BUSINESS ETHICS

Handout 2(Week 5)

TOPICS

 Introduction
 Definition of Stakeholders
 Primary Stakeholders
 Secondary Stakeholders
 Internal Stakeholders
 External Stakeholders
 Stakeholder Groups and Issues
 A Stakeholder Orientation
 Social Responsibility and Ethics
 Four Levels of Social Responsibility

Introduction
Business ethics issues, conflicts, and successes revolve around relationships. Building effective
relationships is considered one of the more important areas of business today. A business exists because
of relationships between employees, customers, shareholders or investors, suppliers, and managers who
develop strategies to attain success. In addition, an organization usually has a governing authority often
called a board of directors that provides oversight and direction to make sure that the organization stays
focused on objectives in an ethical, legal, and socially acceptable manner. When unethical acts are
discovered in organizations, it is often found that in most instances there is knowing cooperation or
compliancy that facilitates the acceptance and perpetuation of unethical conduct. Therefore,
relationships are not only associated with organizational success but also with organizational misconduct.

STAKEHOLDERS DEFINE ETHICAL ISSUES IN BUSINESS

Stakeholders

 In a business context, customers, investors and shareholders, employees, suppliers, government

agencies, communities, and many others who have a “stake” or claim in some aspect of a
company’s products, operations, markets, industry, and outcomes are known as stakeholders.

 These groups are influenced by business, but they also have the ability to influence businesses;
thus, the relationship between companies and their stakeholders is a two-way street.

 Stakeholders provide resources that are more or less critical to a firm’s long-term success. These
resources may be both tangible and intangible. Shareholders, for example, supply capital;
 suppliers offer material resources or intangible knowledge; employees and managers grant
expertise, leadership, and commitment; customers generate revenue and provide loyalty and
positive word-of-mouth promotion; local communities provide infrastructure; and the media
transmits positive corporate images. When individual stakeholders share similar expectations
about desirable business conduct, they may choose to establish or join formal communities that
are dedicated to better defining and advocating these values and expectations. Stakeholders’
ability to withdraw—or to threaten to withdraw—these needed resources give them power over
businesses.

Primary Stakeholders / Market Stakeholders

 Are those whose continued association is absolutely necessary for a firm’s survival; these include
employees, customers, investors, and shareholders, as well as the governments and communities
that provide necessary infrastructure.
Secondary Stakeholders / Non-Market Stakeholders

 They do not typically engage in transactions with a company and thus are not essential for its
survival; these include the media, trade associations, and special interest groups.

Internal Stakeholders

1. Board of Directors

 The board of directors—in a company large enough to have one—is responsible for defining and
evaluating the ongoing mission of a business after its founding.
 It broadly oversees decisions about the mission and direction of the business, the products or
services offered, the markets in which the business will operate, and, salary and benefits for the
senior officers of the organization.
 The board also sets goals for income and profitability.

2. Chief Executive Officer (CEO)

 The CEO is usually the only employee who reports directly to the board of directors, and he or she
is charged with implementing the policies the board sets and consulting with them on significant
issues pertaining to the company, such as a dramatic shift in products or services offered or
discussions to acquire—or be acquired by—another firm.
 The CEO hires executives to lead initiatives and carry out procedures in the various functional
areas of the business, such as finance, sales and marketing, public relations, manufacturing,
quality control, human resources (sometimes called human capital), accounting, and legal
compliance. Employees in these areas are internal stakeholders in the success of both their
division and the larger corporation.
External Stakeholders
Key external stakeholders are usually those outside of the organization who most directly influence a
business’s bottom line and hold power over the business.

1. Customers and Clients

They need to be able to trust that products and services are backed by the integrity of the company. They
also provide reviews, positive or negative, and referrals. Customers’ perceptions of the business matter,
too. Those who learn that a business is not treating employees fairly, for instance, may reconsider their
loyalty or even boycott the business to try to influence change in the organization.

2. Suppliers

 Suppliers and vendors form part of the external stakeholders. Their reputation relies on the
quality of goods or materials of production that they offer their companies of engagement. To be
retained, they have to offer suitable quality materials, deliver them on time and match the
required quantity.
3. Government

 The government is an external stakeholder in all businesses. In fact, it is considered one of the
major stakeholders since it collects taxes from these establishments in the form of corporate
income tax and income tax from the employees of the company.
 The government also offers development opportunities for businesses. It improves infrastructure,
which is needed for the movement of resources from place to place, funded by the taxes paid by
these businesses.
 The government also ensures that these businesses do not harm the general public. Companies
are expected to adhere to several rules regarding the protection of the environment and the
general public.
4. The local community.

 Businesses are generally located around communities that form the major external stakeholders.
Therefore, they have a duty to ensure the safety, health, and economic development of the
communities around them.

