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3 Looking Inward: Employees, Suppliers, Investors Monkeybusinessimages/iStock/Thinkstock Learning Objectives After reading this chapter, you should be able to:1. Understand the three w ays to become “vested” in a company and differentiate between the three kinds of stakeholders.

2. Analyze emplo yee types, strategies to motivate employees, and employees’ rights as described by inter- national agreement and U.S. law.

3. Describe the various kinds of suppliers, w ays to motivate suppliers, and suppliers’ rights.

4. Summarize the types of inv estors, ways to motivate investors, and the rights of shareholders and owners.

5. Summarize shareholder activism.

2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.1 Vesting and Corporate Ownership Pretest Questions 1. Suppliers ar e not internal to a company and are therefore not “vested” in the corporation. T/F 2.

R esearch shows that employees of companies with employee stock ownership plans are more committed to their company. T/F 3.

Suppliers ar e solely motivated by profit margin in deciding to whom they will sell. T/F 4.

An in vestor cannot be an employee. T/F 5.

A B corpor ation is a simple tax designation for a type of corporate structure. T/F Answers can be found at the end of the chapter. Introduction Chapters 1 and 2 introduced the idea of stakeholders and stakeholder analysis and showed how corporate social responsibility can originate from or spread through social networks.

This chapter examines stakeholders who are internal to the corporation. Specifically, it focuses on three different kinds of stakeholders: employees, suppliers, and owners/market stockholders. To reflect the complex nature of business, the chapter also addresses how the lines blur between different types of stakeholders who are financially or emotionally con- nected to the modern corporation. For example, some employees are also owners, and some owners are also suppliers. These arrangements can create complex governing problems for the corporation. Such complexity increases when owners and employees have certain legal rights. To illustrate how CSR includes—and sometimes begins with—taking care of internal stakeholders, the chapter examines how various regulations and laws currently protect both owners and employees. In order to deal with the complexities of corporate governance and the desire for many corporate stakeholders to create more than just wealth, we also examine different corporate offerings. Specifically, we look at programs such as employee stock own- ership plans that enable employee-owned firms, and we investigate benefit corporations as a new form of corporation. These two options alter the corporate governance scene and the way that firms relate to communities and stakeholders. Taken together, the information in the chapter begins to define the current context for CSR and sustainability efforts and reveals key CSR and sustainability opportunities for leaders and managers. 3.1 Vesting and Corporate Ownership What does it mean to “vest” in a company or to “have a vested interest”? A vested inter- est refers to having personal stake or involvement in a firm. Often, having a personal stake means being or becoming an owner or part owner. Of course, anyone working with or for a firm can have a vested interest if the person has a chance to benefit when the firm succeeds.

For example, employees and suppliers can have a vested interest in a company because they receive payment or another benefit from the company. However, to be vested in a firm has an additional meaning that is typically associated with purchasing stock. Most large companies \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.1 Vesting and Corporate Ownership are publicly traded—meaning that small pieces of company ownership in the form of stock can be exchanged in return for cash. In such cases the many and varied individuals and insti- tutions that own shares in the company actually own the company together.

Before the rise in new employee incentives related to stock ownership, there were only two kinds of stakeholders vested in corporations: financial investors and owners. Now, in the age of globalization and with an increase in firms where managers reward employees with a mix- ture of wages plus the promise of staged future ownership with stock options, there are at least three categories of people vested in corporations: employees, owners/investors, and suppliers (see Figure 3.1).

Figure 3.1: Three types of corporate ownership f03_01 Suppliers Employees Investors Such ownership distinctions matter in a book on sustainability and CSR for several reasons.

First, by definition, people vested in a firm tend to care more deeply about how it behaves.

Secondly, people who are vested in a firm become partially responsible (legally and mor- ally) for how it behaves. Some people (typically employees) have a vested interest in the firm even if they do not technically own the firm outright or have stock or stock options. Finally, people vested in a firm also comprise key stakeholders (see Chapter 2), so considering their voice is part of running a sustainable and socially responsible business. The following sec- tions describe different types of vested stakeholders.

Vested Employees Employees constitute the first type of people vested in a corporation. One way employees vest in the corporation is by bringing talent, skills, labor, time, and in the best cases, loyalty and commitment to the workplace. Another way employees vest in a corporation is by purchasing stock, a topic discussed later in this chapter. Most companies pay employees every 2 weeks or monthly, with bonuses paid out quarterly, annually, or semiannually. The anticipation of \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.1 Vesting and Corporate Ownership future benefits (financial, social, reputational, learning, or other) allows employees to commit to giving their time and talent to a commercial enterprise.

Vested Suppliers Suppliers represent another type of entity that can become vested in a company. A supplier is another company or corporation that provides the company with the appropriate parts, inventory, and/or service inputs required for the company to create its products and services.

It may sound surprising to suggest that a supplier would be vested in a client, but this is cer- tainly the case if you follow the financial logic. The supplier vests in the future of a client’s company in anticipation of ongoing financial reward in the form of continued sales, increased sales, or sales referrals. Suppliers (or the parent companies that own and manage supplier companies) can purchase a formal stake in the future of the companies they serve by buying large amounts of stock or by forming legally binding partnerships. Thus, suppliers have a range of options in terms of their degree of vested interest; but by definition, any supplier to a firm has a vested interest in it.

Vested Owners or Investors Another way individuals develop a vested interest in a company relates to investing money as owners, part owners, or nonequity investors (investors with no ownership rights but with other rights as negotiated at the time of investment). Investors provide a business or project with funding or other resources, and in return they expect a financial benefit. An owner of a company invests in the company for a variety of reasons, but the most common relates to securing rights to future financial benefits in the form of increased stock price. Investors and owners provide capital, absorb risk, and over time expect a return on that investment. Inves - tors also provide resources because they believe in the company’s mission or vision or its product or service, and they want to see the venture succeed—not every investor is focused solely on financial returns.

One defining feature of CSR and corporate sustainability relates to how both topics expand the idea of “value” and “responsibility” to spheres beyond the financial. As mentioned, inves - tors, employees, and suppliers invest in, work for, or supply a firm for financial reasons, or for nonfinancial reasons such as believing in the mission, the management, or the technology or service. In many businesses, owners and investors work in the business, or at the very least actively advise the firm. A typical image of an investor is a Wall Street tycoon, distant from the place where work is done. However, most businesses in the United States are small busi- nesses, and owners and investors often work alongside employees to enhance the business’s product or service.

Each category of person possibly vested in a corporation differs in relationship to the com- pany, and perhaps in terms of the amount invested or the ease of access to speak with and influence management. In the following sections, we look at the unique relationships each group has with the corporation; the relationships differ by category, and thus the opportunity and best ways to engage each one differs too.

\251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.2 Employees 3.2 Employees In the 21st century, corporate managers view workers differently than they typically did in the past. Also, employees increasingly have different types of commitments to firms. For example, in technology firms and many new nontechnical startups, employees are seen as family, essential members of a work community. Employees often feel the same way about the firm (AFL-CIO, 2015). Modern companies show more commitment to employees than they did in previous decades, in part because there are fewer choices for substitutes—at least in sectors that employ skilled workers. Many technological problems require specific technical expertise that is rare or unavailable in the broader market.

