Stanwick 03 stakeholders and csr

Chapter 3
Stakeholders and Corporate
Social Responsibility

Case Discussion: When is Fair Trade Not Fair?
• The Fair Trade logo on numerous food products, including coffee, is an
indication that the farmers at the company (i.e., Trade in Coffee)
received a “fair wage” for their work through the higher prices that are
charged for the product.
• A major supporter of Fair Trade products, Green Mountain Coffee
Roasters, is the largest purchaser of fair trade coffee in the world.
• Trans Fair is the US organization that certifies companies to use the Fair
Trade logo. The program allows the farmers to deal directly with the
wholesaler, eliminating as many as five different intermediaries that
could include a local buyer, a miller, an exporter, a shipper, and
importer.
• The underlying Q remains: Where does that additional money for every
pound of Mountain People’s coffee go?
• Critics state that the farmers are not the beneficiaries of the additional
profit, rather the distributers and retailors receive the additional
revenues. Lawrence Solomon, who analyzed trade and consumer
issues for the Canadian Energy Probe Research Foundation,
stated that the fair trade “premium” is captured by the distributors
with very little, if anything, tricking down to the farmers.
2
Stanwick, Understanding Business Ethics, 3e. © 2016, SAGE Publications.

Continuing With preview Case
• Fair trade labels do not identify how much money the farmers are paid
for their products. According to statistics at Fair Trade USA in 2006, “it
was calculated that coca farmers received 3 cents from the $3.49 spent
on an “organic fair trade” labeled 3.5 – ounce chocolate bar sold at
Target. Further details page 39.
• The $10 for a pound of coffee sold at Mountain People’s Co-Op netted
the farmers $1.26 compared to $1.10 for non-fair trade coffee. The
$1.26 rate was fixed, so the farmer would continue to get that rate
regardless whether the coffee sold for $10 or $15.
3

The Origins of the Stakeholder
A. A. Berle (1931)
– All the powers given to a corporation to be
used to create benefits in the interest of
the shareholders
– Managers should consider themselves
trustees and guardians of investments
made by the shareholders
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The Origins of the Stakeholder
E. Merrick Dodd (1932)
– In A rebuttal to berle, E. Merrick Dodd stated
in The Harvard Law Review that the interests
of the shareholders should be considered but
that corporations need to recognize their
obligations to the community, to their
workers, and to the consumers.
– Corporations are allowed to become legal
entities because they serve a purpose to the
community instead of just providing
opportunities for financial gain by their
owners
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An Alternative View
• Friedman (1970)
– “The Social Responsibility of Business is to
Increase its Profits”. He argued that in a free
market system in which people are allowed to
own property, the executives of the company
need to be considered as the employees hired by
the shareholders.
– Argued that social responsibility is a
fundamentally subversive ideal and that the only
social responsibility a manager has is to optimize
the use of company ‘s resources and to enhance
the level of profitability of the firm
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Stakeholder Theory Development
• Edward Freeman (1984)
– Stakeholders were any individuals or groups
that can impact or be impacted by the actions
of the firm
– Freeman built on the original work of Dodd by
Broadening the definition of stakeholder to
encompass any individuals or groups that
have a vested interest in the operations of the
firm ( i.e., employees, suppliers, stockholders,
customers, the government, local
communities, and society as a whole).
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Stakeholders
• Any group that has a vested interest in
the operations of the firm. Traditional
stakeholders include:
8
Source: Thomas Donaldson and Lee E. Preston, “The Stakeholder Theory of the Corporation: Concepts, Evidence, and
Implications,” Academy of Management Review (1995): 69.

