Corporation and Its Stakeholders

Corporation and Its Stakeholders

Introduction

  • Corporations exist as open systems, reliant on society for survival.

  • They must be responsive to society's needs, which are ever-changing.

  • Corporations have the right to exist as independent, profit-seeking entities, granted by society which can be revoked.

Objectives

  • Understand the interactive relationship between business and society (an interactive/symbiotic system).

  • Consider the purpose of modern corporations.

  • Define stakeholders (distinct from shareholders, who are a subgroup).

  • Examine market vs. nonmarket and internal vs. external stakeholders.

  • Conduct stakeholder analysis to understand their desires.

  • Explore the bases of stakeholder power and influence.

  • Analyze how corporations organize internally to interact with stakeholders.

  • Analyze the forces reshaping the business-society relationship.

Business and Society as an Interactive System

  • Business: Organizations providing products or services for profit.

    • Key aspects: providing something society wants and for profit.

    • Contrast: A food bank fulfills societal needs without profit.

  • Society: Human beings and their collectively created social structures.

  • Business and society are interactive and interdependent, each needing things from the other.

  • Businesses can be viewed like living organisms needing resources from their environment.

General Systems Theory

  • Organizations are understood in relation to their surroundings, not in isolation.

  • Businesses are embedded in a broader social environment.

  • Constant interaction: businesses provide to and need things from the environment.

Purpose of Business

  • Businesses exist to provide value for stakeholders including customers, owners/shareholders, and society in general and in return they are allowed to earn a profit.

  • Businesses need to make a profit to exist, but profit is not their sole purpose.

  • Quote: "Profits are to business as breathing is to life. Breathing is essential to life, but it is not the purpose for living."

  • Organizations exist to provide value for various stakeholder groups, including customers, owners, and society.

Evolution of Corporate Responsibility

  • Historically, businesses existed to make money, with minimal responsibility beyond obeying the law.

  • Past practices: unsafe workplaces, environmental damage, unsafe products were tolerated to some extent.

  • Shift: Companies should not harm customers or the environment.

  • Workplaces should be as safe as possible.

  • Emergence of Corporate Social Responsibility (CSR): organizations contributing to the benefit of society.

  • Transition period: businesses navigating issues like LGBTQ rights, balancing societal expectations.

  • Constant monitoring and adaptation to societal expectations are necessary.

Shareholder Theory vs. Stakeholder Theory

Shareholder Theory

  • The company is the property of the owners (shareholders).

  • Shareholders have a right to the company's proceeds.

  • Increasing shareholder wealth is management's primary fiduciary responsibility.

  • The purpose of the firm is to maximize long-term market value for shareholders.

  • Dominant perspective for much of history.

Stakeholder Theory

  • Stakeholders are individuals or groups affected by the firm's actions.

  • Corporations serve a broad public purpose, creating value for society.

  • Profit is necessary for survival but not the only purpose.

  • Corporations have multiple obligations and must consider all stakeholders.

  • Example: Everyone is a stakeholder of Toyota due to its economic impact (employment, taxes) and environmental impact in Bexar County.

Contrasting Shareholder and Stakeholder Perspectives

  • Shareholder Purpose: Satisfying the needs of owners.

  • Shareholder Value: Primary measure of success.

  • Stakeholder Perspective: Meeting the needs of all affected groups.

Arguments for Stakeholder Theory

  • Normative: It is the right thing to do.

  • Instrumental: Organizations depend on society for survival; failure to meet societal expectations can lead to loss of the right to operate.

  • Descriptive: This is how things actually work in the real world.

Stakeholders Defined

  • Stakeholders are any persons or groups that affect or are affected by the firm's decisions, policies, and operations.

  • A "stake" is an interest or claim on a business.

  • Stakeholder is not the same as stockholder (shareholder).

  • Shareholders have legal rights based on ownership.

  • Stakeholders have moral rights, not always legally codified.

  • Shareholders are one group of stakeholders.

