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Library of Congress Cataloging-in-Publication Data Names: Lawrence, Anne T., author. | Weber, James (Business ethics professor), author. Title: Business and society : stakeholders, ethics, public policy / Anne T. Lawrence, San Jose State University, James Weber, Duquesne University. Description: Fifteenth edition. | New York, NY : McGraw-Hill Education, [2017] Identifiers: LCCN 2015044071 | ISBN 9781259315411 (alk. paper) Subjects: LCSH: Social responsibility of business. Classification: LCC HD60 .F72 2017 | DDC 658.4/08--dc23 LC record available at http://lccn.loc.gov/2015044071

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About the Authors Anne T. Lawrence San José State University Anne T. Lawrence is a professor of management at San José State University. She holds a Ph.D. from the University of California, Berkeley, and completed two years of postdoc- toral study at Stanford University. Her articles, cases, and reviews have appeared in many journals, including the Academy of Management Review, Administrative Science Quar- terly, Case Research Journal, Journal of Management Education, California Management Review, Business and Society Review, Research in Corporate Social Performance and Pol- icy, and Journal of Corporate Citizenship. Her cases in business and society have been reprinted in many textbooks and anthologies. She has served as guest editor of the Case Research Journal for two special issues on business ethics and human rights, and social and environmental entrepreneurship. She served as president of both the North American Case Research Association (NACRA) and the Western Casewriters Association and is a Fellow of NACRA, from which she received a Distinguished Contributor Award in 2014. She received the Emerson Center Award for Outstanding Case in Business Ethics (2004) and the Curtis E. Tate Award for Outstanding Case of the Year (1998, 2009, and 2015). At San José State University, she was named Outstanding Professor of the Year in 2005. In 2015, she received a Master Teacher in Ethics Award from The Wheatley Institution at Brigham Young University.

James Weber Duquesne University James Weber is a professor of management and business ethics at Duquesne University. He also serves as the executive director of the Institute for Ethics in Business and coor- dinates the Masters of Science in Leadership and Business Ethics program at Duquesne. He holds a Ph.D. from the University of Pittsburgh and has taught at the University of San Francisco, University of Pittsburgh, and Marquette University. His areas of interest and research include managerial and organizational values, cognitive moral reasoning, busi- ness ethics, ethics training and education, eastern religions’ ethics, and corporate social audit and performance. His work has appeared in Organization Science, Human Relations, Business & Society, Journal of Business Ethics, Academy of Management Perspectives, and Business Ethics Quarterly. He received the SIM Sumner Marcus Award for lifetime contribution to the Social Issues in Management division of the Academy of Management in 2013 and the Best Reviewer Award from Business & Society in 2015. He was recognized by the Social Issues in Management division with the Best Paper Award in 1989 and 1994 and received the Best Article Award from the International Association for Business and Society (IABS) in 1998. He has served as division and program chair of the Social Issues in Management division of the Academy of Management. He has also served as president and program chair of the IABS.

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Preface In a world economy that is becoming increasingly integrated and interdependent, the rela- tionship between business and society is becoming ever more complex. The globalization of business, the emergence of civil society organizations in many nations, and new govern- ment regulations and international agreements have significantly altered the job of manag- ers and the nature of strategic decision making within the firm. At no time has business faced greater public scrutiny or more urgent demands to act in an ethical and socially responsible manner than at the present. Consider the following:

∙ The global financial crisis—highlighted by the failure of major business firms and unprecedented intervention in the economy by many governments—and its continuing aftermath as societies have struggled to recover have focused a fresh spotlight on issues of corporate responsibility and ethics. Around the world, people and governments are demanding that executives do a better job of serving shareholders and the public. Once again, policymakers are actively debating the proper scope of government oversight in such wide-ranging arenas as health care, financial services, and manufacturing. Man- agement educators are placing renewed emphasis on issues of business leadership and accountability.

∙ A host of new technologies have become part of the everyday lives of billions of the world’s people. Advances in the basic sciences are stimulating extraordinary changes in agriculture, telecommunications, and pharmaceuticals, which have the potential to enhance peoples’ health and quality of life. Technology has changed how we interact with others, bringing people closer together through social networking, instant messag- ing, and photo and video sharing. These innovations hold great promise. But they also raise serious ethical issues, such as those associated with genetically modified foods, stem cell research, or use of the Internet to exploit or defraud others, censor free expres- sion, or invade individuals’ privacy. Businesses must learn to harness new technolo- gies, while avoiding public controversy and remaining sensitive to the concerns of their many stakeholders.

∙ Businesses in the United States and other nations are transforming the employment rela- tionship, abandoning practices that once provided job security and guaranteed pensions in favor of highly flexible but less secure forms of employment. The Great Recession caused job losses across broad sectors of the economy in the United States and many other nations. Many jobs, including those in the service sector, are being outsourced to the emerging economies of China, India, and other nations. As jobs shift abroad, trans- national corporations are challenged to address their obligations to workers in far-flung locations with very different cultures and to respond to initiatives, like the Bangladesh Accord on Fire and Building Safety, which call for voluntary commitment to enlight- ened labor standards and human rights.

∙ Ecological and environmental problems have forced businesses and governments to take action. An emerging consensus about the risks of climate change, for example, is lead- ing many companies to adopt new practices, and the nations of the world have recently adopted a groundbreaking agreement designed to limit the emissions of greenhouse gases. Many businesses have cut air pollution, curbed solid waste, and designed prod- ucts and buildings to be more energy-efficient. A better understanding of how human

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activities affect natural resources is producing a growing understanding that economic growth must be achieved in balance with environmental protection if development is to be sustainable.

∙ Many regions of the world and their nations are developing at an extraordinary rate. Yet, the prosperity that accompanies economic growth is not shared equally. Access to health care and education remain unevenly distributed among and within the world’s nations, and inequalities of wealth and income have become greater than they have been in many years. These trends have challenged businesses to consider the impact of their compensation, recruitment, and professional development practices on the persistent— and in some cases, growing—gap between the haves and the have-nots.

∙ The tragic epidemic of Ebola in West Africa, as well as the continuing pandemic of AIDS in sub-Saharan Africa and the threat of a swine or avian flu outbreak have com- pelled drug makers to rethink their pricing policies and raised troubling questions about the commitment of world trade organizations to patent protection. Many businesses must consider the delicate balance between their intellectual property rights and the urgent demands of public health, particularly in the developing world.

∙ In many nations, legislators have questioned business’s influence on politics. Business has a legitimate role to play in the public policy process, but it has on occasion shaded over into undue influence and even corruption. In the United States, recent court deci- sions have changed the rules of the game governing how corporations and individuals can contribute to and influence political parties and public officials. Technology offers candidates and political parties new ways to reach out and inform potential voters. Busi- nesses the world over are challenged to determine their legitimate scope of influence and how to voice their interests most effectively in the public policy process.

The new Fifteenth Edition of Business and Society addresses this complex agenda of issues and their impact on business and its stakeholders. It is designed to be the required textbook in an undergraduate or graduate course in Business and Society; Business, Gov- ernment, and Society; Social Issues in Management; or the Environment of Business. It may also be used, in whole or in part, in courses in Business Ethics and Public Affairs Management. This new edition of the text is also appropriate for an undergraduate sociol- ogy course that focuses on the role of business in society or on contemporary issues in business. The core argument of Business and Society is that corporations serve a broad public purpose: to create value for society. All companies must make a profit for their owners. Indeed, if they did not, they would not long survive. However, corporations create many other kinds of value as well. They are responsible for professional development for their employees, innovative new products for their customers, and generosity to their communi- ties. They must partner with a wide range of individuals and groups in society to advance collaborative goals. In our view, corporations have multiple obligations, and all stakehold- ers’ interests must be taken into account.

A Tradition of Excellence

Since the 1960s, when Professors Keith Davis and Robert Blomstrom wrote the first edi- tion of this book, Business and Society has maintained a position of leadership by discuss- ing central issues of corporate social performance in a form that students and faculty have found engaging and stimulating. The leadership of the two founding authors, and later of

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Professors William C. Frederick and James E. Post, helped Business and Society to achieve a consistently high standard of quality and market acceptance. Thanks to these authors’ remarkable eye for the emerging issues that shape the organizational, social, and public policy environments in which students will soon live and work, the book has added value to the business education of many thousands of students. Business and Society has continued through several successive author teams to be the market leader in its field. The current authors bring a broad background of business and society research, teaching, consulting, and case development to the ongoing evolution of the text. The new Fifteenth Edition of Business and Society builds on its legacy of market leadership by reexamining such central issues as the role of business in society, the nature of corporate responsibility and global citizenship, business ethics practices, and the com- plex roles of government and business in a global community.

For Instructors

For instructors, this textbook offers a complete set of supplements. Continually evolving, McGraw-Hill Connect® has been redesigned to provide the only true adaptive learning experience delivered within a simple and easy-to-navigate environ- ment, placing students at the very center.