Moral Management and Stakeholders
• A manager’s response to stakeholders depends, in part, on the
level of morality of the manager. Archie Carrol distinguished
between three types of managers:
– Immoral
• Does not care how his/her decisions impact the
stakeholders. These managers focus only on their own
goals and the goals of the company and consider legal
requirements as constants or barriers that are ignored
when their corporate actions are implemented.
– Amoral
• Is a manger who could be considered ethically neutral.
• Does not focus proactively on ethical issues nor tries to
purposely go against the social and legal norms that are
expected of the firm by society
• The danger with an amoral manger is that because ethical
considerations are not contemplated in the decision-
making process, the manager may unintentionally commit
unethical acts and not realize the impact the decision had
on various stakeholders.
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– Moral
• Understands the importance and relevance of
considering ethical issues when making
decisions
• Moral managers meet the minimum legal
standards and are proactive in presenting
ethical leadership to the firm’s employees and
other stakeholders.
• How these three types of managers react with
various stakeholders highlights the difference in
the management styles. Table 3.1 highlights the
various interactions that the three types of
managers have with the various stakeholders.
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Identifying Importance of Stakeholders
• High-priority stakeholders have the following three
attributes
– Power: is the extent to which the organization can
influence or impose its will on the stakeholder group.
– Legitimacy: is the assumption that the actions of the
corporation are desirable, proper, or appropriate within the
limits of the corporation.
– Urgency: is the degree to which the issues raised by the
stakeholder must be dealt with in a time-sensitive manner.
• When all three of these attributes are present, that
stakeholder must be considered a high-priority
stakeholder. By using this attribute approach,
corporations may be better able to determine which
stakeholder groups have the highest priority in their
day-to-day operations.
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Stakeholder Impact on
Organization
Stakeholders
– establish expectations about corporate
performance
– experience the effects of corporate
behaviors
– evaluate the effects of corporate
behaviors on their interests
– act upon their interests, expectations,
experiences, and evaluations.
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Building Trust With Stakeholders
• Just as managers are expected to be trustworthy
agent managers of the financial resources of the
stockholders, managers are also expected to
manage the interests of the various stakeholders.
• Trust can be considered a moral exchange between
the stakeholders and the managers of the firm. Three
elements of trust affect relationship between
stakeholders and the firms:
1. Rational prediction of outcomes, emotion, and a clear
moral element. Stakeholders enhance their trust in a firm if
they become more optimistic that the results of the actions of
the firm will have a positive impact on their needs and
expectations.
2. Stakeholders will also strengthen their level of trust the
more they become vulnerable by the actions of the firm
and become more emotional than rational.
3. Stakeholders also have faith that their trustworthy
relationship with the firm is based on mutual moral and
ethical commitment.
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• In addition, a high level of trust allows less stringent
corporate governance structures to be developed to
monitor the actions of the top-level managers, which
reduces costs and enhances the firm’s competitive
advantage. Four dimensions can enhance the level of
trust between the stakeholders and the firms:
1. Ability: based on the firm’s level of expertise,
competence, and product development
2. Benevolence: is based on the level of the firm’s
corporate social responsibility and amount of information
that is dispersed from the firm.
3. Integrity: based on perception of how the firm is
performing in its function of keeping its promises and the
ability to demonstrate to the stakeholders its law-abiding
behavior.
4. Information quality: is evaluated based on the level of
objectivity and intelligibility.
 The Fair Trade case implies that the stakeholders must be
well informed and diligent to ensure their expectations are
met by the actions of others.
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Role of Stakeholder Communication
• This concept must be viewed from the perspective of
both management and the stakeholders. How should
information be communicated?
• For instance, some companies explicitly mention
stakeholders in their vision or mission statement.
These companies might want to open lines of
communication with these stakeholders. Methods
such open houses, public service announcements,
and public newsletters all distribute information about
company issues.
• Another way to open dialogue is to offer a town
meeting to discuss relevant issues about the
corporations. Management needs to be open to the
information needs of stakeholders, and stakeholders
need to express their comments and concerns in a
non-threatening manner.
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Triple Bottom Line Reporting
• Triple bottom line reporting system. Also known as
3BL or by the phrase “people, Planet, Profit”
(Elkington 1997). 3BL is a concept that is receiving
