Social Responsibility and Stakeholders

Chapter 2 states three learning outcomes up front, reproduced below since they map directly onto the chapter's own three major sections (2.1, 2.2, and 2.3).

1. Examine strategic approaches to social responsibility.
2. Analyze the value of corporate social responsibility.
3. Evaluate the stakeholder's role in business ethics and social responsibility and identify the steps required for stakeholder engagement.

The chapter opens with Patagonia, Inc., the outdoor clothing company founded by Yvon Chouinard in 1972. Chouinard has said he did not set out to make Patagonia an industry leader in social and environmental responsibility — that reputation emerged gradually, as decisions about product design, supply, and marketing forced the company to confront the fact that every business has responsibilities beyond profit.

The chapter's worked example is a 1988 incident: staff at a Patagonia store began experiencing headaches from a malfunctioning ventilation system recirculating formaldehyde into the air, traced to the finishing process used on the cotton in the company's clothing. Investigating further, Patagonia discovered the formaldehyde could cause adverse reactions in customers, including cancers and other illnesses. The company responded by studying the environmental impact of its materials and switching to organic cotton — which was not readily available at the time — working with U.S. and later international suppliers to secure a reliable supply. The lesson the chapter draws: being a responsible company means attending to a broad range of stakeholders, and doing so supports a viable, sustainable business.

Patagonia has continued to build on this reputation: it introduced Patagonia Provisions (sustainable sourced foods) in 2012, was featured in a Fast Company "Brands that Matter" list for sustainable seafood, and was ranked the most reputable organization in the U.S. in the 2023 Axios-Harris poll.

Chouinard and Stanley's Five Elements of Business Responsibility

In their book The Future of the Responsible Company (2023), Chouinard and coauthor Vincent Stanley propose five elements of business responsibility as a model other companies can follow. A responsible company has obligations to:

1. The health of the business — the obligation to stay financially viable.
2. The workers — caring for the people who make and sell its products.
3. Customers — focusing on the value of products and services that satisfy customers through truthful and honest relationships.
4. The community — the varied interests of the neighborhoods and cities where the company does business, including suppliers.
5. Nature — recognizing that the economy depends on nature and its resources; businesses should be humble and learn to live on the planet without destroying it.

A Shift in What Being a Responsible Business Means

The chapter draws a key distinction: business ethics programs primarily aim to prevent harm, while corporate social responsibility (CSR) initiatives aim to do good. Societal expectations for responsible business are evolving — a 2021 study of consumers in 32 countries found demand for business leadership on social and environmental issues, including inclusivity, anti-discrimination, equal opportunity, environmental protection, and emissions reduction (GlobeScan Incorporated, 2023).

An ethical business goes beyond compliance to recognize responsibilities to both internal and external stakeholders. Responsible companies need "leaders who care, who are morally conscious, open towards the diversity of stakeholders inside and outside the corporation and who are aware of and understand the responsibilities of business in society" (Pless, 2007, p. 438). The chapter notes a practical talent gap here: a World Economic Forum (2023b) report projects demand for workers with green skills will significantly outpace supply over the next five years, with as much as a 66% increase in green roles needed to progress the green and energy transitions by 2030 — alongside 3.5 million unfilled roles predicted in cybersecurity and information technology.

Corporate social responsibility covers a wide range of activities, sometimes described as good neighborliness or good citizenship. Socially responsive firms actively seek to do no harm — for example, by providing a safe working environment or adopting clean production processes — and CSR also obliges companies to address broad social problems such as urban decay, substance abuse, and poverty.

There is no consensus definition. A study of 37 CSR definitions found common themes of a voluntary program taking a stakeholder approach across the social, economic, and environmental dimensions of business (Dahlsrud, 2008). Modern perceptions of CSR have evolved from an initial focus on individual managers' responsibility for the social consequences of their actions in the 1950s to today's focus on a firm's responsibility to multiple stakeholders (Reavis & Orr, 2021). Regardless of definition, a socially responsive firm monitors and assesses environmental conditions, attends to stakeholder demands, and designs policies to respond to changing conditions (Ackerman, 1975).

Social Responsibility and Ethics

CSR rests on the ethical duty of businesses to accept responsibility for the consequences of their actions beyond financial performance. Howard Bowen's 1953 book Social Responsibilities of the Businessman defines social responsibility as "the obligation of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society" (p. 60). Per DiMaggio and Powell (1983), companies operate within a social framework of norms, values, and assumptions about acceptable behavior — and fear losing the freedom to conduct business independently if seen as unresponsive to social pressures. If powerful stakeholders reject a company's actions, they may increase regulation or revoke its legitimacy to operate. The chapter's example: global mining companies need local approvals to access minerals in remote sites, and the International Council on Mining and Metals (ICMM) offers principles to reduce the harm mining does to the environment and people. A study of mining from 2000–2020 found that following global standards combined with local community responsiveness increases community approval (Ho et al., 2024) — companies risk losing public support for mining operations if they don't comply with international standards.

A business's relationship with societal expectations is a social contract — a basic agreement defining the broad duties a business must meet to retain society's support. Laws and regulations express the formal part of this contract; the tacit part encompasses stakeholders' expectations based on their values and norms. Through legal or stakeholder action, companies recognize that violations can seriously harm reputation and financial well-being — so one view of social responsibility is fundamentally a risk management strategy.

Because there is no consensus on how CSR should guide firm behavior, many terms describe company initiatives for meeting societal expectations: corporate social responsibility (CSR), corporate citizenship, creating shared value (CSV), sustainability, environmental/social/governance (ESG), and responsible business. Regardless of terminology, companies taking a responsible approach tend to stress ethical behavior and responsiveness to multiple stakeholders. Three common approaches — social responsibility as obligation, as citizenship, and as sustainability — organize the rest of this section.

Social Responsibility as Obligation: The Pyramid Model

Many companies view CSR as the obligation to meet society's economic, legal, ethical, and discretionary (e.g., philanthropic) expectations — Carroll's (1991) pyramid of social responsibility. The economic and legal components refer to a business's obligation to produce goods and services at a profit while obeying laws; both are inherent parts of corporate responsibility, since businesses contribute to social welfare through jobs, products, and innovation. The ethical component covers behaviors and norms society expects; the discretionary component covers voluntary and philanthropic contributions of money, time, and talent. There is no consensus on how much responsibility businesses have for each component, and views vary worldwide.

