2. The Stakeholder theory of corporation
2.1. The legal argument of R. Edward Freeman
2.2. The general issue in business ethics
2.3. The economic argument
2.4. The stakeholder concept
3. The importance of stakeholder management
4. The implementation process of the stakeholders management system
5. Nestlé´s stakeholder engagement
5.1. Nestlé´s controversy
5.2. Nestlé way of stakeholder engagement
6. Nestlés stakeholder management, practical example of Ivory Coast
6.2. Nestlé´s stakeholder management in the Ivory Coast
6.3. Nestlé´s Stakeholder Mapping in Ivory Cost
6.4 Supply Chain Mapping and Actors
6.5 Risk Management and Assessment
Stakeholder Management with long-term sustainability is decisive in determining whether a business organization is being successful or not. Stakeholder Management has a direct impact on the company’s competitiveness and its environment. The most profitable companies have strong relationships with their relevant stakeholders groups, that is, the stakeholders in their business field. Stakeholder Management has a wide actively and effectively challenge to manage these important relationships with their different stakeholders groups. Strong customer relationships, successful relationships with suppliers, committed employees and good relationships with other stakeholders groups define the winners of today in the world´s global economy and that is why companies like Nestlé understand, that they should keep an important and a great relationship with their stakeholders. To be able to achieve a sustainable stakeholder management, organizations first have to define who their key stakeholders are, they have to be able to understand their needs, then secondly, they should define what kind of stakeholder management system applies thereto.
According to the explanation above, stakeholder management is a critical component to the successful delivery of any project, program or activity. A stakeholder is any individual, group or organization that can affect, be affected by, or perceive itself to be affected by a program (Sowden 2011, p. 59). Good stakeholder management builds a good relationship between the corporation and its stakeholders, and is more effectively for the company’s profit. This process and control should definitely guide the corporation and be part of its principles.
To analyze stakeholders is important to consider who they are. As part of this, think of all the people who are affected by your work, who have influence or power over it, or have an interest in its successful or unsuccessful conclusion. Remember that although stakeholders may be both organizations and people, ultimately you must communicate with people. Make sure that you identify the correct individual stakeholders within a stakeholder organization (Sowden 2011, p. 64).
However, before moving to the case example of this analysis, it is important to explain what stakeholders are and how to identify them. The basic and most cited definition of stakeholders by R. E. Freeman (1984) says that “any group or individual who can effect or is affected by the achievement of an organization´s purpose”. Stakeholders are, from this definition, all relevant groups or people who are important for the corporate value creation, as their input like capital, work, resources, buying power, and word-of-mouth is vital for the corporation´s success.
From all definitions above, it is clear that stakeholder management is one of the most difficult challenge that most of the biggest corporations have to face to be able to keep their reputation intact and much more, to be successful. The relationship between the Corporation and its stakeholders can be rude, because everyone has to fight for their own interests. Corporations have responsibilities towards their employees, society, government, consumers, owner and the environment. This means they have to keep considering all of them in their economic process and growth. The relation between the Corporation and its stakeholders’ groups implies responsibilities and that is why the main topic of this paper is about Corporate Social Responsibility (corporate conscience). CSR policy functions as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards and international norms. This means that the corporation has to be able to discover the need and benefit of the collaboration with stakeholders, and this can be a painful experience for companies. Therefore, companies have to involve all stakeholders in any large decisions.
Nestlé Corporation is the largest food company in the world with a capital of CHF 120,442 Billion and has been involved in many different scandals related to baby foods, exploitation of rural African producers, animal testing, etc. This company is one of the most controversial companies in the world and due to this; it has to keep up to the challenge with many different internal and external stakeholders.