momentum as a way of satisfying the reporting and
disclosure needs of various stakeholders groups,
although many companies refer to the concept as an
accountability report.
• 3BL expands traditional financial reporting to include
other goals such as environmental and social
reporting. 3BL centers on the vested interests of all
the stakeholders instead of focusing solely on the
interest of the shareholders. With these goals in
place, it may be easier for firms to justify their focus
on social and environmental issues that would result
in long-term financial rewards for the firm.
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• The establishment of these objectives increases
the level of transparency of the actions of the
firm that can be effectively evaluated by its
stakeholders. Environmental performance is
generally focused on the amount of resources
used in operations in areas such as energy, land,
and water. EP evaluation also focus on by-
products of the production process.
• Social performance is usually based on how
the firm and its suppliers both positively and
negatively affect the local communities in which
they operate.
• 3BL is not just a link between the stakeholders
and the firm but it is also a valuable tool the firm
uses to enhance its long-term sustainability from
both a financial and a nonfinancial perspectives.
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The Benefit Corporation
• A new type of corporation that addresses issues related to
financial, social and environmental objectives
• B Corps must have three required criteria
1. Must meet comprehensive and transparent social and
environmental standards
2. Must meet higher legal accountability standards
3. Must build business constituencies for public policies that
support sustainable business.
• The concept can protect the beliefs and values of top
executives of current companies who focus on the 3BL but
want to ensure those beliefs continue in the future. 3BL
focuses on shareholder value and at the same time
provide social and environmental goods to society.
• B Corps are certified by the nonprofit organization B Lab. To
become certified by B Lab, a corporation must successfully
complete a stakeholder impact assessment, incorporate its
social and environmental objectives into the mission and legal
framework of the firm, and sign a “Declaration of
Interdependence” that acknowledges its interdependence
with its stakeholders.
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Suppliers as Stakeholders
• It is necessary to require social responsibility and ethical
behavior in the relationship between firms and their suppliers.
For example, several computer companies have developed
electronics industry codes of conduct to use in conjunction with
their suppliers. Another example:
• Intel’s Supplier Ethics Expectations:
1. Supplier must be in strict compliance with law
2. Supplier must have respect for competition
3. Supplier must not have any actual or perceived conflicts of
interest with any other party
• Outsourcing – assigning a function or task that was previously
done within a company to an external third party. The purpose
is to reduce costs. To avoid exploitation of workers, an
independent nonprofit organization called Verite focuses on
social auditing and research programs to examine the working
conditions of people around the world. Verite reviewed working
standards in 27 countries and presented BusinessWeek with
summary of working conditions in nine top countries to which
“sweatshop” conditions can take place. Each of the countries
was evaluated based on its use of child labor, forced labor,
freedom of association, gender equality, health and safety, and
hours and wages. Details in pages 48-49.
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Customers as Stakeholders
• Customers must have a high level of trust with firms they
are buying goods and services from or the customers will
seek those goods and services from companies they feel
they can trust. Ethical behavior must be the norm in four
critical areas in the relationship between the firm and
customers:
1 The manufacturing/service creation process:
Products that are safe to use and are of at least reasonable
quality. Customers trust firms to manufacture product that
are dependable and are not safety hazard to the public.
2 Marketing, sales and quotes: Salespeople should reflect
honesty and ethicality in dealing with customers. Features
and prices quoted by salespeople are valid.
3 Distribution: Ordered items should be exactly the same
items that is delivered. Customers should be informed of any
adjustments made to the order.
4 Customer service: Firms are to honor any guarantees or
other promises given to the customer at time of purchases.
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Government as Stakeholder
• Is Primarily based on compliance issues
• Law enactment setting rules and
regulations
• Government has the authority to
punish the firm and employees through
fines and possible prison
• Example: BP Gulf oil spill
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NGOs as Stakeholders
Focus on specific causes such as
Human Rights; Natural Environment; Climate Change;
and Individual Freedom
 Use their resources to bring these issues to the
attention of various stakeholders, including
employees, customers, governments, and society.
 The common goal of most NGO campaigns is to
use customer and public pressure to force
corporation to adjust its strategic focus.
 Three factors for firms to consider when
addressing the issues related to NGOs:
Transaction cost, brand impact, and competitive
position.