CSR reports focus mainly on a company's ethical and social practices, and vary by country and industry (Golob & Bartlett, 2007). Companies in controversial industries — tobacco, alcohol, gambling, mining — use these reports to advocate for responsible use of their products while highlighting safety and responsible operations, sometimes to obscure the negative effects of the product or process itself. A study of addictive-industry reports found the most common approach was advocating responsible consumption (Acuti et al., 2024) — and found these reports are met with skepticism when the approach doesn't seem genuine.

Strategic Philanthropy

Businesses stressing philanthropy and charity go beyond economic and legal obligations, focusing on activities unrelated to the core business — donations or encouraging employee volunteer work. Strategic philanthropy combines a company's business mission with its charitable mission, linking social initiatives to commercial objectives. Companies taking this strategic view use their core competencies and resources to address broader social, customer, employee, and supplier problems and needs, through monetary donations, employee volunteerism, and sharing specialized talent with a nonprofit.

The chapter's worked example is Merck & Co., which uses its drug development and production expertise to combat river blindness, one of the leading causes of preventable blindness worldwide. Since 1987, Merck has donated millions of doses to poor countries where river blindness is most prevalent through the Mectizan Donation Program, partnering with the World Health Organization and GSK to distribute the product in 58 countries. In each country, NGOs "train a network of community-directed distributors to ensure that everyone living in endemic communities has access to treatment" (Mectizan Donation Program, 2023, para. 3). Benefits flow both ways: the charitable activity builds the company's reputation as responsible, while the nonprofit gains greater awareness and community support for its cause.

Cause Marketing

Cause marketing is a form of strategic philanthropy in which charitable contributions are tied to purchases of a product — an alliance with a nonprofit charity to raise funds and awareness for the cause while building sales and awareness for the company. Communications about the company's commitment to the cause enhance the customer's image of the brand, and a cause-related campaign can affect consumer attitude, purchasing behavior, and loyalty. Offers may run for a limited time or become permanently woven into the brand: Newman's Own donates all profits from product sales to charity; TOMS Shoes began in 2006 by donating a pair of shoes for every pair purchased, then shifted in 2021 to giving one-third of profits to charity plus letting customers redeem loyalty points for causes; grocery stores commonly let customers round up purchases or donate a dollar at checkout for local charities or disaster relief.

For cause marketing to work financially, customers must actually be willing to pay for the cause-linked product. Cause offers appear to work best for luxury goods, where donating to a well-known charity may help offset consumers' feelings of guilt about the purchase (Boenigk & Schuchardt, 2013). The social issue must also resonate with the target consumer: studies show customers are more willing to pay when the cause fits the product, is human-centric with local impact, and represents a significant percentage of the purchase price going to the cause (Fan et al., 2022).

Corporate citizenship is a managerial approach committing to responsible business policies and practices with a strategic focus on serving communities. Managers often use "corporate citizenship" interchangeably with "corporate social responsibility," with two distinctions: first, corporate citizenship primarily describes initiatives not required by law that support local communities (Gardberg & Fombrun, 2006) — corporate volunteerism, charitable contributions, support for community education and health care, environmental improvement programs. Second, many corporate citizenship statements also address business conduct, ethical standards, and responsible business practices (Matten & Crane, 2005).

Companies report on corporate citizenship to demonstrate community impact. Texas Instruments' 2023 Corporate Citizen Report states, "Since 2006, TI has published program information, goals, progress on goals and relevant data, including a focus on our workplace, environmental sustainability and community impact as part of its commitment to being a good corporate citizen" (p. 5). Procter & Gamble maintains an interactive citizenship report covering community commitment, equity and inclusion, sustainability, and ethics/compliance.

Creating Shared Value (CSV)

Companies that strategically create value for the community experience greater innovation and competitiveness (Porter & Kramer, 2011). Creating shared value (CSV) combines social responsibility with business's profit-making motive, resonating with companies more than obligatory or philanthropic framings of CSR — Porter and Kramer promote it in recognition of the close interdependence between a healthy economy and company competitiveness. An ethical framework gives companies tools for choosing strategies that satisfy legal and ethical obligations (de los Reyes et al., 2017).

Shared value reports differ from CSR reports: shared value reports focus on business impacts on the environment, economy, and society, while CSR reports focus on compliance and meeting obligations. Companies that have published shared value reports include Nestlé, De Beers, Avista, and Novo Nordisk A/S; Walmart and Endesa reference CSV within their ESG or sustainability disclosures. Measuring CSV is problematic and requires attention to both external and internal influences on achieving social and environmental goals (Cuevas Lizama & Royo-Vela, 2023).

Businesses increasingly frame social responsibility in terms of sustainability — recognizing the finite limits of nature and the need to optimize the economic, environmental, and social components of society. The concept traces to the UN's Brundtland Commission, convened to address the decline in global natural resources in the 1980s. Its report, Our Common Future, warned that "economic and ecology can interact destructively" and called for sustainable development, defined as "meeting the needs of the present generation without compromising the ability of future generations to meet their own needs" (World Commission on Environment and Development, 1987, p. 43).

The Triple Bottom Line

Sustainable companies view responsibility through a triple bottom line — economic, environmental, and social dimensions of performance reporting (Elkington, 1998), with the greatest competitive advantage found where the dimensions overlap.

Companies achieve the greatest competitive advantage where triple-bottom-line dimensions overlap (Gonzalez-Padron, 2013). At the economic–social intersection, companies create wealth for communities while meeting responsibilities to employees and customers — e.g., Procter & Gamble's partnership with UNICEF, donating the cost of a tetanus vaccine for every purchase of specially marked Pampers products to combat maternal and neonatal tetanus. At the environmental–economic intersection, organizations realize savings from resource efficiency, lower regulatory costs, and revenue from energy-efficient products — the chemical company Ecolab reduced material and waste disposal costs by $320,000 annually by reusing product scraps, and saved another $260,000 annually by better controlling chemical use in production. At the social–environmental intersection, companies focus on employees, customers, and suppliers exposed to risks from toxic materials, chemical use, and waste disposal — including community concerns about drinking water and customer health risks (cancers, developmental disorders, obesity) linked to chemical exposure.