∙ Performance Analytics—Now available for both instructors and students, easy-to- decipher data illuminates course performance. Students always know how they are doing in class, while instructors can view student and section performance at-a-glance.

∙ Personalized Learning—Squeezing the most out of study time, the adaptive engine within Connect creates a highly personalized learning path for each student by identify- ing areas of weakness and providing learning resources to assist in the moment of need.

This seamless integration of reading, practice, and assessment ensures that the focus is on the most important content for that individual.

Instructor Library The Connect Management Instructor Library is a repository for additional resources to improve student engagement in and out of class. The instructor can select and use any asset that enhances his or her lecture. The Connect Instructor Library includes an exten- sive instructor’s resource manual—fully revised for this edition—with lecture outlines, discussion case questions and answers, tips from experienced instructors, and extensive case teaching notes. A computerized test bank and power point slides for every chapter are also provided.

Manager’s Hot Seat Now instructors can put students in the hot seat with access to an interactive program. Students watch real managers apply their years of experience when confronting unscripted issues. As the scenario unfolds, questions about how the manager is handling the situation pop up, forcing the student to make decisions along with the manager. At the end of the scenario, students watch a postinterview with the manager and view how their responses matched up to the manager’s decisions. The Manager’s Hot Seat videos are now available as assignments in Connect.

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Create With McGraw-Hill Create, www.mcgrawhillcreate.com, the instructor can easily rear- range chapters, combine material from other content sources, and quickly upload self- developed content such as a course syllabus or teaching notes. Content may be drawn from any of the thousands of leading McGraw-Hill textbooks and arranged to fit a partic- ular class or teaching approach. Create even allows an instructor to personalize the book’s appearance by selecting the cover and adding the instructor’s name, school, and course information and to select a print or eBook format.

For Students

Business and Society has long been popular with students because of its lively writing, up-to-date examples, and clear explanations of theory. This textbook has benefited greatly from feedback over the years from thousands of students who have used the material in the authors’ own classrooms. Its strengths are in many ways a testimony to the students who have used earlier generations of Business and Society. The new Fifteenth Edition of the text is designed to be as student-friendly as always. Each chapter opens with a list of key learning objectives to help focus student reading and study. Numerous figures, exhibits, and real-world business examples (set as blocks of col- ored type) illustrate and elaborate the main points. A glossary at the end of the book pro- vides definitions for bold-faced and other important terms. Internet references and a full section-by-section bibliography guide students who wish to do further research on topics of their choice, and subject and name indexes help students locate items in the book.

LearnSmart® The Fifteenth Edition of Business and Society is available with LearnSmart, the most widely used adaptive learning resource, which is proven to improve grades. (To find out more about LearnSmart, go to McGraw-Hill Connect® connect.mheducation.com.) By helping students focus on the most important information they need to learn, LearnSmart personalizes the learning experience so they can study as efficiently as possible.

SmartBook® An extension of LearnSmart, SmartBook is an adaptive eBook that helps students focus their study time more effectively. As students read, SmartBook assesses comprehension and dynamically highlights where they need to study more.

New for the Fifteenth Edition

Over the years, the issues addressed by Business and Society have changed as the envi- ronment of business itself has been transformed. This Fifteenth Edition is no exception, as readers will discover. Some issues have become less compelling and others have taken their place on the business agenda, while others endure through the years. The Fifteenth Edition has been thoroughly revised and updated to reflect the latest the- oretical work in the field and the latest statistical data, as well as recent events. Among the new additions are:

∙ An all-new chapter for this edition on business and its suppliers, incorporating the latest thinking about social, ethical, and environmental responsibility in global supply chains.

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∙ New discussion of theoretical advances in stakeholder theory, corporate citizenship, public affairs management, public and private regulation, corporate governance, social and environmental auditing, social investing, reputation management, business partner- ships, and corporate philanthropy.

∙ Treatment of practical issues, such as social networking, digital medical records, bot- tom of the pyramid, gender diversity, political advertising and campaign contributions, as well as the latest developments in the regulatory environment in which businesses operate, including the Dodd-Frank Act and the Affordable Care Act.

∙ New discussion cases and full-length cases on such timely topics as worker safety in the garment industry in Bangladesh; the ignition switch recalls by General Motors; Google and the “right to be forgotten”; Uber’s responsibilities toward its drivers, customers, and communities; the decision to raise wages at Gravity Payments; the regulation of e-cigarettes; security breaches that compromised customers’ information at Target and other companies; the hacking of Sony Pictures’ servers; the environmental impact of hydraulic fracturing; shareholder proxy access at Whole Foods; the sale of chemically tainted flooring by Lumber Liquidators; substandard wages and working conditions at nail salons; and JPMorgan Chase’s reputational challenges.

Finally, this is a book with a vision. It is not simply a compendium of information and ideas. The new edition of Business and Society articulates the view that in a global community, where traditional buffers no longer protect business from external change, managers can create strategies that integrate stakeholder interests, respect personal values, support community development, and are implemented fairly. Most important, businesses can achieve these goals while also being economically successful. Indeed, this may be the only way to achieve economic success over the long term.

Anne T. Lawrence

James Weber

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Acknowledgments We are grateful for the assistance of many colleagues at universities in the United States and abroad who over the years have helped shape this book with their excellent suggestions and ideas. We also note the feedback from students in our classes and at other colleges and universities that has helped make this book as user-friendly as possible. We especially wish to thank three esteemed colleagues who made special contributions to this edition. Cynthia E. Clark, founder and director of the Harold S. Geneen Institute of Corporate Governance and director of the Alliance for Ethics and Social Responsibility at Bentley University, generously shared with us her expertise on corporate reputation, governance, and media relations. She provided new material for and helped reorganize Chapter 19, which has greatly benefited from her insights. She also advised us on the revi- sions of Chapter 3 and contributed the case, “Google and the Right to Be Forgotten.” Anke Arnaud of Embry-Riddle Aeronautical University provided research support for the two environmental chapters (Chapters 9 and 10), drawing on her extensive knowledge of the sustainability literature. An expert in pedagogy, she also prepared the PowerPoint slides that accompany the text. Harry J. Van Buren III of the University of New Mexico shared his expertise on technology and society and provided in-depth suggestions on how best to reorganize the two technology chapters (Chapters 11 and 12), which have been extensively revised for this edition. For all of these contributions, we are most grateful. We also wish to express our appreciation for the colleagues who provided detailed reviews for this edition. These reviewers were Heather Elms of the Kogod School of Business at American University; Joseph A. Petrick of Wright State University; Kathleen Rehbein of Marquette University; Judith Schrempf-Stirling of the Robins School of Business at the University of Richmond; and Caterina Tantalo of San Francisco State University. In addition, we are grateful to the many colleagues who over the years have generously shared with us their insights into the theory and pedagogy of business and society. In par- ticular, we would like to thank Shawn Berman of University of New Mexico; Jennifer J. Griffin of George Washington University; Ronald M. Roman, Asbjorn Osland, and Marc- Charles Ingerson of San José State University; Bernie Hayen of Kansas State University; Cynthia M. Orms of Georgia College & State University; Alexia Priest of Post University; Sandra Waddock of Boston College; Mary C. Gentile of Giving Voice to Values; Margaret J. Naumes of the University of New Hampshire (retired); Michael E. Johnson-Cramer and Jamie Hendry of Bucknell University; John Mahon and Stephanie Welcomer of the Univer- sity of Maine; Bradley Agle of Brigham Young University; Ann Svendsen of Simon Fraser University (retired); Robert Boutilier of Robert Boutilier & Associates; Kathryn S. Rogers of Pitzer College (retired); Anne Forrestel of the University of Oregon; Kelly Strong of Col- orado State University; Daniel Gilbert of Gettysburg College; William Sodeman of Hawaii Pacific University; Gina Vega of Merrimack College; Craig Dunn and Brian Burton of West- ern Washington University; Lori V. Ryan of San Diego State University; Bryan W. Husted of York University; Sharon Livesey of Fordham University; Barry Mitnick of the Univer- sity of Pittsburgh; Virginia Gerde, Matthew Drake, and David Wasieleski of Duquesne University; Robbin Derry of the University of Lethbridge; Linda Ginzel of the University of Chicago; Jerry Calton of the University of Hawaii–Hilo; Anthony J. Daboub of the Univer- sity of Texas at Brownsville; Linda Klebe Treviño of Pennsylvania State University; Mary

