Chapter 4: Stakeholders, governance and ethics

Chapter learning objectives

Upon completion of this chapter you will be able to:

• explain the importance for an organisation of communicating core values and mission
• evaluate, in a scenario, stakeholder influence using stakeholder mapping
• analyse the implications of corporate governance for a given organisation with respect to its purpose and strategy
• analyse the ethical influences on an organisation with respect to its purpose and strategy
• explain the cases for and against businesses pursuing Corporate Social Responsibility (CSR)

1 Introduction

This chapter looks at how organisations determine their objectivesand policies. This will play a vital role in the chapters that followwhen we consider choosing between different strategies that areavailable to an organisation. Objectives will be set by considering anorganisation's mission statement, its stakeholders, corporate governanceand its attitudes towards ethics. A fundamental theme in this chapteris whether an organisation's purpose should be set solely by its keystakeholders (which might, in a profit seeking business, be itsshareholders, for example), or whether its purpose should include wideraspects and the viewpoints of other stakeholders.

2 Core values and mission

Introduction

Mission statements exist in order to establish the primary reasonfor an organisation's existence and to define core values. This shouldbe the overriding objective from which all other objectives are set. Amission statement should consider all stakeholders of an organisationand aim to satisfy their needs.

Johnson, Scholes and Whittingtonrefer to an organisation's mission as 'the most generalised type ofobjective (that) can be thought of as an expression of its raisond'être'.

Core values are the principles that guide an organisation's behaviour.

The mission indicates to both the world at large and to thosemaking the strategic decisions, the broad ground rules that theorganisation will adhere to when conducting its business.

Contents of a mission statement

A mission statement should contain the following:

• purpose
• strategy
• policies and Standards of Behaviour
• values.

Also:

• mission statements should be short – typically half a page
• note that mission statements can have a valuable role in setting ethical standards and organisational culture.

Further explanation of contents

Purpose

Why is the company in business? What is the organisation for?

Some organisations and companies do not attempt to reach aconclusion about the nature of their overall purpose. However, wherecompanies do have an idea of their purpose, research by Campbell, Devineand Young shows that the companies fall into the following types.

• Companies that just exist for the benefit of the shareholders. Their main purpose is to maximise shareholder wealth and all decisions are assessed against a benchmark of shareholder value.
• Companies that believe that the satisfaction of shareholders is not the only reason for existence and believe it to be important to satisfy all stakeholders. In their mission they address how they are to satisfy the needs of customers, the community, the employees as well as the shareholders.

Strategy

This component of the mission statement then addresses how it isgoing to achieve its purpose. This could involve a statement ofindustrial domain (where to compete) and the nature of competitiveadvantage sought.

Policies and standards of behaviour

Without policy and behaviour guidelines that help staff to makedecisions on a day-to-day basis the strategy and purpose has littlevalue.

Values

Values are the feelings and moral principle that lie behind the company's culture.

Advantages and disadvantages of mission statements

The claimed advantages:

• help resolve stakeholder conflict
• set the direction of the organisation and so help formulate strategy
• help communicate values and culture to employees
• help the marketing process by communicating with customers.

The criticisms of mission statements:

• often full of meaningless terms like 'the best', which give staff little idea of what to aim at
• often written retrospectively to justify past actions
• often ignored by managers
• might simply be a public relations exercise.

Illustration 1 – Core values and mission

Below is the philosophy or mission of Nissan Motors (UK) (NMUK).

As a company we aim to build profitably the highest quality carsold in Europe. We want to achieve the maximum possible customersatisfaction and ensure the prosperity of the company and its staff.

To assist in this we aim to achieve mutual trust and co-operationbetween all people within the company and make NMUK a place wherelong-term job satisfaction can be achieved. We recognise that people areour most valued resource and in line with this spirit believe that thefollowing principles will be of value to all.

People

We will develop and expand the contribution of all staff bystrongly emphasising training and the expansion of everyone'scapabilities.