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 Transaction costs: refer to the costs to the firm to
adjust its strategy in order to address the issues
identified by the NGOs. Includes: manufacturing costs;
plants costs, and equipment costs
 Brand impact: refers to how much of a threat a public
protest would be to brand reputation and sales of the
firm’s products and the threat of the consumer shifting
to a competitors' brand.
 Competitive position: refers to the threat that a firm’s
competitive advantage may weaken if its competitors
do not have a strategic focus that concerns the NGOs.
Non response may impact on corporate
reputation, brand Image, sales and
profitability
Examples: Greenpeace, Oxfam, Amnesty
International
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Local Community and Society as
Stakeholders
• Focus largely on quality of life issues
– Pollution: i.e., firms that release high levels of pollution
into the air or into the water are of concern to the local
communities.
– Traffic generation
– Job loss/gain
• Every firm should consider its stakeholders in any
decision process. A formalized tool to aid in this
evaluation is the Stakeholder Analysis Tool:
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Stakeholder Analysis Tool
Five key steps by organization
1. Set out key project goals and milestones
2. Identify all key impacted stakeholders
3. Identify expectations and interests of the stakeholders
4. Rate each stakeholder in order of importance and
relevance
5. Identify actions required to manage expectations
 From a stakeholder’s perspective, a number of interests
and expectations need to be addressed by the firm:
These are: Accessibility to communicate with firm’s
ability to get information; forthrightness and honesty
of the firm; being treated in a welcoming manner and
with warmth by the firm; being accommodating and
reasonable to the needs of the stakeholders, and
receiving accurate and transparent information.
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• CSR is a term used by corporations to signify several
topics including legal responsibility, fiduciary duty,
legitimacy, and charitable contributions.
• Traditional view: CSR is a cost that would be higher than
the perceived benefits. i.e., supporting charity programs
Versus performing fiduciary duty.
• Contemporary view: CSR yields a positive cost-benefit
evaluation, and it can greatly enhance the firm’s
competitive advantage.
• Carroll presented a three-dimensional model of corporate
performance based on answering three Qs:
1. What components should be included in the definition of
corporate social responsivity.
2. What are the overall external social issues that the firm
must acknowledges?
3. How will the firm address the social issues that affect its
operations.
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• Four arguments in support of firms focusing on CSR as
part of their strategic focus:
• Moral obligation ( firm is good-corporate citizen);
• Sustainability (ability of the firm to provide environmental
and community stewardship);
• License to operate (License to operate given by Govt.,
community, and other stakeholders);
• Reputation (is the establishment of a corporate image in
which stakeholders develop perceptions related to their
commitment to CRS issues).
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Corporate Social Responsibility
• The obligations companies have to develop and implement courses of action
that impact society locally and globally:
– Economic Responsibilities: based on the belief that the firm has a
responsibility to use the resources available to produce goods
and services for society. Lay the foundation for the firm to be
able to support its other three responsibilities.
– Legal Responsibilities: Are the laws and regulations that all firms
are expected to abide by as they perform their daily functions.
Having the firm perform in a way that is consistent with Govt.
and legal expectations … Successful firm be the one in which all
of its legal obligations are fulfilled…
– Ethical Responsibilities: Includes: making sure the firm performs in a
manner that meets or exceeds the expectations of both social and
ethical norms; Adapt to new or evolving ethical and moral norms within
society; ensuring that ethical norms are not ignored or compromised;
behaving in a manner commensurate with being a good corporate
citizen; realizing that corporate integrity and ethical behavior go beyond
the minimum legal and governmental standards.
– Discretionary Responsibilities: includes having firms give to charity
organizations, providing programs to help cope in a work environment.
Philanthropic components of a firm’s CSR could include ensuring that
the firm performs in a manner that is consistent with chartable and
philanthropic expectations from society, helping support causes such
fine arts…
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• Carroll concludes that CSR can be defined as
how well a company meets its economic, legal,
ethical, and discretionary responsibilities
• Carrol presents a CSR pyramid in which the
profitability of the firm is the foundation that
becomes intertwined with the firm’s legal
responsibilities. Those two components allow the
firm to develop its ethical responsibilities, which
could lead to discretionary responsibilities in the
form of philanthropic responsibilities.
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Figure 3.1: The Pyramid of CSR
30
Source: Archie Carroll, “The Pyramid
of Corporate Social Responsibility:
Toward the Moral Management of
Organizational Stakeholders,”
Business Horizons (July–August
1991): 42.

