‘ICHAPTER TWOChapter Objectives• To define stakehold

‘I
CHAPTER TWO
Chapter Objectives
• To define stakeholders and understand
their importance
• To distinguish between primary and
secondary stakeholders
To discuss the global nature of
stakeholder relationships
To consider the impact of reputation and
crisis situations on social responsibility
performance
To examine the development of
stakeholder relationships
To explore how stakeholder relationships
are integral to social responsibility
Chapter Outline
Stakeholders Defined
Stakeholder Identification and Importance
Performance with Stakeholders

Development of Stakeholder Relationships
Implementing a Stakeholder Perspective in
Social Responsibility
Link between Stakeholder Relationships and
Opening Vignette
The Fight against Childhood Obesity
America’s children are growing, not in height or intel
lectual capacity but in weight. Advertising of fast food
and highly processed, corn syrup—laced foods is at the
heart of the controversy. While TV advertising of food
and restaurants has dropped 34 percent from 1977 to
2004, the use of the internet, promotions, school adver
tising and vending machines, and sponsored sports sta
diums is on the rise. Childhood obesity has become such
a concern that First Lady Michelle Obama has created
the movement Let’s Movel to encourage the develop
ment of a healthier generation of children. Regulators,
parents, and our society in general are concerned about
the health of our children, It is estimated that medi
cal costs associated with childhood obesity will total
$19,000 over a person’s lifetime.
Studies conducted by the Kaiser Family Foundation
have found that the average child sees around 40,000
advertisements per year on television—most of these
encourage children to consume candy, cereal, fast food,
and soft drinks. What seems to be particularly prob
lematic is the use of popular licensed children’s cartoon
characters (e.g., SpongeBob SquarePants and Scooby
Doo) to advertise these unhealthy foods. Critics believe
food manufacturers are not being socially responsible

by encouraging children to eat food that is detrimental
to their health. Companies are choosing to do some
thing about this problem.
A study over a five-year period revealed that
16 major food and beverage companies—including
PepsiCo, Coca-Cola, and Bumble Bee Foods—have
reduced calories in foods amounting to an average of
78 calories a day from the American diet. For instance,
Nestlé used new technology to reduce fat by half and
calories by one-third in their “Slow Churned” Edy’s and
Dreyer’s ice cream. What is especially important is that
these 16 companies account for about 36 percent of
calories in packaged foods.
Changes are also being made in advertising. The
Walt Disney Company mandated that the company will
no longer allow sponsorships or advertisements on its
networks for foods that do not meet certain nutritional
criteria. It also pledged to reduce the calories in foods
sold at its theme parks. Coca-Cola has pledged to elimi
nate advertising targeted toward children in markets
where more than 35 percent of viewers are under the
age of 12. These companies’ actions demonstrate sensi
tivity and concern for consumer health and stakeholder
interests.1
.
Strategic Management df
Stakeholder Re1ation
•
•

•
I
42 Business and Society Chapter 2 Strategic Management of
Stakeholder Relationships 43
A
s this example illustrates, most organizations have a number of
constituents and a web of relationships that interface with
society.
In this case, the food industry and its member companies are
facing
the complex task of balancing the concerns of government,
special-interest
groups, parents, children, and corporate. These stakeholders are
increas
ingly expressing opinions and taking actions that have an effect
on the
industry’s reputation, relationships, and products. Today, many
organiza
tions are learning to anticipate such issues and to address them
in their
strategies long before they become the subject of media stories
of negative
attention.
In this chapter, we examine the concept of stakeholders and
explore
why these groups are important for today’s businesses. First, we
define
stakeholders and examine primary, secondary, and global

stakeholders.
Then, we examine the concept of a stakeholder orientation to
enhance social
responsibility. Next, we consider the impact of corporate
reputation and
crisis situations on stakeholder relationships. Finally, we
examine the devel
opment of stakeholder relationships implementing a stakeholder
perspective
and the link between stakeholder relationships and social
responsibility.
STAKEHOLDERS DEFINED
In Chapter 1, we defined stakeholders as those people and
groups to
whom an organization is responsible—including customers,
sharehold
ers, employees, suppliers, governments, communities, and many
others—
because they have a “stake” or claim in some aspect of a
company’s
products, operations, markets, industry, or outcomes. These
groups not
only are influenced by businesses, but they also have the ability
to affect
businesses.
Responsibility issues, conflicts, and successes revolve around
stake-
holder relationships. Building effective relationships is
considered one of
the more important areas of business today. The stakeholder
framework
is recognized as a management theory that attempts to balance
stake-
holder interests. Issues related to indivisible resources and

unequal levels
of stakeholder influence and importance constrain managers’
efforts to
balance stakeholder interests.2 A business exists because of
relationships
among employees, customers, shareholders or investors,
suppliers, and
managers that develop strategies to attain success. In addition,
an organi
zation usually has a governing authority, often called a board of
directors,
which provides oversight and direction to make sure the
organization stays
focused on objectives in an ethical, legal, and socially
responsible man
ner. Corporate governance is discussed in Chapter 3. When
misconduct is
discovered in organizations, it is often found that in most
instances there
is knowing cooperation or compliance that facilitates the
acceptance and
perpetuation of unethical conduct.3 Therefore, relationships are
associated
not only with organizational success but also with
organizational failure
to assume responsibility.
These perspectives take into account both market and nonmarket
con
stituencies that may interact with a business and have some
effect on the
firm’s policies and strategy.4 Market constituencies are those
who are directly
involved and affected by the business purpose, including
investors, employ
ees, customers, and other business partners. Nonmarket groups

include the
general community, media, government, special-interest groups,
and others
who are not always directly tied to issues of profitability and
performance.
The historical assumption that the foremost objective of
business is
profit maximization led to the belief that business is
accountable primarily
to shareholders and others involved in the market and economic
aspects
of an organization. Because shareholders and other investors
provide the
financial foundation for business and expect something in
return, managers
and executives naturally strive to maintain positive
relationships with them.5
In the latter half of the twentieth century, perceptions of
business
accountability evolved toward an expanded model of the role
and respon
sibilities of business in society. The expansion included
questions about the
normative role of business: “What is the appropriate role for
business to
play in society?” and “Should profit be the sole objective of
business?”6
Many businesspeople and scholars have questioned the role of
social
responsibility in business. Legal and economic responsibilities
are generally
accepted as the most important determinants of performance: “If
this is well
done,” say classical economic theorists, “profits are maximized

more or less
continuously and firms carry out their major responsibilities to
society.”7
Some economists believe that if companies address economic
and legal
issues, they are satisfying the demands of society, and trying to
anticipate
and meet additional needs would be almost impossible. Milton
Friedman
has been quoted as saying that “the basic mission of business
[is] thus to
produce goods and services at a profit, and in doing this,
business [is] mak
ing its maximum contribution to society and, in fact, being
socially respon
sible.”8 Even with the business ethics scandals of the twenty-
first century,
Friedman suggests that, although individuals guilty of
wrongdoing should
be held accountable, the market is a better deterrent than new
laws and reg
ulations that discourage firms from wrongdoing.9 Thus,
Friedman would
diminish the role of stakeholders such as the government and
employees
in requiring that businesses demonstrate responsible and ethical
behavior.
This form of capitalism has unfortunately been exported to
many less
developed and developing countries without the appropriate
concerns for
ethics and social responsibility. Friedman’s capitalism is a far
cry from
Adam Smith’s, one of the founders of capitalism. Smith created
the con

cept of the invisible hand and spoke about self-interest;
however, he went
on to explain that this common good is associated with
psychological
motives and that each individual has to produce for the common
good
“with values such as Propriety, Prudence, Reason, Sentiment
and promot
ing the happiness of mankind.”10 These values could be
associated with
the needs and concerns of stakeholders.
In the twenty-first century, Friedman’s form of capitalism is
being
replaced by Smith’s original concept of capitalism (or what is
now called
44 Business and Society
Chapter 2 Strategic Management of Stakeholder Relationships
45
enlightened capitalism), a notion of capitalism that
reemphasizes stake-holder concerns and issues. The acceptance
of enlightened capitalismmay be occurring faster in developed
countries than in those still developing. Theodore Levitt, a
renowned business professor, once wrote thatalthough profits
are required for business just like eating is required forliving,
profit is not the purpose of business any more than eating is
thepurpose of life.1’ Norman Bowie, a well-known philosopher,
extendedLevitt’s sentiment by noting that focusing on profit
alone can create anunfavorable paradox that causes a fi rm to
fail to achieve its objectives.Bowie contends that when a
business also cares about the well-being ofstakeholders, it earns

trust and cooperation that ultimately reduce costsand increases
productivity.’2 This in turn results in increased profits
andsuccess of the organization.
Some critics of business believe there is a tradeoff between
profits andsocial responsibility. They believe that to increase
profits a firm must viewsocial responsibility as a cost that
reduces profits. However, there is muchevidence that social
responsibility is associated with increased profits. Forexample,
one survey indicates that half of all consumers are willing to
paymore for goods and services from socially responsible
companies. Thisrate of response is up by 10 percent from a few
years ago and relates to arange of demographic groups.’3 An
important academic study found thatthere is a direct
relationship between social responsibility and profitability.The
study also found that social responsibility contributes to
employeecommitment and customer loyalty—vital concerns of
any firm trying toincrease profits.’4 As mentioned earlier, the
Ethisphere Institute has foundthat the world’s most ethical
companies outperform the companies on theStandard & Poor’s
index. This clearly demonstrates that social responsibility
decisions are good for business.
STAKEHOLDER ISSUES AND INTERACTION
Stakeholders provide resources that are more or less critical to a
firm’slong-term success. These resources may be both tangible
and intangible. Shareholders, for example, supply capital;
suppliers offer materialresources or intangible knowledge;
employees and managers grant expertise, leadership, and
commitment; customers generate revenue and provideloyalty
and positive or negative word-of-mouth promotion; local
communities provide infrastructure; and the media transmits
positive or negativecorporate images. When individual
stakeholders share similar expectationsabout desirable business
conduct, they may choose to establish or joinformal
communities that are dedicated to better defining and
advocating these values and expectations. Stakeholders’ ability

to withdraw—orthreatening to withdraw—these needed
resources gives them power overbusinesses.15
New reforms to improve corporate accountability and
transparencyalso suggest that stakeholders such as suppliers—
including banks, law
firms, and public accounting firms—can play a major role in
fosteringresponsible decision making.’6 Stakeholders apply
their values and standards to many diverse issues, such as
working conditions, consumer rights,environmental
conservation, product safety, and proper information disclosure.
These are issues that may or may not directly affect an
individualstakeholder’s own welfare. We can assess the level of
social responsibilityan organization bears by scrutinizing its
efforts and communication onthe issues of concern to its
stakeholders. Table 2.1 provides examples ofcommon
stakeholder issues along with indicators of businesses’
impactson these issues.17
TABLE 2.1 Examples of Stakeholder Issues and Associated
Measuresof Corporate Impacts
Employees
1. Compensation and benefits
2. Training and development
Suppliers
1. Encouraging suppliers in
developing countries
2. Encouraging minority suppliers
Community
1. Public health and safety
2. Conservation of energy and

materials
Stakeholder Groups Potential Indicators of Corporate Impactand
Issues on These Issues
3. Employee diversity
1. Average wage paid versus industry averages
2. Changes in average traIning dollars spent per year
peremployee. Resources for ethics training versus
industryaverages.
3. Percentages of employees from different genders andraces,
especially in leadership roles4. Occupational health and safety
4. Standard injury rates and absentee rates
5. Availability of open-door policies or ombudsmenmanagement
S. Communications with
management
Customers
1. Product safety and quality
2. Management of customer
3. Services to customers with
disabilities
Investors
1. Transparency of shareholder
2. Shareholder rights
1. Number of product recalls over time
2. Number of customer complaints and availability ofcomplaint
procedures to answer them
3. Availability and nature of measures taken to ensureservices

to customers with disabilities
1. Availability of procedures to inform shareholdersabout
corporate activities
2. Frequency and type of litigation involving violations
ofshareholder rights
.1
—
1. Prices offered to suppliers in developed countries
anddeveloping countries in comparison to other suppliers
2. Percentage of minority suppliers
1, Availability of emergency response plan protection j
2. Data on reduction of waste produced and
materialscomparison to industry
(Continued)
3. Annual employee time spent in community service
organizations
1. Amount of electricity purchased; percentage of
“green” electricity
2. Minimizing emissions and waste 2. Type, amount, and
designation of waste generated
3. Minimizing adverse environmental 3. Percentage of product
weight reclaimed after the

effect of products product has been used
Identifying Stakeholders
We can identify two different types of stakeholders, primary
and second
ary. Primary stakeholders are those whose continued associ ation
is abso
lutely necessary for a firm’s survival; these include employees,
customers,
suppliers, and shareholders, as well as the governments and
communities
that provide necessary infrastructure. For example, many large
companies
decided to eliminate health care plans in light of the
implementation of
the Affordable Care Act, which requires all U.S. citizens to be
enrolled
in a healthcare plan whether or not their employer offers such
benefits.
This has a direct impact on a primary stakeholder—employees.
However,
more than half of all employees indicate that they value the fact
that their
employers offer healthcare plans, especially those plans that can
be cus
tomized to their health needs.18 These benefits can enhance the
relation
ship between employer and employee. Other primary
stakeholders such
as customers are directly impacted by the quality of products
and the
integrity of communication and relationships. Shareholders
depend on
transparency regarding financial information as well as forward-
looking
statements about sales and profits.

Secondary stakeholders do not typically engage in direct
transactions with
a company and thus are not essential for its survival; these
include the media,
trade associations, and special-interest groups. For example, the
American
Association of Retired People (AARP), a special-interest group,
works to sup
port the rights of retirees in areas such as healthcare benefits.
Both primary
and secondary stakeholders embrace specific values and
standards that dic
tate what constitutes acceptable or unacceptable corporate
behaviors. It is
important for managers to recognize that primary groups may
present more
day-to-day concerns, but secondary groups cannot be ignored or
given less
consideration. Sometimes a secondary stakeholder, such as the
media, can
have more of an impact than a primary stakeholder.
In 2014, Seattle passed the largest minimum wage law
to date. Seattle’s city council unanimously voted to raise
the minimum wage to $15 over the nect several years.
This comes after a bill attempting to raise the federal
minimum wage to $10.10 an hour stalled in Congress.
There are many reasons why raising the minimum
wage might be a good idea. One major issue is that the
minimum wage rates have not kept up with inflation
over the years. A report by the Congressional Office
Budget claims that a federal minimum wage increase
to $10.10 per hour could raise as many as 900,000
people out of poverty. This could add $31 billion to the

paychecks of American families. The biggest argument
in support of a minimum wage increase is that greater
purchasing power will stimulate the economy.
On the other hand, critics believe raising the mini
mum wage has disadvantages. Republicans blocked the
bill in Congress after the Congressional Office Budget
report claimed that an increase could lead to approxi
mately 500,000 lost jobs, about 0.3 percent of the U.S.
workforce. Critics believe the government and busi
nesses should focus more on increasing employment.
Additionally, not everyone is happy about Seattle’s
minimum-wage increase. One Seattle business owner
responded by claiming that the new increase will force
her to raise prices.
The impact on stakeholders is less clear. Although
some studies have concluded that a minimum wage
increase increases unemployment, others claim that it
has little discernible effect. According to economists,
this is because labor markets react differently to
increases. As an alternative to laying off employees,
economists claim that some businesses choose to cut
beyond the minimum wage, settle for less profit,
or raise prices. On the contrary, some economists
claim that minimum wage increases can be beneficial
because it causes business owners to be more effi
cient and increases positive relationships between
employee and employer, reducing turnover and moti
vating employees to work harder.
Because the bill stalled in Congress, supporters are
encouraging states and cities to raise the minimum
wage themselves. Oklahoma responded by passing a
law forbidding individual towns and cities to raise the

minimum wage. The governor of Oklahoma claims
raising minimum wages would destroy Oklahoma jobs,
cause business owners to move to other states, and
raise prices for consumers. Supporters of a minimum
wage increase are likely to challenge this law.
Seattle could also experience difficulties based
upon how it chooses to implement the increase. The
International Franchise Association has threatened to
sue the city based upon what they see as unequal treat
ment. For instance, Seattle is giving businesses with
fewer than 500 employees more time to comply with
the law. However, franchises that have more than 500
employees anywhere in the United States are currently
not given this extension, even though many franchisees
are independently owned.
Walmart claims that it does not oppose a minimum
wage increase. Walmart claims that it pays approxi
mately 5,000 employees the minimum wage, out of
1.3 million workers. How an increase affects a business
will likely depend on the size, nature, and operations
of the company. Not only employee stakeholders but
communities as well as customers and suppliers will be
affected by the decisions on minimum wages.
TABLE 2.1 (Continued)
3. Donations and support of local
organizations
Stakeholder Groups Potential Indicators of Corporate Impact
and Issues on These Issues
Environmental Groups

1. Minimizing the use of energy
Ethical Responsibilities in Human Resources
Should the Minimum Wage Be Increased?
primary stakeholders
They are fundamental to
a company’s operations
and survival; these include
shareholders and investors,
employees, customers, sup
pliers, and public stakehold
ers, such as government
and the community.
secondary stakeholders
They do not typically
engage in direct transac
tions with a company and
thus are not essential for its
survival; these include the
media, trade associations,
and special-interest groups.
benefits, cut wages for employees who already make
Sources: Katie Lobosco, “Coping with $15 Minimum Wage in
Seattle,” CNN Money, June 4, 2Q14,
http:llmoney.cnn.com/2014/06/03/smallbusiness/seattle-
business-minimum-wage/ (accessed June 6, 2014); Brad Plumer,
“Economists Disagree on Whether the MinimumWage Kills
Jobs. Why?” The Washington Post, February 14, 2013,
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/14
/why-economists-are-so-puzzled-by-the-minimum-wagel
(accessed June 4, 2014); Jeanne Sahadi, “Minimum Wage:

