Challenges faced with the corporate responsibility

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Various links between corporate responsibility and stakeholder theory can be established throughout the literature provided. Branco and Rodrigues (2007) argued that stakeholder theory has become something that is unavoidable if you are wishing to analyse corporate responsibility. This agrees with previous articles including that by Matten et al (2003) in which he stated that stakeholder theory is "considered as a necessary process in the operationalisation of corporate responsibility" (Matten et al 2003, pg 111) and therefore it should be seen as a complementary rather than a conflicting issue of literature.

A good way to assess the links between corporate responsibility and stakeholder theory would be to look into Carroll's four-part model of corporate social responsibility (1991) (Figure 1). In terms of corporate responsibility the first three layers, economic, legal and ethical are all required by society, with the fourth, philanthropic, only being desired by society in relation to corporate responsibility and therefore it is not within the corporation's duty to do so. However in relation to stakeholder theory the forth level is at the company's discretion to "improve the quality of life for employees, communities etc" (Crane, Pg 50). Therefore in relation to the stakeholder theory the fourth level is of a much higher importance than it would be within the broader view of corporate responsibility, as various stakeholders and their possible claims must be taken into consideration.

Wood and Jones (1995) used a stakeholder framework to modify Wood's initial definition of corporate responsibility. They argued stakeholders have three roles.

Stakeholders are the source of expectations about what constitutes as desirable and undesirable company performance and responsibility.

They experience the effects of corporate behaviour

And they evaluate the outcomes of corporate behaviour, in terms of their levels of meeting expectations and their affects on the organisations and groups in their environment

Therefore in relation to stakeholder theory, corporate responsibility can be assessed in terms of the corporations being able to meet the demands of their multiple stakeholders, these demands must be satisfied by the company as it is "an unavoidable cost of doing business" (Ruf et al, 2001, Pg 143)

To understand the ethical principles that stakeholder theory is based we must first establish who these stakeholders are in the business context (Figure 2). Freeman 1984 defined stakeholders as, "groups and individuals who benefit from or are harmed by, and whose rights are violated or respected by, corporate actions" (Freeman 1984, pg 174). Stakeholder theory is based on the notion that beyond shareholders there are a number of agents with interests in the actions of a company, and that "the goal of any company is or should be the flourishing of the company and all its principle stakeholders" (Werhane and Freeman, 1999, pg 365).

Clarkson's (1995) typology of stakeholders distinguished primary and secondary stakeholders. He defines primary stakeholders as "those without whose continuing participation the corporation cannot survive as a going concern" (Pg 106), such as shareholders, customers, employees, and suppliers. With secondary stakeholders being defined as those who are influenced or effected by or who influence or affect the corporation; however they are not engaged directly with the corporation and therefore are not essential for its survival. A similar typology of stakeholders by Philips (2003) divides stakeholders into two differing types (Figure 3). Firstly normative stakeholders, to whom the organisation has a moral obligation, an obligation of stakeholder fairness, this should be "over and above that due to other social actors simply by the virtue of them being human" (Phillips, pg 30), these groups are the answer to the question, to whose benefit should the firm be managed? (Freeman, 1984). The second of these types being derivative stakeholders, these stakeholders' actions are accounted for by managers as they have a potential effect upon the organisation and their normative stakeholders, their level of legitimacy to managerial attention is derived from their levels of affect on both the organisation and normative stakeholders. Examples of these stakeholders include the media. An organisation may wish to assist the media but has not obligation to do so. The portrayal of the corporation by the media can be either positive or negative to the organisations and therefore affecting the normative stakeholders. For example say the media portrays the company in a bad light, this will affect the company in sales, reputation etc, and have a follow on effect to shareholders in a drop in share prices. In his paper Phillip's states that these normative stakeholders have some resemblance to the 'dangerous' and 'dormant' stakeholders in the Mitchell et al (1997) theory of identification.

Mitchell et al (1997) established a theory of identification and salience to show the key attributes that stakeholders may have and to show which stakeholders managers view as most significant due to their possession of one or more of three attributes: Power, Legitimacy and urgency (Figure 4 appendix). The inclusion of urgency in his attribute added a dynamic component which allowed stakeholders to attain salience in manager's minds. Mitchell et al combined these three attributes to create a typology of stakeholders. Mitchell's theoretical model was later confirmed by Agle et al (1999) after it was empirically tested.

According to Mitchell et al (1997) if the stakeholders posses only one of the attributes they are considered as latent stakeholders and have a low level of stakeholder salience, such stakeholders include dormant discretionary and demanding stakeholders. As the level of attributes increases as does the level of salience, with stakeholders possessing two attributes considered to have a moderate level of salience (such stakeholders are called expectant stakeholders and consists of dangerous, dominant and dependent stakeholders), and stakeholders with all three attributes said to have a high salience level, and are called definitive stakeholders.

