Week 2: Stakeholders & Workers' Co-Operative
Who is a stakeholder?
According to Freeman, "a stakeholder in an organisation is any group or individual who can affect or is affected by the achievement of the organisation's objectives'" -> Essentially, they are those with a stake in the organisation where some examples include customers, employees, shareholders, suppliers etc.
What should the end aim of an organisation be under stakeholder theory?
Balance stakeholder benefits. If an organisation were to aim at something other than this, it is ruled out by the stakeholder theory
How much were associates paid in Walmart and how did Walmart derive that value?
$11.75 Derivation: Businesses adjust wages by trial and error, using profit sharing as a buffer. The wage can also be arrived by comparing with the market rate etc, essentially the factors that affect the company
How many co-operatives and non co-operatives are there in the Mondragon group?
Co-operatives - 101 Non Co-operatives - 160
How should executives manage stakeholders?
- Managing for stakeholders is about creating as much value as possible for stakeholders, without resorting to trade-offs - Balance stakeholder benefits and not favour one over another
What are the consequences of today's capitalism?
- Shareholders get most of the profits - Increased inequality in society - Profits flow mainly to a small group of executives/shareholders and gets increasingly diluted as it moves down the employment chain - Monopolies may retain supernormal profits over a long period of time without competition
How should Walmart treat terrorists and shoplifters?
- Treat them as sources of value - Call the police (911) - Treat them as a learning opportunity to enhance security - Prevent them from doing their terrorists act and getting in trouble with the law
What are yardsticks to determine whether an associate's pay is fair?
1. Affected by Market Factors - The number of people able to perform a specific job in the employer's region - The availability of jobs - The competition for employees with the necessary skills and education levels 2. Poverty Line Based on cost of necessities/cost of living 3. Minimum Wage The minimum wage of $7.25 was set by the government and is law. it is 2.5% below the national retail average
What are the alternatives to the shareholders' corporation?
1. Communism - all property is owned by the community 2. Socialism - Production, exchange & distribution should be regulated by the community as a whole 3. Credit Unions - Member-owned financial cooperatives 4. Agricultural Cooperatives - Eg. Sunkist, Organic Valley etc. 5. Purchasing Cooperatives - Hardware sectors eg. Ace, True Value etc. 6. Consumer Cooperatives - Eg. REI & independent grocery stores 7. Housing Cooperatives - Address the needs of seniors, students, low-income communities etc. 8. Workers' Cooperatives - Eg. Mondragon
What are the 4 arguments justifying the concept of accountability under stakeholder theory?
1. Performance argument 2. Treating stakeholders as ends 3. Parallel with government 4. Social contract argument
Elaborate on the 4 arguments justifying the concept of accountability under stakeholder theory.
1. Performance argument Stakeholder-focused strategies ultimately help to achieve business success However, the practical success of stakeholder-oriented strategies does not and cannot justify accountability to all stakeholders 2. Treating stakeholders as ends Organisations should ultimately be accountable to all stakeholders, otherwise, those stakeholders are merely treated as means to others' ends. However, in specifying that organisations must seek balanced stakeholder benefits, stakeholder theory forcibly overrides the substantive ends that people select. It therefore prevents consenting moral agents from pursuing their chosen ends 3. Parallel with government Accountability to all stakeholders comes from confusing corporate governance with government. However, unlike government, ordinary organisations cannot legally use force to compel people to do things. Since organisations have no coercive power, there is no need to hold them accountable for the use of such coercive power in the first place 4. Social contract argument Organisations are accountable to all stakeholders because they use society's resources and enjoy special privileges from society, in exchange for society consenting to provide the resources and privileges they need to exist However, although organisations depend on the willing cooperation of the members of society, that does not give society any right to hold them to account
Why should we follow stakeholders' theory?
1. Produces long-term results 2. Generates profits by pursuing purpose with others 3. Building and leading a company has always been about managing for stakeholders 4. Most likely to have sustained success
What is cooperative?
A cooperative is an autonomous association pf persons who voluntarily cooperate for their mutual social, economic & cultural benefits. Cooperatives include non-profit organisations and businesses owned and managed by people who use its service (a consumer cooperative), by people who work there (a worker cooperative), or by people who live there (a housing cooperative)
Which is better for managers and up, the Worker's Cooperative or the Corporation?
Corporation
Who should create value?
Executives
What are the arguments for and against Walmart paying their employees more?