UN Sustainable Development Goals (SDGs)

In 2015 the UN General Assembly adopted 17 Sustainable Development Goals with 169 associated targets as a roadmap to ending poverty, protecting the planet, tackling inequalities, and protecting human rights. The UN's 2030 Agenda resolution ties the SDGs directly to the triple bottom line: "We are committed to achieving sustainable development in its three dimensions—economic, social and environmental—in a balanced and integrated manner" (p. 3). The SDGs give business a framework to "enable the development of positive externalities (knowledge, wealth, and health) or help reduce negative externalities (the overuse of natural resources, harm to social cohesion, or overconsumption)" (Montiel et al., 2021, p. 1001). Externalities are situations where third parties unwillingly bear costs or receive benefits from a company's actions that the company isn't obligated to pay for or consider (Meyer & Kirby, 2010). Managers who invest in the SDGs achieve cost savings, greater employee skills, increased consumer purchasing power, and improved wellness across stakeholders (Montiel et al., 2021).

Measuring company performance on economic, social, and environmental impact gained importance as mutual funds and private equity firms adopted socially responsible investment (SRI) criteria. Early social mutual funds (1972) failed due to undefined criteria for selecting responsible companies (Shapiro, 1973). Even as measurement initiatives evolved — AA1000 (AccountAbility), SA8000 (Social Accountability), the GRI (Global Reporting Initiative) — scholars found social mutual fund screening and impact produced mixed results (McMillan, 1996; Schwartz, 2003). Some studies find a trade-off between financial performance and nonfinancial social/environmental performance (Galema et al., 2008; Mill, 2006).

In 2005 the UN introduced Principles for Responsible Investing, including environmental, social, and governance (ESG) as nonfinancial corporate performance metrics (Lee, 2006). By 2022, global ESG-considering investment reached $30.3 trillion (Global Sustainable Investment Alliance, 2023). As ESG gathered momentum, companies improved ESG performance to strengthen reputation, capital access, and employee motivation, and to lower risk (Henisz et al., 2019).

ESG's dimensions relate to CSR's economic/legal/ethical obligations, the triple bottom line, the UN SDGs, and responsible-business dimensions of ethics, sustainability, and responsibility. Simply put: E = environmental impact, S = societal impact, G = how the organization governs itself and makes decisions.

Table 2.1 — ESG Nonfinancial Topics for Business Activities

ESG Backlash

Whether ESG remains a viable term is unsettled. A recent U.S. survey of senior corporate executives found nearly half of companies are experiencing ESG backlash — "a range of opposition to the corporate focus on ESG but particularly relates to hot-button social and environmental matters" (Washington & Spierings, 2023, p. 39). Investors worry ESG ideology distracts from efficiency and profits. The Texas House of Representatives considered restricting insurers from using ESG in policy decisions (insurance lobbyists countered that environmental/social factors are legitimate underwriting risks). Wealth advisors are pulling back from sustainable investments (Browning, 2023); some companies are pausing diversity programs amid lawsuits and regulation (Murray & Gordon, 2023). After political pressure, BlackRock CEO Larry Fink shifted his 2023 language from ESG toward "stakeholder capitalism" — serving the interests of all stakeholders (Prakash, 2023). One advisor's recommended workaround: use the term "responsible business" instead — "You can be anti-ESG. It's hard to be anti-responsibility" (Cutter & Glazer, 2024).

The Geneva-based International Organization for Standardization (ISO) launched a global Guidance on Social Responsibility (ISO 26000) in 2010 — a guideline, not a certifiable standard. Per Staffan Söderberg, Vice Chair of the ISO working group that developed it, the standard "has been adopted by more than 80 countries, most of which are developing countries," inspiring public policy and business practice in Indonesia, Chile, India, China, Japan, the UK, Korea, the EU, and others (Lewis, 2020). Its core topics: human rights, labor practices, the environment, fair operating practices (anti-corruption and fair competition), consumer rights, and community development.

Not all countries view CSR the same way. In most Anglo countries (Western Europe, Australia, the U.S.), businesses treat CSR as a distinct concept. A study of Gabon, Nigeria, and South Africa found the idea of CSR-as-philanthropy persists even where responsible-business regulations exist (Ndong Ntoutoume, 2023). In some regions, treating CSR as a separate strategy is unfamiliar because prioritizing society's needs is already inherent in how business is conducted.

Japanese managers, drawing on Confucian values like benevolence and integrity, hold a strong sense of social responsibility as part of doing business (shobaido). Interviews found CSR is understood through corporate principles (keieirinen) that "put utmost priority on respecting human dignity, safety, and legal compliance" and "contribute to society via our business or mono zukuri [making things]" (Fukukawa & Teramoto, 2009, p. 138). A study of Chinese managers holding Confucian values found support for equitable, employee-friendly organizational environments, correlating with greater employee satisfaction and productivity (Xu & Wang, 2024). A study of Buddhist, Daoist, and Hindu traditions applied to DEI practice found a common "deeper understanding of our universal interconnectedness, leading to greater mutual respect and eradication of any desire to harm one another" (Marques et al., 2023, p. 13).

Views on charity and philanthropy vary by economic system, ethnicity, and religion. The chapter surveys several: Asian firms' disaster-relief giving differs significantly from European or U.S. firms (Muller & Whiteman, 2009); Singaporean and Malaysian managers — particularly Malay Muslims — skew more profit-oriented than toward employee/environmental welfare (Yong, 2008); Chinese companies expect government, not business, to handle social/environmental issues, reinforced by the government's reluctance to offer tax incentives for corporate charity (Lam, 2009) — Chinese managers of multinational subsidiaries saw enterprise responsibility as paying taxes, following laws, providing employment, and developing capital for growth (Lam, 2009, p. 139). Finland's strong state social system since the 19th century leads Finnish executives to say "charitable work is neither necessary nor even appropriate for companies paying taxes and fulfilling their obligations to society" (Elisa, 2004, p. 20). Swedish domestic companies lean on government for social needs, while internationally operating Swedish companies run strong CSR programs (Mazboudi et al., 2020).

