Stakeholders, Managers, and Ethics Ch. 2 PDF

§2 Stakeholders, managers and ethics 2.1 Organiza onal stakeholders Inside stakeholders Organizaons 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 organizaon, in what it does, and how well...

§2 Stakeholders, managers and ethics 2.1 Organiza onal stakeholders Inside stakeholders Organizaons 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 organizaon, in what it does, and how well it performs. Inducements include rewards such as money, power, and organizaonal status. Contribu ons include skills, knowledge, and experse that organizaons require of their members during task performance. Inside stakeholders are people who are closest to an organizaon and have the strongest of most direct claim on organizaonal resources: shareholders, managers, and the workforce. Shareholders are the owners of the organizaon, and as such, their claim on organizaonal resources is o2en considered superior to the claims or other inside shareholders (their inducements is prospecve money in the form of dividends and increased stock prices). Managers are the employees responsible for coordinang organizaonal resources and ensuring that an organizaon’s goals are met successfully. Top managers are responsible for invesng shareholder money in resources to maximise the value of an organizaon’s future output of goods and services. And organizaon’s workforce consists of all the nonmanagerial employees. Outside stakeholders Outside stakeholders are people who do not own the organizaon and are not employed by it, but they do have some claim on or interest in it: customers, suppliers, the government, trade unions, local communies and the general public. Customers are usually an organizaon’s largest stakeholder group. Their contribuon to the organizaon is the revenue from purchase of goods and services. Customers are induced by the company’s quality and prices of goods and services. Suppliers contribute by providing reliable raw materials and component parts that allow the organizaon to reduce uncertainty in its technical or producon operaons and thus reduce producon costs. Their inducements to contribute are the revenues from purchase of inputs. The government wants companies to compete in a fair manner and obey the rules of free compeon, wants companies to obey agreed-on rules and laws concerning the payment and 4 treatment of employees. The government makes a contribuon to the organizaon by standardizing regulaons so they apply to all companies. Trade unions can be lead to a con:ict or a cooperaon. The nature of this relaonship has a direct e*ect on the producvity and e*ecveness of the organizaon and the union. Local communi es have a stake in the performance of organizaons because employment, housing and the general economic well-being of a community are strongly a*ected by the success or failure of local businesses. The general public is happy when organizaons compete e*ecvely against overseas rivals. Besides that, a naon’s public also wants its corporaons to act in a socially responsible way, which means that corporaons refrain from taking any acons that may injure or impose costs on other stakeholders. 2.2 Organiza onal Eec veness: sa sfying stakeholders’ goals and interests Shareholders evaluate an organizaon by the return they receive on their investment; customers, by the reliability and value of its products relave to their price; and managers and employees, by their salaries, stock opons, condions of employment, and career prospects → o2en these goals con:ict, and stakeholder groups must bargain of the appropriate balance between the inducements and contribuons → organizaons are o2en regarded as alliances or coali ons of stakeholder groups. An organizaon is viable as long as a dominant coalion of stakeholders has control over su;cient inducements so that it can obtain the contribuons it needs from other stakeholder groups. To be eec ve, organizaons must minimally sasfy the interests of all the groups that have a stake in the organizaon. Problems that an organizaon faces as it tries to win stakeholders’ approval include choosing which stakeholder goals to sasfy, deciding how to allocate organizaonal rewards to di*erent stakeholder groups, and balancing short-term and long-term goals. Alloca ng rewards Another major problem that an organizaon has to face is how to allocate the prots it earns as a result of being e*ecve among the various stakeholder groups. Stakeholders’ future investment choices depend on the return they expect. 2.3 Top managers and organiza onal authority Authority is the power to hold people accountable for their acons and to in:uence directly what they do and how they do it. The stakeholder group with ulmate authority over the use of a corporaons’ resources is shareholders. Through the board, shareholders delegate to managers the legal authority and responsibility to use the organizaon’s resources to create value and to meet goals. Accepng this authority, makes managers responsible. The board of directors has the legal authority to hire, re, and discipline corporate management. The chair of the board of directors is the principal representave of the shareholders and, as such, has the most authority in an organizaon. Through the execuve commi9ee (directors and top managers), the chair has the responsibility for monitoring and evaluang the way corporate managers use organizaonal resources. The posion of the chair and the other directors is one of trusteeship: they act as trustees to protect the interests of shareholders and other stakeholders. 