We seek to delegate and involve each staff member in discussion anddecision-making, particularly in those areas in which each of us cancontribute effectively so that all may participate in the efficientrunning of NMUK.

Teamworking

We recognise that all staff have a valued contribution to make asindividuals but in addition believe that this contribution can be mosteffective within a teamworking environment.

Our aim is to build a company with which people can identify and to which we all feel commitment.

Communication

Within the bounds of commercial confidentiality we will encourageopen channels of communication. We would like everyone to know what ishappening in our company, how we are performing and what we plan.

We want information and views to flow freely upward, downward and across our company.

Objectives

We will agree clear and achievable objectives and provide meaningful feedback on performance.

Flexibility

We will not be restricted by the existing way of doing things. We will continuously seek improvements in all our actions.

These are tough targets and we aim high. With hard work and goodwill we can get there.

Test your understanding 1

Consider the usefulness, or otherwise, of the following mission statements:

(1)Courses for careers, research for results. (A university)

(2)To be a pioneer in graphite communications. (A manufacturer of lead pencils)

(3)To be excellent in our chosen field, and provide the best in customer service and quality that resources permit.

(4)Kill Caterpillar. (Komatsu)

3 Stakeholders

Introduction

A stakeholder of an organisation is anyone affected by the organisation.

In the chapters that follow we will explore the strategic choicesthat are available to an organisation in order to improve its position.In order to be able to choose between the various options that are opento organisations it will be important that an organisation has clearobjectives. The objectives will help prioritise some strategies andeliminate others.

Illustration of stakeholders and their objectives

Illustration – Stakeholders

For example, a large company may have the following stakeholders.

Examples of conflicts are:

• shareholders want higher profits, employees want better working conditions
• customers want 24/7 service, employees want 9–5 jobs, 5 days a week
• customers want higher quality and lower prices, shareholders want higher profits
• suppliers want prompt payment, lenders want overdraft limits adhered to.

The objectives of an organisation will be governed by its keystakeholders. These key stakeholders be determined using stakeholdermapping.

Stakeholder mapping

Stakeholder mapping can help deal with stakeholders' conflictingdemands. It identifies stakeholder expectations and power and helps inestablishing political priorities. The process involves making decisionson the following two issues.

• How interested the stakeholder is to impress their expectations on the organisation's choice of strategies, i.e. how likely is the stakeholder to exercise power?
• To what extent the stakeholder has power to impose its wants?

Mendelow proposed a matrix to help analyse stakeholders.

Understanding the matrix

The matrix is normally completed with regard to the stakeholder impact of a particular strategy.

The purpose is to assess:

• whether stakeholder resistance is likely to inhibit the success of the strategy
• what policies may ease the acceptance of the strategy?

The following strategies might be applicable to each quadrant:

Box A – Minimum effort

Their lack of interest and power makes them open to influence. Theyare more likely than others to accept what they are told and followinstructions.

Box B – Keep informed

These stakeholders are interested in the strategy but lack thepower to do anything. Management needs to convince opponents to thestrategy that the plans are justified; otherwise they will try to gainpower by joining with parties in boxes C and D.

Box C – Keep satisfied

The key here is to keep these stakeholders satisfied to avoid themgaining interest and moving to box D. This could involve reassuring themof the outcomes of the strategy well in advance.

Box D – Key players/participation

These stakeholders are the major drivers of change and could stopmanagement plans if not satisfied. Management, therefore, needs tocommunicate plans to them and then discuss implementation issues.

How to determine interest and power

How interested are they?

The 'level of interest' can usefully be described as how likely itis that a stakeholder will take some sort of action to exercise his orher power.

Not all stakeholders have the time or inclination to followmanagement's decisions closely. Again some generalisations are possibleabout what will lead to interest, e.g.: 

• high personal financial or career investment in what the business does
• absence of alternative (e.g. alternative job, customer, supplier or employer)
• potential to be called to account for failing to monitor (e.g. local councils or government bodies such as regulators)
• high social impact of firm (e.g. well known, visible product association with particular issues).