A Global Approach to CSR: based om Carroll’s Work
• Carroll extends (1991) his pyramid to Global perspective:
 Global Economic Responsibility: Global firm like any
domestic firm, must be profitable in order to guarantee its
long-term sustainability.
 Global Legal Responsibility: must address the issues
related to differences in the legal environment in different
countries. Different laws and perspectives related to
acceptable actions by individuals in other countries make it
imperative for any global company to understand the
differences and levels of complexity in countries that have a
different legal system. In addition, governments of countries
may always enforce the laws to protect the rights of the firms
and the employees.
 Global Ethical Responsibility: governments and legal
systems may not be consistent in enforcing the laws, and
the firm’s ethical responsibilities include ensuring that the
ethical norms, standards, and expectations are consistent
globally. Because the home and host countries’ ethical
standards may not match, the firm needs to reconcile this
misalignment in order to present and enforce a global
ethical vision.
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• Continuing:
 Global Philanthropic Responsibility:
Addressing the issues to the needs of the global
stakeholders. Firms need to be involved in
socially responsible activities that have not been
mandated by various stakeholders. The desired
perception is to be proactive and anticipate what
the future needs of the stakeholders will be
before they present them to the firm. Firms'
Social responsive are different from one country
to another. For example, in Finland the
expected level of philanthropic responsibility is
low because the Finnish people are taxed at a
relatively high rate and, therefore, it is expected
that the social needs of the individuals in Finland
will be addressed thru. government programs
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Models of CSR: Three different models
• Business Case Model: Firms use this model view CSR
as a means to generate financial results. Based on the
belief that because firms are driven to perform financially in
the short-term, the only justifiable investments in CSR occur
when there are also short-term financial benefits for the
investment. The value of CSR is the enhancement of the
firm’s competitive advantage, which results in higher
financial performance.
• Social Values - led Model: Based on using specific
CSR issue in D-M-P and these would be the types of firms
in which a social policy entrepreneur is a dominant driving
force. In these firms, 3BL is used to evaluate its financial,
social, and environmental performance.
• Syncretic Stewardship model: Firms encourage
feedback and information flow between the firm and all
their stakeholders (consider different religious, cultural,
and ideas). CSR is a management philosophy that is
intertwined in their day-to-day operations and included
using CSR in the development and revision of the firm's
mission, values, goals, and processes.
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Employee Engagement in CSR
 What is the underlying benefits of a strong CSR
commitment on employee engagement?:
 First: Is that values and vision development within the
firm’s CSR program can be transferred to a strong positive
culture that support employees in their performance.
 Second: Strong CSR commitment can be the foundation
of a strong positive firm reputation, which enhances the
pride and commitment of the employees.
 Third: CSR enables employees to capture and incorporate
their individual social values to help society by participating
in CSR program that impact external stakeholders.
 It is Thru these benefits that firms are developing different
models to serve the needs of the employees and the firms.
The three traditional models of engagement are:
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• Transactional approach: Is based on the development
of firm programs to serve the needs and interests of the
employees who have an interest in participating in CSR
programs. It is considered transactional because it serves the
short-term interests of the employees, which can evolve and
change over time. This approach increases employee
engagement by satisfying higher level self-esteem needs of
the employees. Focuses in addressing the Q: What do I
want from my job?
• Relational approach: is based on the CSR programs
mutually agreed between the firms and the employees.
Focuses on entrenching the commitment by the
employees by developing mutual trust and developing a
shard interest in the programs between the firms and the
employees. It helps the firm to develop a socially
responsive culture and can enhance the identify and
image. Focuses on addressing the employee issues
related to Q: Who Am I as a person?
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• Developmental approach: Is based on the
philosophy of being more proactive related to
CSR issues and having a more comprehensive
commitment of both the firms and the employees
in development and participation in CSR
programs.
 This approach will help the firm implement its
commitment to facilitate the positive impacts of
CSR on the firm and its employees and to make
improvements to society. It support the
employees’ need for self-actualization.
 Focuses on addressing the employee issues
related to the Q of: Who do I want to be as a
person?
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Implementation of CSR
• Martinuzzi & Krumay present a model that links the
implementation of the firm’s CSR vision to four major
components. CSR Activities can act at different levels
in the organization
– Project oriented CSR: Many firms focus on the
development and execution of a social and/or
environmental project with the objective of “doing good”.
The project may address the need of specific internal
and/or external stakeholders. i.e., employees to volunteer
at a homeless shelter one day a month..
– Quality oriented: Firms create not only cost
efficiencies but can reduce the environmental impact of
their operations. This philosophy supports the belief of
avoiding doing “bad things”. The use of TQM and ISO
certifications integrates CSR in the production and
manufacturing process. Quality-oriented also focuses
on addressing working conditions and human rights as
it relates to the firm’s global operations.
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– Strategic oriented: Is based on the belief that
the needs of society can be converted into
opportunities for the firm, which may require the firm to
rethink its business model. The goal is for the firms to
integrate its CSR philosophy into decision making
process and this integration could be in the form of
innovation to differentiate their products and services
from their competitors. An example would be the
introduction of a micro-credit initiative by Muhammad
Yunus…
– Transformational CSR: the focus of the
firms is not only an avenue to develop a competitive
advantage but an opportunity to transform the firm.
Firms use organizational learning in order to reevaluate
the perspective pertaining to their interactions with their
stakeholders. This transformational process will aid the
firm as it seeks to develop a long-term sustainable
competitive advantage based on alignment of its future
needs with the needs of its stakeholders.
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Firm Configurations to Address
Stakeholder Issues
• Four alternatives firm configurations based on the values and
beliefs of the firm. The two dimensions proposed in the framework
are normative and instrumental.
• The Normative dimension is based on Kantianism and fairness.
When a firm has normative perspective of stakeholders, the benefit
is that all stakeholders, regardless of importance, will be treated in
the same manner and be treated equally. A high normative
stakeholder firm is one in which universal principles and standards
are applied fairly and equitably across all stakeholders regardless of
importance. In addition, a highly normative stakeholder firm
welcomes the input of the stakeholders and encourages a close
relationship to ensure that their needs have been met completely.
A firm with low normative belief related to stakeholders views the
interaction of stakeholders as an obligation that the firm must
fulfill. Such firms believe that the focal point of the firm is to
address the needs of the shareholders and owners before
addressing the needs of the other stakeholders.
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• Instrumental stakeholders are those whose support is required so the
firm achieve its objectives. As a result, high participation of the
stakeholders is not based on fairness or equality but is considered a means
to get to results for the firms. High instrumental stakeholder firms are
those in which stakeholders interaction is encouraged for those having
existing or future benefits from the achievement of the firm’s goals.
Stakeholders can be used to influence the outcomes of the firms. Firms
with low instrumental stakeholders relationships believe that stakeholder
interest and interaction should not be based on the level of influence they
have on the firm’s operations. The four types of firms are (figure 3.3, page
59).
• Skeptical Firm: Is based on the view that shareholders, not stakeholders,
are the dominant focal point. These firms do not consider the interests and
needs of other stakeholders, per se, in their strategic decision. Examples:
Tobacco, gaming, and oil companies.
• Pragmatic Firm: Recognizes the current and future benefits of interactions
with various stakeholders. Through this relationship, firms can use influence
and power to help achieve their financial goals. The focal point of
pragmatic firms is maximizing the financial performance of the firm to
serve the needs of stakeholders. However, pragmatic firms understand that
to achieve this goal, they must also interact with influential stakeholders.
Example, Coca-Cola focuses on financial objectives and addresses
stakeholder issues on an ad hoc basis.
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• Engaged Firm: An engaged firm focuses on the long-term
sustainability of its operations. Engaged firms believe that
complete stakeholders commitment will greatly enhance their
ability to survive in the long term regardless of the
environmental conditions. An engaged firm believes that each
stakeholder can contribute to the financial success of the firm
and rejects the belief that serving the stakeholders and
shareholders are mutually exclusive goals.
• Idealistic Firm: Idealistic firms believe that serving
stakeholders and society are the primary goals of the
organization. As a result, the purpose of the firm is to serve the
needs and interests of the stakeholders. The financial success of
the firm allows it to focus on social needs of the stakeholders.
Idealistic firms are usually found by social entrepreneurs.
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Figure 3.3 Stakeholder Orientation Framework
Low Normative High Normative
High instrumental Pragmatic Engaged
Low instrumental Skeptical Idealistic
42

