Organizational Theory, Design, and Change

Sixth Edition Gareth R. Jones

Chapter 2
Stakeholders, Managers, and Ethics
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Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

Learning Objectives
1. Identify the various stakeholder groups and their claims on an organization 2. Understand the choices and problems inherent in distributing the value an organization creates 3. Appreciate who has authority and responsibility at the top of an organization, and distinguish between different levels of management
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Learning Objectives (cont.)

4. Describe the agency problem that exists in all authority relationships and the mechanisms available to control illegal and unethical behaviors 5. Discuss the vital role played by ethics in leading managers and employees to pursue goals that lead to long-run organizational effectiveness

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Organizational Stakeholders
Stakeholders: people who have an interest, claim, or stake in an organization Inducements: rewards such as money, power, and organizational status Contributions: the skills, knowledge, and expertise that organizations require of their members during task performance
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Inside Stakeholders
People who are closest to an organization and have the strongest and most direct claim on organizational resources

Shareholders: the owners of the organization Managers: the employees who are responsible for coordinating organizational resources and ensuring that an organizations goals are successfully met The workforce: all non-managerial employees
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Outside Stakeholders
People who do not own the organization, are not employed by it, but do have some interest in it

Customers: an organizations largest outside stakeholder group Suppliers: provide reliable raw materials and component parts to organizations The government

Wants companies to obey the rules of fair competition Wants companies to obey rules and laws concerning the treatment of employees and other social and economic issues
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Outside Stakeholders (cont.)

Trade unions: relationships with companies can be one of conflict or cooperation Local communities: their general economic well-being is strongly affected by the success or failure of local businesses The general public

Wants local businesses to do well against overseas competition Wants corporations to act in socially responsible way
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Table 2.1: Inducements and Contributions of Stakeholders

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Organizational Effectiveness: Satisfying Stakeholders Goals and Interests

An organization is used simultaneously by various stakeholders to achieve their goals Each stakeholder group is motivated to contribute to the organization Each group evaluates the effectiveness of the organization by judging how well it meets the groups goals For an organization to be viable, the dominant coalition of stakeholders has to control sufficient inducements to obtain the contributions required of other stakeholder groups
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Stakeholder Goals
Shareholders: return on their investment Customers: product reliability and product value Employees: compensation, working conditions, career prospects

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Competing Goals
Organizations exist to satisfy stakeholders goals But which stakeholder groups goal is most important? In the U.S., the shareholders have first claim in the value created by the organization However, managers control organizations and may further their own interests instead of those of shareholders Goals of managers and shareholders may be incompatible
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Allocating Rewards
Managers must decide how to allocate inducements to provide at least minimal satisfaction of the various stakeholder groups Managers must also determine how to distribute extra rewards Inducements offered to shareholders affect their motivation to contribute to the organization The allocation of reward is an important component of organizational effectiveness
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Top Managers and Organizational Authority

Authority: the power to hold people accountable for their actions and to make decisions concerning the use of organizational resources Shareholders: the ultimate authority over the use of a corporations resources

They own the company They exercise control over it through their representatives

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Top Managers and Organizational Authority (cont.)

The board of directors: monitors corporate
managers activities and rewards corporate managers who pursue activities that satisfy stakeholder goals Inside directors: hold offices in a companys formal hierarchy Outside directors: not full-time employees inside stakeholder group that has ultimate responsibility for setting company goals and allocating organizational resources
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Corporate-level management: the

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The Chief Executive Officers (CEO) Role in Influencing Effectiveness

Responsible for setting organizational goals and designing its structure Selects key executives to occupy the topmost levels of the managerial hierarchy Determines top managements rewards and incentives

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The CEOs Role in Influencing Organizational Effectiveness (cont.)

