Lerbinger O. Corporate Public Affairs. Interacting with Interest Groups, Media, and Government

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imum efficiency standards. In making building loans, insurance com

panies would mandate certain insulation requirements and nondis-

crimination in choosing tenants. When business doesn’t strive to reach

such standards, these requirements are sometimes imposed by states

and localities. Some are passing stringent energy codes for new com

mercial buildings, which is causing designers to consider natural light

as a way to save electricity.

Most nations of the world would include human rights as a high-pri

ority public policy issue. Yet many business executives believe they have

no particular responsibility for human rights. When DuPont chairman

Edgar S. Woolard met with the Chinese president in the summer of

1994, he commented that it “is inappropriate for business people to be

involved when governments are involved on this issue.”

Deciding

what behaviors touch on human rights is itself a thorny issue. With ref

erence to China, the American Chamber of Commerce in Hong Kong

(AmCham) believes in a strong and direct pledge to “refuse to do busi-

ness with firms which employ forced labor, or treat their workers in in-

humane or unsafe ways.” AmCham, Human Rights Watch, and others

propose that a corporation is responsible to:

• Maintain acceptable working conditions in its own operations and

uphold the rights of its employees to freedom of expression.

• Take responsibility for the actions of its business partners in such

matters as employment practices, wages and benefits, working

hours, use of child labor, use of prison labor or forced labor, dis-

crimination and disciplinary practices.

• Resist pressure from the Chinese government to use the multina-

tional corporation as a vehicle to abuse human rights, for example,

by not hiring (or rehiring ) employees who are punished by with-

holding jobs from them.

The loftiest and most controversial view of this fifth level of social re

sponsibility is that corporations should aspire to build a just society. It is

the societal equivalent of the highest level on Maslow’s hierarchy of needs,

namely, self-achievement. This view was expressed by well-known public

relations counselor David Finn in his The Corporate Oligarch:

But there is no reason why the primary goal of management cannot even

tually be defined as the utilization of corporate resources for the service of

public interests in every way possible. This will require putting the old max

ims of profit, growth and corporate benefit where they truly belong, in the

junkyard of outmoded symbols, and in their place, raising a new standard

which will make it clear that the corporate oligarch’s mission is to build a

just society capable of fulfilling the potentialities of its citizens.

This noble and visionary statement should inspire business to climb as

far as they can on the pyramid of social responsibility. How far a corpora

412 I CHAPTER 15

tion can climb will depend not only on a corporation’s philosophy but on

the sociopolitical, as well as economic, pressures that surround it.

Growing Support for CSR and Ethics Programs

Some major public relations agencies and ethics centers are advising

corporate clients on CSR and the related subject of ethics. One of them is

Burson-Marsteller, which created a CSR unit in its London office with a

full-time managing director of corporate responsibility, Bennett Free

man.

Another public relations counselor is Robert L. Dilenschneider,

head of the Dilenschneider group and former head of the giant public re

lations firm of Hill & Knowlton. In writing about the challenges facing

business in the new millennium, he stated, “But the bigger challenge will

be mustering the courage to insist that all organizations adopt a

broader, more socially conscious view of their company’s responsibili

ties to their employees, their customers, and the communities in which

they operate.”

Ethics programs in business are also enjoying a boom. The subject is

suddenly all the rage, reports the Economist.

Aside from restoring pub-

lic confidence, companies are motivated to act ethically for many rea-

sons: ethical investors demand it; employees feel better working for

socially responsible companies; bad behavior might stir up a public fuss

and lead to unwanted legislation; and, finally, companies need to com-

mand a reputation for trust in dealing with customers and partners.

These pressures help explain why the Ethics Officer Association, formed

in the United States in 1992, today has 650 members and why more

books are being written about ethics.

One is Lynn W. Paine’s new book,

Value Shift, which argues that companies can’t consider themselves

amoral or apart from society any more and that the relationship be-

tween companies and society at large necessitates bringing a moral di-

mension to decision making.

Michael Hoffman, executive director of the Center for Business Ethics

at Bentley College, saw Enron’s collapse as a “success story for the im

portance of business ethics.” He observed that Enron’s four stated com

pany values—communication, integrity, respect, and excellence—and

code of ethics, were “words, with no substance.”

Nevertheless, busi

ness has crafted more words. In December 2002, leaders from about

two dozen U.S. companies announced the formation of a group to set

ethical guidelines for the American business world. Called The Open

Compliance and Ethics Group, the group will create a suggested “blue

print” for financial employees and environmental standards.

Hopefully, plans will be translated into action.

