Organizations exist because of their ability to create value and acceptable outcomes for various groups of stakeholders, people who have an interest, claim, or stake in an organi- zation, in what it does, and in how well it performs.1In general, stakeholders are moti- vated to participate in an organization if they receive inducements that exceed the value of the contributions they are required to make.2Inducements include rewards such as money, power, and organizational status. Contributions include the skills, knowledge, and expertise that organizations require of their members during task performance.
The two main groups of organizational stakeholders are inside stakeholders and outside stakeholders. Table 2.1 summarizes the inducements and contributions of each group.3
Inside Stakeholders
Inside stakeholders are people who are closest to an organization and have the strongest or most direct claim on organizational resources: shareholders, managers, and the workforce. Stakeholders
People who have an interest, claim, or stake in an
organization, in what it does, and in how well it performs.
Contributions
The skills, knowledge, and expertise that organizations require of their members during task performance. Inducements
Rewards such as money, power, and organizational status.
SHAREHOLDERS Shareholders are the owners of the organization, and, as such, their claim on organizational resources is often considered superior to the claims of other inside stakeholders. The shareholders’ contribution to the organization is to invest money in it by buying the organization’s shares or stock. The shareholders’ inducement to invest is the prospective money they can earn on their investment in the form of dividends and increases in the price of stock. Investment in stock is risky, however, because there is no guarantee of a return. Shareholders who do not believe the inducement (the possible return on their investment) is enough to warrant their contribution (the money they have invested) sell their shares and withdraw their support from the organization.
During the recent recession that resulted because of the sub-prime mortgage prob- lem, the resulting financial crisis led to a meltdown in the stock market during which most investors lost 40% or more of the value of their stock investments. As a result, more and more shareholders, who are most commonly mutual fund investors, are relying increasingly on the government and on large institutional investment companies to protect their inter- ests and to increase their collective power to influence top managers. Large mutual fund companies like Fidelity or TIAA/CREF realize they have an increasing responsibility to their investors who lost billions in their pension funds as a result of the subprime crisis, as well as the earlier dot.com meltdown.4Also, mutual fund managers realize they have an
increasing responsibility to monitor the performance of top managers to prevent the kinds of unethical and illegal behaviors that caused the collapse of Lehman brothers, Enron, Tyco, and many other companies whose dubious accounting practices led to a collapse in their stock price. If mutual fund companies are to protect the interests of their sharehold- ers, they need to monitor and influence the behavior of the companies they invest in, to make sure the top managers pursue actions that do not threaten shareholders’ interests while enhancing their own.
As a result of this concern for shareholders, mutual fund companies have become more vocal in trying to influence top managers. For example, they have sought to get com- panies to remove so-called poison pills, which are antitakeover provisions that make it much more difficult and expensive for another company to acquire it. Top managers like poison pills because it helps them protect their jobs, huge salaries, and other perks. Mutual fund companies are also showing increasing interest in controlling the huge salaries and bonuses that top managers give themselves that have reached record levels in recent years. They have also reacted to the accounting scandals that have led to the collapse of Enron and the poor performance of other companies such as Computer Associates by demand- ing that companies clarify their accounting procedures. And they have successfully lobbied for Congress to pass new laws such as the Sarbanes/Oxley and Dodd-Frank Acts, and to increase the power of government agencies such as the Federal Trade Commission (FTC)
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TABLE 2.1 Inducements and Contributions of Organizational Stakeholders
Stakeholder Contribution to the Organization Inducement to Contribute
Inside
Shareholders Money and capital Dividends and stock appreciation
Managers Skills and expertise Salaries, bonuses, status, and power
Workforce Skills and expertise Wages, bonuses, stable employment, and promotion
Outside
Customers Revenue from purchase of goods and services Quality and price of goods and services
Suppliers High-quality inputs Revenue from purchase of inputs
Government Rules governing good business practice Fair and free competition
Unions Free and fair collective bargaining Equitable share of inducements
Community Social and economic infrastructure Revenue, taxes, and employment
30 PART 1 • THE ORGANIZATION AND ITS ENVIRONMENT
to regulate banks and other financial institutions. These moves have made it much more difficult for companies to hide unfair, unethical, or illegal transactions that might benefit managers but hurt other stakeholders, especially customers.
