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Quality answers to written questions are typically three or more coherent sentences. Psychological Bias Assignment Dunham, BUS 682 The field of behavioral economics is concerned with studying the effects of psychology on the decision-making processes of individuals and institutions. While neoclassical economics and rational choice theory assume that humans act rationally in their own self-interest, the relatively new field of behavioral economics challenges these assumptions by exploring how psychological or cognitive biases circumvent the rationality of agents. A common theme in behavioral economics is the acknowledgement that cognitive bias, emotion, and social influence lead humans to make irrational decisions. Heuristics or mental shortcuts are relied upon to make hasty decisions. The “behavioral turn” in economics is evidenced by several behavioral scholars being awarded the Nobel Memorial Prize in Economic Sciences—including Daniel Kahneman (2002), Robert Shiller (2013), and Richard Thaler (2017)—for their insights into understanding human behavior. Psychological bias can lead to irrational decision-making in a variety of ways. For example, psychological bias contributes to discrimination in the workplace. Unconscious or implicit bias refers to attitudes or beliefs that exist without an individual’s awareness. For example, stereotyping may lead to false assumptions about the characteristics of an individual based on preconceived notions about the given group to which the individual belongs. Implicit biases are different that explicit beliefs and attitudes, which individuals are aware of, yet may conceal for the purposes of avoiding judgement or complying with norms. Furthermore, it is possible for an individual to have an unconscious bias that they consciously oppose. While by no means exhaustive, the following are examples of biases that may contribute to discrimination. · Affinity bias – The tendency to favor people who share similar qualities to ourselves · Beauty bias – Judging or favoring people based on how they look · Bandwagon effect – Tendency to believe something because many other people hold the same beliefs · Confirmation bias – Tendency to focus on and favor information that confirms previously held beliefs · Conformity bias/Groupthink – Desire for harmony or conformity in a group results in a group member’s suppression of critical or alternative viewpoints in order to minimize conflict · Curse of knowledge – Relatively more informed people may find it difficult to perceive problems from the perspective of those that are less informed · Gender centrism – Tendency for a gendered point of view to influence one's world view · Ingroup bias – Tendency to give preferential treatment to people who are perceived to be members of our own group(s) · Naïve realism – The belief that we see reality objectively without bias and that those with opposing viewpoints are incorrect, irrational, or uninformed · Outgroup homogeneity bias – Individuals perceive more variation amongst members of their own group than in members of other groups · Status quo bias – The tendency to like things to stay relatively the same · Survivorship bias – Tendency to concentrate on the people or groups that survived and inadvertently overlook those that didn't Reflect upon the above list of psychological biases and consider how they may reveal themselves in your own life. Also, consider how these biases may lead to discrimination. Then, answer the questions in the space provided below 1. Can you think of an example of a bias that is not listed? Please explain this bias. 2. Have you ever caught yourself relying upon psychological bias to comprehend your surroundings or make a decision? Please explain. 3. How you ever felt that others were using psychological biases to evaluate or judge you? 4. How can psychological bias manifest itself in the workplace? Explain. [ Chapter Objectives To define the concept of social responsibility To trace the development of social responsibility To examine the global nature of social responsibility To discuss the benefits of social responsibility To introduce the framework for understanding social responsibility Chapter Outline Social Responsibility Defined Development of Social Responsibility Global Nature of Social Responsibility Benefits of Social Responsibility Framework for Studying Social Responsibility Opening Vignette Consumers may be surprised to realize that one com pany controls much of the industry for eyewear, including manufacturing, distribution. Critics claim this has resulted in excessive prices for quality eye wear. Among these critics was Neil Blumenthal. In 2008 Neil Blumenthal partnered with David Gilboa, and three classmates to develop a plan for a business to compete against the industry giant and eyewear affordable for the masses. The idea was developed for Wharton Business School’s business plan competition. Unfortunately, the school did not see their idea as a promising endeavor. The business plan did not even reach the final round. Nearly a decade later, this business plan has devel oped into a successful firm that has now sold more than 1 million pairs of glasses. The founders founded their firm—Warby Parker—on the premise that designing and manufacturing glasses in-house and selling them on the Internet would significantly reduce costs. These costs could then be passed onto the consumer so they would be able to afford designer glasses at a fraction of their competitor’s costs. Because of its ability to save on costs, consumers can purchase eyeglasses for as little as $95 each from Warby Parker. Today this $1.2 billion company has expanded beyond selling solely online and has been able to open up 27 retail locations. Warby Parker is known for more than just making eyeglasses affordable for the masses. The foundation of the business was also built on making eyewear available for people in developing countries who could not normally afford glasses. Enter Visionspring, a nonprofit charity that provides glasses to individuals in developing countries. Warby Parker partnered with Visionspring to donate one pair of eyeglasses to an individual in a developing country for every pair of eye glasses it sells. Each month Warby Parker determines how many glasses it sold and then makes a donation to Visionspring that handles the costs of sourcing the eyeglasses. The reason why Warby Parker does not simply donate the glasses is because Visionspring trains consumers in the country—particularly women—to be entrepreneurs and sell the glasses to tradespeople for approximately $4 each. This is much more affordable for tradespeople while also providing more economic opportunities for women to own their own small busi nesses and generate income. Glasses have been found to make a world of difference for people who require eye care in developing countries. It is estimated that these tradespeople see their earning power rise by 20 percent after they have purchased glasses. Warby Parker demonstrates how a company can effect positive change in this world while simultaneously earning a profit. Its strategic social responsibility results in high- quality products at lower prices as well as the ability for those in developing countries to obtain the eyewear they need. CHAPTER ONE Social Responsibility Framework d Warby Parker: Socially Responsible Vision . . . . 