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2-Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall 11

Organizational Theory,Design, and Change

Sixth Edition Gareth R. Jones

Chapter 2

Stakeholders,Managers, and Ethics


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Learning Objectives 1. Identify the various stakeholder

groups and their claims on anorganization

2. Understand the choices and problemsinherent in distributing the value anorganization creates

3. Appreciate who has authority and

responsibility at the top of anorganization, and distinguishbetween different levels of management


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Learning Objectives (cont.)

4. Describe the agency problem thatexists in all authority relationshipsand the mechanisms available tocontrol illegal and unethical behaviors

5. Discuss the vital role played by ethicsin leading managers and employees

to pursue goals that lead to long-runorganizational effectiveness


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Organizational Stakeholders Stakeholders: people who have aninterest, claim, or stake in anorganization

Inducements: reward s such asmoney, power, and organizationalstatus

Contributions: the skills,knowledge, and expertise thatorganizations require of theirmembers during task performance


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Inside Stakeholders People who are closest to anorganization and have the strongest andmost direct claim on organizationalresources

Shareholders: the owners of theorganizationManagers: the employees who are

responsible for coordinating organizationalresources and ensuring that anorganizations goals are successfully metThe 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 havesome interest in it

Customers: an organizations largestoutside stakeholder groupSuppliers: provide reliable raw materialsand component parts to organizationsThe government

Wants companies to obey the rules of faircompetitionWants companies to obey rules and laws concerning the treatment of employees andother social and economic issues


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Outside Stakeholders (cont.) Trade unions: relationships withcompanies can be one of conflict orcooperation

Local communities: their generaleconomic well-being is strongly affected bythe success or failure of local businesses The general public

Wants local businesses to do well againstoverseas competitionWants corporations to act in sociallyresponsible way



Table 2.1: Inducements and Contributions of Stakeholders



Organizational Effectiveness: Satisfying Stakeholders Goals and Interests

An organization is used simultaneously byvarious stakeholders to achieve their goalsEach stakeholder group is motivated tocontribute to the organizationEach group evaluates the effectiveness of the organization by judging how well itmeets the groups goals For an organization to be viable, thedominant coalition of stakeholders has tocontrol sufficient inducements to obtain thecontributions required of other stakeholdergroups



Stakeholder Goals Shareholders: return on theirinvestmentCustomers: product reliabilityand product valueEmployees: compensation,working conditions, careerprospects

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Competing Goals Organizations exist to satisfy stakeholders goalsBut which stakeholder groups goal is most

important?In the U.S., the shareholders have first claimin the value created by the organizationHowever, managers control organizationsand may further their own interests insteadof those of shareholdersGoals of managers and shareholders may be

incompatible



Allocating Rewards Managers must decide how to allocateinducements to provide at least minimalsatisfaction of the various stakeholdergroupsManagers must also determine how todistribute extra rewards Inducements offered to shareholders affecttheir motivation to contribute to theorganizationThe allocation of reward is an important

component of organizational effectiveness



Top Managers and Organizational Authority

Authority: the power to hold peopleaccountable for their actions and to makedecisions concerning the use of organizational resourcesShareholders: the ultimate authority overthe use of a corporations resources

They own the company

They exercise control over it through theirrepresentatives



Top Managers and Organizational Authority (cont.)

The board of directors: monitors corporatemanagers activities and rewards corporatemanagers who pursue activities that satisfystakeholder goals

Inside directors: hold offices in a companysformal hierarchyOutside directors: not full-time employees

Corporate-level management: theinside stakeholder group that has ultimateresponsibility for setting company goals andallocating organizational resources



The Chief Executive Officers (CEO) Role in Influencing Effectiveness

Responsible for setting organizationalgoals and designing its structureSelects key executives to occupy thetopmost levels of the managerialhierarchyDetermines top managements rewardsand incentives



The CEOs Role in Influencing Organizational Effectiveness (cont.)

Controls the allocation of scarceresources such as money and decision-making power among the

organizations functional areas orbusiness divisionsThe CEOs actions and reputation have

a major impact on inside and outsidestakeholders views of the organizationand affect the organizations ability to

attract resources from its environment



Top Management Roles

CEO Often has primary responsibilityfor managing the organizationsrelationship with external stakeholdersCOO Responsible for managing theorganizations internal operations Exec. Vice Presidents Oversees andmanages the companys mostsignificant line and staff roles

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The Top-Management Team

Line-role: managers who have directresponsibility for the production of goods and servicesStaff-role: managers who are incharge of a specific organizationalfunction such as sales or research anddevelopment (R&D)

Are advisory only



The Top-Management Team (cont.)

