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Stakeholder Theory Of Modern Corporation

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Question:

Discuss about the Stakeholder Theory of Modern Corporation.
 
 

Answer:

Introduction

With the advancement in technology and strict rules in regarding environmental pollution, the role of management in an organization is becoming more sophisticated. Trust is a crucial factor in the business environment. In building brand loyalty, managers must gain trust from customers and all the stakeholders of an organization. According to Harris, Moriarty, and Wicks (2014), trust can be viewed as the expectation that the decisions that a relationship partner makes will benefit the trusting partner.  In today's business world, consumers expect a high quality of goods produced as per their expectations and specifications. The more complex issue in the management of organizations and building trust is that, as companies try to go global, they have to comply with regulations which differ from country to country. Managers face the challenge of maximizing profits while adhering to strict rules. On the other hand, businesses are increasingly becoming exposed due to the availability of media technologies which enable the public to scrutinize the behaviour and general performance of any business worldwide. Organizational theories have emphasized on integrity and upholding business ethics in making decisions that will have an impact on all the stakeholders. Using Volkswagen as a case organization, the paper is aimed at exploring the complex nature of organizations’ decision making in handling management issues with reference to institutional theory and stakeholder theory.

Founded in 1937, Volkswagen is one of the largest manufacturers of automobiles. It operates as a public company in Germany, and it is headquartered in Wolfsburg (Forbes 2017).  Due to the stiff competition in the automobile industry, Volkswagen has been involved in the manufacture of hybrid cars with state-of-the-art technology in order to maintain a competitive edge. The most recognized brands include Bently, Bugatti, Lamborghini, Audi, Porsche, SEAT, and Skoda (Forbes 2017, p. 1). With the increasing need to protect the environment, countries around the world have put strict regulations on the level of exhaust gas emissions from vehicles. This has led automakers to develop technologies to ensure that the vehicles being manufactured comply with the standards. The desperate need to comply with the Environmental Protection Agency standards in the United States made Volkswagen, under the management of Martin Winterkorn in 2015, to develop software, known as the "defeat device" which has the ability to manipulate the results of emission tests (Edwing 2016). The device has the capability to detect when the vehicle is being tested for carbon dioxide emission after which it adjusts the performance to achieve improved results (Hotten 2015). In that case, all the vehicles that were tested passed, but, in actual sense, they were emitting more carbon dioxide than the regulation agencies recommend. The public was shocked when the Environmental Protection Agency (EPA) found out about the device.  Volkswagen had been involved in cheating which is in contrary to business ethics. Even after the EPA found out, the then CEO Mr. Martin Winterkorn denied the allegations, stating that he never knew about it. This showed a lack of transparency within the organization.

 

Identification and Analysis of the Issues

The problems surrounding the Volkswagen scandal can be described using the stakeholder theory and the institutional theory. It can be seen that the company wanted to achieve the goal of more profits by selling more diesel cars in the United States and across the world. When the Environmental Protection Agency tested the cars, it was discovered that some car models were equipped with 'duping' device which forced Volkswagen to recall over eleven million of their cars from the market around the world (Hotten 2015). After the revelation, the company became a target of regulatory investigations in various countries around the world such as the United States, France, South Korea, Italy, Canada, Germany and the United Kingdom who were trying to find out how many people were aware of the deceit within the organization (Zhou 2016).

The stakeholder theory serves as an appropriate lens when analyzing complex perspectives of how stakeholders consider as valuable. According to Freeman (2012), stakeholder theory in the management of organizations and business ethics is one that addresses the morals and values that govern an organization. Freeman, Rusconi, Signori and Strudler (2012) argue that the theory does not have any comprehensive claims, but it is essential as it provides tools that organizations' managers can utilize in order to add value to their supply chain, tools to help the various stakeholders improve their relationships with the managers and tools that help scholars to understand how businesses create value along the supply chain. The stakeholders, according to Harrison and Wicks (2013), include everyone that is affected either directly or indirectly by the policies and decisions that a company makes. With this regard, the Volkswagen stakeholders include the shareholders, customers, employees, dealers, the environment, the company’s executives and the governments.  According to Stakeholders theory, Organizations are expected to act for the greater good of all the stakeholders. The company’s decision to install cheat device so that their cars can pass the carbon dioxide emission test was an act of selfishness that was driven by the need to gain more profits. This act is against the stakeholder theory which advocates for the recognition of all the stakeholders. The company’s decisions should always be aimed at satisfying and be in compliance with the expectations of the stakeholders. The Volkswagen’s response to the allegations further showed a lack of respect and transparency. According to Zhang, Veijalainen, and Kotkov (2016, p. 1), the responses provided by actors involved in a certain crisis is critical for the survival and growth of businesses. Lack of transparency when communicating to stakeholders causes negative image for the organizations (Zhang, Veijalainen and Kotkov 2016, p. 1). The Volkswagen CEO failed to use the language of stakeholders which would have made it easier for him to integrate business and ethics together. The CEO of the company lied to the public that he was not aware of the device which showed a lack of ethics and the necessary tools to handle a crisis. The management of the company was facing a trade-off between stakeholders and financial gains where instead, the management chose financial sustainability at the expense of the stakeholders. The actions taken by the management affected all the stakeholders in different ways such as loss of jobs, changes in the stock market, environmental issues and tarnished reputations.

