Freeman's Stakeholder Theory AND CSR At Philip Morris Research Paper Example
The last few decades have seen a significant increase in business interest in what is known as CSR (corporate social responsibility). While at one time, CSR was seen as largely a matter of image and a desire to conform to what society is expected, many corporations are now recognizing that CSR can significantly benefit a corporation, including its bottom line. One of the individuals most responsible for how CSR is currently viewed is R. Edward Freeman. Freeman's stakeholder theory of CSR looks at the relative influences that a wide array of stakeholders have on a company's CSR efforts. The following paper will consider Freeman's stakeholder theory as it applies to how the Philip Morris company practices CSR.
Background of the Organization
Philip Morris is a major player in the tobacco industry, which at one time engendered fears among investors about the company's future. This was because of the health concerns raised by tobacco use and the lawsuits the company frequently faced during the 1990s. However, even during the 90s Philip Morris continue to achieve high revenues and profits. From a relatively small company in the 1960s, Philip Morris took advantage of its Marlboro brand success to rise to a position of leadership in the global tobacco market. Roughly 20% of all cigarettes sold around the world are produced by Philip Morris. However, during this same period Philip Morris attempted to position itself for future reductions in tobacco sales by diversifying itself. The company expanded its business into a number of food -related products. In fact, Philip Morris is currently the second largest food manufacturer in the world, controlling an array of companies, including Kraft and Nabisco. Furthermore, as litigation regarding the tobacco industry has begun to wane, investors have also become more confident about Philip Morris's tobacco business. Of course, this has not in any way mitigated the public relations problems that Philip Morris faces because of its involvement with tobacco.
The Theoretical Perspective
Freeman's stakeholder theory looks at how different kinds of stakeholders can affect a business (Morrison 2011, 402). Stakeholders can include specific individuals, organizations, groups or society as a whole, as long as they are either influenced by the company or can influence the company. In other words, stakeholders are those who have an interest in what the business is doing, what its goals are and how it is going about achieving these goals. The overall purpose of stakeholder theory is to suggest how businesses can more effectively work with their various stakeholders (Freeman 2010, 9).
In Freeman's opinion, stakeholder theory is more than just a single theory. Instead, he views it as what he refers to as a "genre of theories." One common thread in these associated theories are the questions: what is the overall goal of a business (Freeman 2010, 216)? An important aspect of stakeholder theory is the goal of creating as much value as possible for the stakeholders by operating the business extremely effectively (Key, 1999, 194). Freeman argues that the creation of such value for stakeholders requires understanding stakeholder interests and incorporating this information into CSR planning. In Freeman's view, any business organization can be seen as a collection of relationships that are comprised of various stakeholders who all have a vested interest in the businesses activities.
Furthermore, business operations relate to how to use stakeholder interests and managers interact in a way that creates value. When managers better understand the stakeholders in any business, they can more effectively manage that business (Freeman 2010, 24). As the above makes clear, stakeholder theory is essentially a managerial theory and is designed to help business managers better deal with the complex and often very contradictory interests and objectives involved in operating a business (Murray & Haynes 2010, 164).
Freeman's stakeholder theory has is now seen as a means for connecting business activities with ethics. Operating a business in today's environment is no longer just about profitability, but also about ethical behavior and social responsibility (Freeman 2010, 232). Stakeholder theory suggests that the primary purpose for any CSR activities should be to address the responsibility and needs of the principal stakeholders while also creating value for them (Freeman 2010, 263). Furthermore, by carrying out CSR programs, companies can demonstrate that their concerns go beyond just the needs of their wealthy shareholders. A key principle of stakeholder theory is that the previously accepted division of social value and financial interests is inaccurate and unproductive, as well as that the two should be seen as directly linked to one another (Freeman 2010, 260).
Philip Morris Stakeholders
When carrying out its business activities, there are a number of external and internal stakeholders that Philip Morris has to take into consideration. External stakeholders for Philip Morris include Philip Morris customers, the communities they operate in, government agencies, the society in general and the media. Internal stakeholders include Philip Morris employees, suppliers and shareholders. Beyond the standard division of stakeholders into the internal and external, Freeman has further divided them into what he refers to as "primary stakeholders" and "secondary stakeholders"(Freeman 2010, 24).
For Freeman, primary stakeholders are directly connected with the business in some way, such as customers, employees, suppliers and local communities. Secondary stakeholders would be those that that affect the primary stakeholders, including consumer groups, special interests, the government, the media and corporate competitors. Freeman argues that value has to be created for all stakeholders, including the secondary ones (Freeman 2010, 26).
It is the view at Philip Morris that engaging with their stakeholder groups can help them understand their needs and issues. Understanding these issues will allow Philip Morris to take them into account when it is creating business plans and making decisions (Philip Morris 2012c, online).
For employees, their stake in Philip Morris is that it provides them with their income. Moreover, long time Philip Morris employees might have skills that are so closely associated with their specific job at Philip Morris that it would be difficult to find the same kind of job elsewhere. As compensation for the efforts they make for Philip Morris, these employees expect good pay and benefits, job security and a fulfilling workplace, which are essentially the needs laid out give Maslow's Hierarchy of Needs (Sadri 2011, 44). As stated on the Philip Morris website, the average time that the typical employee has been working at the company is 18 years. Long time Philip Morris employees receive excellent benefits and the chance to take part in various leadership programs (Philip Morris USA 2012g, online).