Congress Stalls,States Act,” CNN Money, April 28, 2014,
hftp://money.cnn.com/2014/04/28/news/economy/states-
minimum-wage/ (accessed June 6,2014); Gregory Wallace,
“Oklahoma Bans Minimum Wage Hikes,” CNN Money, April
15, 2Q14, http:I/money.cnn.com/2014/04/15/news/
T
Figure 2.1 offers a conceptualization of the relationship
between busi
nesses and stakeholders. In this stakeholder interaction model,
there are
two-way relationships between the firm and a host of
stakeholders. In
addition to the fundamental input of investors, employees, and
suppliers,
this approach recognizes other stakeholders and explicitly
acknowledges
the dialog and interaction that exists between a firm’s internal
and external
environments.
A Stakeholder Orientation
The degree to which a firm understands and addresses
stakeholder
demands can be referred to as a stakehotder orientation. This
orientation
comprises three sets of activities: (1) the organizationwide
generation ofdata about stakeholder groups and assessment of
the firm’s effects on thesegroups, (2) the distribution of this
information throughout the firm, and(3) the organization’s
responsiveness as a whole to this intelligence.19
Generating data about stakeholders begins with identifying the

stake-
holders that are relevant to the firm. Relevant stakeholder
communities
should be analyzed on the basis of the power each enjoys, as
well as bythe ties between them. Next, the firm should
characterize the concerns
about the business’s conduct that each relevant stakeholder
group shares.This information can be derived from formal
research, including surveys,
focus groups, internet searches, or press reviews. For example,
Ford Motor
Company obtains input on social and environmental
responsibility issuesfrom company representatives, suppliers,
customers, and communityleaders. Shell has an Online
discussion forum where websjte visitors areinvited to express
their opinions on the company’s activities and their
implications. Employees and managers can also generate this
information
informally as they carry out their daily activities. For example,
purchasing managers know about suppliers’ demands, public
relations executivesabout the media, legal counselors about the
regulatory environment,
financial executives about investors, sales representatives about
customers, and human resources advisors about employees.
Finally, the company
should evaluate its impact on the issues that are important to the
various
stakeholders it has identified.2° To develop effective
stakeholder dialogs,
management needs to appreciate how others perceive the risks
of a specificdecision. A multiple stakeholder perspective must
take into account communication content and transparency when
communicating with specificstakeholders.2’
Given the variety of the employees involved in the generation
of information about stakeholders, it is essential that this

intelligence be circulated
throughout the firm. This requires that the firm facilitate the
communication of information about the nature of relevant
stakeholder communities,
stakeholder issues, and the current impact of the firm on these
issues toall members of the organization. The dissemination of
stakeholder intelligence can be organized formally through
activities such as newsletters andinternal information forums.22
A stakeholder orientation is not complete unless it includes
activities that actually address stakeholder issues. For example,
Cloetta, an
international confectionary company, has taken stakeholder
orientationseriously. A page on their website is dedicated to the
topic and clearlyidentifies all of its stakeholders, the issues that
are important to them, andhow the company interacts with
consumers to address these issues. Cloettaengages with all
stakeholders through various media: social media, face-to-face
meetings, virtual meetings, surveys, and influential leaders in
the
economy/oklahoma-minimum-wage-ban? (accessed June 6,
2014); Siobhan Hughes and Colleen McCain Nelson, ‘Senate
Republicans
Block Bill to Raise Minimum Wage,” The Wall Street Journal,
April 30, 2014,
http://online.wsj.com/news/articles/SB10001424052702304
178104579533801387470492 (accessed June 6, 2014); Shelly
Banjo, “Wal-Mart Says It Won’t Oppose Increase in Minimum
Wage,” The
Wall Street Journal, May 15, 2014,

http:/?online.wsj.com/newslarticles/SB1
000142402702304908304579S63763405679116 (accessed
June 6, 2014); MSN Money Partner, “Minimum Wage Increase
Stalls in Washington,” MSN Money, June 26, 2013,
http://money.msn.
com/business-news/Iatestaspx?post=e0e268c2-b93a-41f6-9B4e-
d03c43db981c+ (accessed June 6, 2014); Editorial Board, “The
Clear
Benefits of a Higher Wage,” The New York Times, February 19,
2014, http://www.nytimes.com/2014?02?20/opinion?the-clear-
benef its-of
a-higher-wage.html (accessed June 6, 2014); Stephanie Dinan
and Dave Boyer, “Minimum Wage Hike Would Kill a Half-
Million Jobs,”
The Washington Times, February 18, 2014,
http:llwww.washingtontimes.com/newsI2Ol4/feb/18/minimum-
wage-hike-would-kiIl-half-
million-jobs-cbo??page=all (accessed June 6, 2014).
stakeholder interaction
model
A model that conceptual
izes the two-way relation
ships between a firm and a
host of stakeholders.
49
FIGURE 2.1 Stakeholder Model for Implementing Social
Responsibilities

stakeholder orientation
The degree to which a firm
understands and addresses
stakeholder demands.
Organization
L Primary stakeholders Secondary stakeholders rl Society at
large
Source: Adapted from Isabelle Maignan, 0. C. Ferrell, and
Linda Ferrell, “A Stakeholder Model for Implementing Social
Responsibility in Marketing,” European Journal of Marketing 39
(September/October 2005): 956—977.
Stakeholder Relationships
community. This allows for a free flow of information between
stakehold
ers and the company.23 The responsiveness of the organization
as a whole
to stakeholder intelligence consists of the initiatives the firm
adopts to
ensure that it abides by or exceeds stakeholder expectations and
has a pos
itive impact on stakeholder issues. Such activities are likely to
be specific
to a particular stakeholder group (e.g., family-friendly work
schedules)
or to a particular stakeholder issue (e.g., pollution-reduction
programs).
These responsiveness processes typically involve the

participation of the
concerned stakeholder groups. Kraft, for example, includes
special-interest
groups and university representatives in its programs to become
sensitized
to present and future ethical issues.
Stakeholder orientation can be viewed as a continuum in that
firms
are likely to adopt the concept to varying degrees. To gauge a
given firm’s
stakeholder orientation, it is necessary to evaluate the extent to
which the
firm adopts behaviors that typify both the generation and
dissemination
of stakeholder intelligence and responsiveness to it. A given
organization
may generate and disseminate more intelligence about certain
stakeholder
communities than about others and, as a result, may respond to
that intel
ligence differently.24
Stakeholder Attributes25
Traditionally, companies have had an easier time understanding
the issues
stakeholders raise than their attributes and the tactics they use
to affect
organizational decision making. It is therefore necessary to
understand
both the content (specific issues) and process (actions, tactics)
of each
stakeholder relationship. For example, animal rights activists
sometimes
use an unreasonable process to communicate the content of their

beliefs.
Although they are controversial, animal rights issues do have
solid support
from a number of citizens. One mechanism for understanding
stakeholders
and their potential salience to a firm involves assessing three
stakeholder
attributes: power, legitimacy, and urgency. Table 2.2 describes
these three
attributes. This assessment provides one analytical tool to help
managers
uncover the motivations and needs of stakeholders and how they
relate to
the company and its interests. In addition, stakeholder actions
may also
sensitize the firm to issues and viewpoints not previously
considered.26
TABLE 2.2 Stakeholder Attributes
Attributes Example
Power, legitimacy, and urgency are not constant, meaning
stakeholder
attributes can change over time and context. For example, there
was a
very strong “Buy American” sentiment in the United States in
the l980s,
a time when Japanese manufacturers were making steady market
share
gains. As globalization increased and overseas manufacturing
became
the norm, consumer activism or retailer strategy on activism
toward
this nationalistic buying criterion waned. In the late 1990s and
the first

decade of the twenty-first century, there was increased urgency
concern
ing Chinese manufacturers and legitimate claims concerning
market share
gains. However, nationalism, as it relates to retail purchasing,
seems to
contribute to the intensity of the power gained in the
stakeholder envi
ronment. This was largely due to the fact that the U.S. economy
was
strong, so products from other countries were not seen as
threatening.
The “Buy American” sentiment rose again after the advent of
the Great
Recession in 2008—2009, as Americans felt the sting of job
loss. American
manufacturing came to the forefront of consumer consciousness
through
organizations and movements promoting American-made
products and
activists pressuring companies to bring manufacturing back to
the United
States. More recently, although controversial, the use of
hydraulic frac
turing (fracking) of shale has significantly increased American
gas and oil
production, making the country more energy independent. The
signing of
the American Recovery and Investment Act also put pressure on
domestic
sourcing, investment, and reinvestment in the United States.
Some com
panies have taken this sentiment to heart and are investing in
American
manufacturing.27

Power A stakeholder has power to the extent that it can gain
access to
coercive, utilitarian, or symbolic means to impose or
communicate its
views to an organization.28 Coercive power involves the use of
fear, sup
pression, punishment, or some type of restraint. Utilitarian
power involves
financial or material control or based on a decision’s utility or
usefulness.
Finally, symbolic power relies on the use of symbols that
connote social
acceptance, prestige, or some other attribute.
Symbolism contained in letter-writing campaigns, advertising
mes
sages, and websites can be used to generate awareness and
enthusiasm
for more responsible business actions. In fact, the internet has
conferred
tremendous power on stakeholder groups in recent years.
Disgruntled
stakeholders, especially customers and former employees, may
share their
concerns or dissatisfaction on social media sites. Even current
employ
ees are increasingly expressing their job frustrations over the
internet.
Symbolic power is the least threatening of the three types.
Utilitarian measures, including boycotts and lawsuits, are also
fairly
prevalent, although they often come about after symbolic
strategies fail to
yield the desired response. For example, the government, an
important stake-

holder for most firms, banned the importation of goods made by
children
under the age of 15 through indentured or forced labor.29 This
action came
about after the media and activist groups exposed widespread
abuses in the
57
Power
legitimacy
Urgency
power
The extent to which a
stakeholder can gain access
to coercive, utilitarian, or
symbolic means to impose
or communicate its views to
an organization.
A well-established employee in a specialized field has power it
replacing the
employee would require extensive training and resources.
Special-interest groups that are against genetically modified
foods encourage
protests after legislation favorable to biotechnology companies
is passed.
A company that has discovered a serious product defect that can
cause injury
must immediately implement a product recall.

legitimacy
The perception or belief
that a stakeholder’s actions
are proper, desirable, or
appropriate within a given
context.
apparel industry. This law carries financial—utilitarian—
repercussions for
firms that purchase products manufactured under unacceptable
labor con
ditions. Utilitarian power can be exerted over the fear that
profits will fall
if too much is spent on managing labor or sustainability
Finalty, some stakeholders use coercive power to communicate
their
message, especially when the issue is emotionally charged and
somewhat
controversial. Many protests around the world over hydraulic
fracturing
or fracking, a method of extracting natural gas from the earth by
means
of fluid and other substances, have become violent. For
example, a protest
in Canada resulted in protestors setting police vehicles on fire,
throw
ing Molotov cocktails, and firing gunshots. At least 40
protestors were
arrested. Another violent protest in the United Kingdom

resulted in the
assault of a manager for Dart Energy 30
Legitimacy The second stakeholder attribute is legitimacy,
which is the
perception or belief that a stakeholder’s actions are proper,
desirable, or
appropriate within a given context.31 This definition suggests
that stake-
holder actions are considered legitimate when claims are judged
to be
reasonable by other stakeholders and by society in general.
Legitimacy
is gained through the stakeholder’s ability and willingness to
explore the
issue from a variety of perspectives and then to communicate in
an effec
tive and respectful manner on the desire for change. Legitimacy
is also
linked to compliance with regulations, values, and norms that
support
ethical conduct.
Thus, extremist views are less likely to be considered legitimate
because these groups often use covert and inflammatory
measures that
overshadow the issues and create animosity. For example,
extreme groups
have destroyed property, threatened customers, and committed
other acts
of violence that ultimately discredit their legitimacy.32
Opponents of frack
ing are at risk of delegitimizing their efforts if the main theme
of their com
munication is violent. It is important to remember that this issue
is highly

controversial, and it is in the best interest of companies engaged
in this
activity to be sensitive to the requests of stakeholders. After
many years of
stakeholders requesting acknowledgement and measurement of
the risks of
fracking from various oil and energy companies, ExxonMobil
has agreed
to become the first to disclose such information. Their report
will address
fracking’s effects on air and water quality, roads, and any
potential effects
of the chemicals used in the process. While some stakeholders
are not
completely satisfied with the details of this report, as they think
many
more issues need to be addressed, ExxonMobil is taking a step
in the right
direction toward becoming more transparent in addressing
stakeholder
concerns. The pressure that stakeholders in this example have
exerted on
the industry was seen as a legitimate concern to ExxonMobil.
This report
may spur other energy companies to follow their lead. Although
an issue
may be legitimate, such as environmental sensitivity, it is
difficult for the
claim to be evaluated independently of the way the stakeholder
group
communicates on it.33
Urgency Stakeholders exercise greater pressures on managers
and organi
zations when they stress the urgency of their claims. Urgency is
based on

two characteristics: time sensitivity and the importance of the
claim to the
stakeholder. Time sensitivity usually heightens the
stakeholder’s effort and
may compress an organization’s ability to research and react to
a claim.
For example, hundreds of protesters in Bangladesh took to the
streets after
a major garment factory fire killed over 100 workers. This fire
came after a
string of similar incidents in the region, which caused the death
of over 600
workers in a period of 6 years. The aim of the protest was to
obtain justice
for the death of the workers. Factory owners and managers had
known the
factory was deemed an unsafe workplace, but allowed work to
continue
despite this knowledge. The urgency of the protestors resulted
in the arrest
of factory managers, investigations into the safety practices for
factories
in the region, and a refocusing of multinational companies that
used the
factories in their operations.34
In another example, labor and human rights are widely
recognized as
critical issues because they are fundamental to the well-being of
people
around the world. These rights have become a focal point for
college stu
dent associations that criticized Nike, the world’s leading shoe
company,
for its failure to improve the working conditions of employees
of suppliers

and in not making information available to interested
stakeholders. Nike
experienced a public backlash from its use of offshore
subcontractors to
manufacture its shoes and clothing. When Nike claimed no
responsibility
for the subcontractors’ poor working conditions and extremely
low wages,
some consumers demanded greater accountability and
responsibility by
engaging in boycotts, letter-writing campaigns, public-service
announce
ments, and so forth. Nike ultimately responded to the growing
negative
publicity by changing its practices and becoming a model
company in
managing offshore manufacturing.
Overall, stakeholders are considered more important to an
organiza
tion when their issues are legitimate, their claims are urgent,
and they
can make use of their power on the organization. These
attributes assist
the firm and employees in determining the relative importance
of specific
stakeholders and making resource allocations for developing
and manag
ing the stakeholder relationship.
PERFORMANCE WITH STAKEHOLDERS
Effectively managing stakeholder relationships requires careful
attention to
a firm’s reputation and the effective handling of crisis
situations. Boeing’s
release of the acclaimed 787 Dreamliner was grounded when the

plane’s
lithium ion battery began to overheat. The company had
outsourced pro
duction of many components of the aircraft, one of which was
the battery
to Japanese manufacturer GS Yuasa. Although the 787
Dreamliner had
undergone many tests, the company learned that excessive
outsourcing could
cause coordination issues as well as some unforeseen quality
issues. Boeing
urgency
The time sensitivity and the
importance of the claim to
the stakeholder.
is a company known for its safety standards, but lack of
coordination with
third parties can result in the failure for safety standards to be
emphasized.35
In a similar turn, De Beers, the world’s largest diamond
producer, announced
it would stop buying diamonds from Angola after a group of
European orga
nizations launched a campaign to alert the public to the fact that
an Angolan
rebel group, Unita, funded wars and casualties through diamond
sales.36
Reputation Management
There are short- and long-term outcomes associated with
positive stakeholder

relationships. One of the most significant of these is a positive
reputation.
Because a company’s reputation has the power to attract or
repel stakehold
ers, it can be either an asset or a liability in developing and
implementing
strategic plans and social responsibility initiatives.37
Reputations take a long
time to build or change, and it is far more important to monitor
reputation
than many companies believe. Whereas a strong reputation may
take years to
build, it can be destroyed seemingly overnight if a company
does not handle
crisis situations to the satisfaction of the various stakeholders
involved.
Corporate reputation, image, and brands are more important
than
ever and are among the most critical aspects of sustaining
relationships
with constituents, including investors, customers, financial
analysts,
media, and government watchdogs. It takes companies decades
to build a
great reputation, yet just one slip can cost a company dearly.
Although an
organization does not control its reputation in a direct sense, its
actions,
choices, behaviors, and consequences do influence the
reputation that
exists in perceptions of stakeholders. A 2009 corporate
reputation poii
taken during the financial crisis showed that misconduct and the
failure to
manage properly lowered the overall reputation of American

corporations.
In a 2014 reputation poll of American companies, respondents
indicated
that while they are still skeptical of businesses, they are
confident that their
reputations are improving. Even the percentage of those who are
most
skeptical has decreased significantly 38
Reputation management is the process of building and
sustaining
a company’s good name and generating positive feedback from
stake-
holders. A company’s reputation is affected by every contact
with a
stakeholder.39 Various trends may affect how companies
manage their
reputations. These trends include market factors, such as
increased con
sumer knowledge and community access to information, and
workplace
factors, including technological advances, closer vendor
relationships, and
more inquisitive employees. These factors make companies
more cautious
about their actions because increased scrutiny in this area
requires more
attention from management. A company needs to understand
these factors
and how to properly address them to achieve a strong
reputation. These
factors have also helped companies recognize a link between
reputation
and competitive advantage. If these trends are dealt with wisely
and if
internal and external communication strategies are used

effectively, a
firm can position itself positively in stakeholders’ minds and
thus create
a competitive advantage. Intangible factors related to reputation
can
account for as much as 50 percent of a firm’s market
valuation.40
The importance of corporate reputation has created a need for
accurate
reputation measures. As indicated in Table 2.3, business
publications, research
firms, consultants, and public relations agencies have
established a foothold
TABLE 2.3 Reputation Measures
Reputation List Conducted By Groups Surveyed Primary
Purpose
100 Best Corporate Corporate
Citizens Responsibility
Magazine, Corporate
Responsibility Officers
Association fCROA)
America’s Most Fortune magazine,
Admired Companies Hay Group
Fortune 1000
companies and
Fortune’s Global 500
with revenues at
or over $10 billion;

company executives,
directors, and analysts
are surveyed
Fortune 1000
companies and
Fortune’s Global 500
with revenues at
or over $10 billion;
company executives,
directors, and analysts
are surveyed
Business executives
responsible for pur
chasing and strategic
relationship decisions
from the top brands
with over $50 million
as well as high-level
customers
All of the company’s
stakeholders
General public Customized for
Clients
Professional money Publication
managers
54 Business and Society T Chapter 2 Strategic Management of
100 Best Companies
to Work for in

America
Fortune magazine,
Great Place to Work
Institute
PublicationCompanies that are
at least five years old
and employ at least
1,000 employees;
employees and top
managers are sur
veyed
Russell 1000
companies
Publication
reputation management
The process of building
and sustaining a company’s
good name and generat
ing positive feedback from
stakeholders.
Publication
Best and Worst:
Fortune magazine,
Hay Group
Publication

Corporate Branding
Index
CoreBrand, LLC Customized for
clients
Global Reputation
Pulse
Reputation Quotient
World’s Most
Respected Companies
Reputation Institute
Reputation Institute
and Harris Interactive
Barton’s
Customized for
clients
Business and Society Chapter 2 Strategic Management of
56
model called the 1-1-1 model that contributes 1 percent of the
company’s
time, 1 percent of equity, and 1 percent of company products to
worthy
causes, such as significantly discounting its products for
nonprofit orga

nizations.
Thus, all these elements must be continually implemented to
ensure
that the company’s reputation is maximized through community
rela
tions. However, most firms will, at one time or another,
experience crisis
situations that threaten or harm this reputation. How a company
reacts,
responds, and learns from the situation is indicative of its
commitment and
implementation of social responsibility.
Reputation management is becoming a key consideration for
corpora
tions around the world. Several years ago German firms
invested resources
into building, maintaining, and strengthening their reputations.
A survey
showed that roughly two-thirds of company executives felt that
reputa
tion management was of “very high” or “high” importance to
their com
panies. This focus has paid off: An Edelman poli measuring
trust among
foreign firms ranked Germany at the top of the list. In addition,
when the
American Chamber of Commerce asked American business
executives
which foreign business environment they preferred to conduct
business
in, 73 percent marked Germany as their first choice. Many other
surveys
measuring various aspects of reputation have placed Germany at
or near

the top of the list. Furthermore, the emphasis on building a good
reputa
tion is extending beyond corporations to business schools. For
example,
the European University in Munich offers students an MBA in
Reputation
Management.45
in the new field of reputation manage ment through research and
lists of “the
most reputabLe” firms. However, some questions have arisen as
to who can
best determine corporate reputation. For example, some
measures survey only
chief executives, whereas others also elicit perceptions from the
general public.
Although executives may be biased toward a firm’s financial
performance, the
general public may lack experience or data on which to evaluate
a company’s
reputation. Regardless of how it is measured, reputation is the
result of a pro
cess involving an organization and various constituents.41
The process of reputation management involves four
components
that work together: organizational identity, image, performance,
and
ultimately, reputation •42 Organizational performance involves
the actual
interaction between the company and its stakeholders.
To build and manage a good reputation, these four areas must be
aligned.
Companies must manage identity and culture by pinpointing
those standards

and responsibilities that will allow them to achieve their
objectives, work with
stakeholders effectively, and continuously monitor and change
for effective
ness.43 The Corporate Citizens list provides recognition and
publicity for out
standing performance using corporate responsibility criteria.
AT&T ranked
number 33 in 2012 and number one in 2013. The company has
implemented
a widespread and comprehensive approach to sustainability and
social
responsibility, and the results are significant. One of the
company’s points of
pride is in their “It Can Wait” program, which encourages its
customers to
make a pledge on their website not to text while driving. So far
there have
been over 1.3 million pledges. AT&T also entered into a
partnership with
the Environmental Defense Fund (EDf), and together they have
found ways
of conserving millions of gallons of water each year. Another
partnership in
which AT&T contributed $5 million to Communities in Schools
(CIS), the
leading dropout prevention organization in the United States,
was noted as a
reason for recognition. In California, the company initiated a
program called
“Skip the Bag” to encourage consumers to use reusable bags.
This effort gen
erated donations for the Nature Conservancy.
Additionally, the Guinness Book of World Records entered the
com

pany into their records for the highest number of cell phones
recycled
each week. The company received other recognitions in 2013,
including
placement on the Dow Jones Sustainability Index for the fourth
consecu
tive year, Vigeo’s U.S. 50 (the 50 most advanced companies)
for its con
tributions to environmental, social, and governance
performance, as well
as the FTSE4Good Index for four years in a row. These are only
a few of
the accomplishments the company has achieved over the
last few years. AT&T’s vice-president of Sustainability
and Philanthropy credits the success of the company’s
social responsibility endeavors to the commitment of
the leadership, strength of the collaboration among the
various partnerships the company holds, as well as to the
______
dedication of the company’s employees.44 Table 2.4 lists
ten socially responsible companies known for their CSR
initiatives. Salesforce.com, for instance, has developed a
TABLE 2.4 Ten Socially Responsible
Companies
AT&T
Bueno Foods
Fatagonia
Cummins

Eaton
Salesforce.com
SC Johnson
Marriott
Starbucks
Whole Foods
Crisis Management46
Organizational crises are far-reaching events that can have
dramatic effects
on both the organization and its stakeholders. Along with the
industrial
ization of society, companies and their products have become
ever more
complex and therefore more susceptible to crisis. As a result,
disasters and
crisis situations are increasingly common events from which
few organiza
tions are exempt. General Motors CEO Mary Barra’s response
to the scru
tiny associated with the 2014 recall of certain GM automobiles
with faulty
ignition switches is an example of effective crisis management.
At the time
of the disaster, she had only been CEO for several weeks. Barra
addressed
the problem quickly and straightforwardly. She took
responsibility for
the incidents and issued a recall of millions of vehicles. Barra
also directly

addressed victims injured or affected by death due to the faulty
switches
by meeting with them personally at their request. Finally, she
addressed
the state of the corporate culture that allowed the ignition
switch problem
to go unaddressed for such a long period of time. She also
announced that
she intended to change that culture under her leadership.47
An ethical misconduct disaster (EMD) can be an unexpected
organiza
tional crisis that results from employee misconduct, illegal
activities such
58 Business and Society I Chapter 2 Strategic Management of
Company Disaster
_____________
Manipulated earnings by pushing payments to walnut growers
into the
next year to make company earnings look better, The CEO and
CEO both
resigned when the accounting fraud was exposed.
Pleaded guilty to helping Americans evade taxes and agreed to
pay
$2.5 billion in penalties.
Appeared to ignore warnings of potential hacking activity,
resulting in the
theft of millions of customers personal informatnn.

