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Organizational Stakeholders, Management, and Ethics

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Organizational Stakeholders, Management, and Ethics PAR T I The Organization and Its Environment Organizational Stakeholders, CHAPTER Management, and Ethics 2 Learning Objectives Business and service organizations exist to create valued goods and services that people need or desire. Organizations may have either a profit or nonprofit orientation for the creation of these goods or services. But who decides which particular goods and services an organization should provide, and how do you divide the value that an organization creates among different groups of people such as management, employees, customers, shareholders, and other stakeholders? If people primarily behave self-interestedly, what mecha- nisms or procedures govern the way an organization uses its resources, and what is to stop the different groups within the organization from trying to maximize their own share of the value created, possibly at the detriment or expense of others? At a time when the issue of corporate ethics and management dishonesty and greed has come under intense scrutiny, these questions must be addressed before the issue of design- ing an organization to increase its effectiveness can be investigated. After studying this chapter you should be able to: 1. Identify the various stakeholder groups and their 4. Describe the agency problem that exists in all interests or claims on an organization, its activi- authority relationships and the various mecha- ties, and its created value. nisms, such as the board of directors and 2. Understand the choices and problems inherent stock options, that can be used to align man- in apportioning and distributing the value an agerial behaviour with organizational goals or organization creates. to help control illegal and unethical managerial behaviour. 3. Appreciate who has authority and responsibility within an organization, and distinguish between 5. Discuss the vital role played by ethics in different levels of management. organizations. ORGANIZATIONAL STAKEHOLDERS Stakeholders- People, groups or other Organizations exist because of their ability to create valued goods and services and organizations who have which yield acceptable outcomes for various groups of stakeholders, people who have an interest, claim, or stake in an organization, an interest, claim, or stake in the organization, in what it does, and in how well it per- 1 in what it does, and in forms. In general, stakeholders are motivated to participate in an organization if they how well it performs. receive inducements that exceed the value of the contributions they are required to 34 CHAPTER 2 Organizational Stakeholders, Management, and Ethics 35 make.2 Inducements are rewards such as money, power, the support of beliefs or values, Inducements- and organizational status. Contributions are the skills, knowledge, and expertise that Rewards such as money, power, personal organizations require of their members during task performance. accomplishment, and There are two main groups of organizational stakeholders: inside stakeholders organizational status. and outside stakeholders. The inducements and contributions of each group are sum- 3 Contributions- marized in Table 2-1. The skills, knowledge, and expertise that orga- nizations require of Inside Stakeholders their members during task performance. Inside stakeholders are people who are closest to an organization and have the strongest or most direct claim on organizational resources: shareholders, managerial employees, and nonmanagerial employees. Shareholders Shareholders are the owners of the organization, and, as such, their claim on organizational resources is often considered superior to the claims of other inside stakeholders. The shareholders’ contribution to the organization is to invest money in it by buying the organization’s shares or stock. The shareholders’ induce- ment to invest is the prospective money they can earn on their investment in the form of dividends and increases in the price of the stock they have purchased. Investment in stock is risky, however, because there is no guarantee of a return. Shareholders who do not believe that the inducement (the possible return on their investment) is enough to warrant their contribution (the money they have invested) sell their shares and withdraw their support from the organization. As the following example illustrates, more and more shareholders are relying on large institutional investment companies to protect their interests and to increase their collective power to influence the activi- ties of organizations. (See Organizational Insight 2.1.) Managerial Employees Managers are the employees who are responsible for coordi- nating organizational resources and ensuring that an organization’s goals are success- fully met. Senior managers are responsible for investing shareholder money in various Table 2-1 INDUCEMENTS AND CONTRIBUTIONS OF ORGANIZATIONAL STAKEHOLDERS Stakeholder Contribution to the Organization Inducement to Contribute Inside Shareholders Money and capital Dividends and stock appreciation Managers Skills and expertise Salaries, bonuses, status, and power Workforce Skills and expertise Wages, bonuses, stable employment, and promotion Outside Customers Revenue from purchase of Quality and price of goods and services goods and services Suppliers High-quality inputs Revenue from purchase of inputs Government Rules governing good business practice Fair and free competition Unions Free and fair collective bargaining Equitable share of inducements Community Social and economic infrastructure Revenue, taxes, employment, quality of life, and concern for the environment General public Customer loyalty and reputation National pride 36 PART I The Organization and Its Environment ORGANIZATIONAL INSIGHT 2.1 The Increasing Power of Institutional Investors4 The high-profile corporate scandals of WorldCom, Using their own in-house financial analysts, Enron, Adelphia, Global Crossing, and others in institutional investors closely monitor and assess the the United States, and Nortel Networks in Canada financial performance and governance practices of have sparked significant discussion in investor, gov- the firms whose shares they own. Because of the size ernment, media, and academic circles about the of their investments in many Canadian public com- need for change to corporate governance stan- panies—and because of the negative impact they’d dards and practice. have on these share prices if they sold them sud- The United States government has opted for a denly—institutional investors also command a lot of regulative approach. On July 8, 2002, U.S. President attention. If they have a concern, they are more George W. Bush introduced the Sarbanes-Oxley Act, likely to be able to meet with company executives which is intended to make corporate executives and and directors to discuss the issue and possible reso- their audit firms more accountable and responsible lutions. Until the CCGG was formed, such to shareholders. Canadian politicians are facing exchanges were occurring between institutional pressure to introduce similar legislation and are investors and individual companies, but now the studying various options. In the meantime, though, efforts are more coordinated and will most likely one very important stakeholder group—institutional have greater impact. If desired improvements aren’t investors—is using its power to influence the gover- forthcoming, the CCGG and its members have said nance practices of Canadian companies. they will use “the stick”—that is, they will speak pub- The Canadian Coalition for Good Governance licly about their concerns. They may even go so far (CCGG) is a group comprised of some 33 institu- as to use their shareholder voting power to effect tional investors. Between them, CCGG members change. manage $500 billion in assets. The Ontario Teachers The group is also working to raise the overall Pension Plan and OMERS are among the CCGG’s general awareness and understanding of corporate biggest members, managing the pension plan assets governance issues, making speeches before profes- of Ontario’s 252 000 public school teachers and sional associations, business conferences, and educa- 342 000 municipal government employees. tional forms. The CCGG is using the media and its The CCGG formed in the spring of 2003 with an own Web site to make people aware of the state of objective to jointly promote good governance prac- corporate governance in Canada and promotes gov- tices and increased organizational performance in ernance standards and best practices. It is also pub- publicly traded Canadian companies. In very specific lishing data collected by other groups, such as the terms, the CCGG wants corporate boards to achieve Rotman School of Management’s “report card” on a delicate balance between giving their management Canadian governance practices. teams the freedom and incentive to pursue perfor- What impact will the CCGG have? It’s hard to mance goals, while at the same time ensuring there say, since the group is still in its infancy. The CCGG are appropriate financial, legal, and ethical control has set a big task for itself in trying to align the inter- systems in place. The group describes its approach as ests of boards and management with those of share- being able to “walk softly and carry a big stick.” By holders, but it is an extremely important one. And that, the CCGG means it does much of its work with its financial clout, the CCGG will be a force dif- behind the scenes—away from the media spotlight. ficult to ignore. CHAPTER 2 Organizational Stakeholders,
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