Fair And Equitable Treatment Of Organizational Stakeholders - Essay Example

?FAIR AND EQUITABLE TREATMENT OF ORGANIZATIONAL STAKEHOLDERS Introduction In considering whether organisations that treat their stakeholders in a fair and equitable manner and strive to meet their reasonable expectations are likely to experience high levels of performance this essay firstly identifies the various stakeholders and reviews what their expectations might be. It continues by indentifying various performance criteria including those which focus on financial performance and those associated with the concept of a ‘triple bottom line’. To assist in reaching conclusions about the merits of competing views, the paper analyses the various drivers including the competitive environment, corporate governance, agency theory and sustainability. An approach that was prompted by the views of D’Aveni,(1994) that fair and equitable stakeholder engagement has always played an important role within corporate governance and is important for the success of an organisation especially within highly competitive markets. Stakeholders In any organization there are a number of stakeholder groups as represented by the traditional form of the stakeholder model (Figure 1). Each of these groups may have different views about how the organisation should behave (Palmer and Hartley, 2011, p178); employees, for example, may feel unfairly treated if they are not rewarded adequately or are not given the right working conditions. Supply chain associates expect organizations to honour their contracts whist government is increasingly expecting business organizations to take over many responsibilities from the public sector such as in the payment of sickness, maternity and other benefits (Palmer and Hartley, 2011, p182). Fig 1: “The Corporation and Its Stakeholders” (Post, Preston and Sachs, 2002, p. 10) However, all share a common interest in ensuring the survival of the organization and thus seek to provide benefits to it which can contribute to improved performance. Employees bear the risk of their jobs and hence their livelihood (Ulmer, 2001) but often form a specific set of skills which can be deemed a type of investment and which gives a specific worth to the relationship between a worker and the firm. Employees therefore possess a reasonable and legal interest in terms of job security, equitable salaries, and a safe and satisfactory job environment. They expect the firm’s management to meet their expectations and take care of their needs, and allow them to take part in various decision-making activities that can influence the interests that are at risk (Ulmer, 2001). Consumers buy products that bring in revenues for the corporation and, which can be used for developing new items and services as well as in adding quality to existing products (Cohen and Prusak, 2001). Thus, the consumers possess a legal and reasonable interest in the quality of the products and services being provided by a firm and in the nature of the information provided such as the potential harmful effects of products like alcohol or cigarettes. They expect the firm to adopt a more consumer friendly and quality oriented approach on the basis that it will encourage them to buy more goods and services which in turn helps to improve the performance of the organisation. Suppliers are important to any business as they provide raw materials and other inputs which the firm requires to produce its goods and/or services. Therefore, the firms are clients of, and hence in a relationship with the supplier. The latter has its money at risk, for example it may be invested in raw materials (Cohen and Prusak, 2001). This is of special importance to minor suppliers which are dependent on large corporations, especially if they are their chief or even only client. In such cases of high dependencies, these small suppliers tend to focus on improving the quality of products delivered to the large firms, which further increases the level of dependency on their clients. Here the suppliers seek to bargain for a more close relationship with the client-firms, and not be viewed as mere suppliers of raw materials (Cohen and Prusak, 2001). In accordance to Dyer and Singh (1998, p. 660), government agencies create a legal and institutional structure within which firms operate; these include organisations for market control and various regulatory bodies. It would not be possible for business corporations to function effectively without these legal and institutional bodies and, in return, government agencies expect the firm to be compliant with all the necessary legal provisions of that country such as paying taxes at the appropriate time. Since the governments earn revenues from the firms by providing them with a functional framework, they have a stake in the corporations not only in respect of the regular inflow of tax but also in terms of whether or not the legal and trade regulations are being followed appropriately. The management of the business has a significant part to play. They are, on the one hand stakeholders (employees), whilst on the other; they govern the corporation and are thus obligated to protect its wellbeing. Sacconi (2000) argues that the management team regulates and monitors the various relationships forged with stakeholders, whilst also balancing the legitimate and reasonable claims that other