Obviously, the shareholders at Philip Morris expect to get a financial benefit from the money they have invested in the organization, which consequently means they have a financial stake in Philip Morris (Freeman 2010, 24). Furthermore, the interests of the communities Philip Morris operates in have to be taken into account, since these communities a business organization to establish itself. In turn, Philip Morris contributes economically to the community through taxes and fees, as well as various social donations. It is far easier to generate value for stakeholders in a community that welcomes Philip Morris (Freeman 2010, 25). Conversely, it is much more difficult to generate such value in the community that actively opposes a company's presence and activities.
The media is among the secondary stakeholders for Philip Morris. It can also be viewed as an external stakeholder. Receiving negative press coverage can certainly be extremely harmful to any brand, particularly one as vulnerable as a company that manufactures and sells tobacco products (Philip Morris 2011c, online). Engaging with internal stakeholders allows Philip Morris the opportunity to proactively deal with problems or issues before they can get out of hand. The things that Philip Morris learns from stakeholder engagement is used in for primary ways (Philip Morris 2011c, online):
Identifying and managing emerging issues or problems
Informing business procedures and processes
Assisting with their efforts to practice good corporate citizenship
Building a better public understanding of the Altria Group (the parent company of Philip Morris).
It's important that stakeholder engagement is carried out in a balanced way that avoids creating stakeholder conflict. One way to do this is by carefully communicating with the various stakeholder groups in order to establish a clear understanding of what each stakeholder desires and expects. This understanding can then be used by managers when they are making decisions that might impact those specific stakeholders. Research has demonstrated that consumers are frequently willing to switch from one brand to another based on their perception of a company's social responsibility, particularly when there is little product differentiation (Vogel 2005, 7).
As previously mentioned, CSR focuses on a business organizations obligation to the communities in which it operates, the global environment and its specific stakeholders. Although CSR engagement efforts can be carried out for a number of different reasons, some scholars suggest that any business should be viewed as a "multipurpose social institution" (Carroll 2009, 15). Furthermore, these scholars believe that “business organizations are intended to satisfy the needs of society to the benefit of society” (Carroll 2009: 15). Thus, it may be that the primary purpose of the business is not merely to generate maximum profits. Instead, these revenues should be viewed as a well earned reward for investors who have invested in a business that has successfully engaged in fraud or CSR activities (Carroll 2009, 15).
Philip Morris's basic business strategy incorporates CSR in a way that focuses on understanding its stakeholders and attempting to provide them with value in a responsible way(Philip Morris USA 2012c, online).
Because of its CSR programs, Philip Morris is able to demonstrate to its various stakeholders that it is behaving in an ethically acceptable way (Palazzo & Ricther 2005, 390). Thus, such CSR activities can enhance Philip Morris's brand image and create a positive public perception of the company (CNN Money 2009, online). This can have the effect not only of winning over consumers, it can also help to make Philip Morris a more attractive option for investors. This is certainly important for the company, since Americans have long had a very negative opinion of tobacco companies like Philip Morris (McDaniel & Malone 2005, 197). Indeed, a number of organizations around the world have condemned the products they sell (WHO 2004, online).
Such a negative public perception can affect a business in a number of different ways. For example, sales can be negatively impacted, stock prices can drop, employee morale can be affected and political power to influence regulatory agencies will be reduced. On the other hand, a positive image will help Philip Morris hold onto employees, saving the company money on HR recruitment and training programs (Smith 2011, 232).
As a part of the company's efforts with regard to ethics and social responsibility, Philip Morris largely focuses its social engagement efforts in four primary areas: arts & culture, education, environment, and positive youth development. In addition, Philip Morris employees are encouraged to take part in the company's various community and employee involvement programs (Philip Morris 2012i, online).
The ethical responsibilities of Philip Morris also play into CSR and the interests of the stakeholders. Obviously, if Philip Morris did not maintain itself as a successful business, it would be unable to carry out CSR activities of any kind. Looking at it share of the market in the United States (well over 50%), Philip Morris is the leading US tobacco company (Mackay 2002,Online). For 2014, Philip Morris is revenues were over $7.8 billion which was a small reduction (1.5%) from the 2013 revenues. Given its high revenues and profitability, it can be inferred that Philip Morris and its parent company are in fact fulfilling their respective roles when it comes to economic responsibility (Altria 2012c, online) . The stability of Philip Morris in the face of active anti-smoking campaigns makes it clear that its social and philanthropic efforts are having a positive effect on its brand image (Payton & Moody 2008, 24).
At the same time, it has to be pointed out that it cannot be concretely proven that the strong revenues Philip Morris is experiencing is a direct consequence of its ongoing CSR policies. Nevertheless, anecdotal evidence, experience and a range of studies regarding CSR programs in businesses would seem to suggest that Philip Morris's CSR activities and their associated stakeholder management efforts are yielding useful results.
In conclusion, when looking at the Philip Morris corporation's CSR engagement polcies, it should be mentioned that it has been clearly demonstrated by researchers over the years that there is a close connection between a company's CSR engagement with its stakeholders and its overall corporate brand image (Vogel 2005, 295). In addition, a survey of CSR programs carried out 2011 by KPMG demonstrated that nearly 50% of major global corporations believe that they were experiencing financial gains from their CSR efforts. The survey also revealed that many corporate executives and managers now view their corporate social responsibilities as a vital business issue, rather than something that is simply a moral or public relations necessity (KPMG 2011, 18).
Further research has shown that a company's CSR initiatives can result in changes to their customers purchase choices, with customers in certain situations being willing to switch to another brand if they conclude that that competitor is behaving in a more socially responsible way (Vogel 2005, 295). All of this indicates that Freeman's stakeholder theory regarding corporate social responsibility has a great deal of evidence to support it. Moreover, many businesses are embracing this idea that profitability and social responsibility are not diametrically opposed ideas.
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