Week 3
Ethics, stakeholders and the
social contract
There are few circumstances among those
which make up the present condition of human
knowledge, more unlike what might have been
expected, or more significant of the backward
state in which speculation on the most
important subjects still lingers, than the little
progress which has been made in the decision
of the controversy respecting the criterion of
right and wrong.

John Stuart Mill (1863) - Utilitarianism
Licensed to Kill Inc.
incorporated and licensed in Virginia, March
2003
Purpose, as written in articles of
incorporation:
“the manufacture and marketing of
tobacco in a way that each year kills
over 400,000 Americans and
4.5million other persons worldwide”
What is a stakeholder?


those groups without whose support the
organization would cease to exist
any group or individual who can affect or
is affected by the achievement of the
organization's objectives
Stakeholder categories


Voluntary – involuntary
Internal - external
Stakeholder groups 1







Managers
Employees
Customers
Investors
Shareholders
Suppliers
Government
Stakeholder groups 2




Society
The local community
The environment
The future
Multiple stakeholding





Customer
Employee
Shareholder
Member of society
Member of local community
Stakeholder objectives





Return on investment
Low price
Quality
Security
A pleasant environment
Stakeholder ownership






legal v actual ownership
composition of the firm
power and influence
quasi-ownership of stakeholders
power of internal stakeholders
power of external stakeholders
Why a concern with stakeholders?





Ownership of the firm
accountability
improved performance
natural justice
the future
Stakeholder Theory


All stakeholders considered in decision
making
Why:



Morally & ethically correct
Benefits shareholders
What actually happens
Stakeholder importance for
companies
Stakeholder
Customers
Employees
Shareholders
Suppliers
The environment
Society
Concerned with
%
89
89
100
70
62
73
Very concerned with
%
57
51
78
3
5
3
Rationale for Stakeholder Theory


Maximising wealth for shareholders fails to
maximise wealth for society and all its
members
Only a concern with managing all
stakeholder interests achieves this
Effects of an organisation’s activities





the utilisation of natural resources as a part of its
production processes
the effects of competition between itself and other
organisations in the same market
the enrichment of a local community through the
creation of employment opportunities
transformation of the landscape due to raw material
extraction or waste product storage
the distribution of wealth created within the firm to the
owners of that firm (via dividends) and the workers of
that firm (through wages) and the effect of this upon
the welfare of individuals
Spatial externalisation





environmental degradation though spoil heaps or
through increased traffic imposes costs upon the local
community through reduced quality of life
causing pollution imposes costs upon society at large
waste disposal problems impose costs upon whoever is
tasked with such disposal
removing staff from shops imposes costs upon
customers who must queue for service
just in time manufacturing imposes costs upon suppliers
by transferring stockholding costs to them
Temporal externalisation 1




deferring investment to a future time period and
so increasing reported value in the present
failing to provide for asset disposal costs in
capital investment appraisal and leaving such
costs for future owners to incur
failure to dispose of waste material as it
originates and leaving this as a problem for the
future
causing pollution which must then be cleaned up
in the future
Temporal externalisation 2



depletion of finite natural resources or failure to
provide renewable sources of raw material will
cause problem for the future viability of the
organisation
lack of research and development and product
development will also cause problem for the
future viability of the organisation
eliminating staff training may save costs in the
present at the expense of future competitiveness
The Social Contract





obligations to individuals
obligations to groups and organisations
obligations to government
obligations to society
obligations to self
Organisational ideologies



dominant ideology shapes activities
operational foundation
ethical foundation
 external relations
 relationship with stakeholders
 social contract
 standards of fair trading
Ethical foundation 2

internal relations
 corporate culture
 contractual obligations
 standards of employment
Social responsibility and organisational values


business ethics
 agency theory
 stakeholder theory
corporate governance
 Combined Code of Corporate
Governance
Ethics and control systems


the nature of control systems
 organisations v individuals
facilitating goal congruence
 organisational and individual goals
 reward structures
 coercion and manipulation
 behaviour modification
Arguments against business ethics



added cost
 legal and regulatory framework
collective responsibility
 decisions taken by groups
 groupthink / risky shift
individual ethics
 conflict between individual freedom
and corporate needs
Ethical standpoint and the individual

loyalty to employers


loyalty to profession



reciprocation?
codes of conduct
future career
loyalty to self


core values
self actualisation
Determinants of ethical stance



social constraint
 obedience to the law
social expectations
 obedience to social norms and values
social concern
 long term perspective
Reasons for unethical behaviour






lapses in individual ethics
legitimating decisions through public
acceptance
ruthless pursuit of self interest
outside pressure
the bottom line
responsibility shifting

organisations are externalising machines
“No hiding place”





the veil of incorporation
 ultra vires
collective v individual responsibility
ignorance is no defense
professional codes of conduct
the Panopticon