Power

Resignation, withdrawing labour, cancelling orders, refusing tosell, calling in an overdraft, dismissing directors, legal action,granting contracts, setting remuneration.

Note that legislation tends to move power away from shareholders to other stakeholders.

• Employee protection legislation (dismissal, redundancy, health and safety) moves power to employees and away from management and shareholders.
• Environmental protection legislation moves power to the local community and other interested parties.
• Consumer legislation moves power to customers.

Test your understanding 2

Where should the following probably be mapped on the Mendelow matrix?

(1)Nurses in a hospital

(2)An airline's check-in staff

(3)Small-value customers

4 Governance and ethics

Corporate governance

Introduction

Corporate governance is about the way in which organisations arerun and who should control them – the chairman, the chief executive,and the board of directors, shareholders or other stakeholders such asemployees.

The need for corporate governance

The need for corporate governance arises because in all but the smallest organisations there is a separation between:

• ownership, and
• management control.

The principal-agent model is useful in explaining how the system should work: agents should work on behalf of their principals.

However.

• The gap between ultimate beneficiaries and those making day-to-day decisions can be large and agents might not know what the beneficiaries want.
• Self-interest can cause agents to work for their own benefit at the expense of their principals (remuneration packages, share options, budget padding, short-termism to make current results look good at the expense of long-term performance).

Principles of good corporate governance

Laws and principles have been developed to enhance corporate governance. These include:

• company law – for example, giving shareholders the right to dismiss directors and auditors
• the audit function – an independent review of the accounts
• accounting standards – increased and more uniform disclosure
• various codes on corporate governance. For example, all companies quoted on the London Stock Exchange are expected to comply with the Combined Code of Corporate Governance (though not forced to). If a company does not comply it must explain why.

Typical features of codes, such as the Combined Code include:

• boards should have non-executive directors – to advise and warn the executive directors. Executive and non-executive directors (NEDs) should be in balance so that neither group dominates
• there should be a separation of the roles of chairman and chief executive
• executive remuneration should be decided by a remuneration committee, consisting of non-executive directors
• an audit committee, comprising non-executive directors should look after the appointment and supervision of auditors.

Political aims of corporate governance

The broad aims of corporate governance at a political level include the following.

• Creating a framework for the control of large, powerful companies whose interests may not coincide with the national interest.
• Controlling multinationals, which can dominate the local economy.
• Ensuring that companies are answerable to all stakeholders, not just to shareholders.
• Ensuring that companies are run according to the laws and standards of the country and are not in effect states within states.
• Protecting investors who buy shares in the same way as investors are protected who buy any other financial investment product, such as insurance or a pension.

Principles of good corporate governance

Countries with high standards of corporate governance practices are more likely to attract international capital.

The OECD (Organisation of Economic Co-operation and Development)has carried out work among member countries, and identified some commonelements, which underlie good corporate governance. The OECD Principlesof Corporate Governance cover five sections.

• The rights of shareholders – the corporate governance framework should protect and facilitate the exercise of shareholders' rights. By raising capital from shareholders, companies commit themselves to earning an investment return on that capital. The board of that company must, therefore, be accountable to shareholders for the use of their money.
• The equitable treatment of shareholders – the corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.
• The role of stakeholders – the corporate governance framework should recognise the rights of stakeholders as established by law and encourage active co-operation between corporations and stakeholders in creating wealth, jobs and the sustainability of financially sound enterprises.
• Disclosure and transparency – the corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company.
• The responsibility of the board – the corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board's accountability to the company and the shareholders.

Non-executive directors

NEDs play an important role in corporate governance. Thesedirectors have no managerial responsibility, but they are full boardmembers and therefore have access to and can influence the highest levelof corporate decision making. Their functions include.