Consider the skills of computer programmers, coders, and systems engineers—these skills are specialized and not evenly distributed among the job-seeking population. Other indus - tries face similar situations: Medical personnel have technical training and are currently in high demand by employers. Over time, specific industries create specialists and subspecial- ists, and employees and employers in these industries develop new interdependencies—one worker can no longer be easily substituted for another. Employees in such situations also per- sist in working for the company’s success, because the employee’s financial future depends on it—especially when his or her specialization is so specific that the employee cannot find other work without significant retraining. The employer needs the relationship to persist because firms cannot easily or inexpensively find a replacement in the labor market. For example, many software companies and medical service firms continually adjust to market needs by training current employees on anticipated future needs and providing employees with incen- tives to stay at the company.

Types of Employees Most firms categorize employees in ways that relate to federal employment regulations. In most firms there are four basic categories of employees: full-time, part-time, independent contractors, and informal employees.

Full-Time Employees Full-time employees work either hourly or on a salary. Hourly employees in the United States are typically required by law to spend 30 to 40 hours a week performing their work duties.

Salaried full-time employees differ from hourly full-time employees in that they have a con- tractually defined responsibility. They must manage that responsibility and complete asso - ciated tasks in exchange for a monthly paycheck no matter how many hours they work— sometimes they might be able to complete requirements in under 30 to 40 hours a week, and at other times they may work more than this amount. Unlike hourly employees, salaried employees generally do not track work time in any formal way and typically cannot earn more by working more hours. Another difference between the two relates to the fact that full-time salaried employees generally receive health, retirement, and other benefits paid for or par- tially subsidized by the company. \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.2 Employees Part-Time Employees The second kind of employee is a part-time employee; he or she is generally paid by the hour.

Part-time employees generally work less than 30 hours per week and do not receive com- pany-provided or company-subsidized benefits, although there are some exceptions. For example, the Starbucks Corporation has received significant press coverage for its decision to offer health benefits and tuition reimbursement to part-time employees. Part-time employ - ees have a variety of reasons for choosing to work part time, including preferring the work arrangement and the flexibility or wanting to sample work environments at different places.

Employers who take better care of part-time (and full-time) employees can become employ - ers of choice and can likely select from a large applicant pool.

Independent Contractors The third kind of employee is an independent contractor. An independent contractor works when contacted for a specific skill or project. He or she works for a specific amount of time and for a specified salary or hourly wage; there is typically no expectation that the employ - ment arrangement will extend past the life of the project or specified time.

Note that when someone builds a house or other structure with a specific builder, the builder then contracts (or subcontracts) with skilled people (or many different ones) to complete the various specialized tasks related to building the structure within a specified time frame and quality level. In most cases, no builder can possibly perform all required tasks with equal skill, speed, and precision as what can be accomplished by various specialists hired for the tasks. The same logic applies to building a corporation or other organization, and the rea- sons a corporation might seek contract employees are the same: Some people have a specific skill set for doing a certain job, and they should be paid to perform that job but not remain associated with the company once the job is complete. A contract employee is not consid- ered an employee in current U.S. legal terms, but in modern (nonconstruction) firms, contract employees may provide accounting, payroll, janitorial, marketing, consulting, or other spe- cialized services. An independent contractor might also be someone who works seasonally.

Informal Employees The fourth and final kind of employee is the informal consenting employee. This person might be a friend, spouse, intern, or volunteer. Regardless of the relationship, the informal employee also comes to the corporation to help complete a task. Informal employees are not legally considered employees, and thus have fewer rights and protections than formal employees.

Note that informal employees are not the same as illegal ones. Illegal employees are those who do not have legal documentation to work in the United States or the country of interest.

Therefore, any firm that accepts, demands, or pays for such labor is breaking the law. Often, informal employees with legal documentation do not receive wages (such as in the case of unpaid internships, where people work in exchange for experience rather than money), or they receive minimal wages. Informal employees may receive nonwage benefits such as insur - ance coverage (as is the case with volunteer firefighters in most U.S. states) or benefits such as experience and industry exposure or positive personal references (common benefits of unpaid internships).

\251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.2 Employees Every type of employee has a differ- ent relationship with the corpora- tion, and the working assumption is that the closer and more financially direct the relationship with the employee, the deeper the engage- ment. It can generally be assumed that the full-time employee has a deeper engagement with the corpo- ration and that a part-time, infor- mal, or contract worker has less of a commitment to the corporation’s future. Full-time employees tend to stay longer, be paid more, and have financial and promotion futures more directly tied to the future of the corporation.

Figure 3.2 shows the range of rela- tionships that corporations have with the types of employee stake- holders vested in the corporation.

As the figure indicates, many dif- ferent options exist. An employee might be a partial owner. A contract employee might also be a supplier.

A part-time employee might have a spouse or partner who is employed full-time at the same place. It is important people understand the wide number of options that now exist in the modern work environment. Anyone interested in CSR and sustainability, particularly regarding employees and employee rights, needs to keep a close eye on the many different ways firms define the concept of “employee” and “owner.” Motivating Employees Corporate managers understand the importance of motivating their highest quality workers to have a long-term commitment to the firm. The costs to attain new talent vary by job and industry type, but the costs associated with turnover can be avoided when committed people stay with the firm. Similarly, many workers prefer a stable, reliable, and involved connection with a firm. In some ways, many corporate actions that fall into the category of being socially responsible or sustainable stem from this mutual desire to increase the quality, reliability, and longevity of the connection between employee and employer. One innovation that results from this mutual interest relates to experiments and innovations with employee ownership. Figure 3.2: Types of Employee Stakeholders and Typical Engagement Levels f03_02 Higher Employee owner Employee stockholder Employee (with benefts) Part-time employee Contractor/supplier Intern or informal worker Lower Engagement Level \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.2 Employees Employee Stock Ownership Plan In 1956 the owners of Peninsula Newspapers wanted to exit from ownership of the company; at the same time, the employees wanted to become owners themselves to be more tightly coupled to the organization. Political economist Louis Kelso enabled the employees to pur- chase the company by creating a legal category known as an employee stock ownership plan (ESOP). As the idea of the ESOP emerged, it required authorization through legislation and tax code changes. In the United States an ESOP is a qualified pension plan (another way of saying it offers a type of retirement benefit). Because of this designation, employees do not need to pay taxes or any contribution to the firm until they “cash in” on their vested amount when they leave the company. When employees cash in, they can also roll over any ownership shares into an individual retirement account if they qualify (Doucouliagos, 1995). In refer - ence to stock options, vesting is the amount of time employees must wait to exercise or fully own their stock options (which is known as being fully vested). Stock options usually come with terms that provide more ownership or more stock the longer an employee stays with a firm. Usually, the terms include milestones related to time. For example, if an employee stays 5 years, he or she can be 25% vested in the amount of stock in question; in 7 years he or she can be 50% vested in the amount of stock in question; and so on (the exact time and percent- ages vary by company and industry).