Before going into the two very important parts of this analysis, at this level, it is essential to show the relevance of this topic and the reason of focusing on Nestlé. In the 21st century, with many corporate economical growths, the issues of corporate conscience have turned to be more and more relevant. Companies do not just have to grow economically, but they also have to grow in values, human ways, and make sure that their actions do not disturb or affect others´ existence negatively. The important words that may appear at this level are words like “fair trade”, “philanthropy” and „responsibilities”. Trade does not only have to be fair, but the company also has to make sure that it is responsible as an important role player of the society. Nestlé was chosen because it is the largest food provider worldwide and is available in all regions of the globe. Therefore, Nestlé is the best example of this analysis about CSR stakeholder management. The other reason for choosing Nestlé is its controversial side, since this analysis seeks to find out, with the case study, if Nestlé´s approach to stakeholder management is fair and responsible.
The question of this working paper is to try to analyze the Nestlé´s Stakeholder management approach and to try to find out if this company after all those different scandals has improved its stakeholder approach; in other words if the company´s reputation is better as in former times. That is why the first part of this analysis after the theoretical part will try to analyze its stakeholder management approach regarding the last years. In other words, this part of the paper intends to analyze Nestlé´s way of engagement (Nestlé´s CSR). The second part of this work focused more on examples of the relationship between Nestlé and some of its stakeholders in the Ivory Coast. This part is only a case study and does not aim to present the Nestlé Corporation as a bad or a good company. The main purpose of this section is trying to show the impact of a stakeholder management and sustainability on to the organization´s business. This part intends showing how the Nestlé’s approach would look like theoretically with some mapping.
To itemizing is clear that the first chapter of this paper tries to explain what stakeholders management is, and to present the company organization and its stakeholder management approach, but much more important here is Nestlé stakeholders’ engagement, to understand better the Nestlé approach. There will be some more explanations based on the challenges of Nestlé in this part of the analysis; the whole controversy about the company will be stated to clarify how important it is to analyze the approach. The second chapter of this paper will focus more on sustainable Management of Nestlé in Ivory Cost. The focus here will be based on stakeholders like governmental stakeholders, NGOs, and local communities and village-level committees. Finally, the last and third chapter of this paper will focus on the supply chain management and assessment, with focus on how Nestlé supplies cocoa; this part will close with a Risk management and Assessment.
2. The Stakeholder theory of corporation
The stakeholder theory has been advanced and justified in the management literature based on its descriptive accuracy, instrumental power, and normative validity (Dodd. Jr 1932). These three aspects are the most important points in the stakeholder theory of the modern corporation. Although they are interrelated and are quite distinct: They involve different types of evidence and argument and have different implications (Dodd. Jr. 1932). E. Merrick Dodd Jr. and Thomas Donaldson examine the three aspects of the theory in their article in the Academic of Management Review 1995 Vol. 20. No. 1. 63-91. They did not just examine them, but also criticized and integrated important contributions to the literature. These three aspects of the literature related to each other, and they conclude that these three aspects of stakeholder theory are mutually supportive and constitute the normative theory basis – which includes the modern property rights theory – and is fundamental.
As mentioned in the introduction, the idea of corporate social responsibility and, in this case, corporation stakeholders has now become very important in the literature, and much more in the professional field (practice). Freeman turned this topic into one of the most important ones in the management science in his landmark book, Strategic Management: A Stakeholder Approach (1984) and since that publication more than 100 articles and books with primary emphasis on the stakeholder concept have appeared. Significant examples include books by Alkhafaji, 1989; Anderson, 1989; and Brummer, 1991, and articles by Brenner & Cochran, 1991; Clarkson, 1991; Goodpaster, 1991, Hill & Jones, 1992; and Wood, 1991 a, b; and numerous papers by Freeman and various collaborations cited individually (Donaldson 1995, p. 65-66). Stakeholder management is the central theme of at least one important recent business and society text (Carroll, 1989).
There are central thesis of stakeholder management and stakeholder theory: The stakeholder theory is unarguably descriptive. It presents a model describing what the corporation is. It describes the corporation as a constellation of cooperative and competitive interests possessing intrinsic value. Aspects of this model may be tested for descriptive accuracy: is this model more descriptively accurate than rival models? Moreover, do observers and participants, in fact, see the corporation this way? The model can also serve as framework for testing any empirical claims, including instrumental predictions, relevant to the stakeholder concept (1) (but not for testing the concept´s normative base) (Donaldson 1995, p. 66).