Controls the allocation of scarce resources such as money and decisionmaking power among the organizations functional areas or business divisions The CEOs actions and reputation have a major impact on inside and outside stakeholders views of the organization and affect the organizations ability to attract resources from its environment
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Top Management Roles

CEOOften has primary responsibility for managing the organizations relationship with external stakeholders COOResponsible for managing the organizations internal operations Exec. Vice PresidentsOversees and manages the companys most significant line and staff roles
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The Top-Management Team

Line-role: managers who have direct responsibility for the production of goods and services Staff-role: managers who are in charge of a specific organizational function such as sales or research and development (R&D)

Are advisory only

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The Top-Management Team

(cont.)
Top-management team: a group of managers who report to the CEO and COO and help the CEO set the companys strategy and its long-term goals and objectives Corporate managers: the members of top-management team whose responsibility is to set strategy for the corporation as a whole
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Other Managers
Divisional managers: managers who set policy only for the division they head Functional managers: managers who are responsible for developing the functional skills and capabilities that collectively provide the core competences that give the organization its competitive advantage
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Figure 2.1: The TopManagement Hierarchy

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An Agency Theory Perspective

Agency theory suggests a way to understand the conflict that often arises between shareholder goals and top managers goals Agency relation occurs when one person (the principle, i.e. shareholders) delegates decision-making authority to another (the agent, i.e. managers)

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Agency Problem
There is a problem in determining managerial accountability that arises when delegating authority to managers Shareholders are at information disadvantage compared to top managers It takes considerable time to see the effectiveness of decisions managers may make
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The Moral Hazard Problem

A moral hazard problem exists when agents have the opportunity and incentive to pursue their own interests

Very difficult to evaluate how well the agent has performed because the agent possesses an information advantage over the principal Self-dealing describes the conduct of corporate managers who take advantage of their position in an organization to act in their own interests

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Solving the Agency Problem

In agency theory, the central issue is to overcome the agency problem by using governance mechanisms that align the interests of principles and agents The role of the board of directors:

Monitor and question top managers decisions Reinforce and develop a code of ethics Find the right set of incentives to align the interests of managers and shareholders

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Governance Mechanisms
Stock-based compensation schemes that are linked to the companys performance Promotion tournaments and career paths

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Top Managers and Organizational Ethics

Ethical dilemma: decisions that involve conflicting interests of parties Ethics: moral principles and beliefs about what is right or wrong There are no indisputable rules or principles that determine whether an action is ethical

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Ethics and the Law

Laws specify what people and organizations can and cannot do Laws specify sanctions when laws are broken Ethics and laws are relative

No absolute or unvarying standards exist to determine how people should behave

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Models of Ethics
Utilitarian model: An ethical decision is one that produces the greatest good for the greatest number of people Moral Right Model: An ethical decision is the one that best maintains and protects the fundamental rights and privileges of the people affected by it Justice Model: An ethical decision is a decision that distributes benefits and harms among stakeholders in an impartial way

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Sources of Organizational Ethics

Societal ethics: codified in a societys legal system, in its customs and practices, and in the unwritten norms and values that people use to interact with each other Professional ethics: the moral rules and values that a group of people uses to control the way they perform a task or use resources Individual ethics: the personal and moral standards used by individuals to structure their interactions with other people
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Why Do Ethical Rules Develop?

Ethical rules and laws emerge to control self-interested behavior by individuals and organizations that threaten the societys collective interests Ethical rules reduce transaction costs, that is the costs of monitoring, negotiating, and enforcing agreements between people

Reputation effect: Transaction costs:

Are higher for organizations with a reputation for illegality Are lower for organizations with a reputation for honest dealings
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Why Does Unethical Behavior Occur?

Personal ethics: developed as part of the upbringing and education Self-interest: weighing our own personal interests against the effects of our actions on others Outside pressure: pressures from the reward systems, industry, and other forces
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Creating an Ethical Organization

An organization is ethical if its members behave ethically Put in place incentives to encourage ethical behavior and punishments to discourage unethical behaviors Managers can lead by setting ethical examples Managers should communicate the ethical values to all inside and outside stakeholders
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Designing an Ethical Structure and Control System

Design an organizational structure that reduces incentives to act unethically Take steps to encourage whistleblowing encourage employees to inform about an organizations unethical actions Establish position of ethics officer and create ethics committee
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Creating an Ethical Culture

Values, rules, and norms that define an organizations ethical position are part of its culture Behaviors of top managers are a strong influence on the corporate culture Creation of an ethical corporate culture requires commitment from all levels
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Supporting the Interests of Stakeholder Groups

Find ways to satisfy the needs of various stakeholder groups Pressure from outside stakeholders can also promote ethical behavior The government and its agencies, industry councils, regulatory bodies, and consumer watchdogs all play critical roles in establishing ethical rules
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