Donaldson and Preston (1995) theorised that there are three differing forms of stakeholder theory that can be used.

Normative, when it is used to "interpret the function" of companies and identify "moral or philosophical guidelines" that should be followed with regard to their "operation and management (pg 71).

Instrumental approach states that adopting the stakeholder approach in the running of companies is just as good or even better than rival approaches to obtaining "conventional corporate objectives" (pg 70) such as the maximisation of shareholder value. It states that the recognition of stakeholders as instrumental (a means to an end) in pursuit of achieving these objectives.

Descriptive/ empirical approach is used to describe and to sometimes explain, specific corporation characteristics and behaviours. Describes the firm as a constellation of co-operative and competitive interests.

Berman et al (1999) concluded from the instrumental approach a further theory of strategic stakeholder management. The instrumental approach to stakeholder theory holds that to maximise shareholder value over time, managers must pay attention to key stakeholder relationships. Stakeholders are viewed by firms as part of their environment and therefore must be managed to assure continuing levels of profits, revenues and returns to shareholders. This is because stakeholders control resources that can enhance or facilitate to execution of company decisions (Pfeifer et al 1978). Therefore stakeholder concerns only enter a firm's decision making if there is strategic value for the firm. Two differing forms of strategic stakeholder management have been conceived. (Figures 5 &6). In the direct effects model, the attitudes and actions of mangers in regards to stakeholders perceived to have a direct effect on the financial performance of a firm, independent of the firms strategy. The second moderation model shows that the orientation of managers towards stakeholders does have an impact on firm's strategy; it does this by moderating the relationship between strategy and performance.

Barman et al (1999) also concluded from the normative approach the idea of intrinsic stakeholder commitment (Figure 7). The basis of this commitment states that managerial relationships with stakeholders are based on normative, moral commitments, rather than on the desire to use stakeholders to maximise profits. Donaldson and Preston (1995) stated that stakeholders interests have intrinsic worth, meaning that certain stakeholder claims are based on fundamental moral principles, which are unrelated to the stakeholder's instrumental value to a corporation. In relation to this firms must shape their strategy around the moral obligations they owe to their stakeholders. This leads us to the idea of a Kantian basis towards corporate stakeholder management.

Ireland (1970) first coined the term the "Kantian motive" in which the act of contribution is a positive factor enough to reason it's worth, this was derived from the work of philosopher Immanuel Kant (1724 - 1804). "The goal of a Kantian act is act utility, not the utility of the result the acts brings about" (Ireland 1970 pg 27). Kant developed a moral framework called the 'categorical imperative'; this framework is designed to be applied to every moral issue, regardless of who it profits, who is involved, and who is harmed by the principles. The framework consisted of three parts

Maxim 1 - Act only according to that maxim by which you can at the same time will that it should become a universal law

Maxim 2- Act so that you treat humanity, whether in your own person or in that of another, always as an end and never as a means only.

Maxim 3 - Act only so that the will through its maxims could regard itself at the same time as universally lawgiving.

According to Kant a maxim is regarded as morally right only if it 'survives' all three tests. Evan and Freeman (1993) argued that the ethical basis of the stakeholder theory has been substantially derived from the Kantian way of thinking.

Morris (1998) and Nararro (1988) put forward the ideas of strategic philanthropy and strategic corporate responsibility. In accordance with the resourced based view of a firm each individual company has a collection of firm based resources. Certain in-tangible resources which are valuable, rare, non - substitutable and difficult for rivals to imitate can lead to increased competitive advantage through reduced costs and increased revenue (Barney 1991). In accordance with Clarkson's (1995) typology of primary and secondary stakeholders, Hillman and Keim (2001) put forward the notion that firms may be strategically responsible to primary stakeholders, in order to develop valuable intangible resources, such corporate reputation and brand name that would allow the company to gain a competitive edge over its rivals.

In the context of derivative stakeholders and their legitimacy, I will look into the dealings of Tobacco giant Philip Morris and how they have tried to influence these stakeholders to have a positive effect upon them as a company and their normative stakeholders. In relation to the media being a derivative stakeholder, Philip Morris approached their corporate responsibility with the idea that it would be a good way of advertising the company and increasing their visibility. For example in 1999 Philip Morris spent $75 million on charitable contributions, and then launched a $100 million advertising campaign to publicize them. Philanthropy may be a form of advertising and therefore is profit motivated (Fry 1982). Navarro (1988) found a positive relationship between advertising expenditures and corporate social giving. Positive media reputation is especially important to firms such as Phillip Morris as a study by William and Barrett (2000) found that "charitable giving appears to be a means by which firms may partially restore their good name following the commission of illegal acts" (Pg 346), this is supported by Brammer (2005) findings in that firms who exhibit significant social externalities, such as alcoholic drink and tobacco sectors have a significantly larger link between philanthropy and corporate reputation than it does in other sectors.