For: - Current wages are below the national average for retail employees - Current annual earnings fall below the poverty line of $22k - High supernormal profits justify an increase in wages Against: - With increased wages, there is an increase in costs so Walmart will increase prices to counter that, a move that will affect all of America - If the employee's costs increases, demand for employment will decrease (ie. hire fewer employees) - With increased salaries, that is an increase costs resulting in lesser profits. Lesser profits will reduce tax payments and will contribute to the national budget deficit - Increase in salaries will not address the long-term economic problem of loss of manufacturing jobs/income inequality/horrific unemployment
Why are workers; cooperatives always left with 1 branch in the end?
If 1 branch incurs losses, workers int he profit-making branch will vote to close the loss-making branch down, so size cannot expand too much. Meanwhile, workers in the loss-making branch will vote to not close their branch down. Workers in the loss-making branch will be transferred or retrenched but regardless, the workers' cooperative is left with one branch in the end
What is the difference between internal and external stakeholders?
Internal Stakeholders - Managers & employees employed by the firm External Stakeholders - People not directly employed by the firm
What is the difference between market and non-market stakeholders?
Market stakeholders - Those that engage in economic transactions with the company as it carries out its purpose of providing society with goods and services (eg. creditors, employees, suppliers) Non-market stakeholders - Do not engage in direct economic exchange with the firm (eg. the community, competitors, general public, non-governmental organisations etc.)
Is stakeholder theory compatible with business? Why or why not?
No, stakeholder theory is incompatible with business. This is because... 1. According to stakeholder theory, there is only one type of legitimate organisation - one that balances stakeholder benefits 2. This precludes all objectives favouring a particular group, such as housing the homeless, maximising value for customers etc. as these substantive ends aim at something other than balancing stakeholder benefits 3. Balancing stakeholder benefits is an unworkable objective as the number of stakeholders can be infinite and there is no proper definition of what counts as "balancing benefits" - everyone has a different view of what is beneficial.
Is stakeholder theory compatible with corporate governance? Why or why not?
No, stakeholder theory is incompatible with corporate governance. This is because... 1. Key concept in corporate governance is accountability, but under stakeholder theory, accountability is diffused (ie. an organisation is accountable to everyone). When accountability is diffused it is effectively non-existent, ie. you are accountable to no one 2. Stakeholder theory provides no standard against which corporate agents can be judged 3. Stakeholder theory demands that managers violate prior obligations to owners they undertook in accepting the job (ie. they were supposed to maximise profits)
Where were the non co-operative members of Mondragon mostly located?
Non-cooperative members mainly worked in the distribution sector outside the Basque Country and in the industrial plants either in other parts of Spain or abroad
What is the meaning of "stake"?
Ownership or an interest in (or claim on) a business enterprise It allows one to exercise some level of control, influence and participation in the activities of the company
What are the pros and cons of Mondragon Corporation?
Pros: 1. Focus on equity and tries to balance the interest of stakeholders 2. Employee Ownership -Employees get to make decisions about what they do 3. Inter-cooperation - During the 2008 financial crisis, Fagor Electrodomesticos failed, eliminating the jobs of 1800 worker-owners in 2013. Due to the principle of "inter-cooperation" amongst the Mondragon cooperative enterprises (ie. the idea of connectedness and reciprocity among all participants in the system), employees were relocated to other cooperatives 4. The Mondragon pension system is fully integrated with the Spanish government system. Mondragon retirees receive 60% of their pension from the government and 40% from the Mondragon system. In total, they receive 80% of their former salary and can retire without major shifts in their lifestyle Cons: 1. In trying to balance the interests of stakeholders and maintaining the more equitable roles, Mondragon had to sacrifice other financial gains (ie. opportunity cost) 2. 70% of Mondragon's sales come from international markets, necessitating the hiring of new workers in those markets. As a result, they do not participate in the benefits of worker-ownership as the international workers are not members of the cooperative, given that there isn't a culture of cooperatives in these foreign markets 3. Mondragon had a notion of the "tyranny of the majority", a winner-take-all voting system. This means the will of the majority was imposed on all, including the dissenting minority. 4. Asking workers to vote on complex issues like salary adjustments, unemployment benefits etc. can lead to bad outcomes. This depends on the ability of these individuals to evaluate complex issues and make a right vote (counter: as long as democracy continues, there is still an opportunity for another vote and for a different outcome)
Compare the stakeholder theory and market theory based on: trade-offs
Stakeholder Theory: Avoid trade-offs by taking the perspective of executives and rethinking the problem such that value can be created. Trade-offs only happen due to a failure of imagination, time-pressure or other reasons. Market Theory: Trade-offs are inevitable. The company will not consider whether there are trade-offs as they are taken as a given
Compare the stakeholder theory and market theory based on: creation of value
Stakeholder Theory: Creation of value is the primary goal of the company Market Theory: Creation of value is not the primary goal of the company. Instead, generating of profits is the true primary goal
Compare the stakeholder theory and market theory based on: executives
Stakeholder Theory: Executives under the stakeholder theory are people who have an obligation to balance the interest of all stakeholders, creating value for all stakeholders without trade-offs Market Theory: Executives under the stakeholder theory are people who have the responsibility to ensure that the company is running well and making money. They are answerable and under the control of shareholders and directors
Compare the stakeholder theory and market theory based on: harm to others
Stakeholder Theory: Harm to others is to be avoided. The goal is to balance all interests of stakeholders. Compensate or create value for those you harm Market Theory: Harm to others is allowable as a trade-off so as to put one goal above another. Some forms of harm are unavoidable eg. pollution & dismissal of employees
Compare the stakeholder theory and the capitalism model based on: accountability
Stakeholder Theory: Organisations are accountable to all their stakeholders and should balance stakeholders' competing interests Market Theory: Corporations are only accountable to certain stakeholders, usually higher management, and not all stakeholders. The view is that an organisation accountable to everyone is considered diffused and us ultimately accountable to no one.