Discovered a massive cheating scandal at its Air Force base in
Montana
among officers involved in the launching of intercontinental
ballistic
missiles.
Paid $3 billion to settle allegations that it had marketed
different medica
tions for uses that were unapproved by the Food and Drug
Administration.
Engaged in widespread bribery to foreign officials in Mexico,
allegedly
with knowledge of top executives.
Rigged the Libor rate—used as the benchmark for trillions of
loans—to
benefit the company.
as fraud, or unethical decisions that significantly disrupts
operations and
threatens or is perceived to threaten the firm’s continuity of
operations. An
EMD can even be more devastating than natural disasters such
as a hur
ricane or technology disruptions.48 Table 2.5 discusses some
recent ethical
misconduct disasters that happened due to lapses in leadership
and the
failure to manage risks properly.
As organizations plan for natural disasters and insure against
tradi
tional risks, so too should they prepare for ethical crises. An
EMD can
be managed by organizational initiatives to recognize, avoid,

discover,
answer, and recover from the misconduct. The potential damage
of an
ethical disaster can affect both business and society. The costs
of an EMD
from both a financial and reputation perspective can be
assessed, as well
as the need for planning to avoid an EMD. The role of
leadership in pre
venting a crisis relates to a contingency plan to develop
effective crisis
management programs.
The risks facing organizations today are significant, and the
reputa
tional damage caused can be far greater for companies that find
themselves
unprepared. The key is to recognize that the risks associated
with miscon
duct are real and that, if insufficient controls are in place, the
company can
suddenly find itself the subject of an EMD. Although it is hard
to predict
an ethical disaster, companies can and must prepare for one.
The Deepwater Horizon oil spill of 2010, involving oil company
BP,
is a prominent example of an EMD. The disaster occurred due to
“negli
gent misinterpretation” of pressure readings on the oil rig.
Although the
company was aware of the potential issues, they did not fully
disclose
the issue or make efforts to ensure its function. As a result, an
explosion
occurred, the rig sank, and an oil leak lasting over three months

spewed
over 206 million gallons of oil into the Gulf of Mexico. Among
many injuries, 11 deaths are attributed to the disaster as well as
severe destructionto the environment and economy. The
company pleaded guilty to variouscharges, including
manslaughter, negligence, and obstruction of Congress.Four
years later, BP continues to deal with the ramifications of this
disaster. They have paid nearly $40 billion in fines, penalties,
and recompense,and the amount is expected to increase.
Additionally, the company has tocontend with continual
governmental and civil litigations. This incidentwas not the first
the company faced as a result of ethical lapses, but itwas, and
continues to be, one of the most egregious in its history.
Manyregulations have been instituted or changed in order to
prevent such anoccurrence, and BP is having difficulty
reestablishing a good reputation.49Of course, not every
unethical decision relates to negligence. Manyoften begin as a
marketing effort, and only in retrospect is it revealed tobe
unethical. And clearly not every decision becomes a crisis. An
advertisement for Olay’s Definity Eye Cream was ordered
removed after it wasdetermined that the model featured was
digitally altered. It is importantthat companies be sensitive to
how they communicate the effects of theirproducts as well as
messages they send about body image.5°
It is critical for companies to manage crises effectively because
researchsuggests that these events are a leading cause of
organizational mortality. What follows are some key issues to
consider in crisis management,the process of handling a high-
impact event characterized by ambiguityand the need for swift
action. In most cases, the crisis situation will notbe handled in a
completely effective or ineffective manner. Thus, a crisisusually
leads to both success and failure outcomes for a business and
itsstakeholders and provides information for making
improvements to futurecrisis management and social
responsibility efforts.5’

Organizational crises are characterized by a threat to a
company’shigh-priority goals, surprise to its membership, and
stakeholder demandsfor a short response time. The nature of
crises requires a firm’s leadershipto communicate in an often
stressful, emotional, uncertain, and demanding context. Crises
are very difficult on a company’s stakeholders as well.For this
reason, the firm’s stakeholders, especially its employees,
shareholders, customers, government regulators, competitors,
creditors, and themedia, will closely scrutinize communication
after a crisis. Hence, criseshave widespread implications not
only for the organization but also foreach group affected by the
crisis. To better understand how crises developand move toward
resolution, some researchers use a medical analogy.Using the
analogy, the organization proceeds through chronological
stagessimilar to a person with an illness. The prodromal stage is
a pre-crisisperiod during which warning signs may exist. Next
is the acute stage, inwhich the actual crisis occurs. During the
third (or chronic) stage, the business is required to sufficiently
explain its actions to move to the final stage,crisis resolution.
Figure 2.2 illustrates these stages. Although the stages
areconceptually distinct, some crises happen so quickly and
without warningthat the organization may move from the
prodromal to acute stage within
TABLE 2.5 EthicaL Misconduct Disasters
Diamond Foods
Credit Suisse
Target
Air Force
GlaxoSmithKline

Walmart
59
Barclay’s Bank
crisis management
The process of handling a
high-impact event charac
terized by ambiguity and
the need for swift action.
Ongoing
________
—*crisis requires I
expIanation an
decision makin
minutes. Many organizations faced this situation after Hurricane
Katrina
crashed into New Orleans and the Mississippi Gulf Coast,
disrupting all
business and social activity for years.
One of the fundamental difficulties that a company faces is how
to communicate effectively to stakeholders during and after a
disaster.
Once a crisis strikes, the firm’s stakeholders need a quick
response in the
midst of the duress and confusion. They need information about

how the
company plans to resolve the crisis as well as what each
constituent can
do to mitigate its own negative effects. If a company is slow to
respond,
stakeholders may feel that the company does not care about
their needs
or is not concerned or remorseful, lithe company is at fault,
about the
crisis. Furthermore, a delayed response may in fact increase the
suffering
of particular stakeholder groups. For instance, some
stakeholders may
take on considerable debt due to medical expenses as a result of
the crisis.
Therefore, a rapid response to stakeholders is central to any
crisis resolu
tion strategy so that these groups can plan their recovery.
Ironically, crisis events are often so chaotic that a company’s
leader
ship may not be certain of the cause of the situation before the
media and
other relevant groups demand a statement. Thus, it is not
surprising for
organizations to begin their crisis response with some degree of
ambiguity
in their statements. In fact, some crisis theorists advise
companies to avoid
too much detail in their initial response due to the
embarrassment that
results from changing positions later in the crisis when more
information is
available. Still, stakeholder groups want and, as a matter of
safety in some
cases, need access to whatever information the firm can share.

Although
tensions between the public’s needs and the organization’s fear
of litigation
can hamper an organization’s willingness to communicate, the
demand for
information in such situations is unyielding.
Not only should the firm’s leadership make a public statement
quickly,
but it is also necessary for the organization to communicate
about specific
issues to stakeholder groups. First, leadership should express
concern and!
or remorse for the event. Second, the organization should
delineate guide
lines regarding how it intends to address the crisis so that
stakeholders
can be confident that the situation will not escalate or reoccur.
Finally, the
company should provide explicit criteria to stakeholders
regarding how
each group will be compensated for any negative effects it
experiences
as a result of the crisis. Many companies, however, overlook
these three
essential conditions of crisis management. More often, they
focus on
minimizing harm to the organization’s image, denying
responsibility for
the crisis, and shifting blame away from the organization and
toward
other stakeholder groups. Although this may be an appropriate
strategy
when the firm is not actually responsible, too often companies
choose this

course of action under the stress of the crisis when they are
responsible or
partially responsible for the crisis without expressing sufficient
remorse for
their involvement or concern for their stakeholders.
The varying communication needs and levels of concern of
stakehold
ers during and after a crisis often hamper effective
communication. The
firm’s leadership should try to communicate as much accurate
informa
tion to these groups as possible to minimize their uncertainty.
When a
firm fails to do so, its credibility, legitimacy, and reputation in
the eyes
of stakeholders often suffer. Adding to the complexity of
communication
challenges, the needs of various stakeholder groups may
conflict. For
instance, the needs of customers who become ill as a result of a
contami
nated product and their desire to have medical bills paid may be
at odds
with the company’s ability to bolster its stock price to satisfy
sharehold
ers. Some stakeholders will obviously have more opportuniti es
than oth
ers to voice their concerns after a crisis. Victims and the
general public
rarely have an opportunity to meet with the organization’s
leadership
after a crisis. Conversely, the organization’s stockholders and
employees
will likely have a greater opportunity to express their views
about the

crisis and therefore may have their ideas accepted by
management. Some
researchers suggest that, due to this ability to communicate
directly with
leadership, internal stakeholder needs often take precedence
over those of
external stakeholders. Organizations have a responsibility to
manage the
competing interests of stakeholders to ensure that all
stakehotder groups
are treated fairly in the aftermath of a crisis. Responsible
companies try to
balance the needs of their stakeholders rather than favoring
some groups
over others. The Walt Disney Corporation experienced a
potential crisis
of public concern after an elderly woman died riding the Magic
Kingdom’s
Pirates of the Caribbean and a four-year-old died after riding
the EPCOT
Resort’s Mission: Space, as well as a series of other
incidents.52 Since
Disney is not directly regulated by the state of Florida, it
released a writ
ten statement to the press and various stakeholders stating that
its own
engineers deemed the rides safe. At a very small cost, Disney’s
invitation
to state inspectors to inspect its rides sent a message that the
company was
going beyond the minimum (legal) requirement in its response
to recover
ground in the perception crisis over ride safety.53 Organizations
that fail
to accomplish this communication function risk alienating
stakeholder

groups and intensifying the negative media attention toward the
company.
For many reasons, including effective crisis management,
organizations
need to understand and pursue solid and mutually beneficial
relationships
with stakeholders
FIGURE 2.2 Crisis Management Process
61
62 Business and Society I Chapter 2 Strategic Management of
Relationships of any type, whether they involve family, friends,
coworkers, or
companies, are founded on principles of trust, commitment, and
transparent
communication. They also are associated with a certain degree
of time, inter
action, and shared expectations. For instance, we do not
normally speak of
“having a relationship” with someone we have just met. We
even differentiate
between casual acquaintances, work colleagues, and close
friends.
In business, the concept of relationships has gained much
acceptance.
Instead of just pursuing one-time transactions, companies are
now search
ing for ways to develop long-term and collaborative

relationships with
their customers and business partners.54 Many companies focus
on rela
tionships with suppliers, buyers, employees, and others directly
involved
in economic exchange. These relationships involve investments
of several
types. Some investments are tangible, such as buildings,
equipment, new
toots, and other elements dedicated to a particutar relati onship.
Apple
made an unprecedented move in this regard when it launched an
iPhone
trade-in day in select retail locations. Some owners of older
iPhones were
sent an email invitation to upgrade to a new device.55 Other
investments
are less tangible, such as the time, effort, trust, and commitment
required
to develop a relationship. Southwest Airlines develops the
intangible
aspect of relationships through the level of customer service
they provide
as well as the enjoyable experience they give to their
customers.6
Whereas tangible investments are often customized for a
specific busi
ness relationship, intangible efforts have a more lucid and
permeable qual
ity. Although social responsibility involves tangible activities
and other
communication signals, the key to good stakeholder
relationships resides
in trust, communication quality, and mutual respect. As a
company strives

to develop a dialog and a solid relationship with one
stakeholder, invest
ments and lessons learned through the process should add value
to other
stakeholder relationships. For example, Starbucks provides
excellent ben
efits, including healthcare for part-time employees, and
supports fair trade
or a fair income for farmers growing its coffee.
These efforts result in social capital, an asset that resides in
relation
ships and is characterized by mutual goals and trust.57 Social
capital
include the social connections that can provide economic
benefits that
are mutually advantageous. Social capital provides social
networks that
have value. Like financial and intellectual capital, social capital
facilitates
internal and external transactions and processes. This is
especially true as
more businesses become part of the sharing economy.
Companies such as
Airbnb, a rental sharing company, and Uber, a car reservation
company,
are prime examples of businesses whose level of social capital
is necessary
for their success. These business models depend upon building
and rein
forcing transparency and accountability among users as well as
between
users and the company 58
Unlike financial and intellectual capital, however, social capital
is not

tangible or the obvious property of one organization. In this
same regard,
social responsibility is not compartmentalized or reserved for a
few issues
or stakeholders but should have the company-wide strategic
focus dis
cussed in Chapter 1.
IMPLEMENTING A STAKEHOLDER PERSPECTIVE
IN SOCIAL RESPONSIBILITy59
An organization that develops effective corporate governance
and under
stands the importance of business ethics and social
responsibility in achiev
ing success should develop some processes for managing these
important
concerns. Although there are many different approaches, we
provide some
steps that have been found effective to utilize the stakeholder
framework
in managing responsibility and business ethics. The steps
include: (1)
assessing the corporate culture, (2) identifying stakeholder
groups, (3)
identifying stakeholder issues, (4) assessing the organization’s
commitment
to social responsibility, (5) identifying resources and
determining urgency,
and (6) gaining stakeholder feedback. The importance of these
steps is to
include feedback from relevant stakeholders in formulating
organizational
strategy and implementation. Table 2.6 summarizes these six
steps.
Step 7: Assessing the Corporate Culture

To enhance organizational fit, a social responsibility program
must align
with the corporate culture of the organization. The purpose of
this first
TABLE 2.6 Six Steps for Utilizing a Stakeholder Framework
Steps Example
DEVELOPMENT OF STAKEHOLDER
RELATIONSHIPS
63
social capital
An asset that resides in
relationships and is char
acterized by mutual goals
and trust.
Assess the corporate culture
Identify stakeholder groups
Identify stakeholder issues
Assess the organization’s
Commitment to social
responsibility
Identify resources and
determine urgency
Gain stakeholder feedback
New Belgium Brewing decides to invest in wind power

because it aligns with its mission of environmental
responsibility.
Whole Foods recognizes the importance of working with
animal activist organizations to ensure the animals
supplying its meat products are treated humanely
Chevron identifies sustainability and the increasing concern
over greenhouse gas emissions as important stakeholder
considerations impacting the industry
CVS determines that eliminating cigarette sales will
reinforce its commitment toward becoming a health
services company.
Home Depot provides emergency supplies in areas that are
struck by natural disasters.
Best Buy asked consumers for feedback and realized that
the recycling of electronic waste was a major concern.
65
step is to identify the organizational mission, values, and norms
that are
likely to have implications for social responsibility. In
particular, relevant
existing values and norms are those that specify the stakeholder
groups
and stakeholder issues that are deemed most important by the
organiza
tion. Very often, relevant organizational values and norms can

be found
in corporate documents such as the mission statement, annual
reports,
sales brochures, or websites. For example, Keurig Green
Mountain (for
merly known as Green Mountain Coffee) is a pioneer in helping
strug
gling coffee growers by paying them fair trade prices. The
company also
offers microloans to coffee-growing families to underwrite
business ven
tures that diversify agricultural economies. It has been on the
Corporate
Responsibility Magazine’s 100 Best Corporate Citizens for 14
years, and
has climbed to the number one position twice.60
Step 2: Identifying Stakeholder Groups
In managing this stage, it is important to recognize stakeholder
needs,
wants, and desires. There are many important issues that gain
visibility
because key constituencies such as consumer groups, regulators,
or the
media express an interest. When agreement, collaboration, or
even con
frontations exist on an issue, there is a need for a decision-
making pro
cess. A model of collaboration to overcome the adversarial
approaches
to problem solving has been suggested. Managers can identify
relevant
stakeholders that may be affected by or may influence the
development of
organizational policy.

Stakeholders have some level of power over a business because
they
are in the position to withhold, or at least threaten to withhold,
organiza
tional resources. Stakeholders have most power when their own
survival is
not really affected by the success of the organization and when
they have
access to vital organizational resources. For example, most
consumers of
shoes do not have a specific need to buy Nike shoes. Therefore,
if they
decide to boycott Nike, they have to endure only minor
inconveniences.
Nevertheless, their loyalty to Nike is vital to the continued
success of the
sport apparel giant. The proper assessment of the power held by
a given
stakeholder community also requires an evaluation of the extent
to which
that community can collaborate with others to pressure the firm.
Step 3: Identifying Stakeholder Issues
Together, Steps 1 and 2 lead to the identification of the
stakeholders who
are both the most powerful and legitimate. The level of power
and legiti
macy determines the degree of urgency in addressing their
needs. Step 3
consists then in understanding the nature of the main issues of
concern to
these stakeholders. Conditions for collaboration exist when
problems are
so complex that multiple stakeholders are required to resolve
the issue and
the weaknesses of adversarial approaches are understood.

for example, obesity in children continues to be a concern
acrossgroups and stakeholders. In recent years special interest
groups and government programs have been directed toward
alleviating this issue; however, recent reports have shown that
more progress has yet to be made.The rate of childhood obesity
is still up from 14 years ago, and statisticscomparing more
recent years show little change. The rate of obesity inchildren
ages 2—5 years has decreased, but overall the rate is
stagnating.This is important for businesses to remember when
designing and marketing new products for children’s use.61
Step 4: Assessing the Organization’s Commitment
to Social Responsibility
Steps 1 through 3 consist of generating information about social
responsibility among a variety of influencers in and around the
organization. Step4 brings these three first stages together to
arrive at an understanding ofsocial responsibility that
specifically matches the organization of interest.This general
definition will then be used to evaluate current practices and
toselect concrete social responsibility initiatives, firms such as
Starbucks haveselected activities that address stakeholder
concerns. Starbucks has formalized its initiatives in official
documents such as annual reports, webpages,and company
brochures. They have a website devoted to social responsibility.
Starbucks is concerned with the environment and integrates
policies andprograms throughout all aspects of operations to
minimize their environmental impact. They also have many
community building programs thathelp them be good neighbors
and contribute positively to the communitieswhere their
partners and customers live, work, and play.62
Step 5: Identifying Resources and Determining Urgency
The prioritization of stakeholders and issues along with the
assessment ofpast performance provides for allocating
resources. Two main criteria canbe considered. First, the levels

of financial and organizational investmentsrequired by different
actions should be determined. A second criterionwhen
prioritizing social responsibility challenges is urgency. When
thechallenge under consideration is viewed as significant and
when stake-holder pressures on the issue could be expected,
then the challenge can betreated as urgent. For example, the
White House and the Department ofAgriculture are considering
banning advertising for junk food in schools.This would have a
major impact on food and beverage companies, as theyspend
approximately $149 million to market in schools.63
Step 6: Gaining Stakeholder Feedback
Stakeholder feedback can be generated through a variety of
means. First,stakeholders’ general assessment of the firm and
its practices can be obtained
through satisfaction or reputation surveys. Second, to gauge
stakeholders’
perceptions of the firm’s contributions to specific issues,
stakeholder
generated media such as blogs, websites, podcasts, and
newsletters can be
assessed. Third, more formal research may be conducted using
focus groups,
observation, and surveys. Websites can be both positive and
negative; for
example, user review sites such as Yelp have both generated
and decreased
sales based on reviews left on the site. Because so many
consumers refer to
these websites before visiting a business, many companies are

focusing on
good customer service to ensure good reviews. However, these
reviews can
be misleading and do harm to a business. For example, a small
salon owner
expressed concern over the effect of one negative review left by
a customer
who never set foot in her location. The customer perceived the
salon owner
as rude and rushed in a telephone call and wrote about it. The
owner has
seen a decrease in business that she attributes to the review.64
In the process of developing stakeholder relationships, most
strategies
are focused on increasing the trust that a stakeholder has in a
particular
company. Of course, there is not a “one size fits all” approach
for build
ing and sustaining trusting relationships with stakeholders. As
we discussed
earlier in the chapter, not all stakeholders engage with a
company with the
same level of intensity or locus of control, whether internal or
external. For
example, employees are highly engaged internal stakeholders
while suppliers
may be considered low intensity external stakeholders.
Depending on the
specific issues at hand, historical interactions, relationships
intensity, and
other factors, managers must understand the relative importance
of trans
parency, competence, benevolence, integrity, values, and other
factors.65