• Bringing additional experience and knowledge to the board.
• Warning executive directors about high-risk areas, ethical problems or inappropriate behaviour.
• Providing confidence to other parties as NEDs can provide independent, high-level supervision. For example, NEDs are not allowed to have share options in a company so their remuneration is independent of company performance.
• Determining executive remuneration (as mentioned earlier).
• Appointing and liaising with auditors.
• Providing confidential advice to both the board and individual directors.

The implications of governance for strategy

The results of the increasing focus on governance issues are as follows:

• Increasing power of governance bodies.
• Increasing shareholder power, ensuring that companies are run with shareholders' interests prioritised.
• Greater pressure on boards to formulate strategy and be seen to control the businesses concerned.
• Greater scrutiny of quoted businesses, resulting in more short-termism.
• Greater emphasis on risk assessments, so directors may feel pressured to undertake lower risk (and hence lower return) projects.
• Greater scrutiny of mergers and acquisitions in particular.

Ethical stances

Ethics is not just a matter of being righteous: if an organisationhas a reputation for making unethical decisions it will be perceived asbeing a high-risk organisation that it might be better not to deal with,whether as an employee, lender, investor, supplier or partner.

Ethical stances

Johnson, Scholes and Whittington define ethical stance as:

'The extent to which an organisation will exceed its minimum obligations to stakeholders.'

There are four possible ethical stances:

In effect, acting ethically means expanding the idea of stakeholdermapping so that, rather than simply focusing on key stakeholders, anorganisation expands its viewpoint to consider the impact on otherstakeholders.

Short-term shareholder interest (STSI)

This ethical stance has a short-term focus in that it aims tomaximise profits in the financial year. Organisations with this ethicalstance believe that it is the role of governments to set the legalminimum standard, and anything delivered above this would be to thedetriment of their shareholders.

Longer-term shareholder interest (LTSI)

This ethical stance takes broadly the same approach as theshort-term shareholder interest except that it takes a longer-term view.Hence it may be appropriate to incur additional cost now so as toachieve higher returns in the future. An example could be a publicservice donating some funds to a charity in the belief that it will savethe taxpayer the costs associated with providing the entire serviceshould the charity cease to work. Hence this ethical stance is aware ofother stakeholders and their impact on long-term profit or cost.

Multiple stakeholder obligation (MSO)

This ethical stance accepts that the organisation exists for morethan simply making a profit, or providing services at a minimal cost totaxpayers. It takes the view that all organisations have a role to playin society and so they must take account of all the stakeholders'interests. Hence they explicitly involve other stakeholders, and believethat they have a purpose beyond the financial.

Shaper of society

This ethical stance is ideologically driven and sees its vision asbeing the focus for all its actions. Financial and other stakeholders'interests are secondary to the overriding purpose of the organisation.

Corporate Social Responsibility (CSR)

Corporate responsibility is concerned with the ways in which an organisation exceeds the minimum obligations to stakeholders specified through regulation and corporate governance.

Although there might be differences of opinion about what is and isnot ethical, few people would argue that business ethics, for examplehonesty, are voluntary. However, the case for corporate socialresponsibility is not so clear cut, and there are a number of differentviews relating to social responsibility.

The different views

The shareholder view

Friedman argues that, 'the social responsibility of business is to make a profit'. The justifications for this are:

• pursuing profit will result in increased employment, generate economic growth, stimulate innovation, increase the tax take and generally raise living standards. Making profits is therefore itself a public good and is a sufficient purpose of business
• directors should be acting on behalf of the shareholders. CSR too often means that directors are being charitable with other people's money
• shareholders are free to use their dividends to contribute towards CSR if they wish
• business is not competent to decide moral and ethical matters. Where is the democratic connection between what a business decides to spend money and effort on and where that money and effort are actually needed or wanted by society? Are CSR projects chosen simply because they are areas where directors, or their spouses, are personally interested.

The longer-term self-interest view

Drucker argues that it is in the long-term economic self-interest of business to act in a reasonably responsible manner.