Over time, employees with vested interest in their company can become fully vested as part owners. Initially, employees’ small compensation in stock won’t give them much say in the company’s operations. However, over time, employees with options could amass consider- able influence in its future and governance.

The philosophy behind an ESOP includes at least three parts: broaden ownership of capital, create financial security and incentives, and urge better employee productivity. The California- based National Center for Employee Ownership (2016) claims that 13 million employees in the United States work in places where they are encouraged to participate in ESOPs. In some cases, employees own and manage these companies, and there are no external investors. In other cases, employees own a smaller portion of the corporate stock shares, and external nonemployee investors have greater control. ESOPs are common in the service industry but can be found in many other industries too. Several high-profile companies that have ESOPs include United Airlines and W. L. Gore and Associates (Gimein, Lavelle, Barrett, & Foust, 2006; Paton, 1989).

Why do companies go through so much trouble to create a plan that allows employees to become owners? Scholars have studied this idea extensively, and their conclusions are not always clear. Some studies suggest that ESOP programs make the company more profitable and competitive because employees are more dedicated and have a stronger sense of commit- ment to it (Gates, 1999; Blais, Kruse, & Freeman, 2010). Other studies show that ESOP com- panies are in fact more successful than comparable firms and offer more competitive salaries (Hoffmire, 2015). Perhaps ESOP companies attract a higher quality of worker because the benefits are better.

However, there are some potential downsides to ESOPs. The first is that employees tend to have a large portion of their retirement tied to a single company. This is contrary to the long accepted principle of investment diversification. If an employee has most of his or her net worth tied up in a single company, he or she is vulnerable if that company fails, performs poorly, or is at a low value when the employee needs to sell the stock. One study showed that \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.2 Employees ESOP participants generally had about 60% of their retirement savings invested in a single employer (Rosen, Case & Staubus, 2005; Cornforth, Thomas, Spear, & Lewis, 1998).

Another criticism of ESOPs is that they are excessively ideological, whereas the marketplace is more practical. For example, companies that are forced to downsize because of changes in the marketplace often lay off workers—such decisions make financial sense and help the organization survive for the remaining employees and customers. However, if through an ESOP an employee participates in the company’s management, then he or she is put in a posi- tion to protect employee jobs, making it less likely the company will take the cost-cutting/ job-cutting steps that are sometimes needed to survive. Managing ESOP companies can thus occasionally become problematic (Stumpff & Stein, 2009; McDonnell, 2000).

Other Stock-Related Options In the United States there are other ways that companies can reap the advantages of ESOPs without completely changing the company’s legal structure. One way is to offer stock to employees under very specific conditions. While these are mostly found in highly competi- tive sectors, it is also true that progressively minded companies such as Starbucks use stock options to benefit employees. In such companies workers do not have management control associated with the highest levels and type of stock ownership (there are various levels), but they do have a long-term financial tie to the company created by the option to purchase stock at a fixed price.

Other companies allow employees to directly purchase shares in the company on their own.

In some countries, including the United States, tax-qualified plans allow employees to buy stock at a discount or with matching contributions from the company, which means that employees can purchase stock at an employee price that is set below the normal market price.

The employee can make the purchase with cash or with money the company provides that can only be used for stock purchases.

Non-Stock-Related Options Non-stock-related benefits offer another way for corporations to engage their employees in a benefit under the company umbrella. For example, most life sciences companies (such as Procter & Gamble, Nike, and Johnson & Johnson) and many fast- moving consumer goods manufacturing companies operate company stores where employees can buy products created by that company at a deeply discounted price.

Other companies extend travel discounts to employees or allow them to use company facilities for exercise or social service. All of these benefits are designed to enhance the employee’s life and deepen his or her commitment to the corporation. Some firms Photodisc/Thinkstock The ability to work from home is one exam- ple of a benefit that companies can offer to increase employee engagement.

\251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.2 Employees motivate and retain employees by offering flexible hours, work-from-home telecommuting options, and unlimited no-questions-asked time off and sick leave.

Many employees work for the promise of future income and bonuses, but many people select employers based on nonfinancial criteria too. Employers of choice tend to be places where the culture supports learning, work–life balance, health and wellness, flexibility, growth, a supportive work environment, safety, and a sense of purpose or meaning (Dill, 2015). Thus, a firm’s employment policies and the general way it treats its workers (its human resource policies and practices) influence employee engagement and become a point of consider- ation when candidates apply for jobs and when firm managers build or rebuild policies and practices.

Employee Rights Thus far, we have discussed employees and some options provided to those employees fortu- nate enough to quality for certain benefits. This section examines the rights and protections that government regulations and social standards provide for all employees. While employee rights vary, there is general agreement on the basic rights of workers, despite the fact that enforcing these rights differs by region and industry. The most basic rights include safety, freedom of participation, collective bargaining, free speech, protection from honesty tests, and protection and privacy of information.

The Right to Safety The first right covers basic workplace safety while acknowledging that different industries have different safety concerns. Certainly, almost all work has a reasonable risk associated with it. For example, flying in an airplane is generally safe, but there are occasions when acci- dents occur. Likewise, truck drivers, taxi drivers, emergency services workers, factory work - ers, farmers, and many others absorb a certain amount of risk when they enter the workplace.

All workers should ask themselves what level of risk they are willing to absorb, and every manager and owner should determine whether they are providing the safest possible work environment. All safety issues are associated with a cost–benefit analysis, and it is under- stood that perfect safety can rarely be achieved. There are always limited resources within which companies operate that affect the amount they can spend on safety procedures. But worker safety is and should always be an overriding question and pursuit in any workplace.

Workers, labor unions, managers, leaders, owners, and investors should ask if all reasonable risk is being illuminated and properly managed. An important law that protects worker safety is the Occupational Safety and Health Act of 1970, which regulates the safety and health con- ditions of the majority of industries. This act and its associated department, the Occupational Safety and Health Administration (OSHA), protect workers from unsafe conditions—OSHA violations are expensive and can result in a firm’s closure.

The Right to Participate in Work The second basic right is related to participation in the workplace. Issues related to these rights include the age at which it is appropriate for people to begin or stop working; what constitutes child labor or taking advantage of the elderly; and how can everyone be treated \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.2 Employees fairly in the workplace. Broadly framed, these are issues that all stakeholders in the work - place should consider. There is not necessarily a right answer, but work conditions are gener - ally better when all parties engage in an ongoing dialogue about them. In other words, these questions will likely not ever be settled, but should rather produce an ongoing discussion.

Part of the job of an informed employee and a socially responsible leader is to ensure that such conversations take place and that all interested and affected parties are aware of the conversations and are included in them. Some significant laws related to protecting employ - ees’ rights to participate in the workplace include the following:

• The Federal Employees’ Compensation Act, which offers workers a compensation program that pays for a federal employee’s disability or death if it occurred while performing work duties. This act indirectly protects workers because some of the expense for workplace injuries become the responsibility of the employer. It also provides workers with a sense of security; if they are hurt while doing work, they have options to seek health care and will not lose their job if they cannot work while recovering.