ENGAGING IN STAKEHOLDER RELATIONSHIPS

The need to develop and strengthen relationships with an organiza

tion’s primary stakeholders—investors, employees, community citi

HEED THE PUBLIC INTEREST I 413

zens, and customers—is widely recognized. Excellent stakeholder

relationships contribute to goodwill, that accounting term included un

der intangible assets in a firm’s balance sheet. In the new economy, these

assets are often more important than physical assets in determining a

company’s market value. A 1997 study by Ernst & Young titled Mea

sures That Matter found that up to 65% of the investment decisions made

by mutual fund managers were based on these intangible assets as com

pared to company financial information.

Corporations that build relationships are more likely to succeed.

Samuel B. Graves and Sandra A. Waddock call them “visionary compa

nies” and “built-to-last companies” and say that they focus on more

than profits by treating their multiple stakeholders generously. They re

fer to a study that shows that these companies outperform others both

financially and in the ways they treat other primary stakeholders—em

ployees, customers, and community members—as well as showing a

concern for the environment.

Graves and Waddock say that having an

immutable core ideology, while also stimulating progress with auda-

cious goals that change over time, is the essence of a visionary company.

This core ideology consists of “end values,” such as integrity, service,

helping humanity, meritocracy, valuing people, improving the quality

of life, making contributions, and alleviating pain and disease. Addi-

tional core values are reflected in the description of 18 visionary compa-

nies listed in the study (e.g, 3M’s innovation and integrity, Johnson and

Johnson’s hierarchy of responsibilities to a range of stakeholders, and

Merck’s preserving and improving human life.

The claim that stakeholder relations results in better financial perfor-

mance in terms of return on equity, return on assets, and return on sales

can be extended to include an increase in the intangible asset of goodwill.

A firm’s public standing—its reputation—is enhanced when it is per-

ceived as operating in the interests of multiple stakeholders, and not

only its investors.

Subscribing to the Managerial Creed

The idea of balancing the interests of a wide range of stakeholders is a

business ideology called the managerial creed, which asks that manage

ment serve as a trustee for all of a corporation’s stakeholders. This creed

differs from the opposing classical creed, which states that manage

ment’s responsibility is solely to investors; that is, to maximize share

holder value. This was the prevailing creed during the ebullient 1990s.

Although supporters of the classical creed conveniently assume that the

interests of other stakeholders are automatically satisfied by the mar

ketplace, this has not happened. The extreme example is “Chainsaw Al,”

previously described in Box 15.2.

Acceptance of the managerial creed is likely to grow because public

opinion surveys show that Americans do not support the classical creed.

414 I CHAPTER 15

They reject the notion that “U.S. corporations should have only one

purpose—to make the most profit for their shareholders—and their

pursuit of that goal will be best for America in the long run.” Only 4% of

Americans subscribe to this ideology. What the overwhelming 95% say

is: “U.S. corporations should have more than one purpose. They also

owe something to their workers and the communities in which they op

erate, and they should sometimes sacrifice some profit for the sake of

making things better for their workers and communities.”

The deluge of corporate scandals has shown that CEOs and other cor

porate insiders didn’t even subscribe to the classical creed of raising

shareholder value; their concern was self-enrichment. The public inter

est was in no way heeded. Support for the free enterprise system cannot

endure if the public sees corporate leaders as selfish and exploitive in

their relationship with others in society. The lesson learned from corpo

rate scandals is that trust in the political as well as economic market

place will erode unless corporate managers consciously incorporate

concern for the public interest in their decision making.

When an organization applies the managerial creed and achieves mu-

tually satisfying relationships with its stakeholders, it is likely advanc-

ing the public interest. Thus employees feel they are paid fair wages and

benefits and that other personal needs are cared for; investors feel that

the dividends or interest received is satisfactory; the community is satis-

fied with the jobs provided, taxes paid, and other benefits received from

an organization; and customers are pleased with the variety, quality,

and price of products and services purchased. The aggregate of these

satisfied stakeholders can be summed up by saying that the public inter-

est has been served. As suggested by the managerial creed, however, a

balancing of different stakeholder interests is needed because their inter-

ests are not necessarily compatible. For example, paying high wages to

employees may lead to higher prices, and satisfying investors’ desire for

higher returns may lead to smaller philanthropic contributions to the

community or recklessness with environmental goals. The concept of

the public interest requires that all stakeholders recognize the need for

compromises among them.

An expression of the managerial creed is the willingness of corpora

tions to collaborate with opposing groups. For example, Jerry D.