• Failure to do so will prompt legislation.
• Failure to do so will damage the business and even the industry.
• The public relations and enhancement of reputation arising from CSR will increase profits in the long term. CSR is therefore seen and justified as expenditure that helps to generate long term profits.

The stakeholder view

This view assumes that shareholders are simply one stakeholderamong many, and that their interests are not necessarily paramount.There may be circumstances where shareholder interest has to besacrificed for the greater good of other stakeholders.

Quite how it is decided which stakeholders deserve generosity atany particular time is not clear. There is a danger that thestakeholders that benefit are those with most power – which is notnecessarily the same as the stakeholders who might deserve attention.

Common areas for CSR issues

The following are common areas where businesses get involved in CSR issues:

• work creation and training programmes
• sponsorship of the arts and sport
• employee welfare programmes
• community welfare programmes
• support for educational institutions and links with business
• contributions to overseas aid
• environmental programmes.

Benefits of an organisation being ethical

Apart from an ethical organisation being, perhaps, 'morally correct', there are more quantifiable business benefits:

• lower risk that, for example, should create more stable earnings and should make cheaper finance available
• attractive to customers
• attractive to potential employees
• attractive to potential collaborators and partners
• less time and cost spent dealing with investigations by regulatory bodies
• less spent on paying damages and fines.

On the other hand, acting ethically can bring the following problems:

• as a differentiating strategy it is easily copied by rivals
• it typically adds costs to activities
• success often relies on trial and error
• international businesses may have to adopt different ethical approaches in different markets which may give a lack of global consistency

5 Chapter summary

This chapter has covered the following areas:

• examined the meaning and importance of corporate governance
• analysed the ethical influences on an organisation with respect to its purpose and strategy
• explained the cases for and against businesses pursuing CSR
• evaluated the impact of culture on a given organisation's purpose and strategy
• analysed an organisation's cultural web (symbols, stories, rituals, control systems, structure, power)
• explained the importance for an organisation of communicating core values and mission.

Test your understanding answers

Test your understanding 1

(1)This is the mission statement of aBritish University. It identifies that the range of courses offered willbe restricted to those that lead to an obvious career path, andresearch will be developed in partnership with those who have acommercial interest in discovery, rather than simply a sense ofcuriosity. As you might expect, this is a University with great ambitionbut relative few resources, which therefore focuses its activity intoareas where it may compete effectively against its more august rivals.Note that the mission statement here implicitly describes both thecustomers it seeks and the services it wishes to offer.

(2)This is the mission statement of amanufacturer of lead pencils. The important point is that it suggestsinnovation in a field more usually noted for cost-based competition.Part of the company's business is providing jokey, amusing slogans onits pencils, and the mission statement was chosen to reflect this. Notethat this mission is directed at the customers; any message foremployees is rather too subtle to operate effectively.

(3)It has been argued that any missionstatement containing the word 'excellent' should not be taken seriously– who wouldn't want to be 'excellent', even at providing cheap goods.Excellence subject to resource constraints also appears ratherqualified. However, this particular firm embarked on a rapaciousprogramme of takeovers in a field where this was comparatively unknown.The resource base expanded, but very little of these extra resourcesfound their way into product quality and customer service, leading togreat cynicism from staff.

(4)The final statement is atranslation of the mission of Komatsu, who set their sight on takingCaterpillar's domination of the tracked vehicle market. They picked outthe weaker points of their rival's operation, its softest markets andpoorest products, and spent two decades building up the competences anddriving them out.

Test your understanding 2

(1)Theoretically, nurses have a lot ofpower. If they withdrew labour, a hospital would soon have to stopadmitting and treating patients. However, the ethical, professional andhumanitarian standards of nurses means that industrial action isextremely rare.

(2)Airline staff have, in the past been very willing to take industrial action, which quickly cripples the airline.

(3)If a small-value customer feelsaggrieved, he or she can usually easily take their business to anothersupplier. However, this is likely to have little effect on the supplier.Only if many small customers banded together would they achieve power.

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