As the managers have time-limited resources, they have to decide on the stakeholders which will hold more attention.

Shareholders are the key stakeholders who first provided corporations with the necessary capital to begin their business lives. Without the initial outlays, a corporation will not even exist to serve its stakeholders. As stakeholders represent such a huge and diverse group, purely practicing stakeholder management is not sufficient to meet shareholders’ interests. Thus this calls for agency theory to be incorporated into stakeholder management to serve as a key driver in profit-making to enhance shareholder value, while at the same time considering the interests of other stakeholders second. Carroll (1979) asserted that corporations are the basic economic units in society and their fundamental responsibility is economic in nature – to produce goods and services desired by society and sell them at a profit. In light of this, Dellaportas et al. (2005) also cited that social and environmental concerns are not deemed to be of equal importance and only to that degree they affect financial performance.

Bringing agency theory into stakeholder management, Hill and Jones (1992) proposed stakeholder-agency theory which explains the relationship between shareholders and managers as one of the nexus of contracts that form the corporation, including those between managers and other various stakeholders. A second way of looking at it suggests that a corporation has multiple fiduciary duties to its stakeholders (Gibson 2000). While the corporation owes specific duties to its shareholders, the same argument goes to mean that it also has different responsibilities to the various stakeholder groups.

Both the abovementioned summarized the principal-agent relation between corporations and its stakeholders. Attributed to agency theory, such an association underlined the importance of corporations in fulfilling their respective responsibilities, and in this argument, focus of such responsibilities should be first directed towards the shareholders. As much as satisfying every stakeholders is crucial towards achieving sustainability, corporations should nevertheless seek to place greater emphasis on creating shareholder value. In the case of for-profit organizations, it is absolutely an ethical and valid justification for corporations to bear profit-making responsibility to account to its shareholders who played a significant role in financing the businesses. Not forgetting that if financial ability is not achieved through shareholder wealth maximization, corporations will not even have the necessary funding to begin with fulfilling its social responsibilities.

Corporate governance and ethics in management

As agency problems may arise due to the principal-agent relation, corporate governance should be applied to improve the conduct of corporations. Effective corporate governance can be achieved using a set of best practices and principles, in reference to means that are used to “govern” managers (agents) in aligning their behaviour with desires of the owners (principals). According to Shleifer and Vishny (1997), this helps to mitigate the agency problems.

For instance, the collapse of HIH Insurance in March 2001 was one of the prominent failures in the Australian business industry. Besides breaches of civil and criminal law by managers, the company’s forced liquidation was due to several instances of mismanagement (Mirshekary, Yaftian & Cross 2005). Clearly, corporate governance plays a crucial role in maintaining internal and external controls within corporations.

From an ethical dimension, the underlying concerns of corporate governance also involve questions regarding relationships and developing trust within and outside an organization. Though corporations must make profit in order to be sustainable, the pursuit of profits must nonetheless reside within ethical bounds (Davis, Schoorman & Donaldson 1997; Caldwell & Karri 2005). Practicing stakeholder management may not entail sustainability, it is also crucial that corporations integrate ethical sensitivity into their decision-making process.

Goodpaster (1991) introduced what is called ‘stakeholder paradox’ describing the contradicting obligations of managers to stakeholders that either result in “business without ethics” if shareholders’ interests are prioritized, or “ethics without business” if other stakeholders’ interest are met at the cost of profit. Stakeholder management may involve trade-offs of economic advantages of one group against another, which is unethical in either way.

As such, stakeholder capitalism may be a better approach, serving itself as a value-creating system within which different economic actors such as suppliers, customers and employees work jointly to co-produce value (Freeman & Liedtka 1997). It seeks to recognize the collective nature of corporations in aligning motives and values with their stakeholders rather than a moral duty to oblige with. A reorientation of business strategy in reflecting the mutual interests shared by corporations and society will thus better manage stakeholders.

Adidas has collaborated with Nobel Laureate Muhammad Yunus’s micro-finance organization, Grameen Bank to produce economical shoes for the impoverished in Bangladesh. Besides making it cheap and affordable, the shoes will also protect them from diseases. Such is perfect example illustrating the idea of shared value for both Adidas and Grameen Bank.

Conclusion

Under stakeholder management, the function of corporations is not only profit-making for shareholders but also to defend a reputation and values in respect of all stakeholders. There is certainly a connection between the wealth of shareholders and stakeholders due to their interdependent relationships. In satisfying every stakeholder’s interests, corporations are highly sustainable as they seek to meet the various economic, social and environmental responsibilities. Research has shown relatively conclusive results that practicing stakeholder management tends to achieve increased sales, better external relationships, improved financial standing and workplace morale (Waddock & Graves, 1997; Hillman & Keim 2001; Choi & Wang, 2009).

However in the proper relationship of managing stakeholders, basic attributes of a business life should unquestionably be acknowledged to have a primary economic purpose and competency. Fiduciary obligations to shareholders should not be set aside, and the use of economic prerogative and disregard of corporate stewardship in accounting to business ethics may be viable. The economic motive therefore remains as the main axis structuring decision-making of corporations. Expectations of stakeholders and their demands can be integrated into the value-creation system according to their representation of power.

In a perfect world, an equilibrium could be obtained to please every stakeholders while achieving the organisational goals in profit-making. This is however not practical in reality due to time and resource constraints. Therefore, this issue relates to a more fundamental question of the purpose and nature of the corporation. As every corporate governance theories have their limitations, the best approach would be a good mix of appropriate ones which are stakeholder and agency theories in this case, as well as a fair share of ethics involved. Word count: 2027

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BUSM3199 Ethics & Governance
Research Essay

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