Countries transitioning from a planned to a free-market economy show ambiguous views. A survey of Hungarian managers found more than half felt business ethics and social responsibility mattered less than company survival — one respondent said, "If others did not take [corporate social responsibility] into consideration, then we would do the same and not put ethics very high" (Fulop & Hisrich, 2000, p. 12). A later study of Central Eastern European countries found residents there view the profit motive as less ethical than U.S. residents do, yet hold a more positive overall outlook on ethical business than a comparable U.S. sample — possibly because publicized U.S. corporate ethical lapses have bred public cynicism (Padelford & White, 2010).

Logsdon and Wood's Steps for Global Corporate Citizenship

For companies operating responsibly in the international marketplace, Logsdon and Wood (2002) recommend four steps:

1. Embed a set of fundamental values reflecting universal ethical standards in the corporate code of conduct and policies.
2. Encourage thoughtful awareness throughout the organization of where the code and policies fit well — and where they might not align with stakeholder expectations.
3. Analyze and experiment to deal with problem cases.
4. Establish systematic learning processes to communicate results of implementation and experiments, internally and externally.

Social Responsibility Reporting

Reporting expectations continue to evolve globally. Voluntary frameworks include AA1000, SA8000, ISO 26000, and the GRI. Companies joining the UN Global Compact must submit annual Communication on Progress (CoP) reports. The EU's Corporate Sustainability Reporting Directive (CSRD) requires a broad set of EU and non-EU companies to "publish regular reports on the social and environmental risks they face, and on how their activities impact people and the environment" (European Commission, 2024, p. 1), starting fiscal year 2024. Microsoft's Reports Hub illustrates how extensive this has become: a sustainability report, impact report, global diversity and inclusion report, human rights report, UN SDG report, Global Compact CoP report, multiple regional/national mandated reports, and certification reports. Reporting terminology itself shifts by region — a study of Arab League companies found firms using the GRI framework transitioned from CSR reports to sustainability reports (Ismaeel & Zakaria, 2024), while reporting overall remains less common in Arab countries than elsewhere.

Critiques of Social Responsibility Approaches

Critics argue that if markets function correctly, profit-seeking decisions benefit society anyway. Milton Friedman's (1970) New York Times article argued companies are obligated to shareholders, while individuals — not companies — bear responsibility for charity. As with ESG, some investors worry social responsibility initiatives distract from efficiency and profit. Critics of creating shared value worry companies would sidestep real tensions with the community or overweight social issues relative to profit (Menghwar & Daood, 2021), or that the shared-value approach could encourage unregulated, unethical practices (de los Reyes et al., 2017).

A company that prioritizes social responsibility in its business strategy fosters both competitiveness and growth. Social responsibility strengthens competitiveness by enhancing a company's industry position through a talented workforce, a reliable supply of high-quality materials, and favorable rules and incentives governing competition. It fosters growth by increasing innovation in new products and services, providing access to new market segments, and increasing demand (Gonzalez-Padron & Nason, 2009; Porter & Kramer, 2006).

Socially responsible companies achieve sustainable competitive advantage through differentiating strategies competitors cannot easily duplicate (Barney, 1991), for three reasons: corporate responsiveness policies develop over years, creating a reputational advantage; the mechanisms by which those policies generate value can be complex; and competitors struggle to replicate social aspects like company culture and interpersonal relationships.

Table 2.2 — Competitive Advantages of Social Responsibility

Competitiveness: Talented Workforce

A talented workforce is an advantage competitors can't easily replicate. Patagonia stresses that employee commitment and productivity flow from feeling like they're making a difference and doing the right thing (Chouinard & Stanley, 2012), offering volunteer programs supporting global environmental work. IBM employees get to help solve social problems in emerging and developing markets, which IBM sees as building employees' global leadership skills — benefiting both communities and the company (Guamieri & Kao, 2008).

Attracting and retaining employees is expensive and time-consuming — companies can spend three to four times an employee's salary to search for and select a replacement (Navarra, 2022). Turnover is lower when employees see the company culture as ethical and feel respected. The chapter's example: as demand for Chinese factory labor from rural migrants increased, fewer workers were willing to accept low wages and crowded housing. Facing a 10% turnover rate at its Chinese manufacturing sites, Apache Footwear responded with private living quarters, Saturday night movies and dances, and hiring preference for employees' relatives (Roberts, 2005).

Competitiveness: Reliable Supply Chain

Secure, consistent, long-term, sustainable access to safe, high-quality raw materials and products strengthens competitiveness. Suppliers seek buyers who treat them with respect and integrity — key ethical issues affecting supplier relationships include (a) favoritism toward management-preferred suppliers, (b) personalities improperly influencing buying decisions, and (c) failure to give prompt, honest responses to inquiries (Cooper, Frank, & Kemp, 2000).

Customers care about a company's supply-chain responsibility, and as supply chains globalize, companies increasingly accept responsibility for their suppliers' actions — social issues include unsafe work environments, harmful environmental outputs, and poor product quality. Responsible businesses select and evaluate suppliers on social/environmental performance, pay more for vendors with good social policies (helping competent vendors become socially responsive), and help socially responsive vendors become more competent (Drumwright, 1994). Examples: Patagonia worked with U.S. cotton growers, ginners, and spinners to build a reliable organic cotton supply, then extended the same support to Thailand as its supply chain expanded (Chouinard & Stanley, 2012); Starbucks helps coffee farmers adopt sustainable techniques; The Hershey Company's Cocoa for Good program supports responsible cocoa farming and farming-family income; PepsiCo formally supports suppliers in meeting environmental requirements, including irrigation methods.