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x Acknowledgments

Meisenhelter of York College of Pennsylvania; Stephen Payne of Georgia College and State University; Amy Hillman and Gerald Keim of Arizona State University; Jeanne Logsdon of the University of New Mexico (retired); Barbara Altman of Texas A&M University Central Texas; Craig Fleisher of the College of Coastal Georgia; Karen Moustafa Leonard of Indi- ana University–Purdue University Fort Wayne; Deborah Vidaver-Cohen of Florida Interna- tional University; Lynda Brown of the University of Montana; Kathleen A. Getz of Loyola University–Maryland; Gordon P. Rands of Western Illinois University; Paul S. Adler of the University of Southern California; Diana Sharpe of Monmouth University; Pierre Batellier and Emmanuel Raufflet of HEC Montreal; Bruce Paton, Tom E. Thomas, Denise Klein- richert, Geoffrey Desa, and Peter Melhus of San Francisco State University; Jacob Park of Green Mountain College; Armand Gilinsky of Sonoma State University; Tara Ceranic of the University of San Diego; and Diane Swanson of Kansas State University. These scholars’ dedication to the creative teaching of business and society has been a continuing inspiration to us. Thanks are also due to Murray Silverman of San Francisco State University; Robyn Linde of Rhode Island College and H. Richard Eisenbeis of the University of Southern Colorado Pueblo (retired); Steven M. Cox, Bradley W. Brooks, S. Cathy Anderson, and J. Norris Frederick of Queens University of Charlotte; and Debra M. Staab, a freelance writer and researcher, who contributed cases to this edition. A number of individuals have made research contributions to this project for which we are appreciative. Among the special contributors to this edition were Patricia Morrison of Grossmont College and Caitlin Merritt and Clare Lamperski of Duquesne University, who provided research assistance, and Debra M. Staab, who both provided research and assisted in preparing the instructor’s resource manual and ancillary materials. Thanks are also due to Carolyn Roose, Nate Marsh, and Benjamin Eagle for research support. Emily Marsh, of The Sketchy Pixel, provided graphic design services. We wish to express our continuing appreciation to William C. Frederick, who invited us into this project many years ago and who has continued to provide warm support and sage advice as the book has evolved through numerous editions. James E. Post, another former author of this book, has also continued to offer valuable intellectual guidance to this project. We continue to be grateful to the excellent editorial and production team at McGraw-Hill. We offer special thanks to Laura Hurst Spell, our sponsoring editor, for her skillful leader- ship of this project. We also wish to recognize the able assistance of Diana Murphy, develop- ment editor, and MaryJane Lampe and Ligo Alex, project managers, whose ability to keep us on track and on time has been critical. Casey Keske headed the excellent marketing team. Keri Johnson, media project manager; Susan K. Culbertson, buyer; Richard Wright, copy editor; and Studio Montage, who designed the book cover, also played key roles. Each of these people has provided professional contributions that we deeply value and appreciate. As always, we are profoundly grateful for the ongoing support of our spouses, Paul Roose and Sharon Green.

Anne T. Lawrence

James Weber

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Brief Contents PART ONE Business in Society 1 1. The Corporation and Its Stakeholders 2 2. Managing Public Issues and Stakeholder

Relationships 24 3. Corporate Social Responsibility and

Citizenship 45 4. Business in a Globalized World 70

PART TWO Business and Ethics 91 5. Ethics and Ethical Reasoning 92 6. Organizational Ethics 113

PART THREE Business and Public Policy 133 7. Business–Government Relations 134 8. Influencing the Political

Environment 157

PART FOUR Business and the Natural Environment 181 9. Sustainable Development and Global

Business 182 10. Managing for Sustainability 205

PART FIVE Business and Technology 231 11. The Role of Technology 232 12. Regulating and Managing Information

Technology 256

PART SIX Business and Its Stakeholders 277 13. Shareholder Rights and Corporate

Governance 278

14. Consumer Protection 302 15. Employees and the Corporation 325 16. Managing a Diverse Workforce 347 17. Business and Its Suppliers 371 18. The Community and the

Corporation 394 19. The Public and Corporate

Reputation 417

CASES IN BUSINESS AND SOCIETY 439 1. After Rana Plaza 440 2. Google and the Right to Be

Forgotten 451 3. General Motors and the Ignition Switch

Recalls 461 4. Sustainability at Holland America

Line 471 5. The Carlson Company and

Protecting Children in the Global Tourism Industry 480

6. Ventria Bioscience and the Controversy over Plant-Made Medicines 489

7. Moody’s Credit Ratings and the Subprime Mortgage Meltdown 500

8. The Upper Big Branch Mine Disaster 513

9. Carolina Pad and the Bloggers 523

GLOSSARY 536

BIBLIOGRAPHY 549

INDEXES Name 554 Subject 558

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Contents PART ONE BUSINESS IN SOCIETY 1

CHAPTER 1 The Corporation and Its Stakeholders 2 Business and Society 4

A Systems Perspective 4

The Stakeholder Theory of the Firm 5 The Stakeholder Concept 7

Different Kinds of Stakeholders 8

Stakeholder Analysis 10 Stakeholder Interests 12

Stakeholder Power 12

Stakeholder Coalitions 14

Stakeholder Salience and Mapping 15

The Corporation’s Boundary-Spanning Departments 18 The Dynamic Environment of Business 19

Creating Value in a Dynamic Environment 21

Summary 21 Key Terms 22 Internet Resources 22 Discussion Case: Insuring Uber’s App-On Gap 22

CHAPTER 2 Managing Public Issues and Stakeholder Relationships 24 Public Issues 25 Environmental Analysis 27

Competitive Intelligence 29

Stakeholder Materiality 30

The Issue Management Process 31

Identify Issue 32

Analyze Issue 33

Generate Options 33

Take Action 34

Evaluate Results 34

Organizing for Effective Issue Management 35 Stakeholder Engagement 36

Stages in the Business–Stakeholder Relationship 36

Drivers of Stakeholder Engagement 38

The Role of Social Media in Stakeholder

Engagement 39

Stakeholder Dialogue 40 Stakeholder Networks 40

The Benefits of Engagement 41

Summary 42 Key Terms 42 Internet Resources 42 Discussion Case: Coca-Cola’s Water Neutrality Initiative 43

CHAPTER 3 Corporate Social Responsibility and Citizenship 45 Corporate Power and Responsibility 47 Corporate Social Responsibility and Citizenship 48

The Origins of Corporate Social Responsibility 49

Balancing Social, Economic, and Legal Responsibilities 52 The Corporate Social Responsibility Debate 52

Arguments for Corporate Social Responsibility 52

Arguments against Corporate Social

Responsibility 56

Management Systems for Corporate Social Responsibility and Citizenship 58 Stages of Corporate Citizenship 60 Assessing and Reporting Social Performance 63

Social Audit Standards 63

Social Reporting 64

Summary 66 Key Terms 66 Internet Resources 67 Discussion Case: Corporate Social Responsibility at Gravity Payments 67

CHAPTER 4 Business in a Globalized World 70 The Process of Globalization 71

Major Transnational Corporations 72

International Financial and Trade Institutions 73

The Benefits and Costs of Globalization 76 Benefits of Globalization 76

Costs of Globalization 77

Doing Business in a Diverse World 79 Comparative Political and Economic Systems 80

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Other Functional Areas 120

Making Ethics Work in Corporations 121 Building Ethical Safeguards into the Company 121

Corporate Ethics Awards and Certifications 126

Ethics in a Global Economy 127 Efforts to Curtail Unethical Practices 128

Summary 130 Key Terms 130 Internet Resources 130 Discussion Case: Alcoa’s Core Values in Practice 131

PART THREE BUSINESS AND PUBLIC POLICY 133

CHAPTER SEVEN Business–Government Relations 134 How Business and Government Relate 135

Seeking a Collaborative Partnership 136

Working in Opposition to Government 136

Legitimacy Issues 137

Government’s Public Policy Role 137 Elements of Public Policy 138

Types of Public Policy 140

Government Regulation of Business 142 Market Failure 142

Negative Externalities 142

Natural Monopolies 143

Ethical Arguments 143

Types of Regulation 143

The Effects of Regulation 147

Regulation in a Global Context 152 Summary 153 Key Terms 154 Internet Resources 154 Discussion Case: Should E-Cigarettes Be Regulated? 154

CHAPTER EIGHT Influencing the Political Environment 157 Participants in the Political Environment 158

Business as a Political Participant 159

Influencing the Business–Government Relationship 160

Corporate Political Strategy 160

Political Action Tactics 161 Promoting an Information Strategy 161

Global Inequality and the Bottom of the Pyramid 83

Collaborative Partnerships for Global Problem Solving 85

A Three-Sector World 85

Summary 87 Key Terms 87 Internet Resources 87 Discussion Case: Intel and Conflict Minerals 88

PART TWO BUSINESS AND ETHICS 91

CHAPTER FIVE Ethics and Ethical Reasoning 92 The Meaning of Ethics 93

What Is Business Ethics? 94

Why Should Business Be Ethical? 95

Why Ethical Problems Occur in Business 99 Personal Gain and Selfish Interest 99

Competitive Pressures on Profits 100

Conflicts of Interest 100

Cross-Cultural Contradictions 101

The Core Elements of Ethical Character 102 Managers’ Values 102

Spirituality in the Workplace 103

Managers’ Moral Development 104

Analyzing Ethical Problems in Business 106 Virtue Ethics: Pursuing a “Good” Life 106