4 Business and Society Chapter 1 Social Responsibility Framework 5 Businesses today must cope with challenging decisions related to theirinterface with society. Consumers, as well as others, are increasmgtyemphasizing the importance of companies’ reputations, which are often based on ethics and social responsibility. The meaning of the term “social responsibility” goes beyond being philanthropic or environmen tally sustainable. Seventy-six percent of Americans think the meaning now extends to how employees are treated and the values a company holds.2 In an era of intense global competition and increasing media scrutiny, con sumer activism, and government regulation, all types of organizations need to become adept at fulfilling these expectations. Like Warby Parker, many companies are trying, with varying results, to meet the many economic, legal, ethical, and philanthropic responsibilities they now face. Satisfying the expectations of social responsibility is a never-ending process of contin uous improvement that requires leadership from top management, buy-in from employees, and good relationships across the community, industry, market, and government. Companies must properly plan, allocate, and use resources to satisfy the demands placed on them by investors, employees, customers, business partners, the government, the community, and others. Those who have an interest or stake in the company are referred to as stakeholders. In this chapter, we examine the concept of social responsibility and how it relates to today’s complex business environment. First, we define social responsibility. Next, we consider the development of social responsi bility, its benefits to organizations, and the changing nature of expectations in our increasingly global economy. Finally, we introduce the framework for studying social responsibility used by this text, which includes such elements as strategic management for stakeholder relations; legal, regula tory, and political issues; business ethics; corporate governance; consumer relations; employee relations; philanthropy and community relations; tech nology issues; sustainability issues; and global relations. SOCIAL RESPONSIBILITY DEFINED ___ Business ethics, corporate volunteerism, philanthropic activities, going green, sustainability, corporate governance, reputation management— these are terms you may have heard used, or even used yourself, to describe the various rights and responsibilities of business organizations. You may have thought about what these terms actually mean for business practice. You may also have wondered how businesses engage in these behaviors or contribute to these outcomes. In this chapter, we clarify some of the confusion that exists in the terminology that people use when they talk about expectations for business. To this end, we begin by defining social responsibility. In most societies, businesses are granted a license to operate and the right to exist through a combination of social and legal institutions. Businesses are expected to provide quality goods and services, abide by laws and regulations, treat employees fairly, follow through on contracts, protect the natural environment, meet warranty obligations, and adhere to many other standards of good business conduct. Companies that con tinuously meet and exceed these standards are rewarded with customer satisfaction, employee dedication, investor loyalty, strong relationships in the community, and the time and energy to continue focusing on business- related concerns. Firms that fail to meet these responsibilities can face penalties, both formal and informal, and may have their attention diverted away from core business practice. for example, Volkswagen received a number of penalties and criticisms for installing “defeat devices” into its diesel vehicles. These defeat devices were intended to fool regulators. While the cars were undergoing emissions testing, the cars ran below per formance to meet requirements. However, when on the road they emitted 40 times the allowable limit of emissions in the United States. Perhaps most damaging to the firm is that this scandal was a deliberate attempt to bypass environmental rules. German prosecutors launched an investiga tion to determine whether top executives also mislead investors by failing to inform them about complaints filed against the company in a timely manner.3 The goal is to prevent these negative outcomes in the future. In contrast, a large multinational corporation may be faced with pro testors who use illicit means to destroy or deface property. More firms are seeing their websites hacked and/or sabotaged by those who are protest ing specific issues, for instance, the Japan External Trade Organization’s website crashed after hackers attacked the site to protest against Japan’s stance toward whale hunting.4 Whether the attacks are physical or virtual, they can cost companies significant resources in having to rebuild. Finally, a company engaged in alleged deceptive practices may face for mal investigation by a government agency. For instance, a group of promi nent authors and booksellers are demanding that the Justice Department investigate Amazon for engaging in anticompetitive practices. According to the group, Amazon, which holds 40 percent of the market for new books, has used below-cost pricing to put competitors out of business and blocked the sale of books to force publishers for more favorable deals.5 Investigations such as this could lead to legal charges and penalties, perhaps severe enough to significantly alter the company’s products and practices or close the business. For example, The Scooter Store, a company that sold motorized wheelchairs all over the United States, filed for Chapter 11 bank ruptcy after a federal investigation determined the company had deceptively overcharged Medicare and Medicaid between $47 million and $88 million over the course of two years. The company was found to have engaged in deceptive tactics, such as continually contacting doctors to prescribe the motorized wheelchairs whether or not a patient was in need of one; claim ing the wheelchairs were free in advertisements when taxpayers were paying for them; and contributing to political campaigns to avoid any changes to Medicare and Medicaid. In addition, the city of New Braunfels, Texas, the home of the company’s headquarters, sued the company for the more than $2 million that was given to them from an economic development fund to I 6 Business and Society Chapter 1 Social Responsibility framework 7 build their headquarters. To make matters worse, consumers remarked they made purchases from the company because they claimed their goat was to “Always Do the Right Thing.”6 Businesses today are expected to look beyond self-interest and recog nize that they belong to a larger group, or society, that expects responsible participation. Therefore, if any group, society, or institution is to function, there must be a delicate interplay between rights (i.e., what people expect to get) and responsibilities (i.e., what people are expected to contribute) for the common good. Research indicates that the most ethical and socially responsible companies are the most profitable.7 Therefore, responsible conduct and policies yield significant benefits to society as well as share holders. While the media provides much coverage of misconduct and illegal activities in business, most businesses try to act in an ethical and socially responsible manner. The term social responsibility came into widespread use in the business world during the 1970s. It has evolved into an emphasis on the following areas: social issues, consumer protection, sustainability, and corporate governance. Social issues are linked with the idea of the “common good.” The common good is associated with the development of social conditions that allow for societal welfare and fulfillment to be achieved. In other words, social issues involve the ethical responsibilities a firm owes to soci ety. Equal rights, gender roles, marketing to vulnerable populations, data