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Lecture notes BSILecture 1: Business, sustainability & innovation
The role of business in society: shareholder vs stakeholder theory
A business enterprise (or a company/firm) is: a profit-seeking organization that provides goods
and/or services designed to satisfy customers’ needs by transforming lower-value inputs into higher-
value outputs (adding value).
➔ Business/company: complex entities that have various activities they perform
Corporate activities have (negative) impact on society and the environment.
Growing pressure from stakeholders to integrate sustainability into business practices.
Inbound logistics → Gathering material to start the operation process
Outbound logistics → Storing products in order to reach final customers
After sales service → Customer service
Procurement → Acquiring resources to operate
Supply chain → Also involving other entities related to the company
The term value chain refers to the process in which businesses receive raw materials, add value to
them through production, manufacturing, and other processes to create a finished product, and
then sell the finished product to consumers. A supply chain represents the steps it takes to get the
product or service to the customer, often dealing with OEM and aftermarket parts.
While a supply chain involves all parties in fulfilling a customer request and leading to customer
satisfaction, a value chain is a set of interrelated activities a company uses to create a competitive
advantage.
In addition: the supply chain and value chain concepts have a different underlying perspective.
Supply chain is concerned with the more 'physical' side, i.e. production and distribution of a product,
value chain is about all the activities that a firm (and its partners) engage in to create added value
(from the firm's own viewpoint: competitive advantage; from stakeholder viewpoint: value added by
addressing needs).
1
,Business case: downsides and upsides of certain business activities (e.g. making money)
Shareholders are always stakeholders in a corporation, but stakeholders are not always
shareholders. A shareholder owns part of a public company through shares of stock, while a
stakeholder has an interest in the performance of a company for reasons other than stock
performance or appreciation. These reasons often mean that the stakeholder has a greater need for
the company to succeed over a longer term.
A shareholder can sell their stock and buy different stock; they do not have a long-term need for the
company. Stakeholders, however, are bound to the company for a longer term and for reasons of
greater need. For example, if a company is performing poorly financially, the vendors in that
company's supply chain might suffer if the company no longer uses their services. Similarly,
employees of the company, who are stakeholders and rely on it for income, might lose their jobs.
Mainly shareholders benefit from the firm’s activities → Milton Friedman point of view →
shareholder/stockholder theory
- Focus on making profit
- ‘’Shareholder theory equates to an influential view on the role of business in society which
pushes the idea that the only responsibility of managers is to serve in the best possible
way the interests of shareholders, using the resources of the corporation to increase the
wealth of the latter by seeking profits. According to this theory, such behavior, done within
the constraints of law and without deception or fraud, would be beneficial for society as a
whole. Within this theory corporate social responsibility is defined in purely economic profit
making terms.” (Castelo, 2013)
Mainly stakeholders benefit from the firm’s activities → stakeholder theory
- Many other parties (e.g. customers, stakeholders, producers, competitors etc.) are involved
which also have to be taken into account
- Shareholders are an example of primary stakeholders (primary stakeholders have a strong
influence on the operation of the company and are necessary for the firm to operate)
- Secondary stakeholders are not necessary for the company to work but can strongly
influence or push the primary stakeholders to notify the firm on their performance
(example: NGO’s)
- Interested parties (latent & overt) have a weak influence on organizational activities
Latent stakeholders: parties that the company is not necessarily aware of
Overt stakeholders: parties that the company is aware of
- Stakeholder theory is relevant in the context of sustainability because stakeholders are a big
pressure on the company to be/become more sustainable. Corporate activities have an
positive or negative impact on the environment. Stakeholder’s have expectations about how
the business should operate, which influences the company.
- Stakeholders’ expectations about the environment can affect business. They can present
both threats (e.g. rejection of environmentally harmful products) and opportunities that
arise from customer preference for environmentally friendly goods (e.g. new market
opportunity, investments). (Schaltegger et al., 2003)
- “In the traditional view of the firm, the shareholder view, the shareholders or stockholders
are the owners of the company, and the firm has a binding financial obligation to put their
needs first, to increase value for them. However, stakeholder theory argues that there are
other parties involved, including governmental bodies, political groups, trade associations,
trade unions, communities, financiers, suppliers, employees, and customers. Sometimes
even competitors are counted as stakeholders.” (Freeman, 2015)
2
, Organisations need to be
cognisant of stakeholders to
achieve superior performances
(Freeman, 1984)
Not all companies have the same stakeholders, dependent on:
- Interests
- Location/government type → different laws, rules and institutions
- Type of company
- Market you compete in
The stakeholder categories ‘per se’ are the same for all companies (i.e. customers, producers,
government etc. are important for all companies), however the relevance of each stakeholders
differs per company and per moment/situation (e.g. when a scandal appears or when a new law
is in action)
Sustainability: The business case of/for sustainability
Sustainability: “Corporate activities have an impact on society and the natural environment and,
therefore, may (or may not) contribute to sustainable development (SD).” (Baumgartner & Rauter,
2017: 83)
Companies care about/take action on sustainability because:
- Stakeholders push them to take action
- Social company: sustainability is an important value of the company itself
‘Business case’ in the context of sustainability:
- Whether and how a company can actively create synergies between managing
environmental or social issues in a way that increases corporate economic performances.
- 4 approaches (the approach a company takes on can change per project):
1 - Business case of sustainability
• Maximizing profit is the main goal, environmental activities are only voluntary made if
money can be made.
• Voluntary social and/or environmental activities can be used to improve corporate financial
performance
2 - Business cases for sustainability
• Environmental and social issues that need to be addressed come first, making money is put
second.
• Economic success can and should be created through the conscious consideration of
environmental and/or social issues
3 - Business cases for stakeholder management
4 - Stakeholder business cases for sustainability
3
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