Choate, recently retired chairman and CEO of Allstate Insurance,

said

the need to engage employees has become more important in light of the

recent increase in mergers and acquisitions. Business has gone too far in

absolving itself of social responsibility. It should at least attempt to pro

vide employment security. To this end, the Collective Bargaining Forum,

a group of key U.S. business and labor leaders, agreed on this principle:

acceptance by corporations of employment security, the continuity of

employment for its workforce, as a major policy objective that will fig

ure as importantly in the planning process as product development,

marketing, and capital requirements.

Labor was also assigned respon

sibilities. In a related statement, the Forum states, “All parties to an en

HEED THE PUBLIC INTEREST I 415

terprise should support strategies and practices necessary to secure and

maintain a competitive market position while enhancing the employ

ment security and marketability of the workforce.”

Identifying Stakeholders

A corporation is more than what appears on a formal organizational

chart, with the board of directors on the top and its chain of command

headed by the CEO. As Chester Barnard observed in his classic Functions

of the Executive, outsidegroupslikecustomersareessentialpartsofan

organization and form the extended organizational chart. The field of

public relations is based on the recognition that an organization must

identify all of the publics that can affect an organization’s welfare.

This requirement is well-stated by James E. Grunig, a professor at the

University of Maryland and editor of the influential book Excellence in

Public Relations and Communication Management: “The first step in

strategic management of public relations, therefore, is to make a list of

the people who are linked to or have a stake in the organization.”

These people are called publics, stakeholders, or constituents, terms

that are often used interchangeably. Several authors classify and de-

scribe an organization’s strategic stakeholders. In their Managing Pub-

lic Relations, Grunig and co-author Todd Hunt, list and describe some

of them in the context of four key linkages that are critical for an orga-

nization to survive:

• Functional linkages: Inputs from employees, unions, and suppli-

ers, and outputs to consumers, industrial purchasers, users of ser-

vices, and employers of graduates.

• Enabling linkages: Stockholders, Congress, state legislators, gov

ernment regulators, boards of directors, and community leaders.

• Normative linkages: Associations, political groups, and profes-

sional societies.

• Diffused linkages: Environmentalists, community residents, stu

dents, voters, minorities, women, media, and other publics.

The same idea of identifying and categorizing an organization’s stra

tegic publics appears in the management literature. James E. Post, Lee E.

Preston, and Sybille Sachs list three components of what they call the

extended enterprise in the framework of three dimensions:

1. Resources (investors, shareowners, and lenders; employees; cus

tomers, and users).

2. Industry structure (supply chain associates, regulatory authori

ties, unions, and joint venture partners and alliances).

3. Social-political setting (governments, private organizations, local

communities, and citizens).

416 I CHAPTER 15

Another contribution to stakeholder management is described by

James R. Emshoff and R. Edward Freeman.

Its two basic principles are

that (a) the central goal is to achieve maximum overall cooperation be

tween the entire system of stakeholder groups and the objectives of the

corporation, and (b) the most efficient and effective strategies for man

aging stakeholder relations involve efforts to deal simultaneously with

issues affecting several stakeholders. These are the same principles fol

lowed by public relations, although initially Freeman relegated public

relations to serving as a buffer between an organization and society,

whereas stakeholder management was credited with focus on negotia

tions. As chapter 3 indicates, negotiations are used in public affairs and

public relations in dealing with interest groups.

A Relationship Model

Public relations scholars have added important ideas to the concept of

stakeholder relationships. The basic contention is that the primary goal

of public relations is to build effective relationships with various con-

stituencies. Reflecting the managerial creed, another principle is that

“effective organizations are able to achieve their goals because they

choose goals that are valued both by management and by strategic con-

stituencies, both inside and outside the organizations.”

The joint en-

deavor of management and its constituencies is to cultivate and

maintain long-term relationships. It is important to measure the out-

come of relationship-building activities. Four measures have been pro-

posed: (a) mutual satisfaction, (b) trust, (c) commitment, and (d)

control mutuality.

When an organization and a stakeholder group fulfill the expecta-

tions of the other, mutual satisfaction results. The aggregate of all the

mutual satisfactions is one way of assessing whether an organization is

advancing the public interest. When mutual satisfaction is achieved,

trust, a second dimension of a relationship, is more likely to be achieved.

The trust of stakeholders is won when they believe that the corporation

is acting in their interests as well as its own. This state of affairs is more

likely when some degree of control mutuality—“the degree to which

parties agree on who has the rightful power to influence one an

other—is achieved.”

In the context of the public interest, the most rele

vant aspect of control mutuality is whether management recognizes the

value of inputs from its stakeholders and listens to them.

A popular

name for this kind of decision making is participatory management.

This form of management, along with mutual satisfaction and trust, is

likely to lead both parties to want to continue the relationships (i.e.,

commitment is achieved).