The Role of Corporate Reputation
• According to Charles Fombrun, Reputation is
realizing value from the corporate image.
Corporate reputation is not just “nice” to have but
can add overall value to the corporation.
• An intangible asset that can
– Enhance the value of the firm
– Improve customer perception
– Strengthen competitive advantage
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• From a corporate perspective, a firm’s corporate
reputation is valuable because it helps stakeholders
determine which companies will best serve their needs,
and that may include dependable products, a positive work
environment, and succeeding in their corporate financial
and nonfinancial objectives.
• Firm with positive reputation can develop a halo effect with
its stakeholders. A halo effect refers to when, because of
the positive reputation of the firm, stakeholders will judges
negative actions less harshly than if the firm had a neutral
or negative corporate reputation. This benefit of a doubt
allows the firm to explain its actions before the
stakeholders have concluded their judgment on the action.
The halo effect is valuable to a firm because it allows the
firm time and gives officers the ability to explain their
actions before the consumers jump to a negative
conclusion.
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• Corporate identity: Refers to what characteristics
would be used by the stakeholders to describe the firm. As
a result, a firm's corporate reputation reflects the
integration of the firm’s strategy, corporate culture, and
values as perceived by its stakeholders. With a positive
corporate reputation, a firm is given the opportunity to build
trust and enhance its credibility with its stakeholders. To
use its reputation effectively to its competitive advantage, a
firm must identify what is needed for a strong positive
reputation and how it can be used to separate the firm
from its rivals.
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• Corporate image: Answers the Q, “What are the
public’s perceptions and beliefs about the firm?”. Dowling
argues that there are four major components of
corporate image and identity: Character (include
organizational culture and level of competitiveness within
the industry), Ability (based on the drive and commitment
of the CEO and employees and the availability of
resources that are needed to develop and execute the
firm’s overall strategy), products & services (include the
quality, value, and range of products available to sell to the
customers), and behavior (is based on the managers’
leadership capabilities and the level of drive the managers
have toward maximizing profitability levels).
 The firm’s corporate image is based on the perceived level
of esteem, respect, trust, and confidence the public has
related to interactions with the firm. The validation of the
firm’s corporate reputation is based on:
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1. The feedback given to the firm by its customers
2. The evaluation given by investors
3. Financial analysts and the media
4. The linkage between its corporate reputation and its
business model
5. The establishment of a code of ethics, and
6. The willingness to be evaluated based on the triple
bottom line (social, environmental, financial) perspective.
• Corporate communication: A critical aspect related to
corporate reputation is to ensure the corporate reputation
is communicated to various stakeholders. For external
communications, the firm must ensure that the information
presented increases the level of awareness and support
for the reputation and actions of the company. For internal
communication, the firms must be consistent with their
message as they explain their actions to their employees.
47