• The Employee Retirement Income Security Act of 1974, which ensures that pen- sions or welfare benefit plans offered to employees meet financial, disclosure, and reporting requirements. In large part, this act protects employees’ retirement money more than it protects their physical safety. The act also includes requirements for the Consolidated Omnibus Budget Reconciliation Act of 1985 and the Health Insurance Portability and Accountability Act of 1996. These acts keep employee health infor- mation private so that employers cannot discriminate based on it; these acts also provide ways for employees to continue to obtain health insurance after they are no longer employed.

• The Family and Medical Leave Act of 1993, which allows eligible employees to take up to 12 weeks of unpaid leave after the birth or adoption of a child or for a severely ill child, spouse, or parent. This act protects employees from losing their job during this time.

• The Davis–Bacon Act of 1931, which protects government subcontractors from being underpaid and attempts to set a minimum bar for other firms and industries to follow. Several other acts similarly protect government employees.

• The Migrant and Seasonal Agricultural Workers Protection Act of 1983, which exists to protect migrant workers, farm labor contractors, and seasonal workers by regulat - ing hiring and employment practices.

The Right to Organize and Collectively Bargain The third basic right relates to gathering in unions or other groups and then participating in collective bargaining. It is assumed in most modern societies that workers have a right to organize labor unions that will bargain collectively on their behalf. Governments do not have the right to suppress these unions, nor do owners have the right to ignore them. Western society has long struggled for workers to gain recognition and have the right to collectively bargain. However, this does not mean that labor unions have the right to control access to work. In the United States, right-to-work laws protect workers who do not want to partici- pate in labor unions. Such laws allow everyone to participate in the labor force without being compelled to join unions. For example, the Fair Labor Standards Act (FLSA) of 1938 offers a more extensive mandate that examines worker safety, fair compensation, and worker rights \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.2 Employees in U.S. firms. The FLSA includes the right of organized labor to collectively bargain and the right of some workers to opt out of the collective bargaining system. The FLSA also provides standards for the federal minimum wage and overtime pay.

Each of the rights discussed indicates how some cultural norms about fair and safe work practices have been translated into law. Firm managers and owners interested in enacting socially responsible and sustainable activities must start by evaluating where the firm stands in terms of compliance with current laws and norms. However, compliance represents no more than following the minimum standards. Thus, once compliant, firms with CSR ambi- tions can work with stakeholders and analysts to move beyond the minimum and toward a more responsible and sustainable state.

The Right to Free Speech and Protection After Whistle-Blowing The term whistle-blowing refers to the act of reporting illegal or unethical behavior. Whistle- blowing usually refers to when an employee notices an illegal or unethical behavior at work and alerts management or outside agencies about the violation. Some firms are noncompli- ant by accident and some by choice; laws exist to help move such firms toward compliance and beyond. In the United States constitutional rights protect free speech, and speaking out against internal firm practices is one type of free speech. Governments and other entities such as corporations cannot restrict the right of an individual to speak except in very exceptional circumstances. Of course, corporations and individuals within them also have some degree of right to privacy.

Research suggests that whistle-blowing in the workplace can be very risky. There are many examples of whistle-blowers who revealed wrongdoing by managers and leaders and were subsequently shunned, demoted, abused, and fired, even though laws exist to protect them (Tsahuridu, 2011). Whistle-blowers are protected by two bills. The Sarbanes–Oxley Bill, passed in 2002, makes it illegal for employers to initiate retaliation against whistle-blowers.

The Dodd–Frank Bill, passed in 2010, also prohibits unions or former employees from retali - ating against employees. Such protections for whistle-blowers remain important elements of the corporate operating environment, because whistle-blowers do society a service when they signal wrongdoing and help initiate change. In some ways, whistle-blowers provide data about how and when corporate practices fail, as the information about one violation can be used to help entire industries become more responsible and sustainable (Hilzenrath, 2011).

The Internal Revenue Service offers a multimillion-dollar reward for whistle-blowers who provide credible and actionable information—but experts suggest that unemployment also tends to follow the winners of the high-paying prizes (Sullivan, 2012).

Protection from Honesty Tests There are also occasions when the employer becomes the victim of dishonesty and abuse.

Many businesses, especially retail operations, deal regularly with employee theft or damage of company property by negligent employees. Research suggests that about half of all theft that occurs in retail organizations is done by employees (Matos & Galinsky, 2012). Theft can include shoplifting, vendor fraud, or accounting malpractice. The total value of goods stolen by employees in the United States is estimated to be more than $17 billion a year (Matos & Galinsky, 2012). Historically, many companies used lie detector tests to investigate suspected \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.2 Employees employee theft, but in 1988 passage of the Employee Polygraph Protection Act stopped this practice. This law severely limits the use of polygraphs in the workplace, in part because they are largely seen as unreliable. While not illegal, honesty tests may also generate unreliable false positives. They are ill advised for effective organizations, because simply asking employ - ees to take the test can breed distrust and offense. Interestingly, some companies reduce theft and associated losses by taking a more fair, inclusive, sustainable, and holistic approach to managing employees. In return, these firms see employees “return the favor” by being more responsible and watchful of company property (Lindon, 2010).

The Right to Privacy Companies must identify the line or time of day where formal work ends and personal life begins. This can introduce questions about privacy and the boundaries of private time. For example, should an employee be reachable at any time of the day? How do companies mea- sure productivity when people log less face time (time at the office in front of others) but more computer time? There is also the ongoing question of whether romance is appropriate in a work setting. Can two consenting adults agree to have a relationship if they work together, especially if one supervises the other? Organizations take different approaches to this issue, and the options range from asking employees to notify the human resources department to obtain official permission to engage in a relationship, to firing employees for inappropriate behavior. For instance, in 2016 the CEO of Priceline, Darren Huston, lost his job and his sever - ance package because he had a relationship with an employee (Fitzgerald & Lublin, 2016).

Another area where this balance comes into question is in the area of substance abuse or addiction. Alcohol abuse causes twice as many problems in the workplace as drug addiction.

About 9% of all employees identify themselves as heavy drinkers, meaning they drink five or more drinks on five or more occasions a month. Studies show that up to 40% of all industrial fatalities are linked to alcohol (Zezima & Goodnough, 2010; Wogan, J. B., 2011). Currently, in states where marijuana has been legalized, U.S. companies are wrestling with the problem of marijuana use by employees not only during work hours, but also the effects of marijuana use outside the workplace (Zezima & Goodnough, 2010; Wogan, 2011).

Many companies require mandatory drug testing to help with initial employee screening; still others provide confidential and subsidized access to addiction counseling as part of employee support programs. Leaders and managers interested in advancing social responsibility and sustainability need to consider the strength and supportiveness of the internal workplace as part of the effort; keeping the workplace safe and developmental is a long-term goal rather than a one-time achievement.