More Theses: (2) The stakeholder theory is also instrumental; it establishes a framework to examine the connections; (3): stakeholders are persons or groups with legitimate interest in procedural and/or substantive aspects of corporate activity and they are identified by their interest in the corporation; the interest of all stakeholders is of intrinsic value. (4) The stakeholder theory is managerial in the broad sense of that term; it does not simply describe existing situations or predict cause-effect relationships. (Donaldson 1995, p. 67).
The following illustration shows how stakeholders interact on the company. This image clearly depicts the relation between the company and its stakeholders. This illustration is an example of company´s internal and external stakeholders.
illustration not visible in this excerpt
Figure 1: Origin: Grochim
2.1. The legal argument of R. Edward Freeman
Freedman is the precursor of the theory of stakeholder management. In his academic books, papers about stakeholder management, he properly illustrates the theory of stakeholder management. The basics of managerial capitalism are that in return for controlling the company, the management vigorously pursues the interests of stakeholders (Freedman1984, p.39). The Law of corporations provides a less clear-cut to the question: Under which interests and benefits should the modern corporation be governed? While it states that the corporation should be run primarily in the interests of stakeholders in the corporation, it declares further that the corporation exists “in contemplation of law” and has personality as a “legal person”, limited liability for its actions, and immortality, since its existence transcends that of its members (Freeman 1984, p. 39). Therefore, managers and officers in the firm have a fiduciary obligation to stakeholders in the sense that the “affairs of the corporation” must be conducted in the interest of the stockholders (Freeman 1984 p.39). Theoretically, stakeholders can sue those managers for doing otherwise. Corporations are legal persons and are existing in contemplation of law, therefore firm directors and managers are ruled by law. Law brings into the stakeholder management theory an efficiency and effectively constrain in pursuit of stakeholder interest. At the same time, law has the required effect to protect or give the possibility to customers, suppliers, local communities, and employees to claim by needs; that means that law provides some security to those groups and protects them from the corporation, i.e., the corporations are subordinated to the stakeholders’ claims.
One example is the product liability law that protects consumers while giving the manufacturer a strict liability for damage caused by its products. This means that the consumer has the right to send the product back and at the same time, the consumers’ product safety commission can enact product recalls. Toyota Company for example, had recalled more cars than the ones built. Caveat emptor was replaced, in large part, with the caveat vendor (Charan/Freeman 1980, p.19). Lawmakers required to most industries providing information to customers about product´s ingredients, product´s origin, and the customer doesn´t have to pay for this information, because is about product transparency.
The same logic is applied about employees. The example of USA shows that the National Labor Relation Act gave employees the right to organize themselves in unions and to bargain in good faith. It established the National Labor Relations Board to enforce these rights. The Act of 1964 constrained management from discrimination in hiring practices; there have been followed with the Age Discrimination in Employment Act of 1967 (Millstein /Katsh 1981 Chapter 4). This Act gives employees some rights and protects them from the corporation that might abuse them; those laws insure fairness between the corporation and its employees. The law has protected the due process rights of those employees who enter into collective bargaining agreements with the management (Freeman 1984, p.40).
Concerning local communities, there are some laws like the Clean Air Act and Clean Water Act that constrain the management from “spoiling the commons”. There is much current legal activity in the area of preventing firms from moving plants to contain management´s pursuit of stockholders’ interest at the expense of the local communities in which the firm operates (Freeman 1984, p.40).
2.2. The general issue in business ethics
Business ethics is also called corporate ethics and is a form of applied ethics or professional ethics that examines ethical and moral or ethical problems that arise in the business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations (Stanford Encyclopedia, 2008).