Stakeholder Groups and Issues

Employees

 Compensation and benefits

 Occupational health and safety
Customers

 Product Safety and quality

 Management of customer complaints
 Services to disabled customers
Community/Environmental Groups

 Public health and safety protection

 Conservation of energy and materials
 Donations and support of local organizations
Suppliers

 Encouraging minority suppliers

A Stakeholder Orientation

 The degree to which a firm understands and addresses stakeholder demands can be referred to as
a stakeholder orientation.
Stakeholder orientation comprises three sets of activities:
(1) the organization-wide generation of data about stakeholder groups and assessment of the firm’s
effects on these groups.
For example, Ford Motor Company obtains input on social and environmental responsibility issues from
company representatives, suppliers, customers, and community leaders. Shell has an online discussion
forum where website visitors are invited to express their opinions on the company’s activities and their
implications. Employees and managers can also generate this information informally as they carry out
their daily activities. For example, purchasing managers know about suppliers’ demands, public relations
executives about the media, legal counselors about the regulatory environment, financial executives
about investors, sales representatives about customers, and human resources advisers about employees.
Finally, the company should evaluate its impact on the issues that are important to the various
stakeholders it has identified.
(2) the distribution of this information throughout the firm, and
This requires that the firm facilitate the communication of information about the nature of relevant
stakeholder communities, stakeholder issues, and the current impact of the firm on these issues to all
members of the organization. The dissemination of stakeholder intelligence can be organized formally
through activities such as newsletters and internal information forums.
(3) the organization’s responsiveness as a whole to this intelligence.
The responsiveness of the organization as a whole to stakeholder intelligence consists of the initiatives
that the firm adopts to ensure that it abides by or exceeds stakeholder expectations and has a positive
impact on stakeholder issues. Such activities are likely to be specific to a particular stakeholder group (for
example, family-friendly work schedules) or to a particular stakeholder issue (for example, pollution
reduction programs). These responsiveness processes typically involve the participation of the concerned
stakeholder groups.

Social Responsibility and Ethics

Social Responsibility is an organization’s obligation to maximize its positive impact on stakeholders and
to minimize its negative impact.

 PNC Financial Services Group, for example, contributes $28 million annually in grants and
corporate sponsorships to arts, community improvement, and educational causes. The company
also supports employees with flexible work schedules and backup and holiday daycare, as well as
a free daycare center for new parents. For its operations and technology center in Pittsburgh, the
company built the nation’s largest “green building,” conforming to environmental guidelines on
site planning, energy efficiency, water conservation, material conservation, and indoor
environmental quality. It also built several “green” bank branches in New Jersey.
 Another example of a company being green is Whole Foods, which installs solar panels on many
of its stores and buys wind power credits to offset more than 100 percents of its non-renewable
energy use.
 General Electric also pledged to decrease pollution and double research and development
spending on cleaner technologies.
 Wal-Mart has also joined the growing ranks of green companies. It has a number of
environmentally friendlier stores, which reduce energy consumption and pollution. Wal-Mart
hopes to take what it learns from the stores and use it in all of the new stores that it builds.
 Like Wal-Mart and General Electric, many businesses have tried to determine what relationships,
obligations, and duties are appropriate between the organization and various stakeholders. Social
responsibility can be viewed as a contract with society, whereas business ethics involves carefully
thought-out rules or heuristics of business conduct that guide decision making.

Four Levels of Social Responsibility

There are four levels of social responsibility—economic, legal, ethical, and philanthropic
1. Economic responsibility
• The responsibility to be profitable
• The only way for a business to survive and support society in the long term
2. Legal responsibility
• Operating in a consistent way in accordance with government requirements and the law
• Complying with different national and local regulations
• Behaving as loyal state and company citizens
• Meeting legal obligations
• Supplying goods and services that meet the minimum legal requirements
3. Ethical responsibility
• Performing in a way that’s consistent with society’s expectations
• Recognizing and respecting new or evolving ethical and moral standards that have been
adopted by society
• Preventing ethical standards from being infringed upon to achieve objectives.
• Being proper business citizens by doing what’s ethically or morally expected.
• Acknowledging that business integrity and ethical behavior go beyond compliance with
laws and regulation
4. Philanthropic responsibility
• The philanthropic responsibility of businesses includes the voluntary or discretionary
activities and practices of businesses

Books/References:

BUSINESS ETHICS: Ethical Decison Making and Cases, 8th edition, by O.C. Ferrell. John Fraedrich and Linda Ferrell

BUSINESS ETHICS AND CORPORATE GOVERNANCE 102 III 22/101 VII 33

UTKAL UNIVERSITY
Directorate of Distance & Continuing Education
Bhubaneswar

BUSINESS ETHICS
STEPHEN M. BYARS, USC MARSHALL SCHOOL OF BUSINESS
KURT STANBERRY, UNIVERSITY OF HOUSTON-DOWNTOWN
OpenStax
Rice University
6100 Main Street MS-375
Houston, Texas 77005