International Declaration for Worker Rights In 1988, after years of debate and deliberation, the International Labour Organization (ILO), a United Nations organization, adopted the Declaration on Fundamental Principles and Rights at Work. This document is intended to protect all workers in all nations from abusive work environments. The rights provided in that document are similar to the rights of U.S. work - ers. There are four components to the declaration. The first eliminates all forms of forced or compulsory labor. This means that workers can refuse to work or do something they think is unsafe, and they cannot lose their job because of exercising this right. The second right \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.3 Suppliers abolishes child labor, or the practice of employing children to do adult jobs. This right sug- gests that younger children should not work in order to support a family, although the docu- ment states an exception whereby adolescents may work in certain circumstances. The third right described by the ILO is the elimination of discrimination in respect to employment and occupation. This means that hiring and managerial practices should not discriminate based on race, gender, tribe, religious affiliation, or any other factor. In delineating this right, the ILO hopes that people will be hired, promoted, and rewarded based on their contributions and not on their identity or affiliation.

The final right afforded by the document is the freedom of association and effective recogni - tion of the right to collectively bargain. This right suggests that all workers can ban together in labor unions and demand changes in work conditions, improvements in safety, and increases in benefits and pay (ILO, 2016). Given the scope of this book, discussing employee rights and ongoing debates helps set the stage for finding and developing opportunities. We argue that people cannot improve upon the current work situation until they understand it fully, and when people design a new plan for workers, they should not remove the basic rights that employees deserve. Thus, opportunities to create more socially responsible firms may be found in enforcing employees’ rights. In the following section, we expand the definition of who is impacted by firm behaviors to include the suppliers. 3.3 Suppliers To maintain flow through any business, the corporation depends on any number of supplier entities to accomplish tasks. Needs may include raw materials, specialized parts, skilled labor (such as design or marketing support or programmers), and transportation. Once a product is made or a service is provided, the corporation may need transportation, communication, marketing research, customer service, repair, and any number of other supplier services. Data suggests that the largest businesses in the United States do not sell directly to any consumer, but instead sell to other businesses (Demery, 2014). This relationship is called business-to- business sales and marketing.

Types of Suppliers Like in the case of employees, there are different types of suppliers. Recall that suppliers are increasingly seen as stakeholders and that sometimes, suppliers can also own stock in the firms they supply. As more firms offer products and services both regionally and internation- ally, it becomes even more essential for firms to understand and map all the types of supplier relations that exist with the firm. The following section defines the four types of suppliers, which include manufacturers, distributers, independent craftspeople, and import sources.

Manufacturers Manufacturers provide a final product of some type; it may be just one component among many used in another company’s product (consider that air bag manufacturers supply a finished product, but it is just one of many products supplied to car manufacturers). Most \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.3 Suppliers retailers or resellers buy through a manufacturing company’s sales team or through indepen- dent representatives who offer products from multiple and even competing manufacturers (suppliers). Prices from manufacturers’ representatives are usually lowest, unless the retail - er’s location makes shipping costly.

Distributors Also known as wholesalers, brokers, or jobbers, distributors buy in quantity from several manufacturers and warehouse the goods to sell to retailers or service providers. Although prices are usually higher than a manufacturer’s, distributors can supply retailers and service providers with small orders from a variety of manufacturers. Lower transportation costs and quick delivery time often compensate for the higher per-item cost from distributors.

Independent Craftspeople Exclusive distribution of unique goods is frequently offered by independent craftspeople, who sell their products through representatives or directly at trade shows (industry events where people gather in one location and multiple vendors display wares and try to win business) or via Internet sites. The goods from independent craftspeople are often one-of-a-kind or come in smaller batches; sometimes they are made in international locations. Types of goods range from handmade jewelry to custom vehicles. Thus, the costs of goods from independent craftspeople can vary greatly—if components are inexpensive and if labor is inexpensive at the manufacturing site, then the products may be low cost. However, if the components are expensive, if the labor costs are high, or if transportation costs are high, then goods supplied from independent craftspeople can be costly.

Import Sources Many retailers buy foreign goods from a domestic importer, which is someone who charges a fee to get products out of one country and into another and thus operates much like a domes - tic wholesaler. Sometimes import sources directly supply products to a firm; other times a supplier such as an independent craftsperson uses an import agent to supply his or her goods to other firms.

Suppliers’ Motivations Suppliers have their own motivations for selling to and engaging with client companies; some of their motivations are financial and some are not. Suppliers often share the same motiva- tions as employees, meaning that they may prefer one customer over another because one firm has a better final product, a more compelling mission or vision, and/or a more attrac- tive price. Suppliers may also benefit when their components are used in popular and well- received products and services. Suppliers can rightfully see themselves as part of another company’s success if they supply components to it. Supplier motivation relates to CSR and sustainability because success and good (or bad) press for one company’s products can also bring success and publicity to the companies that supply inputs for the product. \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.4 Investors Supplier Rights As a general rule, suppliers do not have basic rights like employees or investors do. Instead, they have invested in the corporation by virtue of their relationship in supplying parts or skills. Their relationship with the corporation is generally determined by contract and prac- tice rather than a description of rights. Further, suppliers may have more options than do full-time employees for severing a tie with any particular company, since product suppliers can simply find another customer and send goods to the new customer. In contrast, employ - ees may not be able to leave one job and find a similar job in the same regional area. Supplier rights are not as formal as employee rights, and there are fewer laws and regulations that specifically protect suppliers. 3.4 Investors Small companies are usually owned by one person, while large companies are typically owned by more people. This situation is often (but not always) correlated with company size, as small firms are started by enterprising individuals who own the business. As these individuals need more money to expand their business, they reach out to others and sometimes offer partial ownership in return for funds. People can offer others an ownership stake even without for- mally offering stock or selling shares of stock via the stock market. Whether funders became owners via the stock market or a private arrangement, these funders are stockholders or shareholders; they are also investors because they have invested money. Investors can also provide money or other resources to an organization without receiving stock in return—in such cases they are called simply “investors” because such people do not own public or pri- vate stock. According to Bloomberg, almost $60 trillion worth of stock is owned worldwide (Gimein et al., 2006). But who are the stockholders?

Types of Stockholders Two kinds of stockholders own shares of corporations. One type refers to institutional share- holders and the other to individual shareholders. The main reason that individuals and insti- tutions invest in stocks is to obtain a return on their investment. Many people believe it is better to buy stocks than to put money in the bank to accrue interest. The value of stocks rises and falls over time, but on average the stock market goes up at a faster rate than other kinds of investments and thus attracts a lot of people to invest in such opportunities.