Business ethics has normative and descriptive dimensions. As a corporate practice and a career specialization, the field is primarily normative. Academics attempting to understand business behavior employ descriptive methods. The range and quantity of business ethical issues reflects the interaction of profit-maximizing behavior with non-economic concerns. The interest in business ethics accelerated dramatically during the eighties and the nineties, both within major corporations and within the academy. For example, today most major corporations promote their commitment to non-economic values under headings such as ethics codes and social responsibility charters. Adam Smith said, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." (Smith 1776/ 1952, p.55).
Business ethics is the philosophy of the business, it aims is to determine the fundamental view of the corporation. The economist Milton Friedman writes the corporation executives "responsibility... generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom". Friedman also said, "the only entities who can have responsibilities are individuals ... A business cannot have responsibilities. So the question is do corporate executives, provided they stay within the law, have responsibilities in their business activities other than to make as much money for their stockholders as possible? And my answer to that is, no, they do not. (Friedman 1970/1984/2008).
All corporations and most of the large ones face the same dilemmas of the business ethics, there are none industry exception. The ethical issue of the business covers a variety of issues and departments such as human resource, employees, finance, payment rates. Corporations are confronted to these ethical issues/dilemmas and they have to deal with to be able to insure some values in the society.
The most ethical issues in the business in the 21st century are accounting practice Ethics, social Networking Ethics, Harassment in the Workplace, Paying employees equally. Sayali Bedekar Patil (2012) describes four specific issues and his opinion is that this, dealt with pretty strictly as serve an example to rest:
(1) Showing honesty, integrity, and openness in consumer relationships, addressing warranty and guarantee claims in an open and transparent manner and involving the company in some kind of social welfare causes is an ethical business practice that many are yet to follow.
(2) Whether to accept moral responsibility of on-site mishaps, spills, leaks, and disasters and whether to make product recalls if certain harmful information about them becomes known, are ethical issues that all businesses must be prepared for.
(3) Unethical business practices like dumping good at loss making prices just to earn market shares or to oust a new competitor from business, colluding with competitors to fix higher prices, using high pressure selling tactics, using deceptive advertising, etc. are also some things that need to be looked at.
(4) Some stronger ethical issues relate to practices not easily detected, like releasing products that have built-in obsolescence (to generate further demand for future products) and indulging in accounting manipulations to generate secret reserves or to show higher or lower profits as per convenience (Bedekar Patil 2012).
2.3. The economic argument
Based on the rational theory, corporations always try to maximize their benefit, but on the stakeholder theory, they always have to maximize the interest of their stakeholders. In its perennial criticism of government regulation, management adopts the “invisible hand” doctrine. It contends that it created the greatest good for the greatest number, and therefore government need not intervene (Freeman 1984, p.41). This argument means, that corporations have to build positive inter relation between them and their stakeholders without the intervention of the States. However, we know that externalities, moral hazards and monopoly power exist in fact, whether or not they exist in theory (Freeman 1984, p.41).
Fairness is theoretically important for corporations to be able to survive on the market, because customers and media always act on the corporation reputation before they consume their product. Therefore, corporations have to make sure, that stakeholders benefit are important and that they feel satisfied in their trade with the corporation, this notion is quiet significant, even it´s always been difficult to measure the effectiveness of the corporation stakeholder engagement on a company´s bottom line.
Researchers at the Wharton School of Business released a study detailing how stakeholder cooperation increases profitability and success for corporation and for stakeholders. The study implies a successful stakeholder engagement process whereby buy-in from different sectors is achieved. At this point is clear to see that a strong economical relation between stakeholders and company might mean growth, productivity and success for both parts. The economic argument shows that monopoly and none fair trade between corporation and his stakeholders, even in case of monopoly might not be interesting and productive for both parts, so the corporation´s interest is to handle fair with its stakeholders to keep a safer and better image of themselves.
Externalities, moral hazards, and monopoly power have led to more external control on managerial capitalism. There are de facto constrains, due to these economic facts of life, on the ability of management to act in the interest of stakeholders (Freeman 1984, p.41).