 


The institutional theory is another lens that can be used to analyze the issues surrounding Volkswagen. The theory mainly emphasizes on the aspects of social structure. An institution is defined by Scott (2014) as a set of rules and practices that define the meaning and what is perceived as appropriate social behaviour. Scott (2014) described the concept of institutions in three pillars, namely the regulative, normative and the cultural-cognitive pillars (p. 59-66). Based on the three pillars, rules can be understood as the formal regulations, social norms and obligations and the common understandings and beliefs. These rules have a significant influence on how organizations' managers think and act. The rules form the basis in which human beings handle issues and how they perceive things as necessary or morally correct. The application of this lens helps in understanding why individuals and organizations act in a particular manner. Based on this theory, managers are expected to demonstrate social and environmental responsibility in carrying out their duties (Salvioni, Astori, & Cassano 2014). The Volkswagen scandal shows a discrepancy between the organization’s formal statements and the substantial behaviours. Volkswagen was highly trusted by its consumers and other stakeholders to uphold a business code of ethics in their operations. As such, based on the institutional theory, Volkswagen is expected to be transparent in conducting their business and how they communicate to the various stakeholders. Transparency, according to Ephraim (2016, P. 1), comprises of integrity, ethics, honesty, full disclosures, clarity and such factors that lead to good relations among stakeholders. When Volkswagen first delivered a press statement on September 18, 2015, the CEO said that the company was committed to fixing the issue as soon as possible. The message further stated that the company wanted to assure its customers and other stakeholders that their vehicles were safe to drive (US Media Site 2015). It can be seen that the message tone is formal and detached; it lacks transparency and empathy for the external stakeholders of the company affected in different parts of the world. It is apparent that Volkswagen vehicles were not safe since they were emitting gas above the permitted level. The message showed a lack of transparency. Based on the institutional theory, the management was supposed to acknowledge the mistakes and plan to correct, and not focussing on promoting the brand image.

 

Recommendations

Volkswagen strategies should be aimed to win the trust of customers back. Volkswagen should join an independent verification agency that would be responsible for confirming the performance of their vehicles. The company should partner with independent agencies which the customers can trust. Based on the stewardship theory, Volkswagen managers are expected to act as leaders in making decisions that would benefit the society as a whole. The World Business Council for Sustainable Development is an example of the agencies that Volkswagen can partner with. It is an internationally recognized organization that is aimed at creating sustainable future for businesses, society and the environment (Zhou 2016).

Another strategy to win back customer trust is to post a bond as an assurance to the public that such a thing will never happen again. This calls for a strong leadership stands supported by the stewardship theory. The bond will indicate credibility. Volkswagen should make it public that if such a thing happens again, they will fully take responsibility by paying the bond to the European Commission of Automotive Industry and all the affected parties. This will make consumers and other stakeholders to believe that the company is ready to act for the greater good of the society. 

 

Conclusion

Transparency and trust are important factors in an organization. It can be hard to gain customers’ loyalty but losing it can happen in just a blink of an eye. Regaining consumer trust is a hurdle which comes with several business and societal implications. Organizations are expected to act in a way that recognizes all the stakeholders and show responsibility in their dealings. Volkswagen has a role to the environment, consumers, shareholders and its employees. The company management should always have the stakeholders in mind when making decisions and in times of crisis.

 

List of References

Edwing, J., 2016. Martin Winterkorn, Ex-C.E.O. of Volkswagen, Is Under Investigation. The New York Times [Online]. Available at: https://www.nytimes.com/2016/06/21/business/international/volkswagen-winterkorn-germany.html?_r=0

Ephraim, P.E., 2016. Transparency and Ethical Considerations in Business Organizations: A Comparative Case Study of Crisis Relations Strategies of Volkswagen and Mitsubishi Motors. International Journal of Online Marketing Research, 2(2), pp.1-9.

Forbes. 2017. World’s Biggest Public Companies [Online]. Available at: https://www.forbes.com/companies/volkswagen-group/

Freeman, R.E. 2012. Stakeholder Theory of Modern Corporation. [online]. Available at: https://businessethics.qwriting.qc.cuny.edu/files/2012/01/Freeman.pdf

Freeman, R.E., Rusconi, G., Signori, S. and Strudler, A., 2012. Stakeholder theory (ies): Ethical ideas and managerial action. Journal of business ethics, 109(1), pp.1-2.

Harris, J.D., Moriarty, B.T. and Wicks, A.C., 2014. Public trust in business. Cambridge: Cambridge University Pres

Harrison, J.S. and Wicks, A.C., 2013. Stakeholder theory, value, and firm performance. Business ethics quarterly, 23(01), pp.97-124.

Hotten, R., 2015. Volkswagen: The scandal explained. BBCNews. [Online]. Available at: https://www.bbc.com/news/business-34324772

Salvioni, D.M., Astori, R. and Cassano, R., 2014. Corporate Sustainability and Ethical codes effectiveness.

Scott, W.R., 2014. Institutions and organizations: Ideas, interests, and identities. Sage Publications.

US Media Site. 2015, September 18. VOLKSWAGEN STATEMENT REGARDING EPA INVESTIGATION. [Online]. Available at: https://media.vw.com/release/1064/

Zhang, B., Veijalainen, J. and Kotkov, D., 2016. Volkswagen Emission Crisis: Managing Stakeholder Relations on the Web. In WEBIST 2016: Proceedings of the 12th International conference on web information systems and technologies. Volume 1, ISBN 978-989-758-186-1. SCITEPRESS.

Zhou, A., 2016. Analysis of the Volkswagen Scandal Possible Solutions for Recovery.

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