Competitiveness: Favorable Rules and Incentives

A firm's competitive environment can improve through social responsibility: responsible companies see lower local resistance to entering new markets and reduced regulatory costs. Government rules and policies shape the competitive environment, and compliance costs reduce resources available for product development or capital investment — so companies that proactively pursue social responsibility gain an edge by seeking innovative solutions to regulatory pressure rather than just absorbing compliance costs. Example: General Electric, Cinergy Corp., and Bechtel Corporation jointly developed solutions to reduce coal emissions in energy plants, discovering approaches that met environmental regulations at lower cost than traditional practices.

Growth: New Product and Service Innovation

A firm gains competitive advantage by creating products for unmet social needs — but this requires a full understanding of customer needs, competitor actions, and technological development (Calantone et al., 2002). A broad stakeholder base supplies knowledge and expertise for generating new ideas. Kraft Heinz "strives to be at the forefront of ingredient and nutrition innovation and collaborates extensively with academia and other stakeholders to discover novel ingredients and products" (Kraft Heinz Company, 2023, p. 33), including Harvard research on an enzyme that changes how sugary food is absorbed. Ecolab, a global leader in cleaning, sanitizing, and food-safety products, developed DryExx, a waterless lubricant addressing food and beverage clients' concerns about the cost and reputational damage of high water usage in bottling — one large bottling plant cut annual water use by 1.5 million gallons (Milliman, Gonzalez-Padron, & Ferguson, 2012).

Growth: New Markets and Customers

Companies gain new customers by increasing demand through socially responsible activity, via two general approaches: promoting product usage and enabling capacity. Computer firms support education programs and donate laptops, building computer literacy while creating future customers; consumer companies target educational programs to reach populations that could become viable markets. Since 2006, Unilever has partnered with NGOs in Africa, Asia, and Latin America to promote handwashing with Lifebuoy soap to prevent disease (Sidibe, 2020); assessments focused on young children found reductions in diarrhea, acute respiratory infections, and eye infections.

Most businesses are driven by a short-term profit motive and are legally bound to maximize shareholder profits. A shareholder orientation means the company focuses on profits and treats shareholders as its primary stakeholders. The U.S. and U.K. focus on financial markets has propagated a short-term view of success, sometimes at the expense of customers, employees, and communities — news reports on failed banks or product failures often trace back to poor decisions by company leadership and the board. Shareholders themselves increasingly demand attention to long-term sustainability through ethical and responsible practices. By shifting focus from shareholders alone to multiple stakeholder groups, companies can still deliver financial return to shareholders — through long-term growth and viability.

Corporate Governance

Responsible companies need a management system providing oversight, accountability, and control — corporate governance. Oversight ensures compliance with ethical and legal standards; accountability covers responsibility for performance aligned with strategic direction and how that performance is achieved; controls are the auditing and monitoring processes ensuring compliance with ethical standards.

A legal corporation has three levels of authority:

1. Shareholders own the corporation by holding shares of stock.
2. Shareholders elect a board of directors to manage the corporation.
3. The board designates officers to operate the business — CEO at the top, managers beneath — who set company direction under the board's oversight.

Board directors and officers hold a fiduciary duty to manage the company to protect shareholders, with responsibilities outlined in the company charter under the regulatory guidelines of the company's country of registration. Management implements business strategy within the policies and procedures governing acceptable conduct.

Corporate governance structures relationships among management, the board, shareholders, and other stakeholders — trust and confidence in the company depend on transparent, ethical management. Governance sets company objectives, establishes parameters for achieving them, and monitors performance; demonstrating that strategy serves shareholders' best interests builds investor confidence and access to capital.

Governance relies on a company's legal, regulatory, and institutional environment. Regulations address conflicts of interest between ownership and management; in some jurisdictions, specific stakeholders' powers are protected — in Germany, banks, labor unions, and community representatives must sit on a company's supervisory board (Bauer et al., 2008). The Sarbanes-Oxley Act of 2002 prohibits public companies from extending personal loans to directors or officers. Most regulation targets large public companies, but governance matters equally for privately held and family-owned businesses, which must address disputes over employing family members, private use of assets, and dividend decisions.

The board's role evolved as business failures prompted calls for greater accountability. Early U.S. and U.K. legal cases minimized board members' liability for company wrongdoing, reasoning that board members don't have the same time and attention for running the business as managers do ("Liability of corporation directors for negligence," 1906). Over time, sentiment shifted toward holding boards accountable to shareholders — Sarbanes-Oxley reaffirmed that the CEO and CFO hold primary responsibility for financial-report accuracy, and stressed the board's role representing shareholders, including an audit committee overseeing external audits.

More companies now recognize profit cannot be business's sole purpose. A stakeholder approach to corporate governance incorporates the views of multiple groups — employees, suppliers, the community (Ovide, 2013) — and attending to multiple stakeholder demands is linked to greater financial performance through improved reputation and customer satisfaction (Maignan et al., 2011). Industry leaders in social responsibility look beyond shareholder value to create value for employees, customers, suppliers, and the community, since each stakeholder brings different resources and benefits.

Responsible companies must attend to their many stakeholders by developing capabilities for managing stakeholder relationships. A stakeholder approach holds that managers must satisfy various constituents — customers, employees, suppliers, local community organizations — who could withdraw support if important social responsibilities go unmet. Companies that see the strategic importance of doing the right thing consider relevant stakeholder issues in decision making, embedding a stakeholder perspective into their culture, values, norms, and behaviors.

A stakeholder orientation is the extent to which an organization understands and addresses stakeholder demands in daily operations and strategic planning. It consists of three activities (Maignan & Ferrell, 2004): (a) collecting information on relevant stakeholder groups, including the company's effects on them; (b) disseminating that information throughout the organization for strategic decision making; and (c) responding to the information. A stakeholder orientation lets a firm understand its stakeholder impact, anticipate changing societal expectations, and use its innovation capacity to create additional business value from superior social and environmental performance (Laszlo et al., 2005).

A stakeholder's importance varies over a firm's life cycle and shapes the firm's responsiveness to that group. Stakeholders controlling valuable resources can use influence strategies to obtain desired actions — including consumer boycotts, such as those against Bud Light over celebrity advertising choices, or Patagonia's boycott of Facebook (Abdel-Baqui, 2021). Stakeholders also interact with each other, which increases their combined power to pressure a company — as when Monsanto abandoned its attempt to commercialize seed sterilization technology after protests by Indian farmers spread worldwide.