You may be wondering what motivations companies have for
pursuing
stakeholder relationships. As the previous section indicates, a
great deal
of time, effort, and commitment goes into the process of
developing and
implementing a stakeholder perspective. Sometimes, however,
these efforts
do not have the desired effect. Coca-Cola and PepsiCo have
received criti
cism regarding the messages of their social responsibility
initiatives when
compared with their perceived role in the obesity issue. For
example, Coca-
Cola’s social responsibility campaign called “Live Positively”
encourages
involvement with charities and healthy living. In conjunction
with this
campaign, the company released a smaller can of soda, the sales
of which
the company aimed to double. Certain stakeholders saw this as
inconsis
tent. It appeared that the company was not taking responsibility
for con
tributions to obesity and was placing that burden on the
consumer.66 As
was discussed in Chapter 1, social responsibility is a relational
approach
and involves the views and stakes of a number of groups.
Stakeholders are
engaged in the relationships that both challenge and support a
company’s
efforts. Thus, without a solid understanding of stakeholders and
their
interests, a firm may miss important trends and changes in its

environment
and not achieve strategic social responsibility.
Rather than holding all companies to one standard, our approach
to
evaluating performance and effectiveness resides in the specific
expecta
tions and actual results that develop between each organization
and its
stakeholders. Max Clarkson, an influential contributor to our
understand
ing of stakeholders, sums up this view:
Performance is what counts. Performance can be measured and
evalu
ated. Whether a corporation and its management are motivated
by
enlightened self-interest, common sense or high standards of
ethical
behavior cannot be determined by empirical methodologies
available
today. These are not questions that can be answered by
economists,
sociologists, psychologists, or any other kind of social scientist.
They
are interesting questions, but they are not relevant when it
comes to
evaluating a companys performance in managing its
relationships
with its stakeholder groups.67
Although critics and some researchers may seek answers and evi
dence as to the motivations of business for social responsibility,
we are
interested in what companies are actually doing that is positive,
negative,

or neutral for their stakeholders and their stakeholders’
interests. The
Reactive—Defensive—Accommodative—Proactive Scale (see
Table 2.7) Pr 0-
vides a method for assessing a company’s strategy and
performance with
each stakeholder. This scale is based on a continuum of strategy
options
TABLE 2.7 The Reactive—Defensive—Accommodative—
proactive Scale
Rating Strategy Performance Example
Deny responsibity Doing less than
required
LINK BETWEEN STAKEHOLDER RELATIONSHIPS
AND SOCIAL RESPONSIBILITY
_______
Reactive
Defensive Admit responsibility,
but fight it
Doing the least that is
required
Accommodative Accept responsibility
Proactive
Exxon’s refusal to continue
oil spill cleanup after a

certain date
Valero Energy claims it
meets federal regulation;
therefore community
complaints are not
legitimate
General Motors promised
job security if productivity
gains were realized
Xerox shares product
blueprints with suppliers
and takes suggestions
before production
Source: Adapted from Max B. E. Clarkson, “A Stakeholder
Framework for Analyzing and Evaluating
Corporate Social Performance,” Academy of Management
Review 20 (January 1995): 92—117; I. M.
Jawahar and Gary McLaughlin, “Toward a Descriptive
Stakeholder Theory: An Organizational Life
cycle Approach,” Academy of Management Review 26 (July
2001): 397—414; lan Wilson, “What one
company is doing about today’s demands on business,” in G. A.
Steiner (Ed.), Changing business
society interrelations, Los Angeles, CA: Graduate School of
Management, UCLA, 1975.
Anticipate
responsibility
Doing all that is
required

Doing more than is
required
social audit
The process of assess
ing and reporting a firm’s
performance in adopting a
strategic focus for fulfilling
the economic, legal, ethical,
and philanthropic social
responsibilities expected of
it by its stakeholders.
and performance outcomes with respect to stakeholders.68 This
evaluation
can take place as stakeholder issues arise or are identified.
Therefore, it is
possible for one company to be rated at several different levels
because of
varying performance and transitions over time. For example, a
poorly han
dled crisis situation may provide feedback for continuous
improvement
that creates more satisfactory performance in the future. Or a
company
may demonstrate a proactive stance toward employees yet be
defensive
with consumer activists.
The reactive approach involves denying responsibility and
doing less

than is required. This approach can be characterized as
“fighting it all
the way.”69 A firm that fails to invest in safety and health
measures for
employees is denying its responsibilities. An organization with
a defen
sive strategy acknowledges reluctantly and partially the
responsibility
issues that may be raised by its stakeholders. A firm in this
category
fulfills basic legal obligations and demonstrates the minimal
responsibil
ity discussed in Chapter 1. With an accommodative strategy, a
company
attempts to satisfy stakeholder demands by doing all that is
required and
may be seen as progressive because it is obviously open to this
expanded
model of business relationships.7° Today, many organizations
are giv
ing money and other resources to community organizations as a
way
of demonstrating social responsibility. Finally, the proactive
approach
not only accepts but also anticipates stakeholder interests. In
this case,
a company sincerely aligns legitimate stakeholder views with its
respon
sibilities and will do more than is required to meet them.71
Hoechst, a
German life sciences company now part of Aventis, gradually
assumed
the proactive orientation with communities in which it operates.
The
initiation of a community discussion group ted to information
sharing

and trust building and helped transform Hoechst into a society-
driven
company.72
The Reactive—Defensive—Accommodative—Proactive Scale is
use
ful because it evaluates real practice and allows an organization
to
see its strengths and weaknesses within each stakeholder
relationship.
SABMiller, the second largest brewer in the world, uses a risk
assess
ment program to understand the stakeholders and issues that
may pose
a potential risk to its reputation. These risks are prioritized,
planned for,
monitored, and if necessary, responded to if SABMiller cannot
predict,
preempt, or avoid the concern.73 Results from a stakeholder
assessment
like the one at SABM11Ier should be included in the social
audit, the
process of assessing and reporting a firm’s performance in
adopting a
strategic focus for fulfilling the economic, legal, ethical, and
philanthropic
social responsibilities expected of it by its stakeholders.
Because stake-
holders are so important to the concept of social responsibility,
as well
as to business success, Chapters 3—12 are devoted to exploring
significant
stakeholder relationships and issues.
SUMMARY
Stakeholders refer to those people and groups who have a

“stake”
- in
some aspect of a company’s products, operations, markets,
industry, or
outcomes. The relationship between organizations and their
stakeholders
is a two-way Street.
The historical assumption that the key objective of business is
profit
maximization led to the belief that business is accountable
primarily to
investors and others involved fl the market and economic
aspects of the
organization. In the latter half of the twentieth century,
perceptions of
business accountability evolved to include both market
constituencies that
are directly involved and affected by the business purpose (e.g.,
inves
tors, employees, customers, and other business partners) and
nonmarket
constituencies that are not always directly tied to issues of
profitability
and performance (e.g., the general community, media,
government, and
special-interest groups).
In the stakeholder model, relationships, investors, employees,
and Sup
pliers provide inputs for a company to benefit stakeholders.
This approach
assumes a relatively mechanistic, simplistic, and non-
stakeholder view of
business. The stakeholder model assumes a two-way

relationship between
the firm and a host of stakeholders. This approach recognizes
additional
stakeholders and acknowledges the two-way dialog and effects
that exist
with a firm’s internal and external environment.
Primary stakeholders are fundamental to a company’s
operations and
survival and include shareholders and investors, employees,
customers,
suppliers, and public stakeholders, such as government and the
commu
nity. Secondary stakeholders influence and/or are affected by
the company
but are neither engaged in transactions with the firm nor
essential for its
survival.
As more firms conduct htisiness overseas, they encounter the
complex
ity of stakeholder issues and relationships in tandem with other
business
operations and decisions. Although general awareness of the
concept of
stakeholders is relatively high around the world, the importance
of stake-
holders varies from country to country.
A stakeholder has power to the extent that it can gain access to
coercive,
utilitarian, or symbolic means to impose or communicate its
views to the Orga
nization. Such power may he coercive, utilitarian, or symbolic.
Legitimacy is
the perception or belief that a stakeholder’s actions are proper,

desirable, or
appropriate within a given context. Stakeholders exercise
greater pressures
on managers and organizations when they stress the urgency of
their claims.
These attributes can change over time and context.
The degree to which a firm understands and addresses
stakeholder
demands can he referred to as a stakeholder orientation. This
orientation
comprises three sets of activities: (1) the organization-wide
generation of
data about stakeholder groups and assessment of the firm’s
effects on these
groups, (2) the distribution of this information throughout the
firm, and
(3) the organization’s responsiveness as a whole to tills
intelligence.
69
Reputation management is the process of building and
sustaining a
company’s good name and generating positive feedback from
stakehold
cr5. The process of reputation management involves the
interaction of
organizational identity (how the firm wants to he viewed),
orga;uzational
image (how stakeholders initially perceive the firm),

organizational per
formance (actual interaction between the company and
stakehotders), and
organizational reputation (the collective view of stakeholders
after inter
actions with the company). Stakeholders will reassess their
views of the
company on the basis of how the company has actually
performed.
Crisis management is the process of handling a high-impact
event
characterized by ambiguity and the need for swift action. Some
research
ers describe an organization’s progress through a prodromal, or
pre
crisis, stage to the acute stage, chronic stage, and finally, crisis
resolution.
Stakeholders need a quick response with information about how
the com
pany plans to resolve the crisis, as well as what they can do to
mitigate
negative effects to themselves. It is also necessary to)
communicate specific
issues to stakeholder groups, including remorse for the event,
guidelines as
to how the organization is going to address the crisis, and
criteria regard
ing how stakeholder groups will he compensated for negative
effects.
Companies are searching for ways to develop long-term,
collaborative
relationships with their stakeholders. These relationships
involve both tan
gible and intangible investments. Investments and Lessons

learned through
the process of developing a dialog and relationship wi th one
stakeholder
should add value to other stakeholder relationships. These
efforts result in
social capital, an asset that resides in relationships and is
characterized by
mutual goals and trust.
The first step in developing stakeholder relationships i s to
acknowl
edge and actively monitor the concerns of all legitimate
stakeholders.
A firm should adopt processes and modes of behavior that are
sensitive to
the concerns and capabilities of each stakeholder. Information
should he
communicated consistently across all stakeholders. A firm
should he will
ing to acknowledge and openly address potential conflicts.
Investments in
education, training, and information will improve employees’
understand
ing of and relationships with stakeholders. Relationships with
stakehold
ers need to he periodically assessed through both formal and
informal
means. Sharing feedback with stakeholders helps establish the
two-way
dialog that characterizes the stakeholder model.
An organization that develops effective corporate governance
and
understands the importance of business ethics and social
responsibility in
achieving success should develop some processes for managing

these impor
tant concerns. Although there are many different approaches, we
provide
some steps that have been found effective to utilize the
stakeholder frame
work in managing responsibility and business ethics. The steps
include
(1) assessing the corporate culture, (2) identifying stakeholder
groups,
(3) identifying stakeholder issues, (4) assessing the
organization’s com
mitment to) social responsibility, (5) identifying resources and
determining
urgency, and (6) gaining stakeholder feedback. The importance
of these
steps is to include feedback from relevant stakeholders in
formulating orga
nizational strategy aiid implementation.
The Reactive_Defensive_Accommodative_proactive Scale
provides
a method for assessing a company’s strategy and performance
with one
stakeholder. The reactive approach involves denying
responsibility and
doing less than is required. The defensive approach
acknowledges only
reluctantly and partially the responsibility issues that may he
raised by
the firm’s stakeholders. The accommodative strategy attempts to
satisfy
stakeholder demands. The proactive approach accepts and
anticipates
stakeholder interests. Results from this stakehc)lder assessment
should he

included in the social audit, which assesses and reports a firm’s
perfor
mance in fulfilling the economic, legal, ethical, and
philanthropic social
responsibilities expected of it by its stakeholders.
Responsible Business Debate
________
Prioritizing Stakeholder Concerns
Issue: A stakeho/der or shareholder orientation—whose
company is it?
For decades, the question of “Whose company is it?”
has permeated discussions of the role of business in
society. Famously, some economists have long argued
for the primacy of profit, noting that without eco
nomic stability and prospects for growth, a firm cannot
continue to pay employees, buy from suppliers, pay
taxes, and meet other economic and legal expectations.
Adam Smith made this point succinctly, “it is not from
the benevolence of the butcher, the brewer, or the
baker that we expect our dinner, but from their regard
to their own interest.” In the United States and United
Kingdom, the belief is that shareholders are the owners
of firms and managers have a fiduciary responsibility
to act in the interests of shareholders. The shareholder
orientation is dominant in most business and invest
ment communities, although this mind-set is shifting.
In other countries, a stakeholder, not shareholder,
orientation is the norm. Several European countries oper
ate under a system of “co-determination,” where both
employees and shareholders in large companies hold
seats on the oversight board and are required to con

sider multiple interests in decision making. In Denmark,
77
employees in firms with more than 35 workers elect one-
third of the firm’s board members, with a minimum of
two. In Sweden, companies with more than 25 employees
have two labor representatives appointed to the board.
In large German corporations, employees and sharehold
ers hold an equal number of seats. Finally, in Japan, exec
utives can be liable for managerial negligence, but do not
have fiduciary duties to shareholders and are expected to
meet an array of stakeholder expectations.
There Are Two Sides to Every Issue
1. Defend the belief that companies exist first and fore
most for the benefit of shareholders and investors.
For what reasons should the maximization of share
holder value be the accepted corporate paradigm?
2. Defend the belief that companies, in addition to
shareholders and investors, have equally important
stakeholders, such as employees, customers and
suppliers. What about responsibilities to the com
munity, society, and the natural environment?
Sources: “Whose Company Is It?: New Insights into the Debate
over Shareholders vs. Stakeholders,” http://knowledge.whar
ton.upenn.edu/aricIecfm?aicIeid826 (accessed May 17,
2009). Tibor R. Machan, “Stakeholder vs. Shareholder Theory
of the Ethics of Corporate Management,” International Journal
of Economics and Business Research 1 (2009): 12—20.

72 Business and Society C
hapter 2 Strategic Management of Stakeholder Relationships 73
KEY TERMS
Define stakeholder in your own terms. Compare
your definition with the definition used in this
chapter.
What is the difference between primary and
secondary stakeholders? Why is it important for
companies to make this distinction?
How do legitimacy, urgency, and power attributes
positively and negatively affect a stakeholder’s
ability to develop relationships with orgamza
tioflS?
What is reputation management? Explain why
companies are concerned about their reputation
and its effects on stakeholders. What are the four
reputation management (p. 54)
crisis management (p. 59)
social capital (p. 62)
social atidit (p. 68)
elements of reputation management? Why is it
important to manage these elements?
Define crisis management. What should a com
pany facing a crisis do to satisfy its stakeholders

and protect its reputation?
Describe the process of developing stakeholder
relationships. What parts of the process seem
most important? What parts seem most difficult?
How can a stakeholder orientation he imple
mented to improve social responsibility?
What are the differences between the reac
tive, defensive, accommodative, and proactive
approaches to stakeholder relationships?
Global Amusements had been in business for
nearly 20 years and currently used a joint venture
apprcach in establishing new properties. Suvar was its
Thai partner, and the two firms had been successful
two years ago in developing a water amusement park
outside Bangkok. Phuket could hold much promise,
htit there were likely to he questions about the poten
tial destruction of its beauty and the exploitation of
this well-preserved island and cultural reserve. These
concerns had been heightened as the island slowly
recovered from the 2004 tsunami and set a course for
managing future development.
following a day to adjust to the time zone and
refine the strategy for the visit, the next three days
would he spent in Bangkok, meeting with various
company and governmental officials who had a stake
in the proposed amusement facility. After a short flight
to Phuket, the group would he the guest of the Southern
Office of the Tourism Authority of Thailand for nearly

a week. This part of the trip would involve visits tO) pos
sible sites as well as meetings with island government
officials and local interest groups.
After arriving at the hotel, the four employees of
Global Amusement agreed to meet later that evening to
discuss their strategy for the visit. One of their main con
cerns was the deveh)pment of an effective stakeholder
analysis. Each member of the group was asked to bring a
list of primary and secondary stakeholders and indicate
the various concerns or “stakes” that each might have
with the proposed project. What would you do?
EXPERIENTIAL EXERCISE
Choose two compames in different industries and visit
their respective websites. Peruse these sites for informa
tion that is directed at three company stakeholders:
employees, customers, and the media. for example, a
company that places its annual reports online may he
appealing primarily to the interests of investors. Make
a list of the types of information that are on the site and
indicate how the information might he used and perceived
by these three stakeholder groups. What differences and
similarities did you find between the two companies?
WHAT WOULD YOU DO?
Literally huiidreds of buildings dotted the ground

below and the thousands of cars on highways looked
like ants on a mission. The jet airliner made its way to)
the Bangkok International Airport and eased into the
humid afterm)on. The group of four passed through
customs control and looked for the limousine provided
by Suvar Corporation, their Thai liaison in this new
business venture. Representing Global Amusements
were the vice-president of corporate development,
director of Asian operations, vice-president of global
relations, and director of governmental relations for
Southeast Asia.
Global Amusements, headquartered in London,
Was considering the development of a Thai cultural
amusement center on the island of Phuket. Phttket is
a tourist destination known for its stunning beaches,
fine resorts, and famous Thai hospitality. Both Global
Amusements and Suvar Corporation believed Phuket
was a great candidate for a new project. The amuse
ment center would focus on the history of Thailand
and include a variety of live performances, rides,
exhibits, and restaurants. Domestic and international
tourists who visited Phuket would he the primary
target market.
primary stakeholders (p. 46)

secondary stakeholders (p. 46)
stakeholder interaction model
(p. 48)
stakeholder orientation (p. 49)
power (p. 51)
legitimacy
(p.
52)
urgency (p. 53)
1.
DISCUSSION QUESTIONS
2.
3.
5.
4.
6.
7.
8.
[ Chapter Objectives

To define the concept of social
responsibility
To trace the development of social
responsibility
To examine the global nature of social
responsibility
To discuss the benefits of social
responsibility
To introduce the framework for
understanding social responsibility
Chapter Outline
Social Responsibility Defined
Development of Social Responsibility
Global Nature of Social Responsibility
Benefits of Social Responsibility
Framework for Studying Social
Responsibility
Opening Vignette
Consumers may be surprised to realize that one com
pany controls much of the industry for eyewear,
including manufacturing, distribution. Critics claim

this has resulted in excessive prices for quality eye
wear. Among these critics was Neil Blumenthal. In
2008 Neil Blumenthal partnered with David Gilboa,
and three classmates to develop a plan for a business
to compete against the industry giant and eyewear
affordable for the masses. The idea was developed for
Wharton Business School’s business plan competition.
Unfortunately, the school did not see their idea as a
promising endeavor. The business plan did not even
reach the final round.
Nearly a decade later, this business plan has devel
oped into a successful firm that has now sold more than
1 million pairs of glasses. The founders founded their
firm—Warby Parker—on the premise that designing
and manufacturing glasses in-house and selling them
on the Internet would significantly reduce costs. These
costs could then be passed onto the consumer so they
would be able to afford designer glasses at a fraction
of their competitor’s costs. Because of its ability to save
on costs, consumers can purchase eyeglasses for as little
as $95 each from Warby Parker. Today this $1.2 billion
company has expanded beyond selling solely online

and has been able to open up 27 retail locations.
Warby Parker is known for more than just making
eyeglasses affordable for the masses. The foundation
of the business was also built on making eyewear
available for people in developing countries who
could not normally afford glasses. Enter Visionspring,
a nonprofit charity that provides glasses to individuals
in developing countries. Warby Parker partnered with
Visionspring to donate one pair of eyeglasses to an
individual in a developing country for every pair of eye
glasses it sells. Each month Warby Parker determines
how many glasses it sold and then makes a donation
to Visionspring that handles the costs of sourcing the
eyeglasses. The reason why Warby Parker does not
simply donate the glasses is because Visionspring trains
consumers in the country—particularly women—to be
entrepreneurs and sell the glasses to tradespeople for
approximately $4 each. This is much more affordable
for tradespeople while also providing more economic
opportunities for women to own their own small busi
nesses and generate income. Glasses have been found
to make a world of difference for people who require
eye care in developing countries. It is estimated that
these tradespeople see their earning power rise by
20 percent after they have purchased glasses. Warby
Parker demonstrates how a company can effect positive
change in this world while simultaneously earning a
profit. Its strategic social responsibility results in high-
quality products at lower prices as well as the ability for
those in developing countries to obtain the eyewear
they need.