Compare the stakeholder theory and market theory based on: stakeholders
Stakeholder Theory: People who have a stake in the business. You must first determine whether someone is your stakeholder and if so, you must create value for them Market Theory: People indispensable to the business. There is no differentiation between stakeholders and non-stakeholders. Consider whether people are going to provide benefits for the company or not and deal with them as the circumstances direct
Compare the stakeholder theory and market theory based on: profit
Stakeholder Theory: Profitable in the long-term. Profit should not be at the expense of trading off benefits, but should be shared and used to create value for all. Profits are created for stakeholders. Market Theory: Profitable, profits are the overriding aim. Profits should be created for shareholders
Compare the stakeholder theory and market theory based on: subjectivity of value
Stakeholder Theory: There is subjectivity of value. There are different criteria to consider for different people but the primary responsibility still remains: that businesses should create as much value as possible for all stakeholders Market Theory: Consumers decide for themselves whether a good or service is good for them and its value to them (profit-making)
Compare the stakeholder theory and market theory based on: harm by others
Stakeholder Theory: Try to change the harm by others and treat them into value creation Market Theory: Use legal rights as protection against harm by others (ie. sue/eliminate). Alternatively, solve the problems, ignore, or treat the feedback as constructive criticism so as to improve
Compare the stakeholder theory and market theory based on: value
Stakeholder Theory: Value is created by the executive and should be created for all stakeholders. However, there is no defined value. Everything is subjective and dependent on what you consider valuable. Market Theory: Value is determined based on trial and error (ie. what works), or demand and supply (market price). Whether or not the product brings value is on the part of the consumer to determine objectively
What is Stakeholder Theory?
Stakeholder theory is the doctrine that businesses should not be run for the financial benefit of their owners, but for the benefit of all stakeholders. It is an essential tenet of stakeholder theory that organisations are accountable to all stakeholders, and that the proper objective of management is to balance stakeholders' competing interests
Who should do what in the case of a stakeholders' interests conflict?
The executives must find a way to rethink the problem so that the interests can go together, enabling more value to be created for each If trade-offs have to be made because of failure of imagination, time pressure or other reasons, then the obvious next step is to try and figure out how to improve the trade-offs for all sides
What is the wealth distribution in the U.S.?
The richest 1% own 1/3 of the nation's wealth The poorest 50% own 2.5% of the nation's wealth
According to stakeholder theory, how many types of legitimate organisations are there and what are they?
There is only one type of legitimate organisation It is one that balances stakeholder benefits
Summarise the Walmart case
Walmart employs 1.4 million employees in the U.S., making up 1% of U.S. workers Walmart pays its associates $11.75/hr with discounts and profit sharing perks also included This amount of $11.75, whilst higher than the minimum wage amount, still falls below the national average for retail employees (ie. $12.04). Moreover, the poverty line defined in the U.S. is set at $22,000 a year based on a family of 2 adults and 2 children. Walmart's associates are paid $20,744 a year which falls below that Lastly, the CEO of Walmart, Mike Duke, is paid $6 million/year, about 290 times an associates' pay
Which is better for member-workers, the Worker's Cooperative or the Corporation?