• Having a strong positive reputation can produce
three major benefits for the strategic focus of the firm:
1. The first benefit is that stakeholders prefer to do
business with firms that have a positive corporate
reputation. When a customer is unfamiliar with
attributes of one product versus another, the
reputation of the firm is considered. If the customer
has already bought a different product from the firm,
the customer will be more likely to purchase the
additional product from the same firm
2. The second major benefit is that a strong
corporate reputation can greatly aid a company
during a crisis.
3. Third, Is that a strong positive corporate reputation
can increase the financial performance of the firm
because of the firm’s superior competitive
advantage.
48

Corporate Philanthropy
• One study found that firms that had a number of
Environmental Protection Agency (EPA) and Occupational
Safety and Health Administration (OSHA) violations were
able to improve their corporate reputation through their
corporate giving programs.
• Michael Porter and Mark Kramer warn that the corporations
must understand the true meaning of strategic philanthropy. They
argue that true strategic philanthropy is based on the belief that
the actions of the firm can benefits society and the firm through
the firm’s development of unique assets and expertise. As a
result, firms can use their philanthropic focus to enhance their
competitive advantage. Example Cisco Co.
• Heike Bruch and Frank Walter argue that the type of
commitment firms have will be based on their level of corporate
philanthropy related to market and competence orientation.
Market orientation is based on using corporate Philanthropy to
address the external demands on the firm through its
stakeholders. Competence-oriented firms use corporate
philanthropy to address internal goals. Firms align their corporate
Philanthropic programs to their own abilities and core
competencies.
49