Types of Stakeholders

Market Stakeholders

  • Have a financial connection to the organization.

  • Examples: shareholders, suppliers, employees.

  • Engage in economic transactions with the company.

Shareholder Demographics

  • According to Gallup, 62,000,000 Americans own stock in at least one company (almost half of all Americans).

  • This number is increasing.

  • The percentage of ordinary Americans owning stock has increased significantly over the last fifty years, primarily through retirement accounts.

  • Profits aren't just for the wealthy; they benefit average Americans through investments.

Nonmarket Stakeholders

  • Individuals or groups affected by the organization without direct financial participation.

  • Examples: the broader community, local government, business support groups, unions, and society as a whole.

  • They may use services provided by society (infrastructure) and, in return, provide jobs and pay taxes.

Internal vs. External Stakeholders

  • Internal Stakeholders: Employed by the firm (employees and managers).

  • External Stakeholders: Not employed by the firm (shareholders, suppliers, creditors, society at large, government, customers).

Stakeholder Management

Zero Sum vs. Symbiosis

  • Zero Sum: The idea that one group's gain is another group's loss.

    • Stakeholders compete for attention and resources.

    • Belief that if some individuals have vast wealth, then there is less for everyone else.

    • Small children recognize tendency to lean towards zero sum.

  • Symbiosis: Recognition that all groups are mutually interdependent.

    • In order for all groups to benefit, you have to pay attention to everyone.

    • The idea that businesses may pay their employees more, which makes them happier and more productive, and they do a better job, making customers happier as well. This would ultimately boost company profits and make the company's shareholders happy. One plus one is now greater than two. Win-Win Scenarios.

  • Smart managers look for symbiotic relationships and win-win scenarios.

Stakeholder Analysis

  • Involves identifying relevant stakeholders and analyzing their interests and power.

  • Key questions:

    • Who are the relevant stakeholders?

    • What are the interests of each group?

    • How much power do they have to influence the organization?

    • What is the potential for coalitions?

Identifying Relevant Stakeholders

  • Draw market and nonmarket stakeholder maps.

  • Recognize that not every group is relevant to every situation.

  • Some stakeholders are directly affected and highly concerned, while others are not.

Determining Stakeholder Interests

  • Shareholders: ownership interest, dividends, capital appreciation.

  • Customers: fair value, quality goods and services, fair prices.

  • Public interest groups: advance broad social interests (pollution, animal rights, LGBTQ issues).

  • Public interest want to advance their issue, they don't necessarily have a care or interest in what effect that might have on the organization as a whole. They are solely concerned with their issue.

Assessing Stakeholder Power

  • How much ability do they have to make the organization do something or to punish the organization if it doesn't do what they want.

  • Five primary types:

    • Voting Power: Shareholders (legal right to cast a shareholder vote to get rid of management).

    • Economic Power: Economic ties to the organization (employees witholding labor; suppliers not providing goods; customers not spending money).

    • Political Power: Ability to influence broader societal power (community groups, government).

    • Legal Power: Lawsuits or legal actions against the company (harm that is caused).

    • Informational Power: Having access to valuable data, facts, or details (Social Media Influencers).

Likelihood of Coalition Formation

  • Stakeholders often have common interests and form temporary alliances.

  • Combining power increases their ability to achieve their goals.

  • Coalitions are dynamic and can change at any time.

  • Increasingly international due to globalization and the Internet.

  • Example: Bud Light controversy and customer backlash.

Stakeholder Mapping

  • Visual representation of relationships among interest groups (power, coalitions).

  • Tool for management to see how stakeholders feel about an issue.

  • Indicates how much attention to pay to a particular group on a given decision.

Stakeholder Salience

  • Stakeholders stand out when they have power, legitimacy, and urgency.

  • Wages: legitimately within the realm of the company's workers.

  • This group is obviously has a lot of power because they can withhold their labor if they choose to do so.

Boundary Spanning Departments

  • Specific parts of the organization deal with specific stakeholder groups.