stakeholders make towards the corporation. The community provides the organisation with a very important resource, the local environment in which it operates, and where the web of primary stakeholders such as employees, consumers, government agencies and material suppliers is created (McWilliams, Siegel and Wright, 2006). The positive benefits enjoyed by the members of the community where the firm is operating arise not only from the money generated by the firm in the form of employment and local taxes but also in the fact that they help sustain other small-scale local industries. However, business corporations can have negative impact on the local community like, for example, environmental pollution that may have a detrimental effect on the local inhabitants as explained by Jenson, (2001) The above confirms the symbiotic relationship between the organisation and its various stakeholders and suggests there may be mutual advantage in treating them in a fair and equitable manner which meets the reasonable expectations of the stakeholders. However, it also confirms that there may be conflicting expectations which may not easily be managed. Employees seek good wages and salaries and investors want good returns whilst customers expect quality products at a competitive (low) price. Performance measurement Traditionally, performance measurement of a firm focused primarily on its financial achievements, and did not take into account other aspects that may have a potential positive influence on an organization’s overall performance. Cavenaghi (2001) notes that for many years the measurement of a firm’s performance based on financial indicators was viewed as the only mode of analysing the competency and effectiveness of a business firm. However, in the present context there are deviations from this old outlook with Simons and Davila (2000, p73) taking the view that the “classic financial indicators for measuring performance, i.e. return on net assets, return on assets and return on sales, are useful, but are not specifically designed to reflect the company’s quality of work”. Accordingly, a firm’s financial performance should be viewed as only one aspect within a broader range of indicators that need to be taken into account if a firm is to survive in today’s highly competitive global market (Eccles, 1998). Similarly, Drucker (1998) notes that modern performance measures instead of simply serving as financial indicators, can be used as standards for setting objectives and making proper investments, as well as working as a tool for foreseeing and minimising risks. They help to identify those activities which need immediate attention, perhaps by involving employees, whilst acting as a compelling tool for demonstrating the firm’s behavioural activities. This supports the view that in order to achieve high performance across a range of indicators it is necessary to involve a range of stakeholders especially in such areas as risk reduction and organizational behaviour. In this context, Spendolini and Bogan (1997) created two sets of performance indicators, one that reflects the traditional form and another set that reflects the modern view. In the traditional set of performance indicators, the factor of profitability lies at the core of all activities. To achieve this core factor, the various performance indicators used are cash flow, costs, sales, capital expenditure, liability, debts and assets (Spendolini and Bogan, 1997, p60). The modern set of performance indicators has two core factors: quality and performance. In addition to the aforementioned performance indicators, others are used to measure customer retention and satisfaction, employee retention, training, cycle period, recommendation index, and fault index (Spendolini and Bogan, 1997, p60). These indicators relate to the requirements of the various stakeholder groups as considered earlier in this paper and thus support the provision of what Elkingon (1998) termed ‘The Triple Bottom Line’. Competitive Environment Yip (20003) identifies various drivers for international strategies, one set of which he terms ‘competitive drivers’. These relate specifically to globalisation (Johnson, G., Scholes, K, and Whittington, R., 2008 p 298) with the presence of globalised competitors increasing the pressure on other firms. Organizations are thus taking an increasing interest in the environment in which they operate. Whilst the environment gives organizations their means of survival it is also a source of threats. It can be viewed as various layers: the macro-environment; industry; competitors and markets; and, finally, the organization itself (Johnson, G., Scholes, K, and Whittington, R., 2008 p 54). Post, Preston and Sachs (2002, p.10) use a similar concept (see Figure Two) to portray the stakeholder view of the corporation, confirming the complex environment in which organisations compete. Fig 2: “The stakeholder view of the Corporation” (Post, Preston and Sachs, 2002, p. 10). Analysing the environment in this way helps to identify changes which may impact on the business such as a more democratic social order. There is a strong belief amongst people globally that it is their right to be allowed to take part in the decision-making processes that influence their lives (Collins, 1996) whilst simultaneously there is a growing belief that those involved in the decision-making processes