Figure 3.4: Four types of Corporate Philanthropy
Low Competence
Orientation
High Competence
Orientation
High Market Orientation Peripheral
Philanthropy
Strategic Philanthropy
Low Market Orientation Dispersed
Philanthropy
Constricted
Philanthropy
50

• Four types of Corporate Philanthropy
– Peripheral: A company with a high market orientation
and low competence orientation. organizations use
stakeholders demands and expectations as the core of
the corporate philanthropy. This type of philanthropy is not
usually related to the company’s core activities but is used
to enhance its image and reputation. Companies do not
link their philanthropic activities to their core
competences, so there is a danger that skeptics could
consider their actions superficial and lacking sincerity and
creditability.
– Constricted: A firm whose philanthropy focus is
high for competence orientation and low for
market orientation. These firms use their core
competences for social activities. This strategic
focus can allow an evolution of the firm’s
corporate culture and employees’ belief by
connecting their business and philanthropic
activities. The risk with this strategy is that it could
potentially alienate stakeholders because they
may believe their needs and expectations are not
being addressed.
51

– Dispersed: Is based on a firm having both a low-
market and low-competence orientation. Lacks focus
on the strategic direction of the philanthropy efforts.
Philanthropy programs are usually uncoordinated, and
there are no specific criteria to determine what social
programs and causes should be supported. As a result,
the firm usually supports numerous small programs
that do not specifically address the firm’s core
competences or the needs and expectations of its
stakeholders.
– Strategic: A firm that has a high level of commitment
from both a market and competence orientation. This is
considered the most effective approach because it
addresses both internal and external issues. These
firms align their philanthropic actions with their core
competences and address the needs and expectations
of their stakeholders. The firms are able to capture
sustainable results internally by enhancing their
competitive advantage and externally by satisfying the
needs of their external stakeholders.
52

Questions for Thought
1. Why is fair trade an ethical issue?
What are the competitive advantages
of fair trade? What are the potential
problems with fair trade?
2. Identify all of the different stakeholder
groups and comment on their roles in
corporations.
53

Questions for Thought
3. Why is a firm’s corporate reputation
important? Explain how a company
can quickly lose their positive
corporate reputation.
54

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