Utility: Comparing Benefits and Costs 107

Rights: Determining and Protecting Entitlements 108

Justice: Is It Fair? 109

Applying Ethical Reasoning to Business Activities 109

Summary 110 Key Terms 111 Internet Resources 111 Discussion Case: Chiquita Brands: Ethical Responsibility or Illegal Action? 111

CHAPTER SIX Organizational Ethics 113 Corporate Ethical Climates 114 Business Ethics across Organizational Functions 116

Accounting Ethics 116

Financial Ethics 116

Marketing Ethics 118

Information Technology Ethics 120

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Promoting a Financial-Incentive Strategy 165

Promoting a Constituency-Building Strategy 170

Levels of Political Involvement 173 Managing the Political Environment 174 Business Political Action: A Global Challenge 175 Summary 177 Key Terms 177 Internet Resources 178 Discussion Case: Stop Online Piracy Act—A Political Battle between Old and New Media 178

PART FOUR BUSINESS AND THE NATURAL ENVIRONMENT 181

CHAPTER NINE Sustainable Development and Global Business 182 Business and Society in the Natural Environment 184

Sustainable Development 185

Threats to the Earth’s Ecosystem 185

Forces of Change 186

The Earth’s Carrying Capacity 189

Global Environmental Issues 191 Climate Change 191

Ozone Depletion 194

Resource Scarcity: Water and Land 194

Decline of Biodiversity 196

Threats to Marine Ecosystems 197

Response of the International Business Community 198

Codes of Environmental Conduct 200

Summary 202 Key Terms 202 Internet Resources 202 Discussion Case: Clean Cooking 203

CHAPTER TEN Managing for Sustainability 205 Role of Government 207

Major Areas of Environmental Regulation 207

Alternative Policy Approaches 212

Costs and Benefits of Environmental Regulation 216 Managing for Sustainability 218

Stages of Corporate Environmental Responsibility 218

The Ecologically Sustainable Organization 219 Sustainability Management in Practice 219

Environmental Auditing and Reporting 221

Environmental Partnerships 222

Sustainability Management as a Competitive Advantage 222

Cost Savings 223

Brand Differentiation 224

Technological Innovation 224

Reduction of Regulatory and Liability Risk 225

Strategic Planning 225

Summary 227 Key Terms 227 Internet Resources 227 Discussion Case: Hydraulic Fracturing—Can the Environmental Impacts Be Reduced? 228

PART FIVE BUSINESS AND TECHNOLOGY 231

CHAPTER ELEVEN The Role of Technology 232 Technology Defined 233

Phases of Technology in Society 234

Fueling Technological Growth 235

The Role of Technology in Society 236 The Internet 236

The Digital Divide in the United States and Worldwide 239

Mobile Telephones 240

Social Networking 241

The Impact of Scientific Breakthroughs 242 Genetically Engineered Foods 242

Sequencing of the Human Genome 244

Biotechnology and Stem Cell Research 245

The Role of Technology in Business 246 E-Business 247

Transforming Prevailing Business Models 247

The Use of Robotics at Work 248

Ethical Challenges Involving Technology 250 The Loss of Privacy 250

Free Speech Issues 251

Summary 252 Key Terms 252 Internet Resources 252 Discussion Case: How Safe Is Your Personal Information? 252

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CHAPTER TWELVE Regulating and Managing Information Technology 256 Information Technology Challenges for Governments and Businesses 258 Government Interventions of Information and Ideas 259

Government Internet Censorship and Control 259

Government Acquisition of Information to Protect the

Public Good 261

Government Protecting Individuals’ Rights and

Property 262

Business Access to and Use of Confidential Information 263

Access to Stakeholders’ Personal Information 263

Special Issue: Cybercrime—A Threat to Organizations and the Public 265

Costs of Cybercrime 266

Exploring Why Hackers Hack 267

Business Responses to Invasions of Information Security 269

The Chief Information, Security,

Technology Officer 271

Government Efforts to Combat Cybercrime 272 Summary 273 Key Terms 274 Internet Resources 274 Discussion Case: Sony Pictures and North Korean Hackers 274

PART SIX BUSINESS AND ITS STAKEHOLDERS 277

CHAPTER THIRTEEN Shareholder Rights and Corporate Governance 278 Shareholders around the World 279

Who Are Shareholders? 280

Objectives of Stock Ownership 282

Shareholders’ Legal Rights and Safeguards 282

Corporate Governance 283 The Board of Directors 283

Principles of Good Governance 285

Special Issue: Executive Compensation 287 Shareholder Activism 291

The Rise of Institutional Investors 292

Social Investment 293

Shareholder Lawsuits 294

Government Protection of Shareholder Interests 295

Securities and Exchange Commission 295

Information Transparency and Disclosure 295

Insider Trading 296

Shareholders and the Corporation 298 Summary 298 Key Terms 299 Internet Resources 299 Discussion Case: Whole Foods Adopts Egalitarian Compensation Policies—But Fights Back on Board Elections 299

CHAPTER FOURTEEN Consumer Protection 302 The Rights of Consumers 304 Self-Advocacy for Consumer Interests 304

Reasons for the Consumer Movement 306

How Government Protects Consumers 307 Goals of Consumer Laws 307

Major Consumer Protection Agencies 309

Special Issue: Consumer Privacy in the Digital Age 312 Using the Courts and Product Liability Laws 315

Strict Liability 315

Product Liability Reform and Alternative Dispute

Resolution 317

Positive Business Responses to Consumerism 318 Managing for Quality 318

Voluntary Industry Codes of Conduct 320

Consumer Affairs Departments 320

Product Recalls 320

Consumerism’s Achievements 321 Summary 322 Key Terms 322 Internet Resources 322 Discussion Case: Lumber Liquidators’ Laminate Flooring 322

CHAPTER FIFTEEN Employees and the Corporation 325 The Employment Relationship 327 Workplace Rights 327

The Right to Organize and Bargain Collectively 328

The Right to a Safe and Healthy Workplace 329

The Right to a Secure Job 332

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Special Issue: Wages and Income Inequality 335 Privacy in the Workplace 336

Electronic Monitoring 337

Romance in the Workplace 338

Employee Drug Use and Testing 339

Alcohol Abuse at Work 340

Employee Theft and Honesty Testing 341

Whistle-Blowing and Free Speech in the Workplace 341 Employees as Corporate Stakeholders 343 Summary 344 Key Terms 344 Internet Resources 344 Discussion Case: The Ugly Side of Beautiful Nails 344

CHAPTER SIXTEEN Managing a Diverse Workforce 347 The Changing Face of the Workforce 348 Gender and Race in the Workplace 350

Women and Minorities at Work 350

The Gender and Racial Pay Gap 351

Where Women and Persons of Color Manage 353

Breaking the Glass Ceiling 354

Women and Minority Business Ownership 357

Government’s Role in Securing Equal Employment Opportunity 357

Equal Employment Opportunity 357

Affirmative Action 359

Sexual and Racial Harassment 359

What Business Can Do: Diversity and Inclusion Policies and Practices 361

Balancing Work and Life 364

Child Care and Elder Care 364

Work Flexibility 365

Summary 367 Key Terms 368 Internet Resources 368 Discussion Case: Unauthorized Immigrant Workers at Chipotle Mexican Grill Restaurants 368

CHAPTER SEVENTEEN Business and Its Suppliers 371 Suppliers 373 Social, Ethical, and Environmental Issues in Global Supply Chains 376

Social Issues 376

Ethical Issues 377

Environmental Issues 379

Supply Chain Risk 380

Private Regulation of the Business–Supplier Relationship 381

Supply Chain Auditing 384

Supplier Development and Capability Building 387 Summary 391 Key Terms 391 Internet Resources 391 Discussion Case: Apple’s Supplier Code of Conduct and Foxconn’s Chinese Factories 392

CHAPTER EIGHTEEN The Community and the Corporation 394 The Business–Community Relationship 396

The Business Case for Community Involvement 397

Community Relations 399 Economic Development 400

Housing 400

Aid to Minority, Women, and Disabled Veteran-Owned

Enterprises 400

Disaster, Terrorism, and War Relief 401

Corporate Giving 402 Forms of Corporate Giving 405

Priorities in Corporate Giving 407

Corporate Giving in a Strategic Context 408

Measuring the Return on Social Investment 410

Building Collaborative Partnerships 411 Summary 413 Key Terms 414 Internet Resources 414 Discussion Case: Fidelity Investments’ Partnership with Citizen Schools 414

CHAPTER NINETEEN The Public and Corporate Reputation 417 The General Public 419 What Is Reputation? 419

Why Does Reputation Matter? 421

The Public Relations Department 422 Using Technology-Enhanced Channels for Public

Relations 423

Brand Management 424 Crisis Management 425 Engaging Key Stakeholders with Specific Tactics 428

Executive Visibility 428

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User-Generated Content 430

Paid Content 431

Event Sponsorship 432

Public Service Announcements 433

Image Advertisements 433

Summary 435 Key Terms 435 Internet Resources 435 Discussion Case: JPMorgan Chase’s #AskJPM 436