Institutional and Individual Stockholders One kind of stockholder is known as an institutional stockholder. When institutions purchase shares, the shares are not held by one individual or family; instead, the shares are purchased and held on behalf of specialized groups. Examples include pensions, mutual funds, insurance companies, and university endowments. These institutions are the intermediaries of invest- ment; they often pool the money of the people they represent and then buy large amounts of stock. The returns, if any are accrued, are often shared among the people whose money cre- ated the original pool of money. Thus, institutional stockholders are similar to companies that buy stock on behalf of others. \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.4 Investors The other kind of stockholder is known as an individual stockholder, meaning that a single individual or family directly buy shares that are issued by the company through stock market websites or from a stockbroker (U.S. Census Bureau, 2011).

Motivating Stockholders Historically, people are motivated to buy stock for financial reasons—they believe that the company that issues the stock will be successful, and the investor wants to play a role in enabling that success by investing money and receiving money in return. Of course, not all stock shares appreciate, or increase, in value.

Another reason people invest is because they hope to influence a company’s decisions. In today’s society, such influence is difficult to achieve, as one investor cannot usually afford to buy enough shares of stock to make demands of company leaders. Another reason people invest in firms is to show support for the mission or the product.

Stockholder Rights In the following sections, we discuss stockholders’ legal rights and investment safeguards that enable markets for stock and other forms of ownership to function. We examine the role of government and discuss corporate governance (how companies manage themselves), as well as shareholders’ activism in protecting their interests.

Government Protection In the United States the Securities and Exchange Commission (SEC) is a federal agency that is generally responsible for protecting stockholder interests. The SEC was established in 1934, just after the stock market crash that led to the Great Depression. The SEC consists of five presidentially-appointed commissioners that have staggered 5-year terms. For equal representation, the SEC cannot have more than three commissioners from the same political party. The responsibilities of the SEC include issuing and enforcing federal securities laws.

In 2008 the SEC and the Federal Communications Commission, along with other federal investigators, unveiled one of the largest ever tax frauds in U.S. history. The name of Bernie Madoff exists in the annals of crime as being associated with one of the largest thefts in his - tory. Estimates suggest that Madoff, through his investment firm, stole as much as $65 bil - lion from prominent university charities, cultural institutions, and individual investors. SEC chair Christopher Cox admitted to Congress that his agency had failed to see the patterns of deceit coming from Madoff ’s firm, which dated back to 1999. But his admission provided little consolation for the many people who lost their retirement funds, pensions, life savings, and charitable contributions in a scheme that was far reaching and very personal. Many people think the benefit of the Madoff scandal is that it “woke up” the SEC, and as a result the SEC now more aggressively watches banking transactions and financial managers for all types of fraud, including insider trading.

\251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.5 Corporate Governance Insider trading is the illegal practice of manipulating or deceiving the public in stock trading.

In other words, it is illegal to manipulate the stock to create an artificial value (people do this by creating false news reports, hiding information, or generating false information). It is also illegal to use nonpublic information to trade the stock. For example, if an employee knows about an upcoming change that will dramatically affect the value of shares, the employee can- not buy or sell more shares of the company without being investigated for possible insider trading. The public is entitled to transparency and openness related to stock value, and peo- ple who have hidden information have an unfair advantage—thus, insider trading laws aim to prevent that from happening. It is the SEC’s responsibility to ensure that stockholders have the same company information as corporate officers. Stockholders should be able to make a fully informed decision before making an investment. Stockholders have the right to know about the company’s management and the challenges it faces in the marketplace. They espe - cially have rights to financial information. While most of this information is provided at annual meetings and in the form of an annual report, it is also made public through press releases in the media and direct conversations with research analysts from important brokerage houses.

All parties must comply with insider trading rules. In addition, company leaders and own- ers must minimally conduct themselves, and business, in full compliance. When leaders and owners (those who “govern” the organization at its highest levels) seek to be more socially and environmentally responsible and sustainable, they have several options because of their positional power from their position. CSR activities and sustainable decisions and products must usually be approved and supported by top management. The way that firms choose to treat employees, invest corporate profits, and direct employee efforts stems directly from the governance decisions made by the top management team. 3.5 Corporate Governance Corporate governance refers to the structure and relationships that determine corporate direction and performance; the term describes both the act of governing and the way in which an organization makes and follows its own rules. If corporate leaders enact rules and regu- lations that encourage CSR, then the entire firm must comply with the rules, and CSR and sustainability have a higher chance of success. On the flip side, if corporate leaders create rules and regulations that discourage or deter CSR and sustainability, then CSR and sustain- ability will be more difficult to enact. The idea behind corporate governance is that corpora- tions must comply with certain leader-prescribed regulations and use transparent processes while operating. The assurance that leaders are in compliance with government and internal regulations (meaning they are enacting good corporate governance) allows investors to make judgments about the quality of investments. This fact also allows some firms to stand out as exemplars of sustainable and responsible governance (while others stand out for horrendous violations). Here, we argue that understanding these extremes can help leaders and investors decide how to improve firms’ sustainability and social responsibility.

Board of Directors The board of directors is the group of people who typically govern an organization. As a result, it has power and oversight over company behaviors and leaders. A board is an elected group \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.5 Corporate Governance that has a legal duty to oversee the establishment of corporate objectives and to select leader- ship to carry out these objectives. The board regularly reviews the company’s performance and oversees stockholder interests. Boards generally meet four to six times a year. Corporate boards vary in size and composition, but most large companies try to keep the number of board members to around 12. Usually 10 or 11 of these members, or 90%, are from outside of the company. The New York Stock Exchange, for example, requires listed companies to have at least a majority of their board members from outside the company. Other board members from the inside may include chief executives, presidents, founders or major stockholders, and financial officers from within the company. In Europe board composition is different. Most European companies have two different boards. The first is an executive board made up of members of the company. The second is an external board that supervises the executive board and represents the interests of shareholders, stockholders, and even employees.

One of the most important things a board can do is conduct an audit, or contract someone else to do so. The audit committee on a U.S. board of directors must annually examine the company’s financial well-being. It is thus required that board members be financially literate and able to make the judgments required of high-end accounting and finance.

Challenges for Corporate Boards Boards often struggle with transparency in terms of what information to release to the media, employees, and the public. Board meetings are confidential, which leaves a considerable amount of confusion and hidden or partially hidden information in terms of how they oper- ate and manage.

Another important corporate governance issue relates to salary and wages, particularly sal- ary and wage differentials between management and employees. Publicly held corporations are generally run not by their owners, founders, or boards, but by hired professional execu- tives. This creates what is known as the agency problem. Executives in corporations act as agents for the founders or owners (stockholders), and while such executives are mandated (and paid) to look after corporate interests, there is little to prevent them from looking after their own interests instead. In some ways, salaries play a role in mitigating the agency prob- lem, since higher pay can incentivize the executives to do what is best for the owners who, in essence, pay the salary. Yet because boards meet a few times a year while executives work at firms daily, executives have more opportunities to take actions that may not benefit cor - porate leadership. Large corporations typically pay board members a high salary for their work; companies may pay in cash, stock, or stock option rights. Some critics believe board compensation sometimes taints the ability of a corporate board to oversee leadership and appropriately represent stockholders (Twaronite, 2013).