carry a larger stake during the implementation of the decisions made, than those who remain uninvolved in the participatory system (Bloom, 2000). In this context, Ackoff (1999) contends that employees in business firms all over the world are increasingly becoming aware of the discrepancies, where they find their surrounding society as a whole aimed at achieving a democratic order, while their organizations still function on the old lines that are based on authoritative and hierarchical structures. Corporate management which is participatory in nature is seen as being socially responsible with a democratic workplace environment and this gives the corporation a better image, hence lending it a more competitive edge over others (Greenberg, 1986). The trend amongst the business firms to take into consideration stakeholder interest and claims into their decision-making processes was documented by McLagan and Nel, (1995, p. 8) who suggested various reasons for this including the realisation that such an approach improved the employee-management relationship, increased attention towards consumer satisfaction, and following the legal provisions of the country of its operation, gives it a competitive advantage over other organisations (Lawler, 1996). At about the same time, the criteria of societal accountability, also referred to corporate social responsibility (CSR) started receiving greater attention (Collins, 1997). Such shifting perspectives have led to an increased level of participation by employees in firms’ decision-making processes and more focus on consumer satisfaction and retention, characteristics that are necessary for achieving success within the intricacies and a modern organizational setup (Bartlett and Ghoshal, 1991, p. 23). Corporate Governance Johnson, G., Scholes, K, and Whittington, R., (2008 p 139-140) suggest there are two main models of corporate governance; the shareholder model, “epitomised by the economies of the USA and UK”; and the stakeholder model, “founded on the principle that wealth is created, captured and distributed by a variety of stakeholders” Corporate governance is defined by the UK Cadbury code as the ‘system by which companies are directed and controlled’ (IFC, 2005) and includes various traditional modes of stakeholder involvement such as negotiations and dialogues with the employees, voting by citizen groups, and investor road shows. These approaches have made organisations more accountable to their stakeholders, which in turn have worked towards achieving better performance indices (Orlitzky, Schmidt, and Rynes, 2003). To attain sustainable development and to face business related challenges, it has become even more important for corporates to involve the various stakeholders and to accord them equitable treatment. This is especially important for corporations that are facing challenges in the form of transforming social and cultural norms, or while entering a new market as illustrated by Post, Preston and Sachs (2002). Agency Theory In the context of the theory that business managers are under an obligation to satisfy the reasonable and legitimate claims of an organisation’s stakeholders, Jones and Hill (1992) conceptualised a model known as the “stakeholder agency” model, where they contended that the business managers must play the role of agents for the firm’s stakeholders (or the ‘principals’). The extent to which this happens in practice (see discussion on sustainability below) is debatable but Jensen (2001) contends that a firm will fail to optimise financial values if the stakeholder interests were ignored are ignored. Sustainability The shareholder model of corporate governance discussed above provides greater benefits for investors than does the stakeholder model but it suffers from the risk of short-termism and can lead to managers taking decisions that benefit their own careers at the expense of long-term gains (Johnson, G., Scholes, K, and Whittington, R., 2008 p 140). These questions the concept of the agency theory suggested by Jones and Hill (1992) and discussed above. The events of recent years have led to many corporations, especially in the west, seemingly perform strongly but then fail dramatically. The collapse of Lehman Brothers caused chaos around the world (Authers, J., 2009) only a few months after it appeared to be performing well in financial terms. Modern stakeholder theory argues that a firm’s ability to produce wealth that is sustainable in nature takes place over a long period, thus its long-term financial worth is ascertained by the bond is forges with its stakeholders (Freeman, 2001). So whilst the theories support the application of the modern stakeholder approaches it would seem that in practice, particularly in the west, that the CEO of an organization ‘is only as good as the last quarter’s results’. The proponents of the shareholder model, especially, would agree with the view that the core objective of any business is to accrue financial gains, a view epitomised by the statement “the only social responsibility of business is to increase profit” (Friedman, M. 1970). It is appropriate, therefore, to consider whether increased stakeholder participation and satisfaction can also lead to better financial results in addition to improving other measures of performance. Even though it is argued that positive relations with stakeholders improves