protection, and internet tracking are examples of social issues common in business. Social issues can become so significant that they warrant legisla tion to protect consumers. For the Federal Trade Commission’s Bureau of Consumer Protection, leading consumer protection issues include mislead ing advertising, product safety, and advertising to children. Sustainability has also become a growing area of concern in society. In the United States, sustainability is used to refer more to the environ mental impact on stakeholders. Green marketing practices, consumption of resources, and greenhouse gas emissions are important sustainability considerations that socially responsible businesses will have to address. Corporate governance will be described in more detail in Chapter 3. It refers to formal systems of accountability, oversight, and control. Corporate governance is becoming an increasingly important topic in light of business scandals over the last 10—15 years. Issues in corporate governance include concerns over executive compensation, internal con trol mechanisms, and risk management.8 Figure 1.1 discusses the social responsibility issues that we will be covering in this text. These four areas of social responsibility tend to conflict with the tra ditional or neoclassical view of a business’s responsibility to society. The traditional view of social responsibility, articulated in the famous econo mist Milton Friedman’s 1962 Capitalism and Freedom, asserts that busi ness has one purpose, satisfying its investors or shareholders, and that any other considerations are outside its scope.9 Although this view still exists today, it has lost credibility as more and more companies have assumed a social responsibility orientation.10 Companies see social responsibility Social issues J Consumer protectionSustainabilityCorporate governance Philanthropy Legal responsibilities Employee well-being as a part of their overall corporate strategy and a benefit that directly increases the bottom line. We define social responsibility as the adoption by a business of a strategic focus for fulfilling the economic, legal, ethical, and philanthropic responsibilities expected of it by its stakeholders. This definition encompasses a wide range of objectives and activities, including both historical views of business and perceptions that have emerged in the last decade. Let’s take a closer look at the parts of this definition. Social Responsibility Applies to All Types of Businesses It is important to recognize that all types of businesses—small and large, sole proprietorships and partnerships, as well as large corporations— implement social responsibility initiatives to further their relationships with their customers, their employees, and their community at large. For example, Altered Seasons, a candle retailer in Buffalo, New York, operates on a one-for-one model, where the company gives a meal to the hungry for every candle that it sells. The company’s candles are made from environ mentally friendly materials and are manufactured in the United States.11 Thus, the ideas advanced in this book are equally relevant and applicable across a wide variety of businesses and nonprofits. Nonprofit organizations are expected to be socially responsible. Relationships with stakeholders—including employees, those that are served, and the community—affect their reputation. For example, the Southern California chapter of the Better Business Bureau was expelled from the organization after evidence emerged in 2010 that it had been operating a pay-for-play scheme. The Better Business Bureau is a non profit self-regulatory organization that objectively rates businesses on how they treat consumers and handle consumer complaints. Investigations revealed that employees at the Southern California bureau were awarding FIGURE 7.7 Major Emphases of Social Responsibility Recognition Issue Awareness Issues Outcomes Decisions Source: © O.C. Ferrell, 2016. Stakeholder Evaluations social responsibility The adoption by a business of a strategic focus for ful filling the economic, legal, ethical, and philanthropic responsibilities expected of it by its stakeholders. 8 Business and Society Chapter 1 Social Responsibility Framework 9 • Curiosity and Exploration • Performance • Engagement • Design • Relationships • Inclusiveness • A Better World • Transparency • Foundations businesses high rankings only if they paid to become members. The bureau is the largest ever expelled for misconduct.12 This example demonstrates that nonprofit organizations must also develop strategic plans for social responsibility. In addition, government agencies are expected to uphold the common good and act in an ethical and responsible manner. Although the social responsibility efforts of large corporations usually receive the most attention, the activities of small businesses may have a greater impact on local communities.13 Owners of small businesses often serve as community leaders, provide goods and services for customers in smaller markets that larger corporations are not interested in serving, cre ate jobs, and donate resources to local community causes. Medium-sized businesses and their employees have similar roles and functions on both a local and a regional level. Although larger firms produce a substantial portion of the gross national output of the United States, small businesses employ about half of the private sector workforce and produce roughly half of the private sector output. In addition to these economic outcomes, small business presents an entrepreneurial opportunity to many people, some of whom have been shut out of the traditional labor force. Women, minorities, and veterans are increasingly interested in self-employment and other forms of small business activity.14 It is vital that all businesses consider the relationships and expectations that our definition of social responsibility suggests. Social Responsibility Needs a Strategic Focus Social responsibility is an important business concept and involves signifi cant planning and implementation. Our definition of social responsibility requires a formal commitment, or a way of communicating the company’s social responsibility philosophy. For example, Herman Miller, a multina tional provider of office, residential, and healthcare furniture and services, established a set of values that create a culture of community both within and outside of the company (shown in Table 1.1). This statement declares Herman Miller’s philosophy and the way it will fulfill its responsibilities to its customers, its shareholders, its employees, the community, and the natu ral environment. Because this statement takes into account all of Herman Miller’s constituents and applies directly to all of the company’s operations, products, markets, and business relationships, it demonstrates the company’s strategic focus on social responsibility. Other companies that embrace social responsibility have incorporated simi lar elements into their strategic communications, includ ing mission and vision statements, annual reports, and websites. For example, Hershey Entertainment & Resorts focuses upon four pillars of CSR: (1) the environment and the goal to reduce the ecological footprint; (2) the com munity and being a positive, productive, and informed partner; (3) the workplace, in fostering one that is safe, inclusive, desirable, and respectful; and (4) a marketplace and guest focus that considers the ethical treatment of all stakeholders.15 In addition to a company’s verbal and written commitment to social responsibility, our definition requires action and results. To imple ment its social responsibility philosophy, Herman Miller has developed and implemented several corporate-wide strategic