  • These employees work for the company but their job is working with a given stakeholder group.

  • Boundary spanners connect the organization with stakeholder groups.

  • Examples: customer relations, community relations, public relations, health, safety, and sustainability.

  • They gather information from stakeholder groups and communicate the organization's actions to them.

Forces of Change

  • The relationship between business and society is ever-changing.

  • Forces include:

    • Governmental regulations.

    • Emphasis on ethical values.

    • Changing societal expectations.

    • New technology (e.g., artificial intelligence).

    • Globalization.

Artificial Intelligence (AI) Usage

AI in the Workplace

  • Some executives are using AI tools like Google's Bard or Microsoft's ChatGPT to improve communications.

  • KPMG treats Chat GPT like an editor that communicates more succinctly.

  • Executives expect AI to have a major impact on organizations in the next 3-5 years.

  • Companies like IBM have paused hiring for back-office positions that could be automated soon.

AI and Job Skills

  • Generative AI are going to eliminate some jobs that people do; however, it's going to make the people who have both the job skills and the knowledge about how to work with AI much more valuable.

  • Accountants are among the professionals whose careers are most exposed to generative AI; at least half of accounting tasks could be completed much faster with technology.

  • Most jobs will be changed by AI, with 80% of workers in occupations where at least one job task can be performed more quickly by generative AI.

  • People who know both accounting and how to effectively use AI are going to have the advantage over those who only know the numbers and financials.

  • Information processing roles, including public relations specialists, court reporters, and blockchain engineers, are highly exposed.

  • The jobs that will be least affected by technology include short order cooks, motorcycle mechanics, and oil and gas roustabouts.

Effective Use of AI

  • AI can mean either making machines behave like humans or replacing human drudge work with machine learning.

  • AI does a really bad job of things like writing sonnets, explaining jokes, or emulating intelligent conversation.

  • AI works wonders on things like picking defective parts off a conveyor belt, telling a farmer when's the best time to harvest their soybeans, or detecting wear and tear on industrial machines.

Learning from AI Experiments

  • The science writer from The Wall Street Journal decided to use AI to do their job for one year, and then write about throughout the year, their experience doing so. This is what was learned.

  • Working with generative AI has profoundly changed the way I work, what I work on, and increasingly, how I think. It made such a leap forward for them in their thirty year career.

    • Ask for a quick prototype. Before drafting an article or a report, get ChatGPT to do a quick version to see if the idea is going to work.

    • Rethink your limits. Started using AI for help in areas that were out of comfort zone that can make AI better.

    • Resist distraction: Its a great tool, it can also become a big old distraction if you don't focus on it.

    • Get help, not homework. You get better results from AI when you treat it like a tutor rather than expecting it to do your homework for you.

    • Think in sequences. The most powerful results emerge from a series of interactions, not a single question and answer.

    • Pretend sentient. I get the best results since entering into the spirit of let's pretend and started treating it like an actual person.

    • Fact-Check Everything. Make sure that whatever the AI is telling you is correct.

    • Enjoy your superpowers.

Tips on Asking Better Questions

  • The answers you get depend on the questions you ask.

  • Chat GPT can give great answers, but only if you know how to ask the right questions.

  • What are ETFs (Basic). How would you explain ETFs to a layman, and can you provide three examples for me to understand it (Better).

  • Write me a love poem to give to my partner (Basic). Write a love poem to give to my partner who loves mysteries. His favorite Edgar Allan Poe poem is The Raven (Better).

  • Create a five day vegetarian meal plan (Basic). Create a shopping list for a five day vegetarian meal plan (Better).

AI Assignments

  • Reflection paper is due on this specific lecture.

  • You are required to use AI in the paper.

  • You want to learn how to use it effectively in order to learn how to do the job more effectively.

  • First Paper: Have AI write the paper, and then evaluate and critique what AI did.

  • Second Paper: Write the paper and have AI critique what the student did.