CHAPTER ONE
Framework
d
Warby Parker: Socially Responsible Vision
.
.
.
.
4 Business and Society Chapter 1 Social Responsibility
Framework 5
Businesses today must cope with challenging decisions related
to theirinterface with society. Consumers, as well as others, are
increasmgtyemphasizing the importance of companies’
reputations, which are
often based on ethics and social responsibility. The meaning of
the term
“social responsibility” goes beyond being philanthropic or
environmen
tally sustainable. Seventy-six percent of Americans think the
meaning now
extends to how employees are treated and the values a company
holds.2 In
an era of intense global competition and increasing media
scrutiny, con

sumer activism, and government regulation, all types of
organizations need
to become adept at fulfilling these expectations. Like Warby
Parker, many
companies are trying, with varying results, to meet the many
economic,
legal, ethical, and philanthropic responsibilities they now face.
Satisfying
the expectations of social responsibility is a never-ending
process of contin
uous improvement that requires leadership from top
management, buy-in
from employees, and good relationships across the community,
industry,
market, and government. Companies must properly plan,
allocate, and use
resources to satisfy the demands placed on them by investors,
employees,
customers, business partners, the government, the community,
and others.
Those who have an interest or stake in the company are referred
to as
stakeholders.
In this chapter, we examine the concept of social responsibility
and
how it relates to today’s complex business environment. First,
we define
social responsibility. Next, we consider the development of
social responsi
bility, its benefits to organizations, and the changing nature of
expectations
in our increasingly global economy. Finally, we introduce the
framework
for studying social responsibility used by this text, which
includes such

elements as strategic management for stakeholder relations;
legal, regula
tory, and political issues; business ethics; corporate governance;
consumer
relations; employee relations; philanthropy and community
relations; tech
nology issues; sustainability issues; and global relations.
SOCIAL RESPONSIBILITY DEFINED
___
Business ethics, corporate volunteerism, philanthropic
activities, going
green, sustainability, corporate governance, reputation
management—
these are terms you may have heard used, or even used yourself,
to
describe the various rights and responsibilities of business
organizations.
You may have thought about what these terms actually mean for
business
practice. You may also have wondered how businesses engage
in these
behaviors or contribute to these outcomes. In this chapter, we
clarify some
of the confusion that exists in the terminology that people use
when they
talk about expectations for business. To this end, we begin by
defining
social responsibility.
In most societies, businesses are granted a license to operate
and
the right to exist through a combination of social and legal
institutions.

Businesses are expected to provide quality goods and services,
abide by
laws and regulations, treat employees fairly, follow through on
contracts,
protect the natural environment, meet warranty obligations, and
adhere
to many other standards of good business conduct. Companies
that con
tinuously meet and exceed these standards are rewarded with
customer
satisfaction, employee dedication, investor loyalty, strong
relationships in
the community, and the time and energy to continue focusing on
business-
related concerns. Firms that fail to meet these responsibilities
can face
penalties, both formal and informal, and may have their
attention diverted
away from core business practice. for example, Volkswagen
received a
number of penalties and criticisms for installing “defeat
devices” into
its diesel vehicles. These defeat devices were intended to fool
regulators.
While the cars were undergoing emissions testing, the cars ran
below per
formance to meet requirements. However, when on the road they
emitted
40 times the allowable limit of emissions in the United States.
Perhaps
most damaging to the firm is that this scandal was a deliberate
attempt to
bypass environmental rules. German prosecutors launched an
investiga
tion to determine whether top executives also mislead investors

by failing
to inform them about complaints filed against the company in a
timely
manner.3 The goal is to prevent these negative outcomes in the
future.
In contrast, a large multinational corporation may be faced with
pro
testors who use illicit means to destroy or deface property.
More firms are
seeing their websites hacked and/or sabotaged by those who are
protest
ing specific issues, for instance, the Japan External Trade
Organization’s
website crashed after hackers attacked the site to protest against
Japan’s
stance toward whale hunting.4 Whether the attacks are physical
or virtual,
they can cost companies significant resources in having to
rebuild.
Finally, a company engaged in alleged deceptive practices may
face for
mal investigation by a government agency. For instance, a
group of promi
nent authors and booksellers are demanding that the Justice
Department
investigate Amazon for engaging in anticompetitive practices.
According
to the group, Amazon, which holds 40 percent of the market for
new
books, has used below-cost pricing to put competitors out of
business and
blocked the sale of books to force publishers for more favorable
deals.5
Investigations such as this could lead to legal charges and

penalties, perhaps
severe enough to significantly alter the company’s products and
practices
or close the business. For example, The Scooter Store, a
company that sold
motorized wheelchairs all over the United States, filed for
Chapter 11 bank
ruptcy after a federal investigation determined the company had
deceptively
overcharged Medicare and Medicaid between $47 million and
$88 million
over the course of two years. The company was found to have
engaged in
deceptive tactics, such as continually contacting doctors to
prescribe the
motorized wheelchairs whether or not a patient was in need of
one; claim
ing the wheelchairs were free in advertisements when taxpayers
were paying
for them; and contributing to political campaigns to avoid any
changes to
Medicare and Medicaid. In addition, the city of New Braunfels,
Texas, the
home of the company’s headquarters, sued the company for the
more than
$2 million that was given to them from an economic
development fund to
I
framework 7
build their headquarters. To make matters worse, consumers

remarked they
made purchases from the company because they claimed their
goat was to
“Always Do the Right Thing.”6
Businesses today are expected to look beyond self-interest and
recog
nize that they belong to a larger group, or society, that expects
responsible
participation. Therefore, if any group, society, or institution is
to function,
there must be a delicate interplay between rights (i.e., what
people expect
to get) and responsibilities (i.e., what people are expected to
contribute)
for the common good. Research indicates that the most ethical
and socially
responsible companies are the most profitable.7 Therefore,
responsible
conduct and policies yield significant benefits to society as well
as share
holders. While the media provides much coverage of misconduct
and
illegal activities in business, most businesses try to act in an
ethical and
socially responsible manner.
The term social responsibility came into widespread use in the
business
world during the 1970s. It has evolved into an emphasis on the
following
areas: social issues, consumer protection, sustainability, and
corporate
governance. Social issues are linked with the idea of the
“common good.”
The common good is associated with the development of social

conditions
that allow for societal welfare and fulfillment to be achieved. In
other
words, social issues involve the ethical responsibilities a firm
owes to soci
ety. Equal rights, gender roles, marketing to vulnerable
populations, data
protection, and internet tracking are examples of social issues
common in
business. Social issues can become so significant that they
warrant legisla
tion to protect consumers. For the Federal Trade Commission’s
Bureau of
Consumer Protection, leading consumer protection issues
include mislead
ing advertising, product safety, and advertising to children.
Sustainability has also become a growing area of concern in
society.
In the United States, sustainability is used to refer more to the
environ
mental impact on stakeholders. Green marketing practices,
consumption
of resources, and greenhouse gas emissions are important
sustainability
considerations that socially responsible businesses will have to
address.
Corporate governance will be described in more detail in
Chapter 3.
It refers to formal systems of accountability, oversight, and
control.
Corporate governance is becoming an increasingly important
topic in
light of business scandals over the last 10—15 years. Issues in
corporate
governance include concerns over executive compensation,

internal con
trol mechanisms, and risk management.8 Figure 1.1 discusses
the social
responsibility issues that we will be covering in this text.
These four areas of social responsibility tend to conflict with
the tra
ditional or neoclassical view of a business’s responsibility to
society. The
traditional view of social responsibility, articulated in the
famous econo
mist Milton Friedman’s 1962 Capitalism and Freedom, asserts
that busi
ness has one purpose, satisfying its investors or shareholders,
and that any
other considerations are outside its scope.9 Although this view
still exists
today, it has lost credibility as more and more companies have
assumed
a social responsibility orientation.10 Companies see social
responsibility
Social issues
J Consumer protectionSustainabilityCorporate governance
Philanthropy
Legal responsibilities
Employee well-being
as a part of their overall corporate strategy and a benefit that
directly
increases the bottom line. We define social responsibility as the
adoption
by a business of a strategic focus for fulfilling the economic,
legal, ethical,

and philanthropic responsibilities expected of it by its
stakeholders. This
definition encompasses a wide range of objectives and
activities, including
both historical views of business and perceptions that have
emerged in the
last decade. Let’s take a closer look at the parts of this
definition.
Social Responsibility Applies to All Types of Businesses
It is important to recognize that all types of businesses—small
and large,
sole proprietorships and partnerships, as well as large
corporations—
implement social responsibility initiatives to further their
relationships
with their customers, their employees, and their community at
large. For
example, Altered Seasons, a candle retailer in Buffalo, New
York, operates
on a one-for-one model, where the company gives a meal to the
hungry for
every candle that it sells. The company’s candles are made from
environ
mentally friendly materials and are manufactured in the United
States.11
Thus, the ideas advanced in this book are equally relevant and
applicable
across a wide variety of businesses and nonprofits.
Nonprofit organizations are expected to be socially responsible.
Relationships with stakeholders—including employees, those
that are
served, and the community—affect their reputation. For
example, the
Southern California chapter of the Better Business Bureau was

expelled
from the organization after evidence emerged in 2010 that it had
been
operating a pay-for-play scheme. The Better Business Bureau is
a non
profit self-regulatory organization that objectively rates
businesses on
how they treat consumers and handle consumer complaints.
Investigations
revealed that employees at the Southern California bureau were
awarding
FIGURE 7.7 Major Emphases of Social Responsibility
Recognition
Issue Awareness
Issues
Outcomes
Decisions
Source: © O.C. Ferrell, 2016.
Stakeholder Evaluations
social responsibility
The adoption by a business
of a strategic focus for ful
filling the economic, legal,
ethical, and philanthropic
responsibilities expected of
it by its stakeholders.

Framework 9
• Curiosity and Exploration
• Performance
• Engagement
• Design
• Relationships
• Inclusiveness
• A Better World
• Transparency
• Foundations
businesses high rankings only if they paid to become members.
The bureau
is the largest ever expelled for misconduct.12 This example
demonstrates
that nonprofit organizations must also develop strategic plans
for social
responsibility. In addition, government agencies are expected to
uphold
the common good and act in an ethical and responsible manner.
Although the social responsibility efforts of large corporations
usually
receive the most attention, the activities of small businesses
may have a
greater impact on local communities.13 Owners of small
businesses often
serve as community leaders, provide goods and services for
customers in
smaller markets that larger corporations are not interested in
serving, cre
ate jobs, and donate resources to local community causes.

Medium-sized
businesses and their employees have similar roles and functions
on both
a local and a regional level. Although larger firms produce a
substantial
portion of the gross national output of the United States, small
businesses
employ about half of the private sector workforce and produce
roughly
half of the private sector output. In addition to these economic
outcomes,
small business presents an entrepreneurial opportunity to many
people,
some of whom have been shut out of the traditional labor force.
Women,
minorities, and veterans are increasingly interested in self-
employment
and other forms of small business activity.14 It is vital that all
businesses
consider the relationships and expectations that our definition
of social
responsibility suggests.
Social Responsibility Needs a Strategic Focus
Social responsibility is an important business concept and
involves signifi
cant planning and implementation. Our definition of social
responsibility
requires a formal commitment, or a way of communicating the
company’s
social responsibility philosophy. For example, Herman Miller, a
multina
tional provider of office, residential, and healthcar e furniture
and services,
established a set of values that create a culture of community
both within

and outside of the company (shown in Table 1.1). This
statement declares Herman Miller’s philosophy and the
way it will fulfill its responsibilities to its customers, its
shareholders, its employees, the community, and the natu
ral environment. Because this statement takes into account
all of Herman Miller’s constituents and applies directly
to all of the company’s operations, products, markets,
and business relationships, it demonstrates the company’s
strategic focus on social responsibility. Other companies
that embrace social responsibility have incorporated simi
lar elements into their strategic communications, includ
ing mission and vision statements, annual reports, and
websites. For example, Hershey Entertainment & Resorts
focuses upon four pillars of CSR: (1) the environment and
the goal to reduce the ecological footprint; (2) the com
munity and being a positive, productive, and informed
partner; (3) the workplace, in fostering one that is safe,
inclusive, desirable,
and respectful; and (4) a marketplace and guest focus that
considers the
ethical treatment of all stakeholders.15
In addition to a company’s verbal and written commitment to
social
responsibility, our definition requires action and results. To
imple
ment its social responsibility philosophy, Herman Miller has
developed
and implemented several corporate-wide strategic initiatives,
including
research on improving work furniture and environments,
innovation in
the area of ergonomically correct products, progressive
employee devel

opment opportunities, volunteerism, and an environmental
stewardship
program.16 These efforts have earned the company many
accolades, such
as being named the “Most Admired” furniture manufacturer in
America
by fortune magazine, and a place on many prestigious lists,
including
Fortune magazine’s “100 Best Companies to Work for in
America,”
Forbes magazine’s “Platinum List” of America’s 400 best-
managed large
companies, Business Ethics magazine’s “100 Best Corporate
Citizens,”
Diversity Inc. magazine’s “Top 10 Corporations for Supplier
Diversity,”
and The Progressive Investor’s “Sustainable Business Top 20.17
As this
example demonstrates, effective social responsibility requires
both words
and action.
If any such initiative is to have strategic importance, it must be
fully
valued and championed by top management. Leaders must
believe in and
support the integration of stakeholder interests and economic,
legal, ethi
cal, and philanthropic responsibilities into every corporate
decision. For
example, company objectives for brand awareness and loyalty
can be
developed and measured from both a marketing and a social
responsibility
standpoint because researchers have documented a relationship
between

consumers’ perceptions of a firm’s social responsibility and
their intentions
to purchase that company’s brands.18 Likewise, engineers can
integrate
consumers’ desires for reduced negative environmental impact
in product
designs, and marketers can ensure that a brand’s advertising
campaign
incorporates this product benefit. Finally, consumers’ desires
for an envi
ronmentally sustainable product may stimulate a stronger
company inter
est in assuming environmental leadership in all aspects of its
operations.
Home Depot, for example, responded to demands by consumers
and envi
ronmentalists for environmentally friendly wood products by
launching a
new initiative that gives preference to wood products certified
as having
been harvested responsibly over those taken from endangered
forests.19
With this action, the company—which has long touted its
environmental
principles—has chosen to take a leadership role in the campaign
for envi
ronmental responsibility in the home improvement industry.
Although
social responsibility depends on collaboration and coordination
across
many parts of the business and among its constituencies, it also
produces
effects throughout these same groups. We discuss some of these
benefits in
a later section of this chapter.

Because of the need for coordination, a large company that is
commit
ted to social responsibility often creates specific positions or
departments to
TABLE 7.1 Herman Miller, Inc.’s,
Corporate Culture Values of Community
Source: “Things That Matter to Us,” Herman Millet,
Inc., http://www.hermanmiller.com/aboutus/
things-that-maffer-to-us.html (accessed June 17,
2016). Courtesy of Herman Miller, Inc.
Framework
spearhead the various components of its program. For example,
Starbucks
has a Global Responsibility Department that focuses on
responsible and
ethical behaviors regarding the environment, employee
relations, customer
interactions, suppliers, and communities. The company’s
Environmental
Starbucks Coffee Company Affairs team works to develop
environmen
tally responsible policies and minimize the company’s
“footprint.” CEO
Howard Schultz considers the creation of a good work
environment a top
priority. Some of the results of this philosophy include offering
one of
the best healthcare programs in the coffee shop industry and the
institu

tion of wellness programs. Starbucks also practices
conservation with its
Starbucks Coffee and Farmer Equity Praètices (CAFE), which is
a set of
socially responsible coffee-buying guidelines. Finally, the
company is phil
anthropic and engages the community on how well the company
is doing
from their perspective. In the table of contents page of the
company’s
annual report, CSR (corporate social responsibility) is listed as
a key fea
ture.20 A smaller firm may give an executive, perhaps in human
resources
or the business owner, the ability to make decisions regarding
community
involvement, ethical standards, philanthropy, and other areas.
Regardless
of the formal or informal nature of the structure, this
department or execu
tive should ensure that social responsibility initiatives are
aligned with
the company’s corporate culture, integrated with companywide
goals and
plans, fully communicated within and outside the company, and
measured
to determine their effectiveness and strategic impact. In sum,
social respon
sibility must be given the same planning time, priority, and
management
attention that is given to any other company initiative, such as
continuous
improvement, cost management, investor relations, research and
develop
ment, human resources, or marketing research.

Social Responsibility Fulfills Society’s Expectations
Another element of our definition of social responsibility
involves society’s
expectations of business conduct. Many people believe that
businesses
should accept and abide by four types of responsibility:
financial, legal,
ethical, and philanthropic (see Table 1.2). To varying degrees,
the four
types are required, expected, and/or desired by society.21
At Stage 1, businesses have a responsibility to be financially
viable
so that they can provide a return on investment for their owners,
cre
ate jobs for the community, and contribute goods and services
to the
economy. The economy is influenced by the ways organizations
relate
to their shareholders, their customers, their employees, their
suppliers,
their competitors, their community, and even the natural
environment.
For example, in nations with corrupt businesses and industries,
the nega
tive effects often pervade the entire society. Transparency
International,
a German organization dedicated to curbing national and
international
corruption, conducts an annual survey on the effects of business
and
government corruption on a country’s economic growth and
prospects.
TABLE 7.2 Social Responsibility Requirements

Stages Examples
Starbucks offers investors a healthy return on investment,
including paying dividends.
Starbucks specifies in its code of conduct that payments
made to foreign government officials must be lawful accord
ing to the laws of the United States and the foreign country.
Stage 3: Ethics, Principles, and Starbucks offers healthcare
benefits to part-time employees
and supports coffee growers so they get a fair price.
Stage 4: Philanthropic Activities Starbucks created the
Starbucks Foundation to award grants
to eligible nonprofits and to give back to their communities.
The organization reports that corruption reduces economic
growth,
inhibits foreign investment, and often channels investment and
funds
into “pet projects” that may create little benefit other than high
returns
to the corrupt decision makers. Many of the countries with the
high
est levels of perceived corruption also report the highest levels
of pov
erty in the world. These countries include Somalia, Chad, Iraq,
Haiti,
Afghanistan, and Myanmar. Transparency International also
notes
that some relatively poor countries, including Bulgaria,
Colombia, and
Estonia, have made positive strides in curbing corruption.
However,
Canada and Iceland have started to experience higher levels of
perceived
corruption, yet maintain relatively strong economies. The

organization
encourages governments, consumers, and nonprofit groups to
take
action in the fight against corruption.22 Although business and
society
may be theoretically distinct, there are a host of practical
implications
for the four levels of social responsibility, business, and its
effects on
society.
At Stage 2, companies are required to maintain compliance with
legal
and regulatory requirements specifying the nature of
responsibLe business
conduct. Society enforces its expectations regarding the
behavior of busi
nesses through the legal system. If a business chooses to behave
in a way
that customers, special-interest groups, or other businesses
perceive as irre
sponsible, these groups may ask their elected representatives to
draft legis
lation to regulate the firm’s behavior, or they may sue the firm
in a court
of law in an effort to force it to “play by the rules.” For
example, the New
York attorney general’s office is questioning the legality of
making new
hires sign noncompete agreements. A noncompete agreement
stipulates that
the employee cannot work for a competitor for a certain amount
of time
after leaving the organization. New York authorities believes
this placed
undue hardships on employees. Jimmy John’s settled with the

attorney
general’s office by agreeing to no longer make employees sign
these agree
ments. It is estimated that 15 percent of workers without college
degrees
are subject to these noncompete agreements. Criticisms have
emerged from
other states as well.23
Stage 1: Financial Viability
Stage 2: Compliance with Legal
and Regulatory Requirements
17
Values
12 Business and Society Chapter 1 Social Responsibi lity
Framework 13
Beyond financial viability and legal compliance, companies
must
decide what they consider to be just, fair, and right—the realm
of ethics,
principles, and values. Business ethics refers to the principles
and standards
that guide behavior in the world of business. Principles are
specific and
universal boundaries for behavior that should never be violated.
Principles
such as fairness and honesty are determined and expected by the
public,
government regulators, special-interest groups, consumers,

industry, and
individual organizations. The most basic of these principles
have been cod
ified into laws and regulations to require that companies
conduct them
selves in ways that conform to society’s expectations. Ethical
issues exist in
most managerial decisions. A firm needs to create an ethical
culture with
values and norms that meet the expectations of stakeholders.
Values are
enduring beliefs and ideals that are socially enforced. Freedom
of speech,
for example, is a strong value in the Western world. At the
Marriott, val
ues include putting people first, pursuing excellence, embracing
change,
acting with integrity, and serving our world.24
Many firms and industries have chosen to go beyond these basic
laws
in an effort to act responsibly. The Direct Selling Association
(DSA), for
example, has established a code of ethics that applies to all
individual
and company members of the association. Because direct selling
involves
personal contact with consumers, there are many ethical issues
that can
arise. For this reason, the DSA code directs the association’s
members to
go beyond legal standards of conduct in areas such as product
represen
tation, appropriate ways of contacting consumers, and
warranties and
guarantees. In addition, the DSA actively works with

government agencies
and consumer groups to ensure that ethical standards are
pervasive in the
direct selling industry. The World Federation of Direct Selling
Associations
(WFDSA) also maintains two codes of conduct, one for dealing
with con
sumers and the other for interactions within the industry, that
provide
guidance for direct sellers around the world in countries as
diverse as
Argentina, Canada, Finland, Taiwan, and Poland.2
At Stage 4 are philanthropic activities, which promote human
wel
fare and goodwill. By making philanthropic donations of
money, time,
and other resources, companies can contribute to their
communities and
society and improve the quality of life. For example, the UPS
Foundation
has been active in the global community since 1951. The
foundation
offers programs in philanthropy and humanitarian relief.
Donations total
approximately $100 million worldwide. In addition to the
monetary con
tributions, 1.9 million annual volunteer hours have also been
given. The
foundation focuses its efforts on education, disaster
preparedness and
resiliency, urgent response to unexpected disasters, post-
disaster recov
ery, in-kind disaster relief, skill-based volunteering,
partnerships with
humanitarian organizations, and thought leadership.26

When these dimensions of social responsibility were first
introduced,
many people assumed that there was a natural progression from
financial
viability to philanthropic activities, meaning that a firm had to
be financially
viable before it could properly consider the other three
elements. Today,
social responsibility is viewed in a more holistic fashion, with
all four dimen
siOnS seen as related and integrated, and this is the view we
will use in this
book.27 In fact, companies demonstrate varying degrees of
social responsi
bility at different points in time. Figure 1.2 depicts the social
responsibility
continuum. Companies’ fulfillment of their responsibilities can
range from
a minimal to a strategic focus that results in a stakeholder
orientation.
Firms that focus only on shareholders and the bottom line
operate from a
legal or compliance perspective. Firms that take minimal
responsibility view
such activities as a “cost of doing business.” Some critics
believe that phar
maceutical manufacturers take the minimal approach with
respect to the
advertising and sale of certain drugs. A court case involving
pharmaceutical
company GlaxoSmithKline revealed a string of pharmaceutical
companies
engaging in aggressive and deceptive marketing to encourage
doctors to

prescribe psychotropic drugs to children. It was found that over
the course
of 20 years, many companies—including Pfizer, Johnson &
Johnson, and
Eli Lilly—targeted academic leaders, wrote articles, suppressed
data, and
seduced doctors with gifts to sell these drugs for pediatric use.
Further, the
children who were prescribed these drugs were mainly foster
children from
low-income backgrounds.28
Strategic responsibility is realized when a company has
integrated a
range of expectations, desires, and constituenci es into its
strategic direc
tion and planning processes. In this case, an organization
considers social
responsibility an essential component of its vision, mission,
values, and
practices. BT, formerly known as British Telecom, is
communicating its
commitment to strategic responsibility with the theme of
“Responsible
Business,” where BT is focused on tackling climate change,
helping create
a more inclusive society, and enabling sustainable economic
growth. BT
has been reporting on its social responsibility activities for
nearly 20 years,
which makes the company a leader in accountability disclosure.
Finally,
firms may be forced to be more socially responsible by
government, non
governmental organizations, consumer groups, and other
stakeholders.