CASES IN BUSINESS AND SOCIETY 439 1. After Rana Plaza 440

2. Google and the Right to Be Forgotten 451

3. General Motors and the Ignition Switch Recalls 461

4. Sustainability at Holland America Line 471

5. The Carlson Company and Protecting Children in the Global Tourism Industry 480

6. Ventria Bioscience and the Controversy over Plant-Made Medicines 489

7. Moody’s Credit Ratings and the Subprime Mortgage Meltdown 500

8. The Upper Big Branch Mine Disaster 513

9. Carolina Pad and the Bloggers 523

Glossary 536 Bibliography 549 Indexes Name 554 Subject 558

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P A R T O N E

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Business in Society

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C H A P T E R O N E

The Corporation and Its Stakeholders Business corporations have complex relationships with many individuals and organizations in society. The term stakeholder refers to all those that affect, or are affected by, the actions of the firm. An important part of management’s role is to identify a firm’s relevant stakeholders and understand the nature of their interests, power, and alliances with one another. Building positive and mutually ben- eficial relationships across organizational boundaries can help enhance a company’s reputation and address critical social and ethical challenges. In a world of fast-paced globalization, shifting public expectations and government policies, growing ecological concerns, and new technologies, manag- ers face the difficult challenge of achieving economic results while simultaneously creating value for all of their diverse stakeholders.

This Chapter Focuses on These Key Learning Objectives:

LO 1-1 Understanding the relationship between business and society and the ways in which business and society are part of an interactive system.

LO 1-2 Considering the purpose of the modern corporation.

LO 1-3 Knowing what a stakeholder is and who a corporation’s market and nonmarket and internal and external stakeholders are.

LO 1-4 Conducting a stakeholder analysis and understanding the basis of stakeholder interests and power.

LO 1-5 Recognizing the diverse ways in which modern corporations organize internally to interact with various stakeholders.

LO 1-6 Analyzing the forces of change that continually reshape the business and society relationship.

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Walmart has been called “a template for 21st century capitalism.” In each period of history, because of its size and potential impact on many groups in society, a single company often seems to best exemplify the management systems, technology, and social relationships of its era. In 1990, this company was U.S. Steel. In 1950, it was General Motors. Now, in the 2010s, it is Walmart.1

In 2015, Walmart was the largest private employer in the world, with 2.2 million employ- ees worldwide. The company operated more than 11,000 facilities in 27 countries and had annual sales of $473 billion. The retailer was enormously popular with customers, drawing them in with its great variety of products under one roof and “save money, live better” slo- gan; 250 million customers worldwide shopped there every week. Economists estimated that Walmart had directly through its own actions and indirectly through its impact on its supply chain saved American shoppers $287 billion annually, about $957 for every person in the United States.2 Shareholders who invested early were richly rewarded; the share price rose from 5 cents (split adjusted) when the company went public in 1970 to around $90 a share in early 2015, its all-time high. Walmart was a major customer for tens of thousands of suppliers worldwide, ranging from huge multinationals to tiny one-person operations.

Yet, Walmart had become a lightning rod for criticism from many quarters, charged with corruption; driving down wages, benefits, and working conditions; and hurting local communities. Consider that: ∙ On the Friday after Thanksgiving 2014—so-called Black Friday—thousands of pro-

testers rallied at 1,600 Walmart stores across the United States, calling on the retailer to raise its workers’ pay to at least $15 an hour and offer more of them full-time work and predictable schedules. Said one part-time cashier, “It is very hard on what I earn. Right now I’m on food stamps and applying for medical assistance.” A month earlier, the company had announced it would no longer provide health insurance to associates working less than 30 hours a week.3

∙ In 2012, the company confronted shocking charges that it had conducted a “campaign of bribery” to facilitate its rapid growth in Mexico. According to an investigation by The New York Times, Walmart had made $24 million in payments to government officials to clear the way for hundreds of new stores in what became the company’s most important foreign subsidiary, in probable violation of both U.S. and Mexican law. Two years later, the company had spent more than $400 million to investigate the bribery allegations, and faced numerous lawsuits from irate shareholders and an ongoing U.S. government investigation.4

∙ In 2013, local activists protested the opening of a Walmart neighborhood market in Los Angeles’s Chinatown, carrying large puppets dressed as the ghosts of small businesses. It was the latest of many incidents in which communities resisted the arrival of the retail giant, saying it would hurt local shopkeepers.5 Economists studying Walmart’s impact in Chicago, for example, found that about one-quarter of neighborhood retailers near a new Walmart had gone out of business, causing a loss of 300 jobs.6

In a continuing effort to improve its social performance, Walmart offered grants to small businesses, donated to wildlife habitat restoration, and announced a plan to lower

4 “Wal-Mart Hushed Up a Vast Mexican Bribery Case,” The New York Times, April 21, 2012; “After Bribery Scandal, High-Level Departures at Walmart,” The New York Times, June 4, 2014.

3 “Wal-Mart Cutting Health Benefits to Some Part-Time Employees,” Bloomberg, October 7, 2014, and “On Black Friday, Walmart Is Pressed for Wage Increases,” The New York Times, November 28, 2014.

2 Global Insight, “The Price Impact of Wal-Mart: An Update through 2006,” September 4, 2007.

1 Nelson Lichtenstein, “Wal-Mart: A Template for Twenty-First Century Capitalism,” in Wal-Mart: The Face of Twenty-First Century Capitalism, ed. Nelson Lichtenstein (New York: The New Press, 2006), pp. 3–30.

6 Julie Davis et al., “The Impact of an Urban Wal-Mart Store on Area Businesses: An Evaluation of One Chicago Neighbor- hood’s Experience,” Center for Urban Research and Learning, Loyola University Chicago, December 2009.

5 “Walmart in LA’s Chinatown Has Opened, Despite Major Protest,” September 13, 2013, www.huffingtonpost.com.

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the salt, fat, and sugar in many of its packaged foods. The company strengthened its ethics and compliance program. It also pursued ambitious environmental goals to reduce waste, use more renewable energy, and sell more sustainable products, and began reporting to the public on its progress.7 “Reputation is very important to Wal-Mart,” said a historian who had studied the company. “They put a lot of money into building it.”8

Walmart’s experience illustrates, on a particularly large scale, the challenges of man- aging successfully in a complex global network of stakeholders. The company’s actions affected not only itself, but also many other people, groups, and organizations in society. Customers, suppliers, employees, stockholders, creditors, business partners, governments, and local communities all had a stake in Walmart’s decisions. Walmart had to learn just how difficult it could be to simultaneously satisfy multiple stakeholders with diverse and, in some respects, contradictory interests.

Every modern company, whether small or large, is part of a vast global business system. Whether a firm has 50 employees or 50,000—or, like Walmart, more than 2 million—its links to customers, suppliers, employees, and communities are certain to be numerous, diverse, and vital to its success. This is why the relationship between business and society is important for you to understand as both a citizen and a manager.

Business and Society

Business today is arguably the most dominant institution in the world. The term business refers here to any organization that is engaged in making a product or providing a service for a profit. Consider that in the United States today there are 6 million businesses, according to government estimates, and in the world as a whole, there are uncounted millions more. Of course, these businesses vary greatly in size and impact. They range from a woman who helps support her family by selling handmade tortillas by the side of the road in Mexico City for a few pesos, to ExxonMobil, a huge corporation that employs 75,000 workers and earns annual revenues approaching $412 billion in almost every nation in the world.

Society, in its broadest sense, refers to human beings and to the social structures they col- lectively create. In a more specific sense, the term is used to refer to segments of humankind, such as members of a particular community, nation, or interest group. As a set of organiza- tions created by humans, business is clearly a part of society. At the same time, it is also a distinct entity, separated from the rest of society by clear boundaries. Business is engaged in ongoing exchanges with its external environment across these dividing lines. For example, businesses recruit workers, buy supplies, and borrow money; they also sell products, donate time, and pay taxes. This book is broadly concerned with the relationship between business and society. A simple diagram of the relationship between the two appears in Figure 1.1.

As the Walmart example that opened this chapter illustrates, business and society are highly interdependent. Business activities impact other activities in society, and actions by various social actors and governments continuously affect business. To manage these interdependen- cies, managers need an understanding of their company’s key relationships and how the social and economic system of which they are a part affects, and is affected by, their decisions.

A Systems Perspective General systems theory, first introduced in the 1940s, argues that all organisms are open to, and interact with, their external environments. Although most organisms have clear bound- aries, they cannot be understood in isolation, but only in relationship to their surroundings.

8 “Wal-Mart’s Good-Citizen Efforts Face a Test,” The New York Times, April 30, 2012.

7 “2014 Global Responsibility Report,” http://corporate.walmart.com/global-responsibility/environment-sustainability/ global-responsibility.