Identifying Stakeholders

The first task in adopting a stakeholder perspective is identifying and prioritizing stakeholder groups. As Chapter 1 established, a stakeholder is any person or group who can affect, or be affected by, a company's activities — a broad definition requiring managers to consider many groups. There's no generic stakeholder list; the relevant groups depend on a company's size, industry, and geography. Utilities (energy, air travel) focus more heavily on regulatory groups than other industries do; companies with multinational sales and production face unique employee, supplier, and government issues — Harley-Davidson, for example, tailors motorcycles sold in Asian markets to meet strict noise regulations that conflict with its brand image. Managers must identify salient stakeholder groups — those requiring the most attention (Mitchell et al., 1997).

Companies generally classify stakeholders into two categories. Primary stakeholders are groups whose continued association is necessary for the firm's survival — typically customers, employees, suppliers, investors, and shareholders. Each category can include subgroups sharing similar perspectives or differing stakes; an employee stakeholder group, for instance, might include management, staff, temporary employees, and retirees, each with different influence to change work policies even though all depend on the company for earnings. Which subgroups a company treats as primary depends on its industry and strategy.

Table 2.3 — Stakeholder Group Composition

Governments and local communities — whose laws affect company operations and tax obligations while providing infrastructure and markets — can be either primary or secondary stakeholders (Clarkson, 1995; Frederick et al., 1988). Secondary stakeholders can influence, or be influenced by, the firm but aren't directly necessary for its survival: consumer advocate groups, media, unions, political groups, the scientific community, and trade associations. A secondary stakeholder can also represent interests unable to represent themselves — the American Heart Association acting for people at risk of heart disease, or Greenpeace protecting the environment. Some organizations treat the natural environment itself as a stakeholder, since company activities depend on and affect resources like water and clean air — though this raises a genuine question, since the environment has no voice or ability to engage in dialogue with a company (Jacobs, 1997).

The Three Stakeholder Attributes: Power, Legitimacy, Urgency

Mitchell et al. (1997) identify three attributes determining a stakeholder group's importance to a company:

• Power — the extent a stakeholder can impose its will on the firm. Can be coercive (force or threats), utilitarian (incentives or material gain), or normative/symbolic (status or trophies).
• Legitimacy — a stakeholder has legitimacy when its actions toward the firm are desirable or proper within the norms, values, and beliefs of the larger society.
• Urgency — the extent to which a stakeholder's demands require immediate attention, arising from the stakeholder's sense that delay is unacceptable and/or that the issue is critically important to them.

Stakeholder groups exert power and influence to change company behavior. Groups controlling a resource a company needs — labor, capital — have greater impact than groups that don't. Unethical conduct that harms a stakeholder group can provoke an adverse reaction: when companies collude to raise auto parts prices, consumers pay more, industry reputation suffers, and trust in service providers declines. Stakeholder groups can withhold resources or attach conditions to their usage (Frooman, 1999).

Withholding Strategies

Withholding strategies threaten or actually discontinue providing a resource until the company changes its behavior. Stakeholders may boycott brands over child labor, deceptive advertising, or unsafe products — perceived unethical conduct or lack of integrity makes withholding more likely. The scale of influence depends on the company's dependence on that group's resources. Example: if a company disregards employee needs during downsizing — layoffs without notice, forcing quits — employees may strike or leave, though many can't afford to forgo wages entirely and instead partially withdraw, as in productivity slowdowns after downsizing or during periods of discontent (Gallup, 2023; Patton et al., 2024).

Usage (Conditional) Strategies

Stakeholder groups may keep supplying a resource but attach conditions to its use — often following a period of withholding or threatened withholding. Labor: strikes or strike threats occur when management and employees disagree on conditions, wages, or benefits, but employees may return to work once the company agrees to negotiate in good faith. Supply chain: retailers may continue purchasing from suppliers only with proof of environmental and social compliance.

Direct vs. Indirect Strategies

Direct strategies are those a stakeholder group controls on its own; indirect strategies require affiliating with other groups to shift the balance of power. Disgruntled, organized employees may negotiate demands directly; unorganized employees may instead seek government regulatory assistance (an indirect strategy) — indirect strategies are often necessary to achieve change a group couldn't accomplish alone.

The chapter's worked example: environmental activist groups sought to reduce fossil-fuel dependence by encouraging energy-efficient appliances. General Electric, the largest household-appliance provider, initially resisted product redesign. Change only occurred when the ENERGY STAR program allied with Maytag and Whirlpool to educate consumers — consumers then began buying ENERGY STAR products instead of GE's (a withholding strategy), which forced GE to start developing ENERGY STAR products of its own (Hendry, 2005).

Responsible companies build the capability to respond to stakeholder concerns. Understanding what each group values improves company responsiveness.

Customers

Customers are primary stakeholders — their awareness, purchase, use, and repurchase of products are necessary for the firm's financial viability. They want fair pricing and reliable supply, so companies must weigh pricing strategy against securing depleting natural resources; ethical businesses avoid price collusion and monopolistic behavior. Customers value honest marketing/advertising and expect products to perform as promised without negative consequences — parents, for instance, expect toys and furniture to pose no danger to children. Companies also face unintended-consequences issues from legal products with a high probability of socially unacceptable use — pornography, guns, gambling, tobacco, alcohol — and from marketing to vulnerable populations like children or the elderly, requiring companies to balance different consumer subgroups in their marketing strategies.

Ethical, social, and environmental impact matters to customers directly: McKinsey research shows consumers will pay more for organic, dairy-free, energy-efficient, environmentally friendly packaging, and natural-ingredient products (Freundt et al., 2024) — one global food manufacturer saw increased premium-priced sales for a shelf-stable, dairy-free vegetable spread. In Tehran, a juice bar's 25% surcharge experiment on organic juice found social pressure led customers to pay more when choosing in a public setting (Besharat et al., 2024). Companies that don't follow through on environmental or social claims are perceived as greenwashing — misleading customers about a company's environmental practices or a product/service's environmental or safety benefits — and research shows customers view greenwashing as corporate hypocrisy, leading to dissatisfaction with the company's goods and services (Ioannou et al., 2023).