In this case, any expenditures are considered a “tax” that occurs
outside
the firm’s strategic direction and resource allocation process.29
Executives
with this philosophy often maintain that customers will be lost,
employees
FIGURE 1.2 Social Responsibility Continuum
Minimal
Considerations that focus
solely on shareholders
Strategic
Financial, legal, ethical, and
philanthropic considerations
targeted at selected stakeholders
will become dissatisfied, and other detrimental effects will
occur because
of forced social responsibility.30
In this book, we will give many examples of firms that are at
different
places along this continuum to show how the pursuit of social
responsibil
ity is never ending. for example, ConocoPhillips was nomina ted
to the 100
Best Corporate Citizens list in 2015. It was also named to the

Dow Jones
Sustainability North America Index for a number of years.
ConocoPhillips
even has a sustainable development group that considers the
company’s
impact on environmental issues such as climate change and
biodiversity.
However, in 2016 it was dropped from the 100 Best Corporate
Citizens
list. In 2015 it settled a lawsuit in California accusing the firm
of violating
the state’s anti-pollution laws since 2006. It also spent money
to resolve
spill-related claims in China.3’
Social Responsibility Requires a Stakeholder Orientation
The final element of our definition involves those to whom an
orga
nization is responsible, including customers, employees,
investors and
shareholders, suppliers, governments, communities, and many
others.
These constituents have a stake in, or claim on, some aspect of
a com
pany’s products, industry, markets, and outcomes and are thus
known
as stakeholders. We explore the roles and expectations of
stakeholders
in Chapter 2. Companies that consider the diverse perspectives
of these
constituents in their daily operations and strategic planning are
said
to have a stakeholder orientation, meaning that they are focused
on
stakeholders’ concerns. Adopting this orientation is part of the
social

responsibility philosophy, which implies that business is
fundamentally
connected to other parts of society and must take responsibility
for its
effects in those areas.
R. E. Freeman, a developer of stakeholder theory, maintains that
business and society are “interpenetrating systems,” in that each
affects
and is affected by the other.32 For the common good to be
achieved,
cross-institutional and -organizational interactions must move
society
toward shared partnerships. For example, Kingfisher, the
operator
of more than 1,150 home improvement retail stores in nine coun
tries, embarked on a new corporate responsibility initiative
called
“Kingfisher Net Positive.” The four components to this plan
included
timber, energy, innovation, and communities. The company has
nearly
reached its goal of sourcing 100 percent of timber from
responsible
sources, with 96 percent responsibly sourced. Kingfisher has
expanded
energy-efficient product lines in its stores to help customers
reduce
energy consumption. In terms of innovation, the company is
focusing
on designing products with closed loop systems and determining
ways
of producing materials from in-store recycling. Finally, the
company
impacts its communities through education, volunteering, and
partner

ing with other organizations.33
DEVELOPMENT OF SOCIAL RESPONSIBILITY
in 1959, Harvard economist Edward Mason asserted that
business cor
porations are “the most important economic institutions.”34 His
declara
tion implied that companies probably affect the community and
society
as much, or perhaps more, in social terms as in monetary, or
financial,
terms. Employment and the benefits associated with a living
wage are nec
essary to develop a sustainable economy. The opportunity for
individuals
and businesses to attain economic success is necessary to create
a society
that can address social issues. Today some question our
economic system,
but without economic resources little progress can be made in
developing
society.
Although some firms have more of a social impact than others,
com
panies do influence many aspects of our lives, from the
workplace to the
natural environment. This influence has led many people to
conclude that
companies’ actions should be designed to benefit employees,
customers,
business partners, and the community as well as shareholders.
Social
responsibility has become a benchmark for companies today.35
However,
these expectations have changed over time. For example, the

first corpora
tions in the United States were granted charters by various state
govern
ments because they were needed to serve an important function
in society,
such as transportation, insurance, water, or banking services. In
addition
to serving as a “license to operate,” these charters specified the
internal
structure of these firms, allowing their actions to be more
closely moni
tored.36 During this period, corporate charters were often
granted for a
limited period of time because many people, including
legislators, feared
the power that corporations could potentially wield. It was not
until the
mid 1$OOs and early 1900s that profit and responsibility to
stockholders
became major corporate goals.37
After World War II, as many large U.S. firms came to dominate
the
global economy, their actions inspired imitation in other
nations. The
definitive external characteristic of these firms was their
economic domi
nance. Internally, they were marked by the virtually unlimited
autonomy
afforded to their top managers. This total discretion meant that
these
firms’ top managers had the luxury of not having to answer for
some
of their actions.38 In the current business mindset, such total
autonomy
would be viewed as a hindrance to social responsibility because

there is
no effective system of checks and balances. In Chapter 3, we
elaborate on
corporate governance, the process of control and accountability
in organi
zations that is necessary for social responsibility.
In the 1950s, the 130 or so largest companies in the United
States
provided more than half of the countr y’s manufacturing output.
The top
500 firms accounted for almost two-thirds of the country’s
nonagricultural
economic activity.39 U.S. productivity and technological
advancements
dramatically outpaced those of global competitors, such as
Japan and
Western Europe. For example, the level of production in the
United States
was twice as high as that in Europe and quadruple that in Japan.
The level
Chapter 1 Social Responsibility Framework 15
stakeholders
Constituents who have an
interest or stake in a com
pany’s products, industry,
markets, and outcomes.
16 Business and Society Chapter 1 Social ResPons1bI1
framework
of research and development carried out by U.S. corporations

was also
well ahead of overseas firms. For these reasons, the United
States was per
ceived as setting a global standard for other nations to emulate.
During the l950s and l960s, these companies provided benefits
that
are often overlooked. Their contributions to charities, the arts,
culture,
and other community activities were beneficial to the industry
or to soci
ety rather than simply to the companies’ own profitability. For
example,
the lack of competition meant that companies had the profits to
invest
in higher quality products for consumer and industrial use.
Although
the government passed laws that required companies to take
actions
to protect the natural environment, make products safer, and
promote
equity and diversity in the workplace, many companies
voluntarily
adopted responsible practices rather than constantly fighting
government
regulations and taxes. These corporations once provided many
of the
services that are now provided by the government in the United
States.
For example, during this period, the U.S. government spent less
than the
government of any other industrialized nation on such things as
pensions
and health benefits, as these were provided by companies rather
than by
the government.40 In the 1960s and l970s, however, the

business land
scape changed.
Economic turmoil during the l970s and l980s changed the role
ofcor
porations. Venerable firms that had dominated the economy in
the l950s
and l960s became less important as a result of bankruptcies,
takeovers,
mergers, or other threats, including high energy prices and an
influx of for
eign competitors. The stability experienced by the U.S. firms of
midcentury
dissolved. During the l960s and 1970s, the Fortune 500 had a
relatively
low turnover of about 4 percent. By 1990, however, one-third of
the com
panies in the Fortune 500 of 1980 had disappeared, primarily as
a result
of takeovers and bankruptcies. The threats and instability led
companies
to protect themselves from business cycles by becoming more
focused on
their core competencies and reducing their product diversity. To
combat
takeovers, many companies adopted flatter organizational
hierarchies.
Flatter organizations meant workforce reduction but also
entailed increas
ing empowerment of lower-level employees.
Thus, the l980s and 1990s brought a new focus on profitability
and economies of scale. Efficiency and productivity became the
primary
objectives of business. This fostered a wave of downsizing and
restruc

turing that left some people and communities without financial
secu
rity. Before 1970, large corporations employed about one of
every five
Americans, but by the l990s, they employed only one in ten.
The familial
relationship between employee and employer disappeared, and
along with
it went employee loyalty and company promises of lifetime
employment.
Companies slashed their payrolls to reduce costs, and
employees changed
jobs more often. Workforce reductions and “job hopping” were
almost
unheard of in the 1960s but had become commonplace two
decades later.
These trends made temporary employment and contract work the
fastest
growing forms of employment throughout the 1990s.4’
Along with these changes, top managers were largely stripped
of
their former freedom. Competition heated up, and both
consumers and
stockholders grew more demanding. The increased competition
led busi
ness managers to worry more and more about the bottom line
and about
protecting the company. Escalating use of the internet provided
unprec
edented access to information about corporate decisions and
conduct, and
fostered communication among once unconnected groups,
furthering con
sumer awareness and shareholder activism. Consumer demands
put more

pressure on companies and their employees. The education and
activism
of stockholders had top management fearing for their jobs.
Throughout
the last two decades of the twentieth century, legislators and
regulators
initiated more and more regulatory requirements every year.
These factors
resulted in difficult trade-offs for management.
Corporate responsibilities were renewed in the 1990s. Partly as
a result
of business scandals and Wall Street excesses in the 1980s,
many industries
and companies decided to pursue and expect more responsible
and respect
able business practices. Many of these practices focused on
creating value
for stakeholders through more effective processes and decreased
the nar
row and sole emphasis on corporate profitability. At the same
time, con
sumers and employees became less interested in making money
for its own
sake and turned toward intrinsic rewards and a more holistic
approach
to life and work.42 This resulted in increased interest in the
development
of human and intellectual capital; the installation of corporate
ethics pro
grams; the development of programs to promote employee
volunteerism in
the community; strategic philanthropy efforts and trust in the
workplace;
and the initiation of a more open dialog between companies and
their

stakeholders.
Despite major advances in the 1990s, the sheer number of
corporate
scandals at the beginning of the twenty-first century prompted a
new era
of social responsibility. The downfall of Enron, WorldCom, and
other
corporate stalwarts caused regulators, former employees,
investors, non
governmental organizations, and ordinary citizens to question
the role and
integrity of big business and the underlying economic system.
Federal legis
lators passed the Sarbanes—Oxley Act to overhaul securities
laws and gov
ernance structures. The new Public Company Accounting
Oversight Board
was implemented to regulate the accounting and auditing
profession after
Enron and WorldCom failed due to accounting scandals.
Newspapers,
business magazines, and news websites devoted entire
sections—often
labeled Corporate Scandal, Year of the Apology, or Year of the
Scandal—
to the trials and tribulations of executives, their companies and
auditors,
and stock analysts.
In 2007 and 2008, a housing boom in the United States
collapsed,
setting off a financial crisis. Homeowners could not afford to
pay their
mortgages. Because of the housing boom, in many cases the
mortgages

were higher than the houses were worth. People all across the
United
States began to walk away from their mortgages, leaving banks
and other
lenders with hundreds of thousands of houses that had decreased
in value.
77
framework 19
Meanwhile, companies such as AIG were using complex
financial instru
ments known as derivatives to transfer the risks of securities
such as mort
gages, almost as a type of insurance policy. The housing
collapse created
a number of demands on financial firms who had sold these
derivatives to
pay their insurance contracts on the defaulted debt securities,
but financial
firms did not have enough of a safety net to cover so many
defaults. The
housing collapse created a chain reaction that led to the worst
recession
since the Great Depression. The government was forced to step
in to bail
out financial firms in order to keep the economy going and
prevent the
economy from collapsing further. Many established
organizations such as
Bear Stearns, Lehman Brothers, and Countrywide went bankrupt
or were

acquired by other firms at a fraction of what they were
originally worth.
Table 1.3 describes some of the corporations and banks that
collapsed in
the financial crisis.
In 2010, Congress passed the Dodd—Frank Wall Street Reform
and
Consumer Protection Act, the most sweeping legislation since
Sarbanes—
Oxley. Dodd—Frank is intended to protect the economy from
similar
financial crises in the future by creating more transparency in
the financial
industry. This complex law required legislators to develop
hundreds of
laws to increase transparency and create financial stability. The
Dodd—
Frank Act will be discussed in more detail in Chapter 4. The
financial crisis
and the collapse of many well-known institutions has led to a
renewed
interest in business ethics and social responsibility.
In the last five years, the economy has stabilized and the stock
market
has recovered. Even though many banks failed during the
financial crisis,
TABLE 1.3 Corporations and Banks Involved in the Financial
Crisis
Organization Outcome
today banks and the other financial institutions are much larger.
The larg
est five banks are twice as large as they were a decade ago.43

Rather than
getting rid of too-big-to-fail financial institutions, they seem to
be growing
much larger despite recent legislation.
GLOBAL_NATURE OF SOCIAL RESPONSIBILITY
Although many forces have shaped the debate on social
responsibility, the
increasing globalization of business has made it an international
concern.
A common theme is criticism of the increasing power and scope
of busi
ness and income differences among executives and employees.
Questions of
corruption, environmental protection, fair wages, safe working
conditions,
and the income gap between rich and poor were posed. Many
critics and
protesters believe that global business involves exploitation of
the working
poor, destruction of the planet, and a rise in inequality.44 After
the finan
cial crisis, global trust in business dropped significantly. More
recent polls
indicate that trust is rebounding in certain countries, but
companies are
still vulnerable to the ramifications of distrust. Approximately
50 percent
of the general public among global consumers indicate they
trust business.
This is even lower in the United States, where only 49 percent
trust business
overall.45 In an environment where consumers distrust
business, greater
regulation and lower brand loyalty are the likely results. We
discuss more

of the relationship between social responsibility and business
outcomes
later in this chapter.
The globalization of business has critics who believe the
movement
is detrimental because it destroys the unique cultural elements
of indi
vidual countries, concentrates power within developed nations
and their
corporations, abuses natural resources, and takes advantage of
people in
developing countries. Multinational corporations are perhaps
most subject
to criticism because of their size and scope. Table 1.4 shows 25
multi
national companies that are more powerful than many of the
countries
in which they do business. For instance, Apple’s cash exceeds
the gross
domestic product of two-thirds of the world’s countries.
Because of the
economic and political power they potentially wield, the actions
of large,
multinational companies are under scrutiny by many
stakeholders. Most
allegations by antiglobalization protestors are not extreme, but
the issues
are still of consequence. For example, the pharmaceutical
industry has
long been criticized for excessively high pricing, interference
with clinical
evaluations, some disregard for developing nations, and
aggressive pro
motional practices. Critics have called on governments, as well
as public

health organizations, to influence the industry in changing some
of its
practices.46
Advocates of the global economy counter these allegations by
pointing to increases in overall economic growth, new jobs, new
and
more effective products, and other positive effects of global
business.
Although these differences of opinion provide fuel for debate
and
General Motors
AIG
Bank of America
Washington Mutual
C hrysler
Declared bankruptcy and required a government bailout of
$49.5 billion to reorganize. The government sold their last
shares in GM in 2013 and is estimated to have lost more than
$10 billion on its investment.
Received a government bailout of $182 million and was
criticized for using bailout money to pay executives large
bonuses. AIG repaid the last of its loans in 2013.
Received $42 billion in bailout money as part of the Troubled
Asset Relief Program. It paid back its loans in 2009.
Its banking subsidiaries were sold by the Federal Deposit
Insurance Corporation toi.R Morgan for $1.9 billion.
Declared bankruptcy and required a government bailout of
$12.5 billion. By 2011 Chrysler had repaid most of the debt,
and Fiat agreed to purchase the rest of the U.S. Treasury’s

shares
in Chrysler for $500 million.
Acquired by Bank of America for $4.1 billion. Bank of America
inherited many of the lawsuits against Countrywide claiming it
had engaged in fraudulent and discriminatory lending practices.
Countrywide Financial
framework 21
Commodity Trading and Mining
Company
E-Commerce Company
Tech Company
Food and Beverage Producer
Tech Conglomerate
Ride-Hailing Service
Telecommunications Company
Multinational Conglomerate
Consulting Firm
Social Media Company
E-Commerce Company
Investment Manager

Social Media Company
Sources: David Francis, ‘The Top 2S Corporate Nations,”
Foreign Policy, March 15, 2016, http://
foreignpolicy.com/201 6/03/1 5/these-25-companies-are-more-
powerful-than-many-countries-
multinational-corporate-wealth-power/ (accessed June 17,
2016).
discussion, the global economy probably “holds much greater
poten
tial than its critics think, and much more disruption than its
advocates
admit. By definition, a global economy is as big as it can get.
This means
that the scale of both the opportunity and the consequences are
at an
apex.”47 In responding to this powerful situation, companies
around the
world are increasingly implementing programs and practices
that strive
to achieve a balance between economic responsibilities and
other social
responsibilities. The Nestlé Company, a globaL foods
manufacturer and
marketer, published the Nestlé Corporate Business Principles in
199$
and has continually revised them (2002, 2004, and 2010). These
prin
ciples serve as a management tool for decision making at Nestlé
and
have been translated into over 50 languages. The updated
principles are
consistent with the United Nations’ Global Compact, an accord
that

covers environmental standards, human rights, and labor
conditions.48
We explore the global context of social responsibility more
fully in
Chapter 12.
In most developed countries, social responsibility involves
stake-
holder accountability and the financial, legal, ethical, and
philanthropic
dimensions discussed earlier in the chapter. However, a key
question for
Implementing social responsibility on a global scale is: “Who
decides on
these responsibilities?” Many executives and managers face the
challenge
of doing business in diverse countries while attempting to
maintain their
employers’ corporate culture and satisfy their expectations.
Some com
panies have adopted an approach in which broad corporate
standards
can be adapted at a local level. For example, a corporate goal of
demon
strating environmental leadership could be met in a number of
different
ways depending on local conditions and needs. The Coca-Cola
Company
releases sustainability and social responsibility reports for each
region in
which it conducts business. In Eurasia and Africa, the company
highlights
initiatives and progress achieved regarding women’s
empowerment, water
conservation, and improvement of communities. In Greece, the
company

contributed toward reforestation and to active lifestyles for
youth in the
Netherlands. While some of the sustainability and social
responsibility
initiatives are similar among countries, Coca-Cola’s focus on
each indi
vidual region allows them to make the most relevant
contributions to their
stakeholders.
Global social responsibility also involves the confluence of
govern
ment, business, trade associations, and other groups. For
example, coun
tries that belong to the Asia-Pacific Economic Cooperation
(APEC) are
responsible for half the world’s annual production and trade
volume. As
APEC works to reduce trade barriers and tariffs, it has also
developed
meaningful projects in the areas of sustainable development,
clean technol
ogies, workplace safety, management of human resources, and
the health
of the marine environment. This powerful trade group has
demonstrated
that financial, social, and ethical concerns can be tackled
simultaneously.5°
Like APEC, other trade groups are also exploring ways to
enhance eco
nomic productivity within the context of legal, ethical, and
philanthropic
responsibilities.
Another trend involves business leaders becoming
“cosmopolitan

citizens” by simultaneously harnessing their leadership skills,
worldwide
business connections, access to funds, and beliefs about human
and social
rights. Bill Gates, the founder of Microsoft, is no longer active
day-to-day
in the company, as he and his wife spearhead the Bill and
Melinda Gates
Foundation to tackle AIDS, poverty, malaria, and the need for
educational
resources. Golfer Jack Nicklaus and his business partner Jack
Milstein
TABLE 1.4 Top 25 Corporate Nations
Company Type of Company Annual Revenue
(in billions)
Walmart
ExxonMobil
Royal Dutch Shell
Apple
Retailer
Oil and Gas
Oil and Gas
Tech Company
Glencore
Tech Company
221