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This simple but powerful idea can be applied to many disciplines. For example, in botany, the growth of a plant cannot be explained without reference to soil, light, oxygen, moisture, and other characteristics of its environment. As applied to management theory, the systems concept implies that business firms (social organisms) are embedded in a broader social structure (external environment) with which they constantly interact. Corporations have ongoing boundary exchanges with customers, governments, competitors, suppliers, com- munities, and many other individuals and groups. Just as good soil, water, and light help a plant grow, positive interactions with society benefit a business firm.

Like biological organisms, moreover, businesses must adapt to changes in the environ- ment. Plants growing in low-moisture environments must develop survival strategies, like the cactus that evolves to store water in its leaves. Similarly, a long-distance telephone company in a newly deregulated market must learn to compete by changing the products and services it offers. The key to business survival is often this ability to adapt effectively to changing con- ditions. In business, systems theory provides a powerful tool to help managers conceptualize the relationship between their companies and their external environments.

Systems theory helps us understand how business and society, taken together, form an interactive social system. Each needs the other, and each influences the other. They are entwined so completely that any action taken by one will surely affect the other. They are both separate and connected. Business is part of society, and society penetrates far and often into business decisions. In a world where global communication is rapidly expand- ing, the connections are closer than ever before. Throughout this book we discuss exam- ples of organizations and people that are grappling with the challenges of, and helping to shape, business–society relationships.

The Stakeholder Theory of the Firm

What is the purpose of the modern corporation? To whom, or what, should the firm be responsible?9 No question is more central to the relationship between business and society.

9 For summaries of contrasting theories of the purpose of the firm, see Margaret M. Blair, “Whose Interests Should Corpora- tions Serve,” in Margaret M. Blair and Bruce K. MacLaury, Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century (Washington, DC: Brookings Institution, 1995), ch. 6, pp. 202–34; and James E. Post, Lee E. Preston, and Sybille Sachs, Redefining the Corporation: Stakeholder Management and Organizational Wealth (Palo Alto, CA: Stanford University Press, 2002).

FIGURE 1.1 Business and Society: An Interactive System Society

Business

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In the ownership theory of the firm (sometimes also called property or finance theory), the firm is seen as the property of its owners. The purpose of the firm is to maximize its long-term market value, that is, to make the most money it can for shareholders who own stock in the company. Managers and boards of directors are agents of shareholders and have no obligations to others, other than those directly specified by law. In this view, own- ers’ interests are paramount and take precedence over the interests of others.

A contrasting view, called the stakeholder theory of the firm, argues that corporations serve a broad public purpose: to create value for society. All companies must make a profit for their owners; indeed, if they did not, they would not long survive. However, corpora- tions create many other kinds of value as well, such as professional development for their employees and innovative new products for their customers. In this view, corporations have multiple obligations, and all stakeholders’ interests must be taken into account. This approach has been expressed well by the pharmaceutical company Novartis, which states in its code of conduct that it “places a premium on dealing fairly with employees, cus- tomers, vendors, government regulators, and the public. Novartis’ success depends upon maintaining the trust of these essential stakeholders.”10

Supporters of the stakeholder theory of the firm make three core arguments for their position: descriptive, instrumental, and normative.11

The descriptive argument says that the stakeholder view is simply a more realistic description of how companies really work. Managers have to pay keen attention, of course, to their quarterly and annual financial performance. Keeping Wall Street satisfied by man- aging for growth—thereby attracting more investors and increasing the stock price—is a core part of any top manager’s job. But the job of management is much more complex than this. In order to produce consistent results, managers have to be concerned with producing high-quality and innovative products and services for their customers, attracting and retain- ing talented employees, and complying with a plethora of complex government regulations. As a practical matter, managers direct their energies toward all stakeholders, not just owners.

In what became known as the “dollar store wars,” in 2014 two companies made competing bids to buy Family Dollar, a U.S. discount retail chain based in Char- lotte, North Carolina—each with very different consequences for stakeholders. One suitor, Dollar Tree, offered $76.50 per share for the company, while the other, Dol- lar General, offered $80—seemingly a better deal for shareholders. But the Dollar General deal faced likely government antitrust scrutiny and would probably have required the closure of thousands of stores, throwing employees out of work and depriving low-income communities of access to a discount store. In the end, after considering the impact on all stakeholders, Family Dollar’s management recom- mended the lower-priced offer, and three-quarters of its shareholders agreed.12

The instrumental argument says that stakeholder management is more effective as a corporate strategy. A wide range of studies have shown that companies that behave respon- sibly toward multiple stakeholder groups perform better financially, over the long run, than those that do not. (This empirical evidence is further explored in Chapter 3.) These find- ings make sense, because good relationships with stakeholders are themselves a source of value for the firm. Attention to stakeholders’ rights and concerns can help produce

10 “Code of Conduct: Values to Live By,” online at www.novartisvaccines.com. 11 The descriptive, instrumental, and normative arguments are summarized in Thomas Donaldson and Lee E. Preston, “The Stakeholder Theory of the Corporation: Concepts, Evidence and Implications,” Academy of Management Review 20, no. 1 (1995), pp. 65–71. See also, Post, Preston, and Sachs, Redefining the Corporation, ch. 1. 12 “Family Dollar Shareholders Approve Sale to Dollar Tree,” Charlotte Observer, January 22, 2015.

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motivated employees, satisfied customers, committed suppliers, and supportive communi- ties, all good for the company’s bottom line.

The normative argument says that stakeholder management is simply the right thing to do. Corporations have great power and control vast resources; these privileges carry with them a duty toward all those affected by a corporation’s actions. Moreover, all stakehold- ers, not just owners, contribute something of value to the corporation. A skilled engineer at Microsoft who applies his or her creativity to solving a difficult programming problem has made a kind of investment in the company, even if it is not a monetary investment. Any individual or group who makes a contribution, or takes a risk, has a moral right to some claim on the corporation’s rewards.13

A basis for both the ownership and stakeholder theories of the firm exists in law. The legal term fiduciary means a person who exercises power on behalf of another, that is, who acts as the other’s agent. In U.S. law, managers are considered fiduciaries of the owners of the firm (its stockholders) and have an obligation to run the business in their interest. These legal concepts are clearly consistent with the ownership theory of the firm. However, other laws and court cases have given managers broad latitude in the exercise of their fiduciary duties. In the United States (where corporations are chartered not by the federal government but by the states), most states have passed laws that permit managers to take into consider- ation a wide range of other stakeholders’ interests, including those of employees, customers, creditors, suppliers, and communities. (Benefit corporations, firms with a special legal status that obligates them to do so, are further discussed in Chapter 3.) In addition, many federal laws extend specific protections to various groups of stakeholders, such as those that prohibit discrimination against employees or grant consumers the right to sue if harmed by a product.

In other nations, the legal rights of nonowner stakeholders are often more fully devel- oped than in the United States. For example, a number of European countries—including Germany, Norway, Austria, Denmark, Finland, and Sweden—require public companies to include employee members on their boards of directors, so that their interests will be explicitly represented. Under the European Union’s so-called harmonization statutes, man- agers are specifically permitted to take into account the interests of customers, employees, creditors, and others.

In short, while the law requires managers to act on behalf of stockholders, it also gives them wide discretion—and in some instances requires them—to manage on behalf of the full range of stakeholder groups. The next section provides a more formal definition and an expanded discussion of the stakeholder concept.

The Stakeholder Concept The term stakeholder refers to persons and groups that affect, or are affected by, an orga- nization’s decisions, policies, and operations.14 The word stake, in this context, means

14 The term stakeholder was first introduced in 1963 but was not widely used in the management literature until the publica- tion of R. Edward Freeman’s Strategic Management: A Stakeholder Approach (Marshfield, MA: Pitman, 1984). For summaries of the stakeholder theory literature, see Thomas Donaldson and Lee E. Preston, “The Stakeholder Theory of the Corporation: Concepts, Evidence, Implications,” Academy of Management Review, January 1995, pp. 71–83; Max B. E. Clarkson, ed., The Corporation and Its Stakeholders: Classic and Contemporary Readings (Toronto: University of Toronto Press, 1998); Abe J. Zakhem, Daniel E. Palmer, and Mary Lyn Stoll, Stakeholder Theory: Essential Readings in Ethical Leadership and Manage- ment (Amherst, NY: Prometheus Books, 2008); and R. Edward Freeman, Stakeholder Theory: The State of the Art (Cambridge, UK: Cambridge University Press, 2010).

13 Another formulation of this point has been offered by Robert Phillips, who argues for a principle of stakeholder fairness. This states that “when people are engaged in a cooperative effort and the benefits of this cooperative effort are accepted, obligations are created on the part of the group accepting the benefit” [i.e., the business firm]. Robert Phillips, Stakeholder Theory and Organizational Ethics (San Francisco: Berrett-Koehler, 2003), p. 9 and ch. 5.