Regarding salary and compensation, many people feel that board member and executive pay is excessive, particularly in the United States. Corporate senior leadership in the United States receives almost twice the salary as an equivalent position in France, Belgium, and Sweden. In the United States, CEOs typically make 325 times more than the average worker. Since 1990 the ratio of average executive to average worker pay has increased every year (Statista, 2016).

Executive compensation has been the subject of some government regulations. For exam- ple, a provision in the 2010 Dodd–Frank Act required major corporations to disclose execu- tive compensation to the public; companies must reveal compensation packages for at least the top five executives. Firms must also report all of the financial and nonfinancial benefits \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.5 Corporate Governance received. These benefits might include access to a corporate aircraft, gifts received from cli- ents, or tickets to sporting or cultural events. In addition, conflicts over executive compensa- tion are common in boards. One view holds that corporate leaders have such an important influence on the success of the company (and the talent pool for top executives is so small) that high compensation is warranted. Those in favor of high compensation for executives also argue that overall, the amount given to a corporate executive represents a small percentage of the overall corporate value. The other side points out that such high wages are extreme, unwarranted by the workload, and possibly inflammatory to employees and the public. Oth- ers in favor of more restrained executive compensation argue that high executive compensa- tion creates a corporate culture of greed and short-term decision making and undermines transparency. They also argue that providing a living wage to all employees is a moral obliga- tion, though defining this can be problematic. Essentially, the issue of compensation remains an area in which firms have considerable discretion; the compensation choices firms make send signals about their commitment to social responsibility and sustainability (Gerstein, Connelly, Lightdale, & Rowen, 2015).

Wages and executive compensation have been a social responsibility issue for decades, but Ben & Jerry’s in Vermont made the issue famous when, upon founding their company, CEOs Ben Cohen and Jerry Greenfield committed to keep the ratio between executive wages and the lowest paid employee no higher than 5 to 1. The company adjusted the ratio in a transpar- ent way over the years, moving it to 7 to 1 and then 17 to 1 when it could not attract talented management without the increase. When the company was purchased by a large corporation in 2000, the salary information was no longer made public (Weiss, 2013). The topic of sala - ries represents just one of the difficult and controversial decisions that boards and executives must address; CSR and sustainability represent other topics that often require board-level action. When boards and executives remain unresponsive to such issues, shareholders some - times attempt to encourage change through behaviors known as shareholder activism.

Shareholder Activism Frustrations with executive compensation, environmental concerns, and other issues related to corporate strategy cause many shareholders to become more active in corporate gover - nance. Shareholders need not rely on the board of directors to make changes in corporate direction, as institutional and individual shareholders have the option to work together to protect their interests.

Shareholder activism is a strategy for shareholders to influence the decisions of the corpo - rate board and other leaders of the firm. Shareholder actions may include lawsuits or nega- tive media campaigns that are intended to influence corporate leaders. Shareholder cam- paigns often cause the stock price to decline, making owners and managers more willing to bargain with the activists or comply with the shareholders’ demand. In addition, corporate boards typically work with shareholders to avoid going to court and paying related expenses.

Choosing to consistently make socially responsible and sustainable decisions is one way firms can avoid shareholder activism. When leaders decide to pay fair wages, treat employees and suppliers fairly, manage water and electricity use with a stewardship mind-set, and follow other pro-CSR and sustainability behaviors, then pro-CSR shareholders have fewer reasons to complain and less incentive or need to turn to activism. \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 3.5 Corporate Governance Stock Screening Another way stockholders try to exert influence over corporate governance is through stock screening . Socially responsible investing (SRI) describes investors who choose stocks based on environmental or social issues. SRI allows investors to reward firms that sell prod - ucts they admire (environmentally conscious investors might be attracted to solar start-ups, for example) or punish firms that sell products of which they disapprove (so-called sin stocks traditionally include alcohol producers, gun manufacturers, and tobacco companies). A grow - ing number of professionally managed funds also have social filters to help select companies that deserve investment. A socially responsible investment fund might screen out companies that have an excessive impact on the environment, overpay executives, or have a history of discriminating against employees. Socially responsible investors can be as varied as the num- ber of fund managers and the causes they espouse, but estimates suggest that when screening and selection strategies are considered, more than 1 of every 9 dollars under investment is invested in an SRI fund; the total size of the SRI market is in excess of $4 trillion (Forum for Sustainable and Responsible Investment, 2016). This fact means that social responsibility concerns have become mainstream enough to affect Wall Street; it also means that socially responsible and sustainable firms looking to attract capital can identify themselves with the SRI movement.

Stock screening is a kind of social activism that has an indirect impact on board decisions, but it may have a direct impact on a stock’s price and value. Many companies have initiated social responsibility resolutions to guide corporate decisions in the hopes that such moves will increase the value of shares to certain investors. Apply Your Knowledge: Stock Screening Develop a list of five criteria for activist stock screening. These might include social, political, or environmental issues that are meaningful to you, such as child labor, solar energy, or compliance with certain government regulations.

Then, list 20 commonly traded stocks from the New York Stock Exchange: https://w w w.

nyse.com/index . Research event information for each stock, paying close attention to their products, or management processes, and how they do business. Rank the stocks based on their compliance with the stock screening criteria developed.

Based on your activist portfolio, select which of the stocks you would purchase. Then determine what portion of your portfolio each selected stock should constitute. For example, you may choose one particularly positive stock to be 50% of your portfolio while some mix of other stocks will represent the other 50%. Benefit Corporations (B Corporations) In response to the call for firms to behave in more socially responsible ways, a small group of innovators created a new corporate form intended to break the paradigm that corporate managers have a binding duty to put shareholder interests above all other decisions. This \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Chapter Summary new form is called a benefit corporation (B corporation) . A B corporation is a for-profit corporate entity with one significant difference from a traditional corporation: It has a legally binding mandate to positively impact society and the environment, in addition to making a profit. A B corporation’s board of directors makes the same decisions as leaders in a tradi- tional corporation but goes one step further by considering the impact that decisions have on society and the environment. According to the B Corporation (2016), about 1,600 B corpora- tions exist in 43 different countries.

An example of a certified B corporation is Patagonia, the outdoor clothing manufacturer. The corporate website describes in detail how it tries to be different from other companies:

We learned how to make fleece jackets from recycled plastic bottles and then how to make fleece jackets from fleece jackets. We examined our use of paper in catalogs, the sources of our electricity, the amount of oil we consumed driv - ing to work. We continued to support employees with medical insurance, maternity and paternity leave, subsidized child-care and paid internships with non-profit environmental groups. As we have for many years, we gave one percent of sales to grassroots activists. This one percent commitment isn’t typical philanthropy. Rather, it’s part of the cost of doing business, part of our effort to balance (however imperfectly) the impact we have on natural systems—and to protect the world on which our business, employees, and customers rely. (Patagonia, n.d.) Benefit corporations expand directors’ duties to include consideration of nonfinancial and social interests. It is often hard to assess the actual impact of a B corporation on the commu- nity, environment, or other social environment. In cases where firms are not ready to become a B corporation, there is also the option to become B certified. Such certification is a way for standard corporations to signal they are on the move toward social responsibility and sustainability. Chapter Summary This chapter investigated those stakeholders who are closest to a firm, such as employees, and those who are immediately and directly connected, such as suppliers and investors. It examined the differences between shareholders, employees, and suppliers in terms of vest- ing, motivations, and opportunities for increased social responsibility and sustainability.