initiatives, including research on improving work furniture and environments, innovation in the area of ergonomically correct products, progressive employee devel opment opportunities, volunteerism, and an environmental stewardship program.16 These efforts have earned the company many accolades, such as being named the “Most Admired” furniture manufacturer in America by fortune magazine, and a place on many prestigious lists, including Fortune magazine’s “100 Best Companies to Work for in America,” Forbes magazine’s “Platinum List” of America’s 400 best-managed large companies, Business Ethics magazine’s “100 Best Corporate Citizens,” Diversity Inc. magazine’s “Top 10 Corporations for Supplier Diversity,” and The Progressive Investor’s “Sustainable Business Top 20.17 As this example demonstrates, effective social responsibility requires both words and action. If any such initiative is to have strategic importance, it must be fully valued and championed by top management. Leaders must believe in and support the integration of stakeholder interests and economic, legal, ethi cal, and philanthropic responsibilities into every corporate decision. For example, company objectives for brand awareness and loyalty can be developed and measured from both a marketing and a social responsibility standpoint because researchers have documented a relationship between consumers’ perceptions of a firm’s social responsibility and their intentions to purchase that company’s brands.18 Likewise, engineers can integrate consumers’ desires for reduced negative environmental impact in product designs, and marketers can ensure that a brand’s advertising campaign incorporates this product benefit. Finally, consumers’ desires for an envi ronmentally sustainable product may stimulate a stronger company inter est in assuming environmental leadership in all aspects of its operations. Home Depot, for example, responded to demands by consumers and envi ronmentalists for environmentally friendly wood products by launching a new initiative that gives preference to wood products certified as having been harvested responsibly over those taken from endangered forests.19 With this action, the company—which has long touted its environmental principles—has chosen to take a leadership role in the campaign for envi ronmental responsibility in the home improvement industry. Although social responsibility depends on collaboration and coordination across many parts of the business and among its constituencies, it also produces effects throughout these same groups. We discuss some of these benefits in a later section of this chapter. Because of the need for coordination, a large company that is commit ted to social responsibility often creates specific positions or departments to TABLE 7.1 Herman Miller, Inc.’s, Corporate Culture Values of Community Source: “Things That Matter to Us,” Herman Millet, Inc., http://www.hermanmiller.com/aboutus/ things-that-maffer-to-us.html (accessed June 17, 2016). Courtesy of Herman Miller, Inc. 70 Business and Society Chapter 1 Social Responsibility Framework spearhead the various components of its program. For example, Starbucks has a Global Responsibility Department that focuses on responsible and ethical behaviors regarding the environment, employee relations, customer interactions, suppliers, and communities. The company’s Environmental Starbucks Coffee Company Affairs team works to develop environmen tally responsible policies and minimize the company’s “footprint.” CEO Howard Schultz considers the creation of a good work environment a top priority. Some of the results of this philosophy include offering one of the best healthcare programs in the coffee shop industry and the institu tion of wellness programs. Starbucks also practices conservation with its Starbucks Coffee and Farmer Equity Praètices (CAFE), which is a set of socially responsible coffee-buying guidelines. Finally, the company is phil anthropic and engages the community on how well the company is doing from their perspective. In the table of contents page of the company’s annual report, CSR (corporate social responsibility) is listed as a key fea ture.20 A smaller firm may give an executive, perhaps in human resources or the business owner, the ability to make decisions regarding community involvement, ethical standards, philanthropy, and other areas. Regardless of the formal or informal nature of the structure, this department or execu tive should ensure that social responsibility initiatives are aligned with the company’s corporate culture, integrated with companywide goals and plans, fully communicated within and outside the company, and measured to determine their effectiveness and strategic impact. In sum, social respon sibility must be given the same planning time, priority, and management attention that is given to any other company initiative, such as continuous improvement, cost management, investor relations, research and develop ment, human resources, or marketing research. Social Responsibility Fulfills Society’s Expectations Another element of our definition of social responsibility involves society’s expectations of business conduct. Many people believe that businesses should accept and abide by four types of responsibility: financial, legal, ethical, and philanthropic (see Table 1.2). To varying degrees, the four types are required, expected, and/or desired by society.21 At Stage 1, businesses have a responsibility to be financially viable so that they can provide a return on investment for their owners, cre ate jobs for the community, and contribute goods and services to the economy. The economy is influenced by the ways organizations relate to their shareholders, their customers, their employees, their suppliers, their competitors, their community, and even the natural environment. For example, in nations with corrupt businesses and industries, the nega tive effects often pervade the entire society. Transparency International, a German organization dedicated to curbing national and international corruption, conducts an annual survey on the effects of business and government corruption on a country’s economic growth and prospects. TABLE 7.2 Social Responsibility Requirements Stages Examples Starbucks offers investors a healthy return on investment, including paying dividends. Starbucks specifies in its code of conduct that payments made to foreign government officials must be lawful accord ing to the laws of the United States and the foreign country. Stage 3: Ethics, Principles, and Starbucks offers healthcare benefits to part-time employees and supports coffee growers so they get a fair price. Stage 4: Philanthropic Activities Starbucks created the Starbucks Foundation to award grants to eligible nonprofits and to give back to their communities. The organization reports that corruption reduces economic growth, inhibits foreign investment, and often channels investment and funds into “pet projects” that may create little benefit other than high returns to the corrupt decision makers. Many of the countries with the high est levels of perceived corruption also report the highest levels of pov erty in the world. These countries include Somalia, Chad, Iraq, Haiti, Afghanistan, and Myanmar. Transparency International also notes that some relatively poor countries, including Bulgaria, Colombia, and Estonia, have made positive strides in curbing corruption. However, Canada and Iceland have started to experience higher levels of perceived corruption, yet maintain relatively strong economies. The organization encourages governments, consumers, and nonprofit groups to take action in the fight against corruption.22 Although business and society may be theoretically distinct, there