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an interest in—or claim on—a business enterprise. Those with a stake in the firm’s actions include such diverse groups as customers, employees, shareholders (also called stockholders), governments, suppliers, professional and trade associations, social and environmental activists, and nongovernmental organizations. The term stakeholder is not the same as stockholder, although the words sound similar. Stockholders—individ- uals or organizations that own shares of a company’s stock—are one of several kinds of stakeholders.

Business organizations are embedded in networks involving many participants. Each of these participants has a relationship with the firm, based on ongoing interactions. Each of them shares, to some degree, in both the risks and rewards of the firm’s activ- ities. And each has some kind of claim on the firm’s resources and attention, based on law, moral right, or both. The number of these stakeholders and the variety of their inter- ests can be large, making a company’s decisions very complex, as the Walmart example illustrates.

Managers make good decisions when they pay attention to the effects of their deci- sions on stakeholders, as well as stakeholders’ effects on the company. On the positive side, strong relationships between a corporation and its stakeholders are an asset that adds value. On the negative side, some companies disregard stakeholders’ interests, either out of the belief that the stakeholder is wrong or out of the misguided notion that an unhappy customer, employee, or regulator does not matter. Such attitudes often prove costly to the company involved. Today, for example, companies know that they cannot locate a factory or store in a community that strongly objects. They also know that making a product that is perceived as unsafe invites lawsuits and jeopardizes mar- ket share.

Different Kinds of Stakeholders Business interacts with society in many diverse ways, and a company’s relationships with various stakeholders differ.

Market stakeholders are those that engage in economic transactions with the company as it carries out its purpose of providing society with goods and services. Each relationship between a business and one of its market stakeholders is based on a unique transaction, or two-way exchange. Stockholders invest in the firm and in return receive the potential for dividends and capital gains. Creditors loan money and collect payments of interest and principal. Employees contribute their skills and knowledge in exchange for wages, bene- fits, and the opportunity for personal satisfaction and professional development. In return for payment, suppliers provide raw materials, energy, services, finished products, and other inputs; and wholesalers, distributors, and retailers engage in market transactions with the firm as they help move the product from plant to sales outlets to customers. All businesses need customers who are willing to buy their products or services.

The puzzling question of whether or not managers should be classified as stakeholders along with other employees is discussed in Exhibit 1.A.

Nonmarket stakeholders, by contrast, are people and groups who—although they do not engage in direct economic exchange with the firm—are nonetheless affected by or can affect its actions. Nonmarket stakeholders include the community, various levels of government, nongovernmental organizations, business support groups, competitors, and the general public. Nonmarket stakeholders are not necessarily less important than others, simply because they do not engage in direct economic exchange with a business. On the contrary, interactions with such groups can be critical to a firm’s success or failure, as shown in the following example.

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In 2001, a company called Energy Management Inc. (EMI) announced a plan to build a wind farm about six miles off the shore of Cape Cod, Massachusetts, to sup- ply clean, renewable power to New England customers. The project, called Cape Wind, immediately generated intense opposition from residents of Cape Cod and nearby islands, who were concerned that its 130 wind turbines would spoil the view and get in the way of boats. A nonprofit group called Save Our Sound filed dozens of lawsuits, charging possible harm to wildlife, increased electricity rates, and dan- ger to aircraft. In early 2015, EMI appeared blocked on all sides, as local utilities withdrew their commitments to buy power from the wind farm, which one local newspaper called the final “death blow.”15

In this instance, activists were able to block the company’s plans for more than a decade—and possibly permanently—even though they did not have a market relationship with it.

Theorists also distinguish between internal stakeholders and external stakeholders. Internal stakeholders are those, such as employees and managers, who are employed by the firm. They are “inside” the firm, in the sense that they contribute their effort and skill, usu- ally at a company worksite. External stakeholders, by contrast, are those who—although they may have important transactions with the firm—are not directly employed by it.

The classification of government as a nonmarket stakeholder has been controversial in stakeholder theory. Most theorists say that government is a nonmarket stakeholder (as does this book) because it does not normally conduct any direct market exchanges (buying and selling) with business. However, money often flows from business to government in the form of taxes and fees, and sometimes from government to business in the form of subsidies or incentives. Moreover, some businesses—defense contractors for example—do

15 “Renewable Energy: Wind Power Tests the Waters,” Nature, September 24, 2014; “Cape Wind’s Future Called into Ques- tion,” The Boston Globe, January 8, 2015; and “Cape Wind Becalmed,” Providence Journal, January 21, 2015. The website of the project is at www.capewind.org. The story of the opposition to Cape Wind is told in Robert Whitcomb and Wendy Williams, Cape Wind: Money, Celebrity, Energy, Class, Politics, and the Battle for Our Energy Future (New York: PublicAffairs, 2008).

Are Managers Stakeholders?

Are managers, especially top executives, stakeholders? This has been a contentious issue in stakeholder theory. On one hand, the answer clearly is “yes.” Like other stakeholders, managers are impacted by the firm’s decisions. As employees of the firm, managers receive compensation—often very generous compensation, as shown in Chapter 13. Their managerial roles confer opportunities for professional advancement, social status, and power over others. Managers benefit from the company’s success and are hurt by its failure. For these reasons, they might properly be classified as employees. On the other hand, top executives are agents of the firm and are responsible for acting on its behalf. In the stakeholder theory of the firm, their role is to integrate stakeholder interests, rather than to promote their own more narrow, selfish goals. For these reasons, they might properly be classified as representatives of the firm itself, rather than as one of its stakeholders. Management theory has long recognized that these two roles of managers potentially conflict. The main job of executives is to act for the company, but all too often they act primarily for themselves. Consider, for example, the many top executives of Lehman Brothers, MF Global, and Merrill Lynch, who enriched them- selves personally at the expense of shareholders, employees, customers, and other stakeholders. The chal- lenge of persuading top managers to act in the firm’s best interest is further discussed in Chapter 13.

Exhibit 1.A

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sell directly to the government and receive payment for goods and services rendered. For this reason, a few theorists have called government a market stakeholder of business. And, in a few cases, the government may take a direct ownership stake in a company—as the U.S. government did after the financial crisis of 2008–09 when it invested in several banks and auto companies, becoming a shareholder of these firms. Government also has special influence over business because of its ability to charter and tax corporations, as well as make laws that regulate their activities. The unique relationship between government and business is discussed throughout this book.

Other stakeholders also have some market and some nonmarket characteristics. For example, business support groups, such as the Chamber of Commerce, are normally con- sidered a nonmarket stakeholder. However, companies may support the Chamber of Com- merce with their membership dues—a market exchange. Communities are a nonmarket stakeholder, but receive taxes, philanthropic contributions, and other monetary benefits from businesses. These subtleties are further explored in later chapters.

Modern stakeholder theory recognizes that most business firms are embedded in a com- plex web of stakeholders, many of which have independent relationships with each other.16 In this view, a business firm and its stakeholders are best visualized as an interconnected network. Imagine, for example, an electronics company, based in the United States, that produces smartphones, tablets, and music players. The firm employs people to design, engineer, and market its devices to customers in many countries. Shares in the company are owned by investors around the world, including many of its own employees and man- agers. Production is carried out by suppliers in Asia. Banks provide credit to the company, as well as to other companies. Competing firms sell their products to some of the same customers, and also contract production to some of the same Asian suppliers. Nongovern- mental organizations may seek to lobby the government concerning the firm’s practices, and may count some employees among their members. A visual representation of this company and its stakeholders is shown in Figure 1.2.

As Figure 1.2 suggests, some individuals or groups may play multiple stakeholder roles. Some theorists use the term role sets to refer to this phenomenon. For example, a person may work at a company, but also live in the surrounding community, own shares of com- pany stock in his or her 401(k) retirement account, and even purchase the company’s prod- ucts from time to time. This person has several stakes in a company’s actions.

Later sections of this book (especially Chapters 13 through 19) will discuss in more detail the relationship between business and its various stakeholders.

Stakeholder Analysis

An important part of the modern manager’s job is to identify relevant stakeholders and to understand both their interests and the power they may have to assert these interests. This process is called stakeholder analysis. The organization from whose perspective the analy- sis is conducted is called the focal organization.

The first step of a stakeholder analysis is for managers of the focal organization to identify the issue at hand. For example, in the Cape Wind situation discussed earlier in this chapter, Energy Management Inc. had to analyze how best to win regulatory approval for the construction of its wind farm. Once the issue is determined, managers must ask four key questions, as discussed below and summarized in Figure 1.3.

16 Timothy J. Rowley, “Moving Beyond Dyadic Ties: A Network Theory of Stakeholder Influence,” Academy of Management Review 22, no. 4 (October 1997).

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Who are the relevant stakeholders?

The first question requires management to identify and map the relevant stakeholders. Exhibit 1.B, which appears later in this chapter, provides a guide. However, not all stake- holders listed will be relevant in every management situation. For example, a privately held

FIGURE 1.2 A Firm and Its Stakeholders

Business Firm

Governments

Customers

Stockholders

Employees

Creditors

Competitors

Suppliers

Non governmental organizations

FIGURE 1.3 The Four Key Questions of Stakeholder Analysis

Who are the relevant stakeholders?