MANAGERS Managers are the employees responsible for coordinating organizational resources and ensuring that an organization’s goals are met successfully. Top managers are responsible for investing shareholder money in resources to maximize the value of an organization’s future output of goods and services. In effect, managers are the agents or employees of shareholders; they are appointed indirectly by shareholders through an organization’s board of directors that shareholders elect to oversee managers’ performance. Managers’ contributions are the skills and knowledge they use to plan and direct the organization’s response to pressures from the organizational environment, and to design its structure and culture. For example, a manager’s skills at opening up global markets, identifying new product markets, or solving transaction cost and technological problems can greatly facilitate the achievement of organizational goals.
Various types of rewards induce managers to perform their activities well: monetary compensation (in the form of salaries, bonuses, and stock options) and the psychological satisfaction they get from controlling the corporation, exercising power, or taking risks with other people’s money. Managers who do not believe that the inducements meet or exceed their contributions are likely to withdraw their support by leaving the organiza- tion. Thus top managers move from one organization to another to obtain greater re- wards for their contributions.
THE WORKFORCE An organization’s workforce consists of all nonmanagerial employees. Members of the workforce have task responsibilities and duties (usually outlined in a job description) that they are accountable for performing at the required level. Employees’ contribution to the organization is to use their skills and knowledge to perform required duties and responsibilities at a high level. However, how well an employee performs, in some measure, is within the employee’s control. Indeed, an employee’s motivation to perform well is often a function of the inducements (rewards and punishments) that the organization uses to influence job performance. Employees who do not believe that these inducements meet or exceed their contributions are likely to withdraw their support for the organization by reducing the level of their performance or by leaving the organization.
Outside Stakeholders
Outside stakeholders are people who do not own the organization and are not employed by it, but they do have some claim on or interest in it. Customers, suppliers, the govern- ment, trade unions, local communities, and the general public are types of individuals and groups that are outside stakeholders.
CUSTOMERS Customers are usually an organization’s largest outside stakeholder group. Customers are induced to select a particular product (and thus a specific organization) from alternative products by their estimation of the value of what they receive from it relative to what they have to pay for it. The money they pay for the product is their contribution to the organization (its sales revenue) and reflects the value they believe they receive from the organization. As long as the organization produces a product whose price is equal to or less than the value customers feel they are getting, they will continue to buy the product and support the organization.5If customers refuse to pay the price the organization is asking, they withdraw their support, and the organization loses a vital stakeholder. Southwest Airlines, which as we noted in Chapter 1 focuses on increasing its efficiency to offer lower airfares, is an example of one company that strives to offer customers a lot of value, and the result is their loyal support.
Former CEO Herb Kelleher attributes his airline’s success to its policy of “dignify- ing the customer.”6 Southwest sends birthday cards to its frequent fliers, responds personally to the thousands of customer letters it receives each week, and regularly
CHAPTER 2 • STAKEHOLDERS, MANAGERS, AND ETHICS 31
obtains feedback from customers on ways to improve service. Such personal attention makes customers feel valued and inclined to fly Southwest, and customer support has made it one of the faster growing and the most profitable U.S. airline company for over a decade.
Moreover, Southwest believes that if management fails to treat employees right, em- ployees will not treat customers right. And, as we also noted, Southwest’s employees own 20% of the airline’s stock, which increases their motivation to contribute to the or- ganization and improve customer service.7 One stakeholder group (employees) thus helps another (customers). One example of a company whose top managers had no con- cern for the well-being of its customers or employees is profiled in Organizational Insight 2.1.