Ethics affects every individual, from business owners, executives, and employees to suppliers, customers, and competitors. The study and practice of ethics helps us develop skills to articulate our own values and gives us tools to evaluate the values and behaviors of others--all of which impacts how we as individuals develop relationships and interact with others. The same applies to a company. A stronger ethical environment leads to better interactions with those inside and outside the organization. And better interactions lead to better results. As such, ethics has a close connection to stakeholder theory.
As articulated by R. Edward Freeman in his book Strategic Management: A Stakeholder Approach, stakeholder theory involves measuring a business's overall performance as it relates to a variety of stakeholder relationships. It requires that managers develop a stakeholder mind-set. This means reconfiguring value-creation efforts to consider and address everyone who is impacted by an organization.
Organizations have direct relationships with a variety of individuals and groups, including employees, customers, investors, suppliers, donors, volunteers, community advocates, supporters, financiers, members of the media, regulators, and others who have a stake in their success (see Table 1). Each of these groups plays a vital role in the success of the enterprise. This business environment is too diverse and complex to manage in narrow silos--hence, the need to manage stakeholders. Navigating the relationships with these diverse constituencies is the essence of strategic management of stakeholders. The turbulence of the business world requires managers to be vigilant about current conditions and to continuously adjust to changes in the environment.
Under stakeholder theory, executives manage actual behavior and create mechanisms for policies that encourage people to make the world a better place. Managers striving to create value within an organization must understand that business is fully situated in the realm of humanity. Freeman states that ethics is the natural conversation that we have about how we live and work together with stakeholders. He suggests that managers should be open to approaching ethics through the lens of a more complex psychology that acknowledges that work involves different kinds of people. The two bodies of knowledge--ethics and stakeholder theory--work in concert and complement each other.