Samsung
Amazon
Microsoft
Nestle
Alphabet
Uber
Huawei Technologies
Vodafone
Anheuser-Busch lnBev
Maersk
Goldman Sachs
Halliburton
Accenture
McDonald’s
Emirates
Facebook
Alibaba
BlackRock

McKinsey & Company
Twitter
Telecommunications Provider
Beverage Company
Shipping Company
Investment Banking Firm
163
107
62.54 )
Fast-Food Restaurant
Airline
Consulting Firm
designed a line of golf balls whose proceeds are designated to
chil
dren’s heatth care.51 SurveyMonky has a platform called
SurveyMonkey
Contribute that allows survey takers to earn rewards for taking
surveys.
Every week for each survey completed, SurveyMonkey will
donate to a
participating charity of the survey taker’s choice.52 Patagonia
donates 1
percent of its profits to environmental organizations. These

business lead
ers are acting as agents to ensure the economic promises of
globalization
are met with true concern for social and environmental
considerations. In
many cases, such efforts supplant those historically associated
with gov
ernment responsibility and programs.53
In sum, progressive global businesses and executives recognize
the
“shared bottom line” that results from the partnership among
busi
ness, communities, government, customers, and the natural
environ
ment. In a Nielsen survey of more than 28,000 citizens in 56
countries,
76 percent of the respondents indicated that they consult others
online
regarding the social responsibility of companies before they
make a
purchase. The top three issues that are most important to
consumers
include environmental sustainability, advancements in STEM
(science,
technoLogy, engineering, mathematics) education, and relieving
hunger
and poverty.54 Thus, our concept of social responsibility is
applicable to
businesses around the world, although adaptations of
implementation
and other details on the local level are definitely required. In
companies
around the world, there is also the recognition of a relationship
between
strategic social responsibility and benefits to society and

organizational
performance.
BENEFITS OF SOCIAL RESPONSIBILITY
The importance of social responsibility initiatives in enhancing
stake-
holder relationships, improving performance, and creating other
benefits
has been debated from many different perspectives.55 Many
business
managers view such programs as costly activities that provide
rewards
only to society at the expense of the bottom line. Another view
holds that
some costs of social responsibility can be recovered through
improved
performance. If social responsibility is strategic and aligned
with a firm’s
mission and values, then improved performance can be
achieved. It is
hard to measure the reputation of a firm, but it is important to
build trust
and achieve success. Moreover, ample research evidence
demonstrates
that companies that implement strategic social responsibility
programs
are more profitable.
Some of the specific benefits include increased efficiency in
daily
operations, greater employee commitment, higher product
quality,
improved decision making, increased customer loyalty, as well
as
improved financial performance. In short, companies that
establish a rep

utation for trust, fairness, and integrity develop a valuable
resource that
fosters success, which then translates to greater financial
performance
(see Figure 1.3). This section provides evidence that resources
invested in
social responsibility programs reap positive outcomes for both
organiza
tions and their stakeholders.
Trust
Trust is the glue that holds organizations together and allows
them to
focus on efficiency, productivity, and profits. According to
Stephen R.
Covey, author of The 7 Habits of Highly Effective People,
“Trust lies at
the very core of effective human interactions. Compelling trust
is the high
est form of human motivation. It brings out the very best in
people, but it
takes time and patience, and it doesn’t preclude the necessity to
train and
develop people so their competency can rise to that level of
trust.” When
trust is low, organizations decay and relationships deteriorate,
resulting
in infighting, playing poLitics within the organization, and
general inef
ficiency. Employee commitment to the organization declines,
product
quality suffers, employee turnover skyrockets, and customers
turn to more
trustworthy competitors.56 Any stakeholder that loses trust can
create a

missing link necessary for success.
In a trusting work environment, however, employees can reason
ably expect to be treated with respect and consideration by both
their
peers and their superiors. They are also more willing to rely and
act on
the decisions and actions of their coworkers. Thus, trusting
relationships
between managers and their subordinates and between peers
contribute
to greater decision-making efficiencies. Research by the Ethics
Resource
Center indicates that this trust is pivotal for supporting an
ethical climate.
Employees of an organization with a strong ethical culture are
much more
likely to report misconduct but are much less likely to observe
misconduct
I FIGURE 1.3 The Role of Social Responsibility in Performance
Chapter 1 Social Responsibility framework 23
Social
ResponsibilitY
.Ioy
Cornmitment-:
Organizational
Performance
SharehoderSl
-

Support
24 Business and Society Chapter 1 Social ResponsibilitY
Framework 25
TABLE 7.5 Indicators of Support, Trust, and Transparency
Supervisor gives positive feedback for ethical behavior
Satisfied with information from senior leadership about what is
going on in company
Supervisor supports following company’s ethics standards
Believe that senior leadership is transparent about critical issues
that impact our company
Trust coworkers will keep their promises and commitments
Source: Ethics Resource Center, National Business Ethics
Survey of the U.S. Workforce fArlington,
Virginia: Ethics Resource Center, 2014), p. 33.
than employees in firms with a weak ethical culture.57 Table
1.5 shows five
indicators of trust, support, and transparency that have a strong
impact on
whether employees will report ethical issues. As the table
demonstrates, a
key factor that inspires trust and transparency in organizations
involves
support from senior leadership.
Trust is also essential for a company to maintain positive long-
term rela
tionships with customers. A study by Cone Communications

reported that
42 percent of consumers have boycotted or refused to purchase
from compa
nies that have demonstrated irresponsible behavior in the last 12
months.58
For example, after the Deepwater Horizon oil spill in 2010,
certain groups
and individual citizens aggressively boycotted BP due to the
vast environ
mental damage in the Gulf of Mexico. Communities and
regulators that lose
trust in a company can damage the firm’s reputation and
relationships with
other stakeholders.
Customer Loyalty
The prevailing business philosophy about customer
relationships is that
a company should strive to market products that satisfy
customers’
needs through a coordinated effort that also allows the company
to
achieve its own objectives. It is well accepted that customer
satisfac
tion is one of the most important factors for business success.
Although
companies must continue to develop and adapt products to keep
pace
with consumers’ changing desires, it is also crucial to develop
long-term
relationships with customers. Relationships built on mutual
respect and
cooperation facilitate the repeat purchases that are essential for
suc
cess. By focusing on customer satisfaction, a business can
continually

strengthen its customers’ trust in the company, and as their
confidence
grows, this in turn increases the firm’s understanding of their
require
ments.
In a Cone survey of consumer attitudes, 89 percent of
consumers
indicated they would be likely to switch to brands associated
with a good
cause if price and quality were equal. These results show that
consumers
take for granted that they can buy high-quality products at low
prices;
therefore, companies need to stand out as doing something—
something
that demonstrates their commitment to society.59 A study by
Harris
Interactive Inc. and the Reputation Institute reported that one-
quarter of
the respondents had boycotted a firm’s products or lobbied
others
to do
so when they did not agree with the firm’s policies or
activities.60
Another
way of looking at these results is that irresponsible behavior
could trigger
disloyalty and refusals to buy, whereas good social
responsibility initia
tives couLd draw customers to a company’s products. For
example, many
firms use cause-related marketing programs to donate part of a

product’s
sales revenue to a charity that is meaningful to the product’s
target mar
ket. Among the best known cause-related marketing programs is
Avon’s
“pink ribbon.”
Employee Commitment
Employee commitment stems from employees who are
empowered with
training and autonomy. Sir Richard Branson, founder of the
Virgin
Group, has one of the most committed groups of employees in
busi
ness for these reasons, as well as many others. He has created a
culture
wherein he personally asks employees for their input, writes
their ideas
down, and incorporates them when relevant. He is a very visible
and
approachable authority and inspires a “passion of commitment”
for
customer service. Virgin Airlines is ranked as the highest in
quality
for domestic airlines. In the end, empowered employees keep
custom
ers happy and coming back for more.61 For instance, service
quality is
positively related to employee loyalty. This, in turn, leads to
higher cus
tomer satisfaction and customer loyalty.62 Evidence also
suggests that
corporate social responsibility initiatives are a good way to
retain and
attract employees.63

When companies fail to provide value for their employees,
loyalty
and commitment suffer. A survey by Gallup found low levels of
employee
loyalty and commitment worldwide. The study, which surveyed
thousands
of employees in 142 countries, found that only 13 percent of
workers
indicated feeling engaged in their jobs.64 Employees spend
many of their
waking hours at work; thus, an organization’s commitment to
goodwill
and respect of its employees usually results in increased
employee loyalty
and support of the company’s objectives.
Shareholder Support
Investors look at a corporation’s bottom line for profits or the
poten
tial for increased stock prices. To be successful, relationships
with
stockholders and other investors must rest on dependability,
trust, and
commitment. But investors also look for potential cracks or
flaws in a
company’s performance. Companies perceived by their
employees as
having a high degree of honesty and integrity had an average
three-year
total return to shareholders of 101 percent, whereas companies
perceived
as having a low degree of honesty and integrity had a three-year
total

Framew01 21
return to shareholders of just 69 percent.65 After hackers broke
into
Target’s databases and stole customers’ credit card numbers and
other
information, stock fell 46 percent.66 Target has been criticized
for its
lack of sufficient internal controls.
Many shareholders are also concerned about the reputation of
companies in which they invest. Investors have even been
known to
avoid buying the stock of firms they view as irresponsible. For
example,
Warren Buffet sold 25 percent of his holdings in General
Motors after
a series of recalls was initiated following a federal
investigation. The
investigation concluded that the company was at fault in several
inju
ries and deaths resulting from negligence of a faulty ignition
switch.67
Many socially responsible mutual funds and asset management
firms
are available to help concerned investors purchase stock in
responsible
companies. These investors recognize that corporate
responsibility is the
foundation for efficiency, productivity, and profits. In contrast,
investors
know that fines or negative publicity can decrease a company’s
stock
price, customer loyalty, and long-term viability. Consequently,
many

chief executives spend a great deal of time communicating with
investors
about their firms’ reputations and financial performance and
trying to
attract them to their stock.
The issue of drawing and retaining investors is a critical one for
CEOs,
as roughly 50 percent of investors sell their stock in companies
within one
year, and the average household replaces 80 percent of its
common stock
portfolio each year.68 This focus on short-term gains subjects
corporate
managers to tremendous pressure to boost short-term earnings,
often at
the expense of long-term strategic plans. The resulting pressure
for short-
term gains deprives corporations of stable capital and forces
decision mak
ers into a “quarterly” mentality.
Conversely, those shareholders willing to hold onto their invest
ments are more willing to sacrifice short-term gains for long-
term
income. Attracting these long-term investors shields companies
from
the vagaries of the stock market and gives them flexibility and
stability
in long-term strategic planning. In the aftermath of the Enron
scandal,
however, trust and confidence in financial audits and published
financial
statements were severely shaken. Membership in grassroots
investment
clubs declined, retail stock investments declined, and investors

called for
increased transparency in company operations and reports.69
Gaining
investors’ trust and confidence is vital for sustaining a firm’s
financial
stability.
The Bottom Line: Profits
Social responsibility is positively associated with return on
investment,
return on assets, and sales growth.7° A company cannot
continuously be
socially responsible and nurture and develop an ethical
organizational
culture unless it has achieved financial performance in terms of
profits.
Businesses with greater resources—regardless of their staff
size—have
the ability to promote their social responsibility along with
serving their
customels, vaLuing their employees, and establishing trust with
the pub
lic. As mentioned before, the stock returns of the world’s most
ethical
companies are often higher than that of companies listed on the
S&P 500.
Many studies have identified a positive relationship between
social
responsilMl1tY and financial performance.7’ For example, a
survey of the
500 largest public corporations in the United States found that
those that
commit to responsible behavior and emphasize compliance with
codes

of conduct show better financial performance.72 A managerial
focus
on stakeholder interests can affect financial performance,
although the
relationships between stakeholders and financial performance
vary and
are very complex.73 A meta analysis of 25 years of research
identified
33 studies (63 percent) demonstrating a positive relationship
between
corporate social performance and corporate financial
performance, 5
studies (about 10 percent) indicating a negative relationship,
and 14
studies (27 percent) yielding an inconclusive result or no
relationship.74
Research on the effects of legal infractions suggests that the
negative
effect of misconduct does not appear until the third year
following a
conviction, with multiple convictions being more harmful than a
single
one.75
In summary, a company with strong efforts and results in social
responsibility is generally not penalized by market forces,
including the
intention of consumers to purchase the firm’s products. Social
responsi
bility efforts and performance serve as a reputational lever that
managers
may use to influence stakeholders. A high-performing company
may also
receive endorsements from governmental officials or other
influential
groups, and these are more believable than company messages.

A com
pany with a strong social responsibility orientation often
becomes quite
proactive in managing and changing conditions that yield
economic
benefits, including avoiding litigation and increased reguLation.
finally,
corporate social performance and corporate financial
performance are
positively correlated. These findings subjugate the belief that
social
responsibility is just a “cost factor” for business and has no real
benefits
to the firm.76
National Economy
An often asked question is whether business conduct has any
bearing on a
nation’s overall economic performance. Many economists have
wondered
why some market-based economies are productive and provide a
high
standard of living for their citizens, whereas other market-based
economies
lack the kinds of social institutions that foster productivity and
economic
growth. Perhaps a society’s economic problems can be
explained by a lack
of social responsibility. Trust stems from principles of morality
and serves
as an important “lubricant of the social system.”77 Many
descriptions of

Framework 29
market economies fail to take into account the role of such
institutions as
family, education, and social systems in explaining standards of
living and
economic success. Perhaps some countries do a better job of
developing
economically and socially because of the social structure of
their economic
relationships.
Social institutions, particularly those that promote trust, are
impor
tant for the economic wellbeing of a society.78 Society has
become eco
nomically successful over time “because of the underlying
institutional
framework persistently reinforcing incentives for organizations
to engage
in productive activity.”79 In some developing countries,
opportunities
for political and economic development have been stifled by
activities
that promote monopolies, graft, and corruption and by
restrictions on
opportunities to advance individual, as well as collective,
wellbeing.
L. E. Harrison offers four fundamental factors that promote
economic
wellbeing: “( 1) The degree of identification with others in a
society—
the radius of trust, or the sense of community; (2) the rigor of
the
ethical system; (3) the way authority is exercised within the
society; and

(4) attitudes about work, innovation, saving, and profit.”8°
Countries with institutions based on strong trust foster a
productivity-
enhancing environment because they have ethical systems in
place that
reduce transaction costs and make competitive processes more
efficient
and effective. In market-based systems with a great degree of
trust, such as
Germany, Sweden, Switzerland, Canada, and the United
Kingdom, highly
successful enterprises can develop through a spirit of
cooperation and the
ease in conducting business.81
Superior financial performance at the firm level within a society
is
measured as profits, earnings per share, return on investment,
and capital
appreciation. Businesses must achieve a certain level of
financial perfor
mance to survive and reinvest in the various institutions in
society that
provide support. But, at the institutional or societal level, a key
factor
distinguishing societies with high standards of living from those
with
lower standards of living is whether the institutions within the
society are
generally trustworthy. The challenge is to articulate the process
by which
institutions that support social responsibility can contribute to
firm-level
superior financial performance.82

A comparison of countries that have high levels of corruption
and
underdeveloped social institutions with countries that have low
levels of
corruption reveals differences in the economic wellbeing of the
country’s
citizens. Transparency International, an organization discussed
earlier,
publishes an annual report on global corruption that emphasizes
the
effects of corruption on the business and social sectors. Table
1.6 lists the
countries with the most and least corrupt public sectors, as
perceived by
Transparency International. Eighteen countries are perceived to
be more
ethical than the United States.83 As stated several times in this
chapter,
conducting business in an ethical and responsible manner
generates trust
and leads to relationships that promote higher productivity and
a positive
cycle of effects.84
TABLE 7.6 Perceptions of Countries as Least/Most Corrupt
Country CPI Least Country CPI Most Corrupt
Rank Score* Corrupt Rank Score*
8 Somalia
18 Turkmenistan
18 Syria

18 Eritrea
* cpi score relates to perceptions of the degree of public sector
corruption as seen by businesspeople
and country analysts and ranges between 10 (highly clear) and 0
(highly corrupt). The United States is
perceived as the 16th least-corrupt nation.
Source: © Transparency International, Corruption Perceptions
Index 2015 (Berlin, Germany, 2016).
All rights reserved.
FRAr1EwoRK FOR STUDYING SOCIAL
The framework we have developed for this text is designed to
help you
understand how businesses fulfill social expectations. It begins
with the social
responsibility philosophy, includes the four levels of social
responsibilities,
involves many types of stakeholders, and ultimately results in
both short and
long-term performance benefits. As we discussed earlier, social
responsibility
must have the support of top management—both in words and in
deeds—
before it can become an organizational reality. Like many
organizations,
Cummins Engine Company has faced a number of challenges
over the past
several decades. Cummins is currently the world leader in the
design and
manufacture of diesel engines and was the largest employer in
Columbus,
Indiana, for many years. Cummins’s drive to build positive
relationships

with employees, customers, and community led Business Ethics
to rank
tile firm on the magazine’s fist of the “100 Best Corporate
Citizens.” The
company received the highest possible rating for its corporate
governance
2
3
4
S
5
7
8
9
10
10
10
I’.
91 Denmark
90 Finland
89 Sweden

88 New Zealand
87 Netherlands
87 Norway
86 Switzerland
85 Singapore
83 Canada
81 Germany
81 Luxembourg
81 United
Kingdom
79 Australia
79 Iceland
77 Belgium
167
167
166
165
163

163
161
161
158
158
158
154
154
154
154
8 North Korea
11 Afghanistan
12 Sudan
15 South Sudan
15 Angola
16 Libya
16 Iraq
17 Venezuela

17 Guinea-BissaU
17 Haiti
18 Yemen
13
13
15
framework 37
practices from Governance Metrics International fGMI), even
during the
global recession of 2009. In addition, Ethisphere named the
company as one
of the “World’s Most Ethical Companies” for seven years in a
row.85
Once the social responsibility philosophy is accepted, the four
aspects
of corporate social responsibility are defined and implemented
through pro
grams that incorporate stakeholder input and feedback.
Cummins, like other
companies, is aware of the potential costs associated with
addressing social
responsibility issues and stakeholder requirements. When social
responsibil
ity programs are put into action, they have both immediate and
delayed

outcomes.
Figure 1.4 depicts how the chapters of this book fit into our
framework.
This framework begins with a look at the importance of working
with
stakeholders to achieve social responsibility objectives. The
framework also
includes an examination of the influence on business decisions
and actions
of the legal, regulatory, and political environment; business
ethics; and cor
porate governance. The remaining chapters of the book explore
the respon
sibilities associated with specific stakeholders and issues that
confront
FIGURE 7.4 An Overview of This Book
business decision makers today, including the process of
implementing a
social responsibility audit.
strategic Management of Stakeholder Relationships
Social responsibility is grounded in effective and mutually
beneficial rela
tionships with customers, employees, investors, competitors,
government,
the community, and others who have a stake in the company.
Increasingly,
companies are recognizing that these constituents both affect
and are affected
by their actions. For this reason, many companies attempt to
address the con
cerns of stakeholder groups, recognizing that failure to do so
can have seri

ous long-term consequences. For exampLe, the Better Business
Bureau of the
Alaska, Oregon, and Western Washington region revoked the
membership of
12 businesses in a period of three months for not meeting the
organization’s
standards.86 Chapter 2 examines the types of stakeholders and
their attri
butes, how stakeholders become influential, and the processes
for integrating
and managing stakeholders’ influence on a firm. It also
examines the impact
of corporate reputation and crisis situations on stakeholder
relationships.
Corporate Governance
Because both daily and strategic decisions affect a variety of
stakeholders,
companies must maintain a governance structure to ensure
proper control
of their actions and assign responsibility for those actions. In
Chapter 3,
we define corporate governance and discuss its role in achieving
strategic
social responsibility. Key governance issues addressed include
the rights of
shareholders, the accountability of top management for
corporate actions,
executive compensation, and strategic-level processes for
ensuring that
financial, legal, ethical, and philanthropic responsibilities are
satisfied.
Legal, Regulatory, and Political Issues
In Chapter 4, we explore the complex relationship between
business and

government. Every business must be aware of and abide by the
laws and reg
ulations that dictate acceptable business conduct. This chapter
also exam
ines how business can influence government by participating in
the public
policy process. A strategic approach for legal compliance is
also provided.
Business Ethics and Strategic Approaches to Improving
Ethical Behavior
Because individual values are a component of organizational
conduct,
these findings raise concerns about the ethics of future business
leaders.
Chapters 5 and 6 are devoted to exploring the role of ethics in
business
decision making. These chapters explore business
responsibilities that go
beyond the conduct that is legally prescribed. We examine the
factors that
Corporate
Governance
(Chapter 3)
Global Social
Responsibility
(Chapter 72)
Legal,
Regulatory, and
Political Issues
(Chapter 4)
Sustainability