Worker's Cooperative
Compare the Worker's Cooperative (eg. Mondragon) with the Corporation (eg. Walmart) in terms of: Voting rights
Worker's Cooperative: 1 member, 1 vote Corporation: 1 share, 1 vote (ie. the more shares you have the more you can overrule minority shareholders. in that regard, there is greater fairness and equality in workers' cooperatives)
Compare the Worker's Cooperative (eg. Mondragon) with the Corporation (eg. Walmart) in terms of: Types of businesses
Worker's Cooperative: Different cooperatives = different businesses Cooperatives cannot have 2 different types of businesses in the same cooperative due to... - clashing objectives - sharing of resources - division of resources and money Moreover, members are also workers and won't want their division to suffer in relation to the other Corporation: Shareholders only care about money and are not concerned with how big each sector is
Compare the Worker's Cooperative (eg. Mondragon) with the Corporation (eg. Walmart) in terms of: Speed of decision-making
Worker's Cooperative: Ironically can be harder to get a decision by vote despite the small worker cooperative. This is because it is easier to get a decision by vote in a large company with only 2 or 3 shareholders with voting rights Corporation: Faster decision-making as only shareholders make the decisions and they are more objective. There might be thousands of shareholders, but only a few own the larger portion of the shares
Compare the Worker's Cooperative (eg. Mondragon) with the Corporation (eg. Walmart) in terms of: Managers' pay
Worker's Cooperative: Mangers are paid 6 to 12 times the pay of a normal worker Compared to similar jobs, Mondragon's managers' wages are considerably lower Corporation: Very large disparity compared to workers, can even be hundreds of times more than the lowest-paid employee
Compare the Worker's Cooperative (eg. Mondragon) with the Corporation (eg. Walmart) in terms of: Members
Worker's Cooperative: Members are workers in the cooperative and these workers are also owners. This means you have to be a worker in order to be a shareholder of the company Corporation: Members need not be workers and you don't have to be a worker to be a shareholder
Compare the Worker's Cooperative (eg. Mondragon) with the Corporation (eg. Walmart) in terms of: Non-member workers
Worker's Cooperative: Non-member workers are taken advantage of Corporation: Should be treated the same
What are some problems faced by the Worker's Cooperative?
Worker's Cooperative: When you limit financing to your workers, you will not be able to get a lot of money, especially from individuals who work because they need to earn money and do not have enough to invest in the first place. Since each individual owns an individual share, they will choose to pay themselves better. If an individual feels like he can slack as part of the cooperation, that is when the manager comes in
Compare the Worker's Cooperative (eg. Mondragon) with the Corporation (eg. Walmart) in terms of: Member-workers
Worker's Cooperative: Workers are... - more motivated - have ownership in the co-operation - have higher pay - given more responsibilities - able to share capital - able to decide their own pay Corporation: Not Applicable
Compare the Worker's Cooperative (eg. Mondragon) with the Corporation (eg. Walmart) in terms of: Number of members
Worker's Cooperative: Smaller Corporation: Larger
Compare the Worker's Cooperative (eg. Mondragon) with the Corporation (eg. Walmart) in terms of: Member workers' income
Workers' Cooperative: Higher member workers' income (makes sense given that they invested in the corporation) Corporation: Lower member workers' income
Compare the Worker's Cooperative (eg. Mondragon) with the Corporation (eg. Walmart) in terms of: Financing from members
Workers' Cooperative: Less investments from them since the workers are not as rich as other investors Corporation: More
Compare the Worker's Cooperative (eg. Mondragon) with the Corporation (eg. Walmart) in terms of: Differences between members
Workers' Cooperative: No difference between members, fairer than corporations Corporation: Different depending on the number of shares you have
Compare the Worker's Cooperative (eg. Mondragon) with the Corporation (eg. Walmart) in terms of: Profits
Workers' Cooperative: Profits go to workers Corporation: Profits go to shareholders (conflict of interest since workers work but shareholders get the profit instead)
Compare the Worker's Cooperative (eg. Mondragon) with the Corporation (eg. Walmart) in terms of: Non-member workers' income
Workers' Cooperative: Same Corporations: Same
Compare the Worker's Cooperative (eg. Mondragon) with the Corporation (eg. Walmart) in terms of: Loss
Workers' Cooperative: Workers will suffer the loss Corporation: Only shareholders suffer the loss, not workers
Can businesses harm anyone?
Yes. Some businesses may disregard stakeholders' interests, either out of the belief that the stakeholder is wrong, or out of the misguided notion that an unhappy customer, employee or regulator does not matter. Businesses can harm people/communities by carrying out unethical business practices eg. sweatshops
Is Walmart creating value for its associates?
Yes: Walmart gives the associates jobs, pay and a clear career path with extra perks like discounts to reduce their expenditure No: Associates are paid below retail average