are a host of practical implications for the four levels of social responsibility, business, and its effects on society. At Stage 2, companies are required to maintain compliance with legal and regulatory requirements specifying the nature of responsibLe business conduct. Society enforces its expectations regarding the behavior of busi nesses through the legal system. If a business chooses to behave in a way that customers, special-interest groups, or other businesses perceive as irre sponsible, these groups may ask their elected representatives to draft legis lation to regulate the firm’s behavior, or they may sue the firm in a court of law in an effort to force it to “play by the rules.” For example, the New York attorney general’s office is questioning the legality of making new hires sign noncompete agreements. A noncompete agreement stipulates that the employee cannot work for a competitor for a certain amount of time after leaving the organization. New York authorities believes this placed undue hardships on employees. Jimmy John’s settled with the attorney general’s office by agreeing to no longer make employees sign these agree ments. It is estimated that 15 percent of workers without college degrees are subject to these noncompete agreements. Criticisms have emerged from other states as well.23 Stage 1: Financial Viability Stage 2: Compliance with Legal and Regulatory Requirements 17 Values 12 Business and Society Chapter 1 Social Responsibility Framework 13 Beyond financial viability and legal compliance, companies must decide what they consider to be just, fair, and right—the realm of ethics, principles, and values. Business ethics refers to the principles and standards that guide behavior in the world of business. Principles are specific and universal boundaries for behavior that should never be violated. Principles such as fairness and honesty are determined and expected by the public, government regulators, special-interest groups, consumers, industry, and individual … ‘I CHAPTER TWO Chapter Objectives • To define stakeholders and understand their importance • To distinguish between primary and secondary stakeholders To discuss the global nature of stakeholder relationships To consider the impact of reputation and crisis situations on social responsibility performance To examine the development of stakeholder relationships To explore how stakeholder relationships are integral to social responsibility Chapter Outline Stakeholders Defined Stakeholder Identification and Importance Performance with Stakeholders Development of Stakeholder Relationships Implementing a Stakeholder Perspective in Social Responsibility Link between Stakeholder Relationships and Social Responsibility Opening Vignette The Fight against Childhood Obesity America’s children are growing, not in height or intel lectual capacity but in weight. Advertising of fast food and highly processed, corn syrup—laced foods is at the heart of the controversy. While TV advertising of food and restaurants has dropped 34 percent from 1977 to 2004, the use of the internet, promotions, school adver tising and vending machines, and sponsored sports sta diums is on the rise. Childhood obesity has become such a concern that First Lady Michelle Obama has created the movement Let’s Movel to encourage the develop ment of a healthier generation of children. Regulators, parents, and our society in general are concerned about the health of our children, It is estimated that medi cal costs associated with childhood obesity will total $19,000 over a person’s lifetime. Studies conducted by the Kaiser Family Foundation have found that the average child sees around 40,000 advertisements per year on television—most of these encourage children to consume candy, cereal, fast food, and soft drinks. What seems to be particularly prob lematic is the use of popular licensed children’s cartoon characters (e.g., SpongeBob SquarePants and Scooby Doo) to advertise these unhealthy foods. Critics believe food manufacturers are not being socially responsible by encouraging children to eat food that is detrimental to their health. Companies are choosing to do some thing about this problem. A study over a five-year period revealed that 16 major food and beverage companies—including PepsiCo, Coca-Cola, and Bumble Bee Foods—have reduced calories in foods amounting to an average of 78 calories a day from the American diet. For instance, Nestlé used new technology to reduce fat by half and calories by one-third in their “Slow Churned” Edy’s and Dreyer’s ice cream. What is especially important is that these 16 companies account for about 36 percent of calories in packaged foods. Changes are also being made in advertising. The Walt Disney Company mandated that the company will no longer allow sponsorships or advertisements on its networks for foods that do not meet certain nutritional criteria. It also pledged to reduce the calories in foods sold at its theme parks. Coca-Cola has pledged to elimi nate advertising targeted toward children in markets where more than 35 percent of viewers are under the age of 12. These companies’ actions demonstrate sensi tivity and concern for consumer health and stakeholder interests.1 . Strategic Management df Stakeholder Re1ation • • • I 42 Business and Society Chapter 2 Strategic Management of Stakeholder Relationships 43 A s this example illustrates, most organizations have a number of constituents and a web of relationships that interface with society. In this case, the food industry and its member companies are facing the complex task of balancing the concerns of government, special-interest groups, parents, children, and corporate. These stakeholders are increas ingly expressing opinions and taking actions that have an effect on the industry’s reputation, relationships, and products. Today, many organiza tions are learning to anticipate such issues and to address them in their strategies long before they become the subject of media stories of negative attention. In this chapter, we examine the concept of stakeholders and explore why these groups are important for today’s businesses. First, we define stakeholders and examine primary, secondary, and global stakeholders. Then, we examine the concept of a stakeholder orientation to enhance social responsibility. Next, we consider the impact of corporate reputation and crisis situations on stakeholder relationships. Finally, we examine the devel opment of stakeholder relationships implementing a stakeholder perspective and the link between stakeholder relationships and social responsibility. STAKEHOLDERS DEFINED In Chapter 1, we defined stakeholders as those people and groups to whom an organization is responsible—including customers, sharehold ers, employees, suppliers, governments, communities, and many others— because they have a “stake” or claim in some aspect of a company’s products, operations, markets, industry, or outcomes. These groups not only are influenced by businesses, but they also have the ability to affect businesses. Responsibility issues, conflicts, and successes revolve around stake- holder relationships. Building effective relationships is considered one of the more important areas of business today. The stakeholder framework is recognized as a management theory that attempts to balance stake- holder interests. Issues related to indivisible resources and unequal levels of stakeholder influence and importance constrain managers’ efforts to balance stakeholder interests.2 A business exists because of relationships among employees, customers, shareholders or investors, suppliers, and managers that develop strategies to attain success. In addition, an organi zation usually has a governing authority, often called a