Each of the discussions built the foundation for an increased understanding of why business runs as it does today, as well as how business norms and practices can improve and innovate toward a more responsible and sustainable future. Upcoming chapters further illustrate how different stakeholders relate, behave, and innovate.

\251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Chapter Summary Posttest 1. All of the f ollowing are ways in which people can be vested in a corporation EXCEPT as a(n) .

emplo yee b.

supplier c. investor d.

r egulatory agency member 2.

A ccording to the text, what is another reason—aside from financial considerations— that individuals might invest in a company?

belie ving in its mission b.

f aith in its employees c.

desir e to increase their personal reputation d.

personal ad visors suggest the investment 3.

F rank works for a company where he receives health insurance and other benefits, but he does not track his hours. What kind of employee is Frank?

casual b. part-time c. salary d.

hourly 4.

One of the most important w orkers’ rights, as acknowledged by international accords, is the right to a .

bett er salary b.

saf e work environment c.

clear set of w ork instructions d.

f air and living wage 5.

All of the f ollowing are examples of a supplier EXCEPT .

a tr ansportation company that trucks goods from factories to distribution centers b.

a f actory that makes circuit boards for computers c.

a fr eelance graphic designer d.

a cust omer of a company that sells computers for home use 6.

A ccording to the text, a domestic importer (for a U.S. company) is someone who .

supplies a compan y with goods that come from inside the United States b.

mo ves products from a different country to inside the United States c.

sells pr oducts from the United States to other countries d.

mo ves products from the United States to other countries \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Chapter Summary 7. One of the most important functions of a boar d of directors is to .

audit the compan y b.

endorse da y-to-day decisions c.

appr ove all promotions d.

r eview marketing plans 8.

An institutional in vestor is:

An in vestor who blocks others from owning shares of the corporation.

An in vestor who controls a majority share of the corporation.

A mutual fund, pension fund or insur ance company that purchases corporate shares.

An indi vidual who invests in institutions.

A corpor ate board of a publicly traded company has a single important interest, that is to:

Look aft er shareholder interests.

Manage da y to day operations of the institution.

K eep the public informed about corporate functions.

K eep corporate secrets 10.

B corpor ations are different from traditional C corporations in that .

the y are not-for-profit b.

the y are taxed differently c.

the y take on social and environmental causes d.

their in vestors are more aggressive with their funds Answers: 1(d); 2(a); 3(c); 4(b); 5(d); 6(b); 7(a); 8(c); 9(\ a); 10(c) Critical-Thinking Questions 1. What is the diff erence between an employee and a shareholder? Why has the line blurred?

What ar e the advantages and disadvantages of an ESOP?

Wh y are whistle-blowers frequently punished for such potentially positive actions?

What are additional steps government and companies can take to prevent whistle- blowers from being punished?

What rig hts do shareholders have to control administrative action in a corporation?

Wh y should corporations maintain good relationships with suppliers?

If a person uses substances such as drugs or alcohol that impact w ork performance, does the employer have the right to hold the person accountable? If drug use impacts employee performance, what is the employer’s obligation to help the employee over- come the disease of addiction? What do you think is the firm’s obligation to protect investors and other employees from potential safety hazards posed by their employ- ees’ choices?

\251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Chapter Summary 7. If y ou were building a stock portfolio that was socially active, in which kinds of stocks would you actively invest? Which kinds of stocks would you avoid? Explain your reasoning. Additional Resources For more information on the size and composition of the socially responsible investing mar- ket, visit: http://www.ussif.org/sribasics Additional information on the Family and Medical Leave Act can be found here: ht tps://w w w.dol.gov/whd/fmla/ Additional information on the Employee Retirement Income Security Act can be found here:

ht tps://w w w.dol.gov/general/topic/health-plans/erisa Additional information on the Federal Employees’ Compensation Act can be found here:

ht tps://w w w.dol.gov/owcp/regs/compliance/ca_feca.htm Answers and Rejoinders to Chapter Pretest 1. F alse. Just because suppliers are external does not mean they do not have an interest in the corporation. For example, if the company goes bankrupt, the supplier may not get paid and additionally will lose a source of revenue.

T rue. Employee stock ownership plans give employees an investment in the company, which is one reason researchers think employees who have them are more engaged.

F alse. Like other stakeholders, suppliers often look at which company has the most compelling product or vision, in addition to taking price into account.

F alse. Employee stock ownership plans and pension plans often mean employees are also investors in a company. 5.

F alse. B corporations have a legally binding mandate to have a positive impact on society and the environment. Rejoinders to Posttest 1. A member of a r egulatory agency should be unbiased and not have a vested interest in a corporation.

Belie ving in a company’s mission might lead someone to invest in that company.

Salaried emplo yees rarely track their hours and generally receive benefits such as health insurance and paid leave.

The rig ht to a safe work environment is fundamental and internationally recognized and is protected by organizations such as the ILO and OSHA.

The cust omer who bought the computer is not a supplier, as he or she will most likely not turn around and sell the computer to anyone else.

A domestic import er is someone who charges a service fee to move products out of one country and into another. \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Chapter Summary 7. A uditing—critically examining a company’s financial well-being—is the single most important function of a board of directors.

An institutional in vestor is an institution, like a mutual fund, insurance company, pen- sion, or university endowment that invests on behalf of an institution.

The major and most important function of a corpor ate board is to look after share- holder interests. It selects and advises corporate leadership with this goal in mind. 10.

B corpor ations are socially minded and do business to make a profit and make a difference. Key Terms benefit corporation (B corporation) An organization that is for-profit but has legally protected social and environmental goals.

business-to-business Sales that take place between two businesses.

corporate governance Both the structure of a corporation and the act of oversight and control.

employee stock ownership plan (ESOP) A program that compensates employees in the form of corporate stock and gives them a voice in governance according to their proportion of ownership.

insider trading Illegal stock trading moti- vated by confidential information.

investors People who contribute money or other items of value to a corporation.

Securities and Exchange Commission (SEC) The government body that regulates the acquisition and sale of investments such as corporate stocks. shareholder A strategy by which share- holders can influence the decisions of corpo- rate boards and other leaders of firms.

shareholder activism A strategy by which shareholders can influence the decisions of corporate boards and other leaders of firms.

socially responsible investing (SRI) The act of choosing investments based on envi- ronmental or social issues; often refers to screening out some types of firms while purposefully selecting others.

supplier A company that sells specific parts, services, or raw materials to a corporation.

vested interest Having a stake or involve- ment in a firm, especially of a financial nature.

vesting The legal right to a future benefit.