5 here are two kinds of directors. Inside directors are directors who also hold o;ces in a company’s formal hierarchy; they are full-me employees of the corporaon. Outside directors are not employees of the company; many are professional directors who hold posions on the board of many companies, or they are execuves of other companies who sit on other companies’ boards. Inside directors tend to dominate because they have access to the most informaon. Corporate-level management is the inside stakeholder group that has the ulmate responsibility for se3ng goals and objecves, for allocang organizaonal resources to achieve objecves, and for designing the organizaon’s structure Chain of command is the system of hierarchical reporng relaonships of a large corporaon. A hierarchy is a classicaon of people according to authority and rank. The Chief Execu ve O2cer (CEO) The CEO is the most powerful person in the corporaon because he or she controls the allocaon of resources, and has the power to set the organizaon’s strategy and use its resources to create value. O2en CEO is also the chair of the board. A CEO can in:uence organizaonal e*ecveness and decision making in ve ways: 1. 2. 3. 4. The CEO is responsible for se3ng the organizaon’s goals and designing its structure. The CEO selects key execuves to occupy the topmost levels of the managerial hierarchy. The CEO determines top management’s rewards and incenves. The CEO controls the allocaon of scarce resources such as money and decision making power among the organizaon’s funconal areas or business divisions. 5. The CEO’s acons and reputaon have a big impact on inside and outside stakeholders’ views of the organizaon and a*ect the organizaon’s ability to a9ract resources from its environment. The Top-Management Team A2er the chair and CEO, the Chief Operang O;cer (COO) is the next most important execuve. The COO or president reports directly to the CEO, and together they share the principal responsibility for managing the business. The COO or president has primary responsibility for managing the organizaon’s internal operaons to make sure they conform to the organizaon’s strategic objecves. At the next level of top management are the execu ve vice presidents, who have responsibility for overseeing and managing a company’s most signicant line and sta* responsibilies. A line role is held by managers who have direct responsibility for the producon of goods and 6 . services. A sta role is held by managers who are in charge of a specic organizaonal funcon such as sales or R&D. The top-management team is a group of managers who report to the CEO and COO and help the CEO set this company’s strategy and its long-term goals and objecves. All the members of the topmanagement team are corporate managers, whose responsibility is to set strategy for the corporaon as a whole. At the next level of management are a company’s senior vice presidents and vice presidents, senior corporate-level managers in both line and sta* funcons. In pracce, general managers of divisions commonly have the tle CEO of their divisions, because they have direct line responsibility for their division’s performance and normally report to the CEO or COO. However, they are divisional managers, because they set policy only for their division. Func onal managers are responsible for developing the funconal skills and capabilies that collecvely provide the core competences that give the organizaon its compeve advantage. 2.4 An Agency Theory Perspec ve Agency theory o*ers a useful way of understanding the complex authority relaonship between top management and the board of directors. An agency rela on arises whenever one person (the principal) delegates decision-making authority or control over resources to another (the agent). An agency problem is a problem in determining managerial accountability that arises when delegang authority to managers. The problem is that shareholders or principals are at an informaon disadvantage compared with top managers. The moral hazard problem A moral hazard problem exists when (1) a principal nds it very di;cult to evaluate how well the agent has performed because the agent possesses an informaon advantage, and (2) the agent has an incenve to pursue goals and objecves that are di*erent from the principal’s. Self-dealing is the term used to describe the conduct of corporate managers who take advantage of their posion in an organizaon to act in their own interests rather than in the interests of other stakeholders. Solving the agency problem The central issue is to overcome the agency problem by using governance mechanisms, which are forms of control that align the interests of principal and agent so that both pares have the incenve to work together to maximize organizaonal e*ecveness. The most e*ecve way of aligning interests between management and shareholders is to make managers’ rewards conngent on the outcomes of their decisions, that is, conngent on organizaonal performance. This can be achieved in several ways: - - Stock-based compensa on schemes are monetary rewards in the form of stocks or stock opons that are linked to the company’s performance. E*ecvely, interests are aligned because managers become stockholders. Promo on tournaments and career paths include developing organizaonal career paths that allow managers to rise to the top of the organizaon. Besides, all organizaons have ‘promoon tournaments’, where execuves compete for limited promoon opportunies by displaying superior skills and competences. 