Issues
(Chapter 11)
Business Ethics
and Ethical
Decision Making
(Chapter 5)
Technology
Issues
(Chapter 10)
Strategic Approaches
to Improving
Ethical Behavior
(Chapter 6)
Community Relations
and Strategic
Philanthropy
pter 9)
Employee
Relations
(Chapter 7)
Consumer
Relations
(Chapter 8)

framework 33
influence ethical decision making and consider how companies
can apply
this understanding to increase their ethical conduct. We also
examine ethi
cal leadership and how it contributes to an ethical corporate
culture.
Employee Relations
In today’s business environment, most organizations want to
build long-
term relationships with a variety of stakeholders, but
particularly with
employees—the focus of Chapter 7. Employees today want fair
treatment,
excellent compensation and benefits, and assistance in
balancing work and
family obligations. This is increasingly important as employee
privacy issues
have become a major concern in recent years. Raytheon
developed a com
puter program called SilentRunner that can detect patterns of
data activity
that may reflect employee fraud, insider trading, espionage, or
other unau
thorized activity.87 Critics, however, question whether the use
of such soft
ware contributes to an environment of trust and commitment.
Research has
shown that committed and satisfied employees are more
productive, serve
customers better, and are less likely to leave their employers.
These benefits
are important to successful business performance, but

organizations must
be proactive in their human resources programs if they are to
receive them.
Consumer Relations
Chapter 8 explores companies’ relationships with consumers.
This con
stituency is part of a firm’s primary stakeholder group, and
there are a
number of financial, legal, ethical, and philanthropic
responsibilities that
companies must address. Chapter 8 therefore considers the
obligations
that companies have toward their customers, including health
and safety
issues, honesty in marketing, consumer rights, and related
responsibilities.
Community and Philanthropy
Chapter 9 examines community relations and strategic
philanthropy,
the synergistic use of organizational core competencies and
resources to
address key stakeholders’ interests and to achieve both
organizational
and social benefits. Whereas traditional benevolent philanthropy
involves
donating a percentage of sales to social causes, a strategic
approach aligns
employees and organizational resources and expertise with the
needs and
concerns of stakeholders, especially the community. Strategic
philan
thropy involves both financial and nonfinancial contributions
(employee
time, goods and services, technology and equipment, and

facilities) to
stakeholders and reaps benefits for the community and
company.
Technology Issues
In Chapter 10, we examine the issues that arise as a result of
enhanced
technology in the business environment, including the effects of
new
chnbl0gy on privacy, intellectual property, and health. The
strategic
direction for technology depends on government as well as on
business’s
0bility to plan the implementation of new technology and to
assess the
influence of that technology on society.
Thanks tO the internet and other technological advances, we can
communicate faster than ever before, find information about
just about
anything, and live longer, healthier lives. However, not all of
the changes
that occur as a result of new technologies are positive. For
example, because
shopping via the internet does not require a signature to verify
transactions,
online credit card fraud is significantly greater than fraud
through mail-
order catalogs and traditional storefront retailers. A major
identity theft
ring in New York affected thousands of people. Members of the
theft ring
illegally obtained the credit records of consumers and then sold
them to
criminals for about $60 per record. The criminals used the

credit records to
obtain loans, drain bank accounts, and perform other fraudulent
activities.88
Sustainability Issues
In Chapter 11, we dedicate an entire chapter to issues of
sustainability,
including the interdependent nature of economic development,
social
development, and environmental impact. Sustainability has
become
a watchword in business and community circles, and this
chapter
explores the ways in which companies define and develop goals,
imple
ment programs, and contribute to sustainability concerns. The
Dow
Jones Sustainability Index (DJSI) makes an annual assessment
of com
panies’ economic, environmental, and social performance, based
on
more than 50 general and industry specific criteria. The DJSI
includes
2,500 companies from 20 countries and is used by investors who
prefer
to make financial investments in companies engaged in socially
respon
sible and sustainable practices.89
Global Social Responsibility
Finally, in order for many businesses to remain competitive,
they must
continually evolve to reach global markets and anticipate
emerging world
trends. Chapter 12 delves into the complex and intriguing nature
of social

responsibility in a global economy. Building on key concepts
discussed
throughout the book, we examine the forces that make overseas
business
plans and activities of paramount concern to host countries,
local and
national governments, nongovernmental organizations, and
other mem
bers of society. The chapter covers a wide range of challenges
and oppor
tunities, such as outsourcing, environmental protection, living
wages,
labor standards, and trade restrictions.
We hope this framework provides you with a way of
understanding
the range of concepts, ideas, and practices that are involved in
an effec
tive social responsibility initiative. So that you can learn more
about the
Chapter 1 Social Responsibility Framework 35
racti5 of specific companies, a number of cases are provided at
the
nd of the book. In addition, every chapter includes an opening
vignette
and other examples that shed more light on how social
responsibility
works in today’s businesses. Every chapter also includes a real-
life sce
nario entitled “What Would You Do?,” a contemporary debate
issue,

and another exercise to help you apply concepts and examine
your own
cISiomang process. As you will soon see, the concept of social
sponsibility is both exciting and controversial; it is in a constant
state
of develoPment_jt15t like all important business concepts and
practices.
A recent survey of thought leaders in the area of social
responsibility
found that a majority believes social responsibility has made
steady progress
into conventional business thinking. Much like the social
responsibility con
tinuum introduced in this chapter, the thought leaders described
several stages
of commitment to corporate social responsibility. These stages
range from
light, where companies are concerned about responding to
complaints, to
deep, where companies are founded on a business model of
improving social
or environmental circumstances. Many companies fall
somewhere in between,
with a focus on complying with new standards and surviving in
a climate of
increasing social responsibility expectations.9° We encourage
you to draw on
current news events and your own experiences to understand
social responsi
bility and the challenges and opportunities it poses for your
career, profession,
role as a consumer, leadership approach, and the business
world.
I SUMtARY

The term social responsibility came into widespread use during
the last
several decades, hut there remains some confusion over the
term’s exact
meaning. This text defines social responsibility as the adoption
by a husi
ness of a strategic focus for fulfilling the economic, legal,
ethical, and phil
anthropic responsibilities expected of it by its stakeholders.
All types of businesses can implement social responsibility
initiatives
to further their relationships with their customers, their
employees, and
the community at large. Although the efforts of large
corporations usu
ally receive the most attention, the actions of small businesses
may have a
greater impact on local communities.
The definition of social responsibility involves the extent to
which a
firm embraces the social responsibility philosophy and follows
through
with the implementation of initiatives. Social responsibility
must be fully
valued and championed by top managers and given the same
planning
time, priority, and management attention as is given to any
other company
initiative.
Many people believe that businesses should accept and abide by
four types of responsibilities: financial, legal, ethical, and
philanthropic.
Companies have a responsibility to be financially or

economically viable
so that they can provide a return on investment for their owners,
create
Earth in the Balance: BUSINESS SUSTAINABILITY
Automakers Develop Lighter Cars
to Meet Fuel-Efficient Standards
-
Today, many consumers are using sustainability criteria
in their purchase decisions. This has had a major impact
on the automotive industry. Automobile makers such
as Ford are investigating new ways to increase the
sustainability of their vehicles. Vehicles have started
evolving into lighter versions of themselves as lighter
materials increase fuel efficiency.
Although automobile makers have a market incen
tive to increase the fuel-efficiency of vehicles, they
also have a legal incentive. In the United States it has
been mandated that vehicles must reach 35.5 miles
per gallon (mpg) by 2016. The government plans to
extend this to 54.5 mpg by 2025. In Europe, cars must
reduce emissions 40 percent 2007 levels by 2021. This is
requiring automakers to be innovative in investigating
ways to make their vehicles lighter. Materials for these
lighter cars include aluminum, carbon fiber, and high-
strength steel, which can decrease a vehicle’s weight by
200 pounds. Automakers are optimistic that develop
ing these lighter vehicles will cut fuel emissions in half.
Unfortunately, these criteria create a challenge for
carmakers developing electric vehicles (EVs). Although
EV5 reduce greenhouse gas emissions, the batteries

needed for the EV are often expensive and heavy. EV
maker Tesla Motor is dealing with these issues by using
less costly, lighter batteries. Its Giga Factory is esti
mated to produce 30 gigawatt hours worth of batteries
each year—what is needed to power approximately
400,000 vehicles. BMW is spending nearly $3 billion
to completely reinvent the car. It is producing a new
brand of light hybrid luxury vehicle with a carbon-
neutral supply chain. Its i3 EV utilizes light carbon-fiber
thread and aluminum to make it incredibly lightweight
for a car, at 2,680 pounds. This enables it to get 81 mpg.
Automakers are also increasing their use of sus
tainable materials in their vehicles’ interiors. The i3,
for instance, has an interior made from eucalyptus.
Another EV firm called Fisker is using reclaimed wood
for the interior of its sedans. These often lighter mate
rials contribute to a more fuel-efficient vehicle. The
Ford Fusion’s use of kenaf leaves instead of oil-based
resins in its doors reduces door bolsters by 25 percent.
All of these changes will entail challenges, not
only for automakers but also for consumers. While
consumers might desire more socially responsible and
sustainable products, many do not like to sacrifice
convenience or cost. It is estimated that repair costs
for vehicles made of aluminum will increase due to the
lightness of the materials. In countries such as Germany,
consumers enjoy driving quickly on the roads, requiring
vehicles that use a lot of gas. More fuel-efficient vehi
cles may be more limited in speed. Both businesses and
consumers will have to make trade-offs in the quest for
a more sustainable industry. However, these trade-offs
have the potential to significantly reduce the negative
impact of vehicle emissions on the environment.

Sources: Gary Witzenburg, “Future Fuel Economy Mandates,
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going-to-be-ha/ (accessedJune 5, 2014); Chris Woodyard, “If a
Tree Falls in the Forest, Does It End Up in a Car?” USA Today,
June 28, 2013, 3B; Bill Esler, “RealWood Preferred in Eco Car
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/Reclaimed-Wood-Dresses-Car-Interiors-214604411
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“Ford Uses KenafPlant Inside Doors in the All-New Escape,
Saving Weight and Energy,”
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essed July 26, 2013); Chris Woodyard, “Lighter Cars Add
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Plumer,“Why Cars Will Keep Getting Lighter,” Washington
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(accessed October 15, 2013); Mark Rogowsky, “Musk: ‘We
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0457953561 2915387656 (accessed June 5, 2014).

jobs for the community, and contribute goods and services to
the economy.
They are also expected to obey laws and regulations that specify
what is
responsible business conduct. Business ethics refers to the
principles and
standards that guide behavior in the world of business.
Philanthropic
activities promote human welfare or goodwill. These
responsibilities can be
viewed holistically, with all four related and integrated into a
comprehen
sive approach. Social responsibility can also be expressed as a
continuum.
Because customers, employees, investors and shareholders,
suppliers,
governments, communities, and others have a stake in or claim
on some
aspect of a company’s products, operations, markets, industry,
and out
comes, they are known as stakeholders. Adopting a stakeholder
orienta
tion is part of the social responsibility philosophy.
The influence of business has led many people to conclude that
cor
porations should benefit their employees, their customers, their
business
partners, and their community as well as their shareholder s.
However,
these responsibilities and expectations have changed over time.
After
World War II, many large U.S. firms dominated the global
economy.

Their power was largely mirrored by the autonomy of their top
manag
ers. Because of the relative lack of global competition and
stockholder
input dtiring the 1950s and 1960s, there were few formal
governance
procedures to restrain management’s actions. The stability
experienced
by midcentury firms dissolved in the economic turmoil of the
1970s and
1 980s, leading companies to focus more on their core
competencies and
reduce their product diversity. The 1980s and 1990s brought a
new focus
on efficiency and productivity, which fostered a wave of
downsizing and
restructuring. Concern for corporate responsibilities w as
renewed in the
1990s. In the 1990s and beyond, the balance between the global
market
economy and an interest in social justice and cohesion best
characterizes
the intent and need for social responsibility. Despite major
advances in
the 1990s, the sheer number of corporate scandals at the
beginning of
the twenty-first century prompted a new era of social
responsibility.
The increasing globalization of business has made social
responsibility
an international concern. In most developed countries, social
responsibil
ity involves economic, legal, ethical, and philanthropic
responsibilities to a
variety of stakeholders. Global social responsibility also

involves responsi
bilities to a confluence of governments, businesses, trade
associations, and
other groups. Progressive global businesses recognize the
“shared bottom
line” that results from the partnership among businesses,
communities,
governments, and other stakeholders.
The importance of social responsibility initiatives in enhancing
stakeholder relationships, improving performance, and creating
other
benefits has been debated from many different perspectives.
Many
business managers view such programs as costly activities that
pro
vide rewards only to society at the expense of the bottom line.
Others
hold that some costs of social responsibility can he recovered
through
improved performance. Although it is true that some aspects of
social
responsibility may not accrue directly to the bottom line, we
believe that
organizations benefit indirectly over the long run from these
activities.
Moreover, ample research and anecdotal evidence demonstrate
that
there are many rewards for companies that implement such
programs.
The process of social responsibility begins with the social
responsibil
itV philosoPhY includes the four responsibilities, involves
many types of

stakehoklels, and ultimately results in both short and long-term
perfor
mance benefits. Once the social responsibility philosophy is
accepted, the
four types of responsibility are defined and implemented
through pro
grams that incorporate stakeholder input and feedback.
p.esponsible_Business Debate
How to Regulate Global Business
Issue: Are less formal systems and agreements likely to be
more sUCCes5fUl than a formal legal and regulatory system?
A key lesson learned from recent business scandals is that
responsible, transparent, and ethical leadership is needed
in order for companies to develop and maintain a long-
term commitment to social responsibility for the benefit
of multiple stakeholders. This is especially true of multi
national corporations (MNC5) because of the power and
influence these businesses and their executives represent.
MNCs operate in multiple environments and contexts
where laws, rules, expectations, and mores are divergent.
In addition, the enforcement and monitoring mecha
nisms to oversee these expectations range from the
barely existent to well-resourced government agencies.
The failure to have a global legal and regulatory
scheme has resulted in environmental disasters, child
labor, financial fraud, antitrust violations, tainted food
products, and other problems. For example, in 2008
Mattel paid a $12 million settlement to 39 U.S. states for
shipping Chinese-made toys containing unsafe amounts of
lead. The country’s largest toy maker also agreed to new
standards for lead content in its toys. Apple Inc. was later
criticized for workplace disasters and worker suicides at

one of its Chinese suppliers, Foxconn. To save on manufac
turing costs, many U.S. companies make products where
wages are lower and regulatory standards often differ.
Framework 37
A
Despite the new coverage of corporate wrongdo
ing and questionable decision-making, there are many
firms making the commitment to social responsibility
through self-regulation. Over 12,000 participants in 145
countries are signatories to the United Nation’s (UN)
Global Compact, signaling their agreement to 10 prin
ciples on human rights, anticorruption, environment,
and labor. The Global Reporting Initiative (GRI) provides
a framework for companies developing social responsi
bility reports that discuss key standards, are comparable
to peers, and capture performance over time. The new
150 26000 standards assist in voluntary organizational
self-analysis, media review, investor due diligence, and
other reviews of social responsibility efforts.
There Are Two Sides to Every Issue
1. Defend the need for a legal and regulatory system
that would oversee international and multina
tion business operations. How would the system
be developed? How would the system enact its
responsibility for enforcing legal and regulatory
standards?
2. Defend the efficacy of assurance systems and agree
ments, such as the UN Global Compact and ISO
26000 standards. Why are these less formal systems
and agreements likely to be more successful than a

formal legal and regulatory system?
_________
Framework 39
Jamie wondered what this day would bring. As the
nager of conmt1mtY relations, her job was to repre
sent Unified in the community, manage the employee
volunteer prOgtafl1, create a quarterly newsletter, serve
as a liaison tO the Company’s philanthropic founda
tiOfl, develop solid relationships, and serve on various
hoards related to social welfare and community needs.
The company s foundation donated nearly $1.5 million
a year to charities and causes. Over one-quarter of its
empl0Ye volunteered ten hours a month in their c01fl
moflities.
jarnie reported to a vice-president and was pleased
with the career progress she had made since graduat
ing from college eight years earlier. Although some of
her friends wondered out loud how she could work for
a tobacco) company, Jamie was steadfast in her belief
that even a tobacco firm could contribute something
meaningful to society. She had the chance to affect some
of those contributions in her community relations role.
Jamie’s phone rang and she took a call from her
vice-president. The VP indicated that, although the
protestors seemed relatively calm this time, he was not
comfortable with their presence. Several employees had
taped signs in office windows telling the protestors to

“Go away.” Other VPs had dropped by his office to
discuss the protest and thought that the responsibility
for handling these issues fell to his group. He went on
to) say that he needed Jamie’s help, and the assistance of
a few others, in formulating a plan to (1) deal with the
protest today and (2) strengthen the strategy for com
municating the company’s message and goodwill in the
future. Their meeting would begin in one hour, so Jamie
had some time to sketch out her recommendations on
both issues. What would you do?
Evaluate Fortune magazine’s annual list of the most
admired companies found on the magazine’s website
(www.fortune.com). These companies as a group have
superior financial performance compared to other
firms. Go to each company’s website and try to
assess its management commitment to the welfare of
Jamie Ramos looked out her window at the early morn
ing sky and gazed at the small crowd below. The words
and pictures on their posters were pretty tame this time,
she thought. The last protest group used pictures of
tarred lungs, corpses, and other graphic photos to show
the effects of smoking on a person’s internal organs.
Their words were also hateful, so much so that employ
ees at the Unified Tobacco headquarters were afraid to
walk in and out of the main building. Those who nor
mally took smoking breaks on the back patio decided
to skip the break and eat something instead at the
company-subsidized cafeteria. By midday, Unified hired
extra security to escort employees in and out of the
building and to ensure that protestors followed the state
guideline of staying at least 15 feet from the company’s
entrance. The media picked up on the story—and the
photos—and it caused quite a stir in the national press.

At least this protest group seemed fairly reason
able. Late yesterday, a state court provided a reduced
judgment to the family of a lifelong smoker, now
deceased. This meant that Unified was going to owe
millions less than originally expected. The length and
stress of the lawsuit had taken its toll, especially on
top management, although all employees were certainly
affected. After two years of being battered in the media,
learning of a huge settlement, and then continuing on
with the appeals process, emotions were wearing thin
with the contintied criticism.
KEY TERMS
social responsibility (p. 7) stakeholders (p. 14)
1.
DISCUSSION QUESTIONS
S.
3.
l)efine social responsibility. How does this view
of the role of business differ from your previous
perceptions? How is it consistent with your atti
tudes and beliefs about business?
2. If a company is named to one of the “best in
social responsibility” lists, what positive effects
can it potentially reap? What are the possible
costs or negative outcomes that may be associated
with being named to one of these lists?
What historical trends have affected the social
responsibilities of business? How have recent

scandals affected the business climate, including
any changes in responsibilities and expectations?
How would you respond to the statement that
this chapter presents only the positive side of
4.
6.
the argument that social responsibility results in
improved organizational performance?
On the basis of the social responsibility model
presented in this chapter, describe the philosophy,
responsibilities, and stakeholders that make up
a company’s approach to social respc)nsihihty.
What are the short and long-term outcomes of
this effort?
Consider the role that various business disci
plines, including marketing, finance, accounting,
and human resources, have in social responsibil
ity. What specific views and philosophies do these
different disciplines bring to the implementation
of social responsibility?
EXPERIENTIAL EXERCISE
WHAT WOULD YOU DO?
stakeholders. If any of the companies have experienced
legal or ethical misconduct, explain how this may affect
specific stakeholders. Rank the companies on the basis
of the information available and your opinion on their
fulfillment of social respc)nsibihty

‘ICHAPTER TWOChapter Objectives• To define stakehold

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