board of directors, which provides oversight and direction to make sure the organization stays focused on objectives in an ethical, legal, and socially responsible man ner. Corporate governance is discussed in Chapter 3. When misconduct is discovered in organizations, it is often found that in most instances there is knowing cooperation or compliance that facilitates the acceptance and perpetuation of unethical conduct.3 Therefore, relationships are associated not only with organizational success but also with organizational failure to assume responsibility. These perspectives take into account both market and nonmarket con stituencies that may interact with a business and have some effect on the firm’s policies and strategy.4 Market constituencies are those who are directly involved and affected by the business purpose, including investors, employ ees, customers, and other business partners. Nonmarket groups include the general community, media, government, special-interest groups, and others who are not always directly tied to issues of profitability and performance. The historical assumption that the foremost objective of business is profit maximization led to the belief that business is accountable primarily to shareholders and others involved in the market and economic aspects of an organization. Because shareholders and other investors provide the financial foundation for business and expect something in return, managers and executives naturally strive to maintain positive relationships with them.5 In the latter half of the twentieth century, perceptions of business accountability evolved toward an expanded model of the role and respon sibilities of business in society. The expansion included questions about the normative role of business: “What is the appropriate role for business to play in society?” and “Should profit be the sole objective of business?”6 Many businesspeople and scholars have questioned the role of social responsibility in business. Legal and economic responsibilities are generally accepted as the most important determinants of performance: “If this is well done,” say classical economic theorists, “profits are maximized more or less continuously and firms carry out their major responsibilities to society.”7 Some economists believe that if companies address economic and legal issues, they are satisfying the demands of society, and trying to anticipate and meet additional needs would be almost impossible. Milton Friedman has been quoted as saying that “the basic mission of business [is] thus to produce goods and services at a profit, and in doing this, business [is] mak ing its maximum contribution to society and, in fact, being socially respon sible.”8 Even with the business ethics scandals of the twenty-first century, Friedman suggests that, although individuals guilty of wrongdoing should be held accountable, the market is a better deterrent than new laws and reg ulations that discourage firms from wrongdoing.9 Thus, Friedman would diminish the role of stakeholders such as the government and employees in requiring that businesses demonstrate responsible and ethical behavior. This form of capitalism has unfortunately been exported to many less developed and developing countries without the appropriate concerns for ethics and social responsibility. Friedman’s capitalism is a far cry from Adam Smith’s, one of the founders of capitalism. Smith created the con cept of the invisible hand and spoke about self-interest; however, he went on to explain that this common good is associated with psychological motives and that each individual has to produce for the common good “with values such as Propriety, Prudence, Reason, Sentiment and promot ing the happiness of mankind.”10 These values could be associated with the needs and concerns of stakeholders. In the twenty-first century, Friedman’s form of capitalism is being replaced by Smith’s original concept of capitalism (or what is now called 44 Business and Society Chapter 2 Strategic Management of Stakeholder Relationships 45 enlightened capitalism), a notion of capitalism that reemphasizes stake-holder concerns and issues. The acceptance of enlightened capitalismmay be occurring faster in developed countries than in those still developing. Theodore Levitt, a renowned business professor, once wrote thatalthough profits are required for business just like eating is required forliving, profit is not the purpose of business any more than eating is thepurpose of life.1’ Norman Bowie, a well-known philosopher, extendedLevitt’s sentiment by noting that focusing on profit alone can create anunfavorable paradox that causes a firm to fail to achieve its objectives.Bowie contends that when a business also cares about the well-being ofstakeholders, it earns trust and cooperation that ultimately reduce costsand increases productivity.’2 This in turn results in increased profits andsuccess of the organization. Some critics of business believe there is a tradeoff between profits andsocial responsibility. They believe that to increase profits a firm must viewsocial responsibility as a cost that reduces profits. However, there is muchevidence that social responsibility is associated with increased profits. Forexample, one survey indicates that half of all consumers are willing to paymore for goods and services from socially responsible companies. Thisrate of response is up by 10 percent from a few years ago and relates to arange of demographic groups.’3 An important academic study found thatthere is a direct relationship between social responsibility and profitability.The study also found that social responsibility contributes to employeecommitment and customer loyalty—vital concerns of any firm trying toincrease profits.’4 As mentioned earlier, the Ethisphere Institute has foundthat the world’s most ethical companies outperform the companies on theStandard & Poor’s index. This clearly demonstrates that social responsibility decisions are good for business. STAKEHOLDER ISSUES AND INTERACTION Stakeholders provide resources that are more or less critical to a firm’slong-term success. These resources may be both tangible and intangible. Shareholders, for example, supply capital; suppliers offer materialresources or intangible knowledge; employees and managers grant expertise, leadership, and commitment; customers generate revenue and provideloyalty and positive or negative word-of-mouth promotion; local communities provide infrastructure; and the media transmits positive or negativecorporate images. When individual stakeholders share similar expectationsabout desirable business conduct, they may choose to establish or joinformal communities that are dedicated to better defining and advocating these values and expectations. Stakeholders’ ability to withdraw—orthreatening to withdraw—these needed resources gives them power overbusinesses.15 New reforms to improve corporate accountability and transparencyalso suggest that stakeholders such as suppliers—including banks, law firms, and public accounting firms—can play a major role in fosteringresponsible decision making.’6 Stakeholders apply their values and standards to many diverse issues, such as working conditions, consumer rights,environmental conservation, product safety, and proper information disclosure. These are issues that may or may not directly affect an individualstakeholder’s own welfare. We can assess the level of social responsibilityan organization bears by scrutinizing its efforts and communication onthe issues of concern to its stakeholders. Table 2.1 provides examples ofcommon stakeholder issues along with indicators of businesses’ impactson these issues.17 TABLE 2.1 Examples of Stakeholder Issues and Associated Measuresof Corporate Impacts Employees 1. Compensation and benefits 2. Training and development Suppliers 1. Encouraging suppliers in developing countries 2. Encouraging minority suppliers Community 1. Public health and safety 2. Conservation of energy and materials Stakeholder Groups Potential Indicators of Corporate Impactand Issues on These Issues 3. Employee diversity 1. Average wage paid versus industry averages 2. Changes in average traIning dollars spent per year peremployee. Resources for ethics training versus industryaverages. 