Betrayal of Trust. One outcome of a relationship, trust, has been

severely damaged during the last decade.

Since the Enron and other

HEED THE PUBLIC INTEREST I 417

corporate scandals, Wall Street has recognized that it faces a crisis of

confidence. Trust is a component of public confidence in business,

which, in turn, is affected by the presence or absence of transparency.

Transparency, a topic discussed in chapter 14, is one of the prerequisites

for establishing trust and a solid, long-term relationship. When people

do not trust the information they are given, they lose confidence. Cor

porations and financial institutions are consequently engaging in confi

dence-building campaigns in the hope that trust will be restored.

Former American Airlines CEO Donald J. Carty provides a glaring ex

ample of how trust can be betrayed. After the union membership had

narrowly voted to accept $1.62 billion worth of annual concessions in the

name of “shared sacrifice” to avoid bankruptcy, Carty admitted that he

and six other executives still benefitted from executive-retention bonuses

and pension protections. BusinessWeek called this lack of timely disclosure

a megablunder.

Carty was seen as trying to pull a fast one on the un

ions. Later he and the other executives agreed to give up their retention

bonuses, which would have paid them twice their base salary.

Restoring trust was the theme of the Public Relations Coalition, a

partnership of 19 major U.S.-based organizations representing corpo-

rate public relations, investor relations, public affairs, and related com-

munications disciplines. They have challenged corporate America to do

three things: adopt ethical principles, pursue transparency and disclo-

sure in everything they do, and make trust a fundamental precept of

corporate governance. Its first report, “Restoring Trust in Business:

Models for Action,” contains several worthy ideas.

A basic one, cred-

ited to Arthur W. Page, who is recognized as the first corporate public re-

lations vice president in the history of public relations, is the view that

“real success, both for big business and the public, lies in a large enter-

prise conducting itself in the public interest and in such a way that the

public will give it sufficient freedom to serve effectively.”

To this end

ethical behavior must be encouraged and promoted.

In discussing disclosure and transparency, the report emphasizes the

importance of creating an open company and lists nine steps, among

which are these:

• Be willing to disclose all of your business, social, and political ac

tivities, as long as doing so does not raise legal issues or jeopardize

your competitive position in the marketplace.

• When addressing issues of public concern, localize the message by

involving company employees in affected communities and enlist

ing the help of independent, objective third parties.

• Proactively engage your stakeholders in dialogue, with particular

emphasis on employees and middle management.

The report reflects the application of the relationship model, espe

cially the importance of making trust a board-level precept. This is in

keeping with new corporate governance guidelines.

418 I CHAPTER 15

INCORPORATING THE PUBLIC INTEREST

IN CORPORATE GOVERNANCE

A potent way to incorporate the public interest into corporate

policymaking and decision making is to link it to corporate governance.

Even before recent developments in corporate governance reforms, Peter

Drucker, the management guru, wrote in a well-known Wall Street

Journal editorial, “The Real Duties of a Director”: “The board is responsi

ble for making sure that a company has adequate policies for its key

outside relationships—with government, with the labor union, with

the public in general; and that it have adequate policies with respect to

its legal and regulatory responsibilities.”

Drucker’s ideas were reflected at the 54th American Assembly on

Corporate Governance in America held in the late 1970s when busi

ness leaders recognized that “Boards of directors have a primary role

in interpreting society’s expectations and standards for manage-

ment.”

These leaders recognized that boards of directors were in

deed the key organ by which the corporation interfaces with

society—and not only with the economic marketplace. This was a

major theme in the 1970s in response to consumer, environmental,

and other social movements. They concluded that corporations “can

and should improve their responsiveness to emerging social and ethi-

cal questions.” One suggestion was to hold open regional meetings

with public groups to discuss social issues and related corporate ac-

tions. The assembly stressed the importance of disclosure, recogniz-

ing the value of a well-informed public. For this reason they

recommended giving the press access to “responsible and well-in-

formed corporate officers.” These and other policies and procedures

pertaining to corporate governance deserve to be revisited in the

wake of today’s loss of public confidence in corporations.

Signs are appearing that corporations are reforming their corporate

governance structures, not only in the traditional operational and fi

nancial areas but also in the social and public responsibility areas. Re

sponding to this interest, management consultants, law firms, and

public relations firms offer a variety of services in advising on corporate

governance.

Moreover, some companies and professional groups are

making efforts to comply with the spirit of reform. GE, for example,

made the following changes, some of which exceed Sarbanes-Oxley and

the NYSE proposals:

• Two-thirds of GE’s board members must be independent—a mat

ter not addressed by the Sarbanes-Oxley Act, and the NYSE re

quires only a majority to be independent. All members of the audit

committee are independent.