7 2.5 Top managers and organiza onal ethics An ethical dilemma is the quandary people nd themselves in when they have to decide if they should act in a way that might help another person or group and is the ‘right’ thing to do, even though doing so might go against their own self-interest. Moral scruples are thoughts and feelings that tell a person what is right or wrong; they are a part of a person’s ethics. Ethics are the inner-guiding moral principles, values, and beliefs that people use to analyse or interpret a situaon and then decide what is the ‘right’ or appropriate way to behave. Ethics and the law Once a law is passed, a decision about what the appropriate behaviour is with regard to a person or situaon is taken from the personally determined ethical realm to the socially determined legal realm. But it’s important to understand that neither laws nor ethics are xed principles. However, some behaviour might not be illegal, but that doesn’t mean that it is ethical; such behaviour is clearly unethical. Ethics and organiza onal stakeholders Managers have to balance their interests and the interests of the ‘organizaon’ against the interests of other stakeholder groups. There are three models to decide whether a decision is ethical (table 2.2, p. 68), these are: 1. U litarian model: an ethical decision is one that produces the greatest good for the greatest number of people. 2. Moral rights model: an ethical decision is a decision that best maintains and protects the fundamental rights and privileges of the people a*ected by it. 3. Jus ce model: an ethical decision is a decision that distributes benets and harms among stakeholders in a fair, equitable, or imparal way. 8 Although, it’s very di;cult for a decision maker to use these models to ascertain the most ethical course of acon. A decision is probably acceptable on ethical grounds if a manager can say ‘yes’ to each of these quesons: 1. Does my decision fall within the accepted values or standards that typically apply in the organizaonal environment? 2. Am I willing to see the decision communicated to all stakeholders a*ected by it? 3. Would the people with whom I have a signicant personal relaonship approve the decision? Sources of organiza onal ethics The three principal sources of ethical values that in:uence organizaonal ethics are societal, group or professional, and individual. 1. Societal ethics are codied in a society’s legal system, in its customs and pracces, and in the unwri9en norms and values that people use to interact with each other. Many ethical norms and values are followed automacally by people in a society because people have internalized society’s values and made them part of their own. When societal ethics are codied into law, then judged by the ethical standards of a society, all illegal behaviour may be regarded as unethical behaviour. 2. Professional ethics are the moral rules and values that a group of people uses to control the way they perform a task or use resources. 3. Individual ethics are the personal and moral standards used by individuals to structure their interacons with other people 9 Why do ethical rules develop? One of the most important reasons why ethical rules governing acon develop is to slow down or temper the pursuit of self-interest. One of the best ways of understanding the self-interest issue is to discuss the ‘tragedy of the commons’ problem. Ethical laws and rules emerge to control self-interested behaviour by individuals and organizaons that threatens society’s collecve interests. Behaviour that follows accepted ethical rules confers a reputaon e*ect on an individual or an organizaon that also reduces transacon costs. In sum, acng ethically promotes the good of a society and the well-being of its members. More value is created in sociees where people follow ethical rules. Why does unethical behaviour occur? There are many reasons why unethical behaviour takes place. - personal ethics; self-interest when we are weighing our personal interests against the e*ects of our acons on others; outside pressure. 2.6 Crea ng an ethical organiza on Ulmately, an organizaon is ethical if the people inside are ethical. An organizaon can encourage employees to act ethical by pu3ng in place incenves for ethical behaviour and disincenves to punish those who act unethically. Because the board and top managers have the ulmate responsibility for se3ng policy, they establish the ethical culture of the organizaon. Designing an ethical structure and control system Ethics in:uence the choice of the structure and culture that coordinate resources and movate employees. Managers can design an organizaonal structure that reduces the incenves for people to behave unethically. Whistle-blowing occurs when an employee informs an outside person or agency about an organizaon’s illegal or immoral behaviour. Employees become whistle-blowers when they feel powerless to prevent an organizaon from commi3ng an unethical act or when they fear retribuon from the company if they voice their concerns. However, an organizaon can make whistle-blowing acceptable by making procedures that allow subordinates access to upper-level managers to voice their concerns. Crea ng an ethical structure The values, rules and norms that dene an organizaon’s ethical posion are part of culture. An ethical culture is most likely to emerge if top managers are ethical. 10