3. Percentages of employees from different genders andraces, especially in leadership roles4. Occupational health and safety 4. Standard injury rates and absentee rates 5. Availability of open-door policies or ombudsmenmanagement S. Communications with management Customers 1. Product safety and quality 2. Management of customer 3. Services to customers with disabilities Investors 1. Transparency of shareholder 2. Shareholder rights 1. Number of product recalls over time 2. Number of customer complaints and availability ofcomplaint procedures to answer them 3. Availability and nature of measures taken to ensureservices to customers with disabilities 1. Availability of procedures to inform shareholdersabout corporate activities 2. Frequency and type of litigation involving violations ofshareholder rights .1 — 1. Prices offered to suppliers in developed countries anddeveloping countries in comparison to other suppliers 2. Percentage of minority suppliers 1, Availability of emergency response plan protection j 2. Data on reduction of waste produced and materialscomparison to industry (Continued) 46 Business and Society Chapter 2 Strategic Management of Stakeholder Relationships 47 3. Annual employee time spent in community service organizations 1. Amount of electricity purchased; percentage of “green” electricity 2. Minimizing emissions and waste 2. Type, amount, and designation of waste generated 3. Minimizing adverse environmental 3. Percentage of product weight reclaimed after the effect of products product has been used Identifying Stakeholders We can identify two different types of stakeholders, primary and second ary. Primary stakeholders are those whose continued association is abso lutely necessary for a firm’s survival; these include employees, customers, suppliers, and shareholders, as well as the governments and communities that provide necessary infrastructure. For example, many large companies decided to eliminate health care plans in light of the implementation of the Affordable Care Act, which requires all U.S. citizens to be enrolled in a healthcare plan whether or not their employer offers such benefits. This has a direct impact on a primary stakeholder—employees. However, more than half of all employees indicate that they value the fact that their employers offer healthcare plans, especially those plans that can be cus tomized to their health needs.18 These benefits can enhance the relation ship between employer and employee. Other primary stakeholders such as customers are directly impacted by the quality of products and the integrity of communication and relationships. Shareholders depend on transparency regarding financial information as well as forward-looking statements about sales and profits. Secondary stakeholders do not typically engage in direct transactions with a company and thus are not essential for its survival; these include the media, trade associations, and special-interest groups. For example, the American Association of Retired People (AARP), a special-interest group, works to sup port the rights of retirees in areas such as healthcare benefits. Both primary and secondary stakeholders embrace specific values and standards that dic tate what constitutes acceptable or unacceptable corporate behaviors. It is important for managers to recognize that primary groups may present more day-to-day concerns, but secondary groups cannot be ignored or given less consideration. Sometimes a secondary stakeholder, such as the media, can have more of an impact than a primary stakeholder. In 2014, Seattle passed the largest minimum wage law to date. Seattle’s city council unanimously voted to raise the minimum wage to $15 over the nect several years. This comes after a bill attempting to raise the federal minimum wage to $10.10 an hour stalled in Congress. There are many reasons why raising the minimum wage might be a good idea. One major issue is that the minimum wage rates have not kept up with inflation over the years. A report by the Congressional Office Budget claims that a federal minimum wage increase to $10.10 per hour could raise as many as 900,000 people out of poverty. This could add $31 billion to the paychecks of American families. The biggest argument in support of a minimum wage increase is that greater purchasing power will stimulate the economy. On the other hand, critics believe raising the mini mum wage has disadvantages. Republicans blocked the bill in Congress after the Congressional Office Budget report claimed that an increase could lead to approxi mately 500,000 lost jobs, about 0.3 percent of the U.S. workforce. Critics believe the government and busi nesses should focus more on increasing employment. Additionally, not everyone is happy about Seattle’s minimum-wage increase. One Seattle business owner responded by claiming that the new increase will force her to raise prices. The impact on stakeholders is less clear. Although some studies have concluded that a minimum wage increase increases unemployment, others claim that it has little discernible effect. According to economists, this is because labor markets react differently to increases. As an alternative to laying off employees, economists claim that some businesses choose to cut beyond the minimum wage, settle for less profit, or raise prices. On the contrary, some economists claim that minimum wage increases can be beneficial because it causes business owners to be more effi cient and increases positive relationships between employee and employer, reducing turnover and moti vating employees to work harder. Because the bill stalled in Congress, supporters are encouraging states and cities to raise the minimum wage themselves. Oklahoma responded by passing a law forbidding individual towns and cities to raise the minimum wage. The governor of Oklahoma claims raising minimum wages would destroy Oklahoma jobs, cause business owners to move to other states, and raise prices for consumers. Supporters of a minimum wage increase are likely to challenge this law. Seattle could also experience difficulties based upon how it chooses to implement the increase. The International Franchise Association has threatened to sue the city based upon what they see as unequal treat ment. For instance, Seattle is giving businesses with fewer than 500 employees more time to comply with the law. However, franchises that have more than 500 employees anywhere in the United States are currently not given this extension, even though many franchisees are independently owned. Walmart claims that it does not oppose a minimum wage increase. Walmart claims that it pays approxi mately 5,000 employees the minimum wage, out of 1.3 million workers. How an increase affects a business will likely depend on the size, nature, and operations of the company. Not only employee stakeholders but communities as well as customers and suppliers will be affected by the decisions on minimum wages. TABLE 2.1 (Continued) 3. Donations and support of local organizations Stakeholder Groups Potential Indicators of Corporate Impact and Issues on These Issues Environmental Groups 1. Minimizing the use of energy Ethical Responsibilities in Human Resources Should the Minimum Wage Be Increased? primary