Week TWO: Stakeholder Relationships, Social Responsibility & Corporate Governance

Question 1

What is a stakeholder, their relationship with a company and what are some of their ‘stakes’ in a company

Answer 1

Stakeholders: those who have a stake or claim in some aspect of a company’s products, operations, markets, industry and outcomes, their ‘stake’ includes;

• Investment
• Exposure to risk
• Claim for consideration
• Capacity to benefit/be harmed
• Capacity to influence the firm

Relationship between companies and their stakeholders is a two-way street

• Stakeholders prove tangible and intangible resources critical to a firm’s success
• Firms (executives) try and create as much value as possible for stakeholders without resorting to trade-offs

Question 2

Differentiate between primary and secondary stakeholders

Answer 2

Primary stakeholder: those whose continued association is absolutely necessary for a firm’s survival
- Employees, customers, investors, governments, communities

Secondary stakeholders: do not typically engage in transactions with the firm and are not essential to a firm’s survival
- Media, trade associations, special interest groups

Question 3

Explain the descriptive, normative and instrumental stakeholder theories

Answer 3

Descriptive

• Focuses on actual behaviour, addressing decisions and strategies in stakeholder relationships
• Describes the organisation, the way it works, and its impact on the wider environment
• Eg. ‘The company does a lot of things for reasons besides profit motive. We want to leave the world better than we found it.’ Apple CEO

Normative

• Presumption that stakeholders have value (principle in practice - what’s best for all)
• Focus on how firms should treat stakeholders

Instrumental

• Examines stakeholder relationships and describes outcomes for particular behaviours
• Increased profitability, growth, sustainability
• Tests the connections between managing stakeholders and reaching business targets

Question 4

What is social responsibility and what does it comprise?

Answer 4

Social responsibility is an organisation’s obligation to maximise its positive impact on stakeholders and minimise its negative impact (societal focus)

Four levels of social responsibility

• Philanthropic - giving back to society
• Ethical - following standards of acceptable behaviour as judged by stakeholders
• Legal - abiding by all laws and government regulations
• Economic - maximising stakeholder wealth and/or value

Question 5

What is corporate governance and its dimensions

Answer 5

Degree to which businesses strategically meet the economic, legal, ethical and philanthropic responsibilities placed on them by their stakeholders
Includes formal systems of accountability (strategic design alignment), oversight (minimise misconduct opportunities) and control (process of auditing and improving organisational decisions)
-> long and short term strategies
-> board composition and structure
-> integrity and control of financial reporting
-> compliance with regulations
-> ethics programs

Dimensions

• Strong, sustained economic performance
• Rigorous compliance
• Ethical actions beyond what the law requires
• Voluntary contributions that advance the reputation and stakeholder commitment of the organisation, Where reputation -> actions, intentions, policies, consequences that influence stakeholder perceptions of being a good corporate citizen

Question 6

What is the role of the board of directors from an ethics POV

Answer 6

Holds final responsibility for its firms sucess, failure and ethicality of actions

• Have fiduciary duty
• Global financial crisis motivation many to demand greater accountability from boards
• In reality, boards rarely manage but instead monitor executive decisions
• Trend toward ‘outside directors’ chosen for their expertise, competence and ability to improve strategic decision making
• > Interlocking directorate: board members linked to more than one company

Question 7

Briefly outline the five steps to implement a stakeholder perspective (need to satisfy these important people)

Answer 7

1. Assess corporate culture
2. Identify stakeholder groups and issues
3. Assess organisational commitment to social responsibility
4. Identify resources and determine urgency
5. Gain stakeholder feedback