organizational performance (Russo and Fouts, 1997), it is important to note that quality products is the most appropriate approach of increasing consumer demand (Brown and Dacin, 1997). Additionally, when suppliers see high levels of employer and consumer satisfaction they become more confident in providing raw materials along and more willing to share knowledge with the client-?rm (Dyer and Singh, 1998). Firms with a history of good stakeholder relationships manage to forge favourable deals with core government agencies and local communities, where they are likely to receive greater local support (Fombrun, 1996). Thus, a firm with positive stakeholder relationship receives all the advantages, which build up towards achieving higher financial gains, especially in the medium to long term. The benefits of stakeholder involvement The potential benefits that are associated with stakeholder involvement and satisfaction are summarised as below (Lawler, 1990, p. 38-40): 1. Improved communication between worker class and manager segment across the organisation. Kanter (1982 and 1992) adds that a work environment which involves its stakeholders within the decision-making processes and takes care of their claims and interests promotes knowledge sharing between the worker level and the managers, and the former being nearer to the products manufactured and the actual work done are more likely to give a better feedback. 2. Innovative work methods with better employee performances, staff more motivated and having a high level of job satisfaction; Kanter (1982 and 1992) supports this view by suggesting such an approach is more effective at producing innovative outcomes than the traditional mode of functioning. 3. Employee retention and addition of new employees. If employees are motivated and involved they are less likely to seek opportunities elsewhere; also the firm is more likely to attract high calibre applications for any vacancies that do arise. Skilled workers are capable of elevating organisational performance; however to sustain such high levels of performance, the employees must be retained. This is possible with a strong relationship between an organisation and its employees, where there is loyalty and obligation; which in turn decreases the risk of the employees leaving the firm (McWilliams and Siegel, 2001) 4. Decreased instances of delay in work related punctuality and absenteeism from work and expected turnover due to the employees being more highly motivated. 5. Increased levels of self-management amongst the employees and hence less supervision required due to a feeling of empowerment. Markowitz (1996) reiterates this assumption and claims that providing employees with the power to make decisions increases their obligation towards the firm whilst stepping-up their morale. 6. Increased levels of production and higher performances by the firm; Markowitz (1996) further claims that this leads to increased productivity where everyone concerned benefits, the business earns more revenues from increased profitability and hence gains stability; the workers feel more attached to their company and satisfied with their working conditions (as they have a voice in various decision making strategies) and the consumers end up getting high quality products. 7. Better product and service quality which leads to satisfaction of the consumer segment and hence more new customers and retention of the older ones, again confirmed by Markowitz (1996) as discussed above. 8. Less instances of organisational conflict and better chances of a conflict resolution due to improved communication between the workers and managers which leads to reduced cases of grievances; 9. Better feedbacks from all the stakeholders that take part in the decision-making processes allow the firm to yield better outcomes and increase the performance levels of the organisation. The costs of shareholder involvement Often, owing to variations in culture, organisational set-up and other characteristics, corporations may need to invest extra resources (primarily financial) into creating good stakeholder relationships. For example, companies function on core values where stakeholders are given an inherent feeling of belonging and the power to participate in the decision making processes find it easier to build positive stakeholder relations than ?rms that function without such values (Graves and Waddock, (2000). Thus, building positive stakeholder relations results from corporate values that are integrated within a firm’s culture. If the culture of the organisation is based on meeting short-term targets, which are often financially based, it will be more difficult to involve all shareholders. Such a culture can be found in in the strategic business units whose corporate parenting style is that of portfolio manager Johnson, G., Scholes, K, and Whittington, R., (2008). Conclusion Thus in conclusion it can be suggested that the stakeholders of a firm have legitimate stakes in the organisation as they provide the necessary resources (financial and other types), which means that firm’s management (which is the agent) acting on behalf of the shareholders (the principal) are obliged to involve the stakeholders and provide them with appropriate commissions for the invested resources. Word Count 3241 References Ackoff, R., 1999. 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