stakeholders They are fundamental to a company’s operations and survival; these include shareholders and investors, employees, customers, sup pliers, and public stakehold ers, such as government and the community. secondary stakeholders They do not typically engage in direct transac tions with a company and thus are not essential for its survival; these include the media, trade associations, and special-interest groups. benefits, cut wages for employees who already make Sources: Katie Lobosco, “Coping with $15 Minimum Wage in Seattle,” CNN Money, June 4, 2Q14, http:llmoney.cnn.com/2014/06/03/smallbusiness/seattle-business-minimum-wage/ (accessed June 6, 2014); Brad Plumer, “Economists Disagree on Whether the MinimumWage Kills Jobs. Why?” The Washington Post, February 14, 2013, http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/14/why-economists-are-so-puzzled-by-the-minimum-wagel (accessed June 4, 2014); Jeanne Sahadi, “Minimum Wage: Congress Stalls,States Act,” CNN Money, April 28, 2014, hftp://money.cnn.com/2014/04/28/news/economy/states-minimum-wage/ (accessed June 6,2014); Gregory Wallace, “Oklahoma Bans Minimum Wage Hikes,” CNN Money, April 15, 2Q14, http:I/money.cnn.com/2014/04/15/news/ T Figure 2.1 offers a conceptualization of the relationship between busi nesses and stakeholders. In this stakeholder interaction model, there are two-way relationships between the firm and a host of stakeholders. In addition to the fundamental input of investors, employees, and suppliers, this approach recognizes other stakeholders and explicitly acknowledges the dialog and interaction that exists between a firm’s internal and external environments. A Stakeholder Orientation The degree to which a firm understands and addresses stakeholder demands can be referred to as a stakehotder orientation. This orientation comprises three sets of activities: (1) the organizationwide generation ofdata about stakeholder groups and assessment of the firm’s effects on thesegroups, (2) the distribution of this information throughout the firm, and(3) the organization’s responsiveness as a whole to this intelligence.19 Generating data about stakeholders begins with identifying the stake- holders that are relevant to the firm. Relevant stakeholder communities should be analyzed on the basis of the power each enjoys, as well as bythe ties between them. Next, the firm should characterize the concerns about the business’s conduct that each relevant stakeholder group shares.This information can be derived from formal research, including surveys, focus groups, internet searches, or press reviews. For example, Ford Motor Company obtains input on social and environmental responsibility issuesfrom company representatives, suppliers, customers, and communityleaders. Shell has an Online discussion forum where websjte visitors areinvited to express their opinions on the company’s activities and their implications. Employees and managers can also generate this information informally as they carry out their daily activities. For example, purchasing managers know about suppliers’ demands, public relations executivesabout the media, legal counselors about the regulatory environment, financial executives about investors, sales representatives about customers, and human resources advisors about employees. Finally, the company should evaluate its impact on the issues that are important to the various stakeholders it has identified.2° To develop effective stakeholder dialogs, management needs to appreciate how others perceive the risks of a specificdecision. A multiple stakeholder perspective must take into account communication content and transparency when communicating with specificstakeholders.2’ Given the variety of the employees involved in the generation of information about stakeholders, it is essential that this intelligence be circulated throughout the firm. This requires that the firm facilitate the communication of information about the nature of relevant stakeholder communities, stakeholder issues, and the current impact of the firm on these issues toall members of the organization. The dissemination of stakeholder intelligence can be organized formally through activities such as newsletters andinternal information forums.22 A stakeholder orientation is not complete unless it includes activities that actually address stakeholder issues. For example, Cloetta, an international confectionary company, has taken stakeholder orientationseriously. A page on their website is dedicated to the topic and clearlyidentifies all of its stakeholders, the issues that are important to them, andhow the company interacts with consumers to address these issues. Cloettaengages with all stakeholders through various media: social media, face-to-face meetings, virtual meetings, surveys, and influential leaders in the 48 Business and Society economy/oklahoma-minimum-wage-ban? (accessed June 6, 2014); Siobhan Hughes and Colleen McCain Nelson, ‘Senate Republicans Block Bill to Raise Minimum Wage,” The Wall Street Journal, April 30, 2014, http://online.wsj.com/news/articles/SB10001424052702304 178104579533801387470492 (accessed June 6, 2014); Shelly Banjo, “Wal-Mart Says It Won’t Oppose Increase in Minimum Wage,” The Wall Street Journal, May 15, 2014, http:/?online.wsj.com/newslarticles/SB1 000142402702304908304579S63763405679116 (accessed June 6, 2014); MSN Money Partner, “Minimum Wage Increase Stalls in Washington,” MSN Money, June 26, 2013, http://money.msn. com/business-news/Iatestaspx?post=e0e268c2-b93a-41f6-9B4e-d03c43db981c+ (accessed June 6, 2014); Editorial Board, “The Clear Benefits of a Higher Wage,” The New York Times, February 19, 2014, http://www.nytimes.com/2014?02?20/opinion?the-clear-benef its-of a-higher-wage.html (accessed June 6, 2014); Stephanie Dinan and Dave Boyer, “Minimum Wage Hike Would Kill a Half-Million Jobs,” The Washington Times, February 18, 2014, http:llwww.washingtontimes.com/newsI2Ol4/feb/18/minimum-wage-hike-would-kiIl-half- million-jobs-cbo??page=all (accessed June 6, 2014). stakeholder interaction model A model that conceptual izes the two-way relation ships between a firm and a host of stakeholders. Chapter 2 Strategic Management of Stakeholder Relationships 49 FIGURE 2.1 Stakeholder Model for Implementing Social Responsibilities stakeholder orientation The degree to which a firm understands and addresses stakeholder demands. Organization L Primary stakeholders Secondary stakeholders rl Society at large Source: Adapted from Isabelle Maignan, 0. C. Ferrell, and Linda Ferrell, “A Stakeholder Model for Implementing Social Responsibility in Marketing,” European Journal of Marketing 39 (September/October 2005): 956—977. 50 Business and Society Chapter 2 Strategic Management of Stakeholder Relationships community. This allows for a free flow of information between stakehold ers and the company.23 The responsiveness of the organization as a whole to stakeholder intelligence consists of the initiatives the firm adopts to ensure that it abides by or exceeds stakeholder expectations and has a pos itive impact on stakeholder issues. Such activities are likely to be specific to a particular stakeholder group (e.g., family-friendly work schedules) or to a particular stakeholder issue (e.g., pollution-reduction programs). These responsiveness processes typically involve the participation of the concerned stakeholder groups. Kraft, for example, includes special-interest groups and university representatives in its programs to become sensitized to present and future ethical issues. Stakeholder orientation can be viewed as a continuum in that firms are likely to adopt the concept to varying degrees. To gauge a given firm’s stakeholder orientation, it is necessary to evaluate the …