Philip Morris have also engaged in strategy towards the political/government stakeholders, an example of this is a 1988 Philip Morris memo, which lays the groundwork for PM/Altria's public relations strategy of engaging in "social responsible" activities like feeding the hungry and funding domestic violence shelters. However this is far from an altruistic as the memo states (among other things) that "Benefits Philip Morris - USA may realize from a program of this type include access to political decision makers." (Lembo 1988) It also says these programs could "Enhance PM-USA's position with legislative bodies who might be considering marketing sanctions, advertising bans and public smoking restrictions." (Lembo 1988).

An example of ethical corporate responsibility is shown when we look into the levels that firms throughout the US give to religious congregations. America is most actively religious country in the western world, the reported church attendance of US households is 54 % who are regular (monthly or more often) church attendees (Jowell et al 1989). Reingold's figures (1993) showed that 50% of US corporations giving going to church groups. This shows that in relation to Barman's (1999) idea of intrinsic stakeholder commitment, that the firms have related their strategy around the moral obligations they owe to their stakeholders, in this case the strong religious feelings that US corporations feel towards their religious congregations. This idea is further established by the empirical evidence of Brammer's (2009) study, which showed that even during recessions the levels of giving do not decrease even as profits before tax does.

A further example is the corporate responsibility shown by Vodafone in regards to their stakeholders. They state that their corporate responsibility is part of the core business strategy and not and 'add-on'. Vodafone through its extensive network of corporate reporting and awareness uses stakeholder feedback to understand what is expected of the company and further feedback to see if they are meeting these expectations; this related to Wood and Jones (2005) three stakeholder roles. Vodafone take both the issues and claims of derivative and normative stakeholders into consideration when planning their corporate strategy. Various goals to improve stakeholder standard of living have been set out in their corporate responsibility reports, e.g. Vodafone have invested 30 million into the local community schools across Africa to decrease child illiteracy and to ensure they have a better level of education and skills. This 'survives' Kant's three tests, and therefore can be described as morally right.

As can be seen when assessing corporate responsibility it is hard to distinguish whether corporations are acting purely for ethical/altruistic reasons, or if they are acting in a strategic way. As when corporations act in a responsible manner they could easily pass it off as truly ethical, however various instrumental means that benefit the corporation may be the reason why the company is acting this way, as Freeman (1970) stated these reasons are not corporate responsibility but merely profit-maximisation 'under the cloak of corporate responsibility', as the firms are acting in terms of 'enlightened self-interest'. The Kant test is a way of assessing the moral rightness of firm's actions; however this is highly complex and hard to interpret sometimes. In effect it will always be hard to distinguish between strategic and ethical motives or corporate responsibility; it is only shown that when profits fall and strategies change whether the levels of responsibility will remain the same or if corporations will look to more instrumental ways to increase profits and company value.

References

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Barney, J. (1991). 'Firm resources and sustained competitive advantage'. Journal of management 17. Pg 99-120

Berman, S. Wicks, R. Kotha, S and Jones T. (1999). "Does Stakeholder Orientation Matter? An Empirical Examination of the Relationship between Stakeholder Management Models and Firm Financial Performance". Academy of Management Journal. Vol. 42, No 5. Pg 488-506

Brammer, S. and Millington, A. (2005). 'Corporate Reputation and Philanthropy: An Empirical Analysis' Journal of business ethics 61, pg 29-44, Springer, Netherlands .

Branco, M and Rodrigues, L (2007). "Positioning stakeholder theory within the debate on corporate social responsibility". Electronic journal of business ethics and organisational studies, Vol 12, No 1. Pg 5-15

Carroll, B. (1979). 'A three-dimensional model of corporate performance', Academy of management review 44, Pg 497-505

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Crane, A and Dirk, M (2007). "Business ethics, Managing corporate citizenship and sustainability in the age of globalization". Second edition. Oxford university press Inc, New York.

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Evan, W and Freeman R (1993). "A stakeholder theory of the modern corporation: Kantian capitalism". In Bowie, N (ed.), Ethical theory and business (3rd edn). Englewood Cliffs, NJ: Prentice-Hall

Freeman, R (1984). "Strategic management: A stakeholder approach". (Boston, Pitman)

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Matten, D and Crane, A and Chapple, W (2003). "Behind the mask: Revealing the true face of corporate citizenship". Journal of business ethics, Vol 45, No 1/2. Pg 109-120

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Werhane, P. Freeman, R (1999). "Business ethics: The state of the art". International Journal of Management reviews. Vol 1. No 1. Pg 1-16

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