• Directors not employed by GE must meet at least three times a

year without management present, a requirement only in the

NYSE proposals.

HEED THE PUBLIC INTEREST I 419

• Each director must visit two GE businesses a year without repre

sentatives of corporate management, which is not required by fed

eral law or the NYSE.

• GE senior managers must hold a specified amount of company

stock as part of their salaries and hold for at least a year any GE

shares they acquire through stock options, neither of which is re

quired by federal law or the NYSE.

Most of the post-Enron discussions about corporate governance have

focused on the need for greater transparency, greater responsibility by

boards, and their restructuring (e.g., more independent directors). With

all the attention going to financial reforms, little has been said about the

broader issue of improving corporate responsibility to society and act

ing in the public interest. These are concerns of public affairs and public

relations. As stated by Douglas A. Pinkham, president of the Public Af

fairs Council, “Many business leaders claim to understand how their

business environment affects long-term profitability, but remarkably

few embrace all of the public relations and public affairs tools available

to them.”

Wes Pederson, editor of the Public Affairs Review, reinforces

this view by reminding business executives, “Sadly, business lagged for

years in its understanding of the political effects of corporate gover-

nance despite the pleas of savvy CEOs and public affairs professionals

for corporate transparency and ethical orthodoxy.”

To integrate public interest considerations in corporate governance,

three promising approaches have been discussed: (a) forming a public

interest committee, (b) expanding the composition of the board, and (c)

conducting social audits and publishing social reports

Form a Public Interest Committee

The formation of a public interest committee—also labeled public pol

icy, corporate responsibility, or social responsibility committee—is a

useful structural addition to corporate governance. Such a group could

educate board members on significant happenings in the larger society

and introduce new ideas on how to relate to this larger world. An excel

lent example is Dow Chemical, whose corporate governance structure

includes a Public Interest Committee:

The Public Interest Committee shall have oversight responsibility and shall

advise the Board on matters impacting corporate social responsibility and

the Company’s public reputation. The Committee’s focus includes the

Company’s public policy management, philanthropic contributions, inter

national codes of business conduct, and corporate reputation manage

ment. Recognizing that positive perceptions of the Company’s policies

and practices are valuable assets, the Committee will monitor these per

ceptions and will make recommendations to the Board and management

to continually enhance the Company’s public standing.

420 I CHAPTER 15

Such board committees are reminiscent of the 1970s when they were

seen as a response to the social issues and concurrent public pressures

that arose in the 1960s. Top management recognized that a full board

often cannot devote enough time and consideration to social issues. Nor

do board members feel they have sufficient specialization in this area, a

fact recognized by Milton Friedman. One of the first companies to estab

lish a public policy committee was GM in 1970 as a response to Ralph

Nader’s proxy resolution, “Campaign GM.” The then GM chairman,

Richard C. Gerstenberg, described its purpose as follows:

The purpose of the Committee is to give matters of broad national concern

a permanent and prominent place at the highest level of management—

and I emphasize “at the highest level of management”—on the board of di

rectors which ought to be the first to perceive change and the first to grasp

the opportunity of responding to it.

The Committee’s mandate is to inquire into every phase of the corpora-

tion’s business activities that relates to matters of public policy, and to

recommend any changes it feels appropriate to management or the full

board of directors. The Public Policy Committee assures us that broad

national concerns are considered in the major policy decisions of the cor-

poration.

As of early 1979, the Conference Board identified 103 companies

with public policy committees. A notable one was GE, whose function

corporate strategist Ian Wilson described as providing “an independent

checkpoint on the issues—present or potential—that affect General Elec-

tric; and to appraise the effectiveness of management’s response.”

Harvard Business Review article listed 35 companies with public respon-

sibility committees, including Aetna Life and Casualty Company, AT&T,

Citicorp, International Paper, Philip Morris, and Sears, Roebuck.

Members of a public interest committee should represent diverse

backgrounds, including experience outside the world of business. A sur

vey showed that their number was somewhat larger than that of most

other board committees, ranging from 3 to 14 members, with the me

dian size of 5 to 6. Most of them were outsiders, although 55% of the

committees included some insider directors (e.g., retired CEOs). Most

committees included more women, minorities, and academics than are

typically on corporate boards of directors. As a university president on

one committee reported, managing conflicting interest groups can be a

challenge.

The charter of a public interest committee might include the follow

ing activities:

• Identify major constituencies, both internal and external, and ex

amine what each expects of the corporation’s performance socially

and environmentally.

HEED THE PUBLIC INTEREST I 421