Employees

Employees are concerned with their livelihood and supporting their families — continuity of the business to provide wages and benefits matters most, but this broad stakeholder category (line workers through executives) has issues and concerns that vary by occupation. Employees expect a safe workplace with equal opportunity for advancement and development, much of it enforced by regulation. Attention to employee concerns produces happy employees, and employee satisfaction directly affects company performance and customer satisfaction, enhancing reputation (Martinez & Norman, 2004) — hence benefits like child care support or flexible schedules for family obligations.

Suppliers

Suppliers — individuals, firms, or industries providing materials, services, or manufacturing/assembly — seek customers who honor contract terms, pay on time, respect their intellectual property, and share accurate forecasting information. Managers must attend to both supply chain needs and socially responsible purchasing, including noneconomic buying criteria on diversity, environmental, and labor issues. Ethics and sustainability audits are common practice for evaluating supplier social/environmental performance; supply chain managers must motivate suppliers to participate and respond to audit findings of ethical violations (Gonzalez-Padron, 2016). The Institute for Supply Management (2020) offers a responsible supply chain management framework covering anti-corruption, diversity and inclusiveness, environment, ethics and business conduct, financial integrity, global citizenship, health and safety, human rights, labor rights, and supply chain sustainability and transparency.

Shareholders

Shareholders care most about business strategy and continuity, scrutinizing risk management and reputational effects — the manner of achieving financial performance, not just the result, matters increasingly. Shareholder activists demand strategy changes, from resolutions to hostile takeovers. Example: Herbalife International had to defend itself when hedge fund manager Bill Ackman alleged it relied on inflated pricing, misleading sales information, and a complicated incentive plan to disguise a pyramid scheme; Herbalife responded by assuring investors it was a legitimate multilevel direct-selling company following all industry ethical standards.

Stakeholder engagement includes gathering information about stakeholder interests and expectations, sharing company activity and performance information, and dialogue/consultation. Effective stakeholder management reduces the risk that a group resorts to withholding or usage strategies. Depending on stakeholder power and legitimacy, one-way communication may suffice; time-sensitive or critical issues call for dialogue or partnership to establish two-way communication. Some approaches target a single stakeholder group (employee training, benefit information); others span multiple groups on a shared issue (a task force on energy-efficient products including employees, customers, and environmental groups).

Table 2.4 — Stakeholder Engagement Strategies

Communication

One-way communication is a normal part of business as companies convey information about themselves, their brand, or products to customers and the public, informing internal and external stakeholders on the issues the company deems most important. However, trust in business leaders' truthfulness is low among customers, employees, and the public (Edelman, 2024) — an effective communication strategy requires honesty, transparency, accuracy, and timeliness.

Consultation

Consultation gathers information or advice from stakeholders for strategic decision making. Surveys are a one-way consultative tool for discovering employee/customer satisfaction, supplier compliance, and community perceptions — even when results don't change company action, respondents should get some acknowledgment their input was considered. Field sales reps gather client-need information as part of sales calls, making sales staff an important consumer-input channel; management may attend community or association meetings to hear concerns directly. Formal consultative approaches include advisory forums (industry or outside experts) and online input campaigns — Goodyear Tire & Rubber sought public names for a new blimp, received 21,000 ideas, and settled on "Spirit of Innovation" (Hockensmith, 2006). Employee suggestion programs, often with cash incentives for implemented cost-saving ideas, make employees champions for energy conservation and safer processes.

Dialogue

Dialogue strategies are two-way conversational exchanges. Rather than the company simply gathering information and deciding how to use it (as in consultation), dialogue seeks cooperation on an issue, strategy, or initiative — stakeholders ask questions, interpret information, and make recommendations. Formal dialogue strategies include leadership forums and advisory panels exploring solutions together; companies facing shareholder resolutions may negotiate directly with the activist group to reach a mutually acceptable solution (Rehbein et al., 2013). Dialogue requires mutual trust and good faith from all parties.

Partnerships

When responding to stakeholder demands requires resources or expertise beyond the company's own capabilities, partnerships involve multiple organizations and go beyond talk to focus on action. A cross-sector alliance is a business partnering with nonprofits or government agencies to solve a social issue. Businesses gain increased legitimacy, positive reputation effects, social status, recognition, and learning opportunities, while offering partners managerial efficiency, technical expertise, creativity, dynamism, and access to finance. Nonbusiness partners, facing competition for limited funding, escalating societal needs, and sustainability pressures, bring field expertise, mission focus, and better reach to impoverished populations — the two sides complement each other and better allocate resources for the common good. Other partnership forms include formal stakeholder networks with joint plans of action: the Defense Industry Initiative shows companies joining forces on ethical conduct, while Accenture involves its own and client employees working with NGOs in developing countries on health, education, and energy challenges (Accenture, 2013).

Stakeholder management is complex and requires continuous attention: companies must anticipate new stakeholders and issues, since critical issues for existing stakeholders shift with social forces, and stakeholder groups may combine power or legitimacy to gain greater influence. Companies need ongoing processes to identify salient stakeholders, monitor issues, and build engagement strategies that add value to both the business and the community.

Before engaging, a company must assess the values governing its daily conduct — mission, values, and norms have direct implications for stakeholder relationships. A company valuing honesty and transparency should set an expectation of mutual trust and open communication in stakeholder interactions; respect for property rights may require monitoring supply chains for software piracy. Timberland and Patagonia treat their products' environmental impact as a brand differentiator, which shapes which stakeholder groups and issues they treat as most critical.

Identifying Stakeholders (Brainstorming Dimensions)

Identifying stakeholders looks simple but requires researching current and potential stakeholders to fully understand the issues and challenges that could affect business activities — including how new strategies or regulations affect existing or new stakeholder subgroups. One approach: brainstorm every group meeting these dimensions (Stakeholder Research Associates Canada Inc., United Nations Environment Programme, & AccountAbility, 2005b):

• Groups that the firm has responsibilities toward.
• Groups that the firm interacts with the most.
• Groups that could influence the firm's performance.
• Groups that are dependent on the firm.
• Groups that represent other individuals, such as trade union representatives and community officials.