What are the interests of each stakeholder?

What is the power of each stakeholder?

How are coalitions likely to form?

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firm will not have shareholders. Some businesses sell directly to customers online, and therefore will not have retailers. In other situations, a firm may have a stakeholder—say, a creditor that has loaned money—but this group is not relevant to a particular issue that management faces.

But stakeholder analysis involves more than simply identifying stakeholders; it also involves understanding the nature of their interests, power, legitimacy, and links with one another.

Stakeholder Interests What are the interests of each stakeholder?

Each stakeholder has a unique relationship to the organization, and managers must respond accordingly. Stakeholder interests are, essentially, the nature of each group’s stake. What are their concerns, and what do they want from their relationship with the firm?17

Shareholders, for their part, have an ownership interest in the firm. In exchange for their investment, shareholders expect to receive dividends and, over time, capital appreciation. The economic health of the corporation affects these people financially; their personal wealth—and often, their retirement security—is at stake. They may also seek to achieve social objectives through their choice of investments. Customers, for their part, are most interested in gaining fair value and quality in exchange for the purchase price of goods and services. Suppliers wish to obtain profitable orders, use their capacity efficiently, and build stable relationships with their business customers. Employees, in exchange for their time and effort, want to receive fair compensation and an opportunity to develop their job skills. Governments, public interest groups, and local communities have another sort of relation- ship with the company. In general, their stake is broader than the financial stake of owners, customers, and suppliers. They may wish to protect the environment, assure human rights, or advance other broad social interests. Managers need to understand these complex and often intersecting stakeholder interests.

Stakeholder Power What is the power of each stakeholder?

Stakeholder power means the ability to use resources to make an event happen or to secure a desired outcome. Stakeholders have five different kinds of power: voting power, eco- nomic power, political power, legal power, and informational power.

Voting power means that the stakeholder has a legitimate right to cast a vote. Share- holders typically have voting power proportionate to the percentage of the company’s stock they own. They typically have an opportunity to vote on such major decisions as mergers and acquisitions, the composition of the board of directors, and other issues that may come before the annual meeting. (Shareholder voting power should be distinguished from the voting power exercised by citizens, which is discussed below.)

For example, Starboard Value LP, a New York–based hedge fund, used its voting power as a shareholder to force change in a company it had invested in. Starboard bought more than 8 percent of the shares of Darden Restaurants, the owner of Red Lobster, Olive Garden, and other eatery chains. It called for radical change, slamming management for tolerating “lavish excess, bureaucracy, and low standards.” When Darden resisted, Starboard and its allies fielded their own slate of nominees in the

17 A full discussion of the interests of stakeholders may be found in R. Edward Freeman, Ethical Theory and Business (Engle- wood Cliffs, NJ: Prentice Hall, 1994).

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election for the board of directors, organized support from other voting shareholders— and won. Activist investors like Starboard engaged in almost 300 such campaigns in 2014, the highest in five years, and won almost three-quarters of the time.18

Suppliers, customers, employees, and other stakeholders have economic power with the company. Suppliers, for example, can withhold supplies or refuse to fill orders if a com- pany fails to meet its contractual responsibilities. Customers may refuse to buy a compa- ny’s products or services if the company acts improperly. They can boycott products if they believe the goods are too expensive, poorly made, or unsafe. Employees, for their part, can refuse to work under certain conditions, a form of economic power known as a strike or slowdown. Economic power often depends on how well organized a stakeholder group is. For example, workers who are organized into unions usually have more economic power than do workers who try to negotiate individually with their employers.

Governments exercise political power through legislation, regulations, or lawsuits. While government agencies act directly, other stakeholders use their political power indi- rectly by urging government to use its powers by passing new laws or enacting regulations. Citizens may also vote for candidates that support their views with respect to government laws and regulations affecting business, a different kind of voting power than the one dis- cussed above. Stakeholders may also exercise political power directly, as when social, environmental, or community activists organize to protest a particular corporate action.

Stakeholders have legal power when they bring suit against a company for damages, based on harm caused by the firm; for instance, lawsuits brought by customers for damages caused by defective products, brought by employees for damages caused by workplace injury, or brought by environmentalists for damages caused by pollution or harm to species or habitat. After the mortgage lender Countrywide collapsed, many institutional share- holders, such as state pension funds, sued Bank of America (which had acquired Country- wide) to recoup some of their losses.

Finally, stakeholders have informational power when they have access to valuable data, facts, or details and are able to bring their own information and perspectives to the atten- tion of the public or key decision makers. With the explosive growth of technologies that facilitate the sharing of information, this kind of stakeholder power has become increas- ingly important.

Consumers’ ability to use social networks to express their views about businesses they like—and do not like—has given them power they did not previously have. For example, Yelp Inc. operates a website where people can search for local businesses, post reviews, and read others’ comments. In 2014, a decade after its launch, Yelp attracted almost 140 million unique visitors every month. Its reviewers collectively have gained considerable influence. Restaurants, cultural venues, hair salons, and other establishments can attract customers with five-star ratings and “People Love Us on Yelp” stickers in their windows—but, by the same token, can be badly hurt when reviews turn nasty. A study in the Harvard Business Review reported that a one-star increase in an independent restaurant’s Yelp rating led to a 5 to 9 percent increase in revenue. Some businesses have complained that Yelp reviewers have too much power. “My business just died,” said the sole proprietor of a housecleaning business. “Once they locked me into the 3.5 stars, I wasn’t getting any calls.”19

18 “The Hedge Fund Presentation on Olive Garden is a Masterpiece,” Business Insider, September 13, 2014; “Activist Hedge Fund Starboard Succeeds in Replacing Darden Board,” The New York Times, October 10, 2014; and “Taking Recipes from the Activist Cookbook,” The New York Times, December 9, 2014. 19 “Is Yelp Fair to Businesses?” PC World, November 15, 2011.

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Activists often try to use all of these kinds of power when they want to change a com- pany’s policy. For example, human rights activists wanted to bring pressure on Unocal Corporation to change its practices in Burma (Myanmar), where it had entered into a joint venture with the government to build a gas pipeline. Critics charged that many human rights violations occurred during this project, including forced labor and relocations. In an effort to pressure Unocal to change its behavior, activists organized protests at stock- holder meetings (voting power), called for boycotts of Unocal products (economic power), promoted local ordinances prohibiting cities from buying from Unocal (political power), brought a lawsuit for damages on behalf of Burmese villagers (legal power), and gathered information about government abuses by interviewing Burmese refugees and publicizing the results online (informational power). These activists increased their chances of success by mobilizing many kinds of power. This combination of tactics eventually forced Unocal to pay compensation to people whose rights had been violated and to fund education and health care projects in the pipeline region.20

Exhibit 1.B provides a schematic summary of some of the main interests and powers of both market and nonmarket stakeholders.

Stakeholder Coalitions An understanding of stakeholder interests and power enables managers to answer the final question of stakeholder analysis regarding coalitions.

How are coalitions likely to form?

Not surprisingly, stakeholder interests often coincide. For example, consumers of fresh fruit and farmworkers who harvest that fruit in the field may have a shared interest in reducing the use of pesticides, because of possible adverse health effects from exposure to chemicals. When their interests are similar, stakeholders may form coalitions, temporary alliances to pursue a common interest. Companies may be both opposed and supported by stakeholder coalitions, as shown in the example of the controversial Keystone XL pipeline.

TransCanada, a major North American energy company, sought approval to build a pipeline from Alberta, Canada, to Steele City, Nebraska, where it would connect to existing pipelines running to refineries and ports along the Gulf Coast. In opposing the Keystone XL pipeline, environmentalists argued it would enable the export of oil extracted from Canadian tar sands, an energy-intensive and dirty process. When burned, the tar sands oil would release carbon dioxide, contributing to further climate change, and spills from the pipeline could foul water supplies. They were joined in coalition by other groups, such as ranchers, farmers, and Native Ameri- cans whose land would be crossed by the pipeline. On the other side, construction unions, many local governments, and business groups supported the pipeline, say- ing that it would create jobs, reduce U.S. dependence on foreign oil, and provide a safer method of transport than trains or tanker trucks.21

Stakeholder coalitions are not static. Groups that are highly involved with a company today may be less involved tomorrow. Issues that are controversial at one time may be uncontroversial later; stakeholders that are dependent on an organization at one time may be less so at another. To make matters more complicated, the process of shifting coali- tions does not occur uniformly in all parts of a large corporation. Stakeholders involved with one part of a large company often have little or nothing to do with other parts of the

20 Further information about the campaign against Unocal is available at www.earthrights.org/unocal. 21 “Keystone Pipeline Pros, Cons and Steps to a Final Decision,” The New York Times, November 18, 2014.

chapter 1, case reading page 21-22

short answer the questions. As short as possible.

1.understand the relationship between business and society.

2.know what a stakeholder is.

3.Analyze the forces of change that reshape the business and society relationship.