Top-management team: a group of managers who report to the CEO andCOO and help the CEO set the

companys strategy and its long -termgoals and objectives Corporate managers: the membersof top-management team whoseresponsibility is to set strategy for thecorporation as a whole



Other Managers Divisional managers: managers whoset policy only for the division theyhead

Functional managers: managerswho are responsible for developing thefunctional skills and capabilities thatcollectively provide the corecompetences that give theorganization its competitive advantage



Figure 2.1: The Top- Management Hierarchy



An Agency Theory Perspective

Agency theory suggests a way tounderstand the conflict that oftenarises between shareholder goals andtop managers goals

Agency relation occurs when oneperson (the principle, i.e. shareholders)

delegates decision-making authority toanother (the agent, i.e. managers)



Agency Problem

There is a problem in determiningmanagerial accountability that ariseswhen delegating authority to managers

Shareholders are at informationdisadvantage compared to topmanagers

It takes considerable time to see theeffectiveness of decisions managers maymake

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The Moral Hazard Problem A moral hazard problem exists whenagents have the opportunity and incentiveto pursue their own interests

Very difficult to evaluate how well the agenthas performed because the agent possesses aninformation advantage over the principalSelf-dealing describes the conduct of

corporate managers who take advantage of their position in an organization to act in theirown interests


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Solving the Agency Problem In agency theory, the central issue is toovercome the agency problem by usinggovernance mechanisms that align theinterests of principles and agentsThe role of the board of directors:

Monitor and question top managers decisionsReinforce and develop a code of ethicsFind the right set of incentives to align theinterests of managers and shareholders


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Governance Mechanisms

Stock-based compensation

schemes that are linked to thecompanys performance Promotion tournaments and career

paths

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d


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Top Managers and Organizational Ethics

Ethical dilemma: decisions thatinvolve conflicting interests of parties Ethics: moral principles and beliefsabout what is right or wrongThere are no indisputable rules orprinciples that determine whether anaction is ethical


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Ethics and the Law Laws specify what people andorganizations can and cannot doLaws specify sanctions when laws arebrokenEthics and laws are relative

No absolute or unvarying standards existto determine how people should behave


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Models of Ethics

Utilitarian model: An ethical decision is onethat produces the greatest good for thegreatest number of people

Moral Right Model: An ethical decision is theone that best maintains and protects thefundamental rights and privileges of the peopleaffected by it

Justice Model: An ethical decision is a decisionthat distributes benefits and harms amongstakeholders in an impartial way

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S f O i i l


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Sources of Organizational Ethics

Societal ethics: codified in a societyslegal system, in its customs and practices,and in the unwritten norms and valuesthat people use to interact with each otherProfessional ethics: the moral rules andvalues that a group of people uses tocontrol the way they perform a task or useresourcesIndividual ethics: the personal andmoral standards used by individuals tostructure their interactions with otherpeople


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Why Do Ethical Rules Develop?

Ethical rules and laws emerge to controlself-interested behavior by individuals andorganizations that threaten the societyscollective interestsEthical rules reduce transaction costs, thatis the costs of monitoring, negotiating,and enforcing agreements betweenpeople

Reputation effect: Transaction costs: Are higher for organizations with a reputation forillegality

Are lower for organizations with a reputation for

honest dealings

Wh D U hi l B h i


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Why Does Unethical Behavior Occur?

Personal ethics: developed as partof the upbringing and educationSelf-interest: weighing our ownpersonal interests against the effectsof our actions on othersOutside pressure: pressures fromthe reward systems, industry, andother forces


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Creating an Ethical Organization

An organization is ethical if itsmembers behave ethicallyPut in place incentives to encourageethical behavior and punishments todiscourage unethical behaviorsManagers can lead by setting ethical

examplesManagers should communicate theethical values to all inside and outsidestakeholders

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Designing an Ethical Structure and Control System

Design an organizational structure thatreduces incentives to act unethicallyTake steps to encourage whistle-blowing encourage employees toinform about an organizationsunethical actionsEstablish position of ethics officer andcreate ethics committee


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Creating an Ethical Culture

Values, rules, and norms that definean organizations ethical position arepart of its cultureBehaviors of top managers are astrong influence on the corporatecultureCreation of an ethical corporate culturerequires commitment from all levels

S ti th I t t f


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Supporting the Interests of Stakeholder Groups

Find ways to satisfy the needs of various stakeholder groupsPressure from outside stakeholderscan also promote ethical behaviorThe government and its agencies,industry councils, regulatory bodies,and consumer watchdogs all playcritical roles in establishing ethicalrules

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