Once identified, consider how groups overlap or intersect — employees, for example, may also belong to a community group that influences the company.

Gathering Information and Mapping to the Value Chain

The next phase gathers information on what each stakeholder group values and their greatest concerns, via surveys, focus groups, and informal conversations — groups not directly accessible may require internet research or outside industry sources. Information gathering should be routine: customer surveys as standard process, employee surveys and feedback for workplace insights.

The company should then examine how its activities affect each stakeholder group by looking for where stakeholder values and concerns intersect with the value chain — raw material procurement, production, marketing, or product usage. Employees valuing health and safety may care about production-process chemical toxicity, workplace air/water quality, and voluntary wellness programs; customers valuing product quality may react to modifications using cheaper materials or reduced portion sizes. Understanding which groups have the most concern in which business activities lets each functional area focus on its most salient stakeholders.

Governance of the Engagement Process

Top management sets the level of stakeholder engagement — dialogue on critical, high-impact issues often sits at the executive level, while functional managers maintaining ongoing stakeholder relationships may be better positioned to handle day-to-day issues. As one CEO put it, "You want to embed engagement as a general mindset and competency of managers, not just something done by specialists" (Stakeholder Research Associates Canada Inc., United Nations Environment Programme, & AccountAbility, 2005a, p. 30). Functional-level decisions include how much to communicate, the level of dialogue, and how information is shared internally — stakeholder information has no value unless it reaches company decision makers.

Chapter 2 closes with four critical thinking and discussion questions, each paired below with a concise model answer grounded in the chapter's content.

1. Provide an example from an actual business on how it is meeting (or not meeting) the company's economic, legal, ethical, and philanthropic responsibilities to customers.

Using Carroll's (1991) pyramid, Patagonia illustrates strong performance across all four levels toward customers: economically, it remains a viable, profitable business; legally, it complies with product safety and labeling requirements; ethically, it went beyond compliance by proactively investigating and eliminating formaldehyde exposure risk in its clothing once discovered; philanthropically, it directs significant resources to environmental causes aligned with its brand. A contrasting example of a gap would be a company found greenwashing — meeting economic and legal obligations while making environmental claims that don't hold up, which the chapter notes customers perceive as corporate hypocrisy (Ioannou et al., 2023).

2. Consider how the business model of Blue Star Recyclers allows for competitive positioning in the electronics recycling industry. How does hiring workers with autism provide a competitive advantage? How could companies learn from Blue Star's example?

Blue Star Recyclers positions itself in a growing, over $24 billion U.S. e-waste industry (IBISWorld, 2023) by combining ethical recycling with a mission to employ people with autism and other disabilities. This produces a talented, stable workforce advantage per Table 2.2's logic: the company reports zero turnover, zero accidents, zero theft, and minimal absences — dramatically lower costs from attraction and turnover than a typical employer would face (Navarra, 2022). It also generates goodwill, community recognition (state environmental awards), and government relations value, since the model saves taxpayers roughly $100,000 per year per worker previously in state-funded day programs. Other companies could learn to look for underutilized labor pools where a values-driven mission and operational excellence reinforce each other, rather than treating workforce inclusion and business performance as a trade-off.

3. The World Health Organization (2014) estimates that approximately 59 million African children suffer from hunger (2013 data). What innovative solution could companies come up with to address this social need? What challenges would they likely face? How might they overcome them? Which stakeholders could they work with to do so?

Following the chapter's strategic philanthropy and cause marketing models, a food or agriculture company could adapt the Merck Mectizan Donation Program approach — using its own product expertise and distribution networks to deliver fortified foods, paired with a cause-marketing tie-in (a la TOMS or grocery-store checkout donations) to fund it. Likely challenges include distribution infrastructure in remote regions, political instability, and ensuring aid reaches intended recipients without corruption — mirroring the chapter's caution that companies entering developing markets are often expected to fund infrastructure governments should provide. Overcoming these requires partnerships (cross-sector alliances) with NGOs that have local expertise and community trust, similar to how Merck partnered with the WHO, GSK, and local NGOs to train community-directed distributors. Relevant stakeholders: NGOs and the WHO for distribution expertise, local governments for market access and legitimacy, and consumers in the company's home markets whose cause-marketing purchases could fund the effort.

4. Consider IKEA's discovery that its iconic meatballs contain traces of horsemeat. IKEA sells an estimated 150 million meatballs at their furniture stores and through grocery stores. The meat comes from slaughterhouses in Europe that cut costs by mixing horsemeat into ground beef products. Which stakeholder groups are involved in this situation? How much power does each group have to influence the company? Recommend how the company should engage with the stakeholder groups.

Stakeholder groups involved: customers (concerned about truthful labeling and food safety — high power, since they can withhold purchases at scale given 150 million meatballs sold), suppliers/slaughterhouses (whose cost-cutting caused the contamination — the company depends on them but must now scrutinize and potentially replace them), regulators and food safety agencies (legal power to fine or restrict sales), media (secondary stakeholder with power to amplify reputational damage), and shareholders/investors (financial interest in the brand's reputation). Applying Mitchell et al.'s (1997) framework, customers and regulators combine high power, high legitimacy, and high urgency here — the classic profile of a stakeholder group demanding immediate, direct engagement. The recommended response follows the chapter's engagement-strategy hierarchy: move beyond one-way communication (a public statement) to genuine dialogue and consultation — transparently disclosing what happened, auditing and tightening supplier oversight (echoing the chapter's point on ethics and sustainability audits for suppliers), and following up visibly on corrective action, since the chapter identifies follow-up as the most critical step in maintaining stakeholder trust.

Every key term listed at the end of Chapter 2, defined in one line each, in the order the chapter's key terms list presents them.

A single table capturing the chapter's core frameworks, its three organizing approaches to CSR, its three stakeholder attributes, and its most important distinctions.