Organizational Theory, Design, and Change: Stakeholders, Managers, and Ethics
Organizational Theory, Design, and Change: Stakeholders, Managers, and Ethics
Organizational Theory, Design, and Change: Stakeholders, Managers, and Ethics
Stakeholders,
Managers, and Ethics
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Learning Objectives
1. Identify the various stakeholder groups and
their claims on an organization
2. Understand the choices and problems inherent
in distributing the value an organization creates
3. Appreciate who has authority and
responsibility at the top of an organization, and
distinguish between different levels of
management
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Organizational Stakeholders
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Inside Stakeholders
• People who are closest to an organization and have
the strongest and most direct claim on
organizational resources
• Shareholders: the owners of the organization
• Managers: the employees who are responsible for
coordinating organizational resources and ensuring that
an organization’s goals are successfully met
• The workforce: all non-managerial employees
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Outside Stakeholders
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Outside Stakeholders (cont.)
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Table 2.1: Inducements and
Contributions of Stakeholders
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Organizational Effectiveness: Satisfying Stakeholders’ Goals and
Interests
• An organization is used simultaneously by
various stakeholders to achieve their goals
• Each stakeholder group is motivated to
contribute to the organization
• Each group evaluates the effectiveness of the
organization by judging how well it meets the
group’s goals.
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Stakeholder Goals
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Competing Goals
• Organizations exist to satisfy stakeholders’ goals
• But which stakeholder group’s goal is most
important?
• However, managers control organizations and
may further their own interests instead of those of
shareholders
• Goals of managers and shareholders may be
incompatible
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Allocating Rewards
• Managers must decide how to allocate
inducements to provide at least minimal
satisfaction of the various stakeholder groups.
• Managers must also determine how to distribute
“extra” rewards.
• Inducements offered to shareholders affect their
motivation to contribute to the organization.
• The allocation of reward is an important
component of organizational effectiveness.
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Top Managers and Organizational Authority
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Top Managers and Organizational Authority (cont.)
• The board of directors: monitors corporate
managers’ activities and rewards corporate managers who
pursue activities that satisfy stakeholder goals
• Inside directors: hold offices in a company’s formal
hierarchy
• Outside directors: not full-time employees
• Corporate-level management: the inside
stakeholder group that has ultimate responsibility for
setting company goals and allocating organizational
resources
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The Chief Executive Officer’s (CEO) Role in Influencing Effectiveness
• Responsible for setting organizational goals and
designing its structure
• Selects key executives to occupy the topmost
levels of the managerial hierarchy
• Determines top management’s rewards and
incentives
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The CEO’s Role in Influencing Organizational Effectiveness (cont.)
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Top Management Roles
• CEO—Often has primary responsibility for managing the
organization’s relationship with external stakeholders
• COO—Responsible for managing the organization’s internal
operations
• Exec. Vice Presidents—Oversees and manages the company’s most
significant line and staff roles
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The Top-Management Team
• Line-role: managers who have direct
responsibility for the production of goods and
services
• Staff-role: managers who are in charge of a
specific organizational function such as sales or
research and development (R&D)
• Are advisory only
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The Top-Management Team (cont.)
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Other Managers
• Divisional managers: managers who set policy only for the division
they head
• Functional managers: managers who are responsible for developing
the functional skills and capabilities that collectively provide the core
competences that give the organization its competitive advantage
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The Top-Management Hierarchy
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An Agency Theory Perspective
• Agency theory suggests a way to understand the
conflict that often arises between shareholder goals
and top managers’ goals.
• Agency relation occurs when one person (the
principal, i.e. shareholders) delegates decision-
making authority to another (the agent, i.e.
managers).
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Agency Problem
• There is a problem in determining managerial accountability
that arises when delegating authority to managers.
• Shareholders are at information disadvantage compared to top
managers.
• It takes considerable time to see the effectiveness of decisions
managers may make.
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The Moral Hazard Problem
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Solving the Agency Problem
• In agency theory, the central issue is to overcome the
agency problem by using governance mechanisms that
align the interests of principles and agents
• The role of the board of directors:
• Monitor and question top managers decisions
• Reinforce and develop a code of ethics
• Find the right set of incentives to align the interests of
managers and shareholders
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Governance Mechanisms
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Top Managers and Organizational Ethics
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• The Use of Animals in Cosmetics Testing
Gillette believes that the only safe way to test its products is to use animals, and it defends its position by
responding to every letter of protest, and even telephoning children at home to explain.
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Models of Ethics
• Utilitarian model: An ethical decision is one that produces the greatest
good for the greatest number of people
• Moral Right Model: An ethical decision is the one that best maintains and
protects the fundamental rights and privileges of the people affected by it
• Justice Model: An ethical decision is a decision that distributes benefits
and harms among stakeholders in an impartial way
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Sources of Organizational Ethics
• Societal ethics: codified in a society’s legal system, in its customs
and practices, and in the unwritten norms and values that people use
to interact with each other.
• Professional ethics: the moral rules and values that a group of
people uses to control the way they perform a task or use resources.
• Individual ethics: the personal and moral standards used by
individuals to structure their interactions with other people.
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Why Do Ethical Rules Develop?
• Ethical rules and laws emerge to control self-
interested behavior by individuals and organizations
that threaten the society’s collective interests
• Ethical rules reduce transaction costs, that is the costs
of monitoring, negotiating, and enforcing agreements
between people
• Reputation effect: Transaction costs:
• Are higher for organizations with a reputation for illegality
• Are lower for organizations with a reputation for honest dealings
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Why Does Unethical Behavior Occur?
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Creating an Ethical Organization
• An organization is ethical if its members behave ethically.
• Put in place incentives to encourage ethical behavior and
punishments to discourage unethical behaviors.
• Managers can lead by setting ethical examples.
• Managers should communicate the ethical values to all
inside and outside stakeholders.
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Designing an Ethical Structure and Control
System
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Creating an Ethical Culture
• Values, rules, and norms that define an organization’s ethical position
are part of its culture.
• Behaviors of top managers are a strong influence on the corporate
culture.
• Creation of an ethical corporate culture requires commitment from all
levels.
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Supporting the Interests of Stakeholder Groups
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