CH2: Stakeholders

Question 1

Definition: Stakeholder

Answer 1

Groups which have an interest in how an organisation operates.

note. they can affect or be affected by an organisation’s strategy/policies hence it is important for a organisation to understand its stakeholders and stakeholder’s interests.

Question 2

Give some general examples of stakeholders

Answer 2

Customers, suppliers, employees, creditors, debtors, the community, government and unions

Question 3

What are the 3 groups that stakeholders can be classified into and why is this important?

Answer 3

Importance: to help the organisation make informed decisions and policies regarding all it’s stakeholders

Stakeholder groups: Internal, External and Connected

Question 4

Give examples of Internal stakeholders and their objectives

note. internal stakeholders are Primary stakeholders (ie. have a direct interest in the business)

Answer 4

Examples: Employees, managers, directors, board members

Objectives:

Employee: earnings, work hours, working conditions, job satisfaction, job security

Managers: Earnings, bonuses, status, job security/satisfaction

Directors: earnings, bonuses, status, job security/satisfaction

Question 5

Give examples of External stakeholders and their objectives

note. external stakeholders are Secondary stakeholders (i.e. have an indirect interest in the business)

Answer 5

Examples: Local residents, environmental groups, government, trade unions

Objectives:

Local residents: Pollution, congestion, employment

Environmental groups: environmental impact, pollution, impact on wildlife

Government: employment, payment of tax, adherence to law

Trade unions: working conditions, pay

Question 6

Give examples of Connected stakeholders and their objectives

note. Connected stakeholders are primary stakeholders (external to the business but closely related e.g. business relationships)

Answer 6

Examples: customers, banks, shareholders, suppliers

Objectives:

Customers: availability of products, value for money, convenience, quality of service

Suppliers: payment terms, prompt payment, future orders

Shareholders: continued trading, profits, dividends, rise in share price

Banks: continued trading, profits, loans repaid

Question 7

How does stakeholder power impact organisations?

Answer 7

The degree to which stakeholder needs should be considered as part of the organisation’s objectives setting process depends on the level of power they have to impact the organisation.

ie. the needs of more powerful groups will tend to be prioritised

Question 8

What is the objective of Mendelow’s matrix (in regards to stakeholder mapping)?

Answer 8

Helps to identify 4 levels of RELATIONSHIPS that should be built with different stakeholders. a stakeholder’s position in the matrix is based on 2 factors:

• POWER- the power to influence the organisation and affects its decision making
• INTEREST- the interest the stakeholder has in the organisation

Question 9

Minimal Effort

e.g. small suppliers, temporary employees

Answer 9

Low power

low interest

Question 10

Keep informed

e.g. employee, community groups

Answer 10

Low power

High interest

Question 11

Keep satisfied

government departments, tax authorities

Answer 11

High power

Low interest

Question 12

Key players

major shareholders, key customers

Answer 12

High power

High interest

Question 13

Why does stakeholder conflict arise?

Answer 13

stakeholders have different needs and expectations. it is crucial for organisations to understand the needs of varying stakeholders to resolve conflicts wherever possible.

Question 14

What did Cyert and March propose?

Answer 14

4 ways in which companies can look to resolve stakeholder conflict

Question 15

What are the 4 ways to resolve stakeholder conflict as proposed by CYERT and MARCH?

Answer 15

1) ‘Satisficing’
2) Sequential attention
3) Side payments
4) Exercise of power

Question 16

What is ‘Satisficing’?

Answer 16

satisfying+sacrificing - involves holding negotiations between key stakeholder groups and arriving at an accepted compromise

Question 17

What is Sequential attention?

Answer 17

Taking in turns focusing on the needs of different stakeholder groups

Question 18

What are side payments?

Answer 18

Providing compensation in someway to compromise for when a stakeholder’s needs cannot be met initially

Question 19

What is exercise of power?

Answer 19

A senior figure exercises their power to force a decision, when a compromise/action cannot be agreed upon

Question 20

What is the Agency problem?

aka Principal-agent problem

Answer 20

it is an example of stakeholder conflict.

The shareholders (principal) employ the directors/managers (agent) to run the business on their behalf. 
Even though the director should be running the business in the shareholder's interests (fiduciary duty), they have their own personal interest too. 

shareholders push for profits, but directors may push for sales if their bonuses are linked to this.

Question 21

Who is the principal and agents in the context of the principal-agent problem?

Answer 21

principal - business owners/shareholders

agent - managers/directors, agent employed by the company

Question 22

What is one general cause of the agency problem?

Answer 22

Information Asymmetry - the info available to each party is not equal. The directors tend to have more info available to them vs. shareholders hence shareholders are not always able to fully hold directors accountable for decisions made.

Question 23

What are two models which highlight the agency problem?

Answer 23

1) Baumol’s theory of sales maximisation

2) Williamson’s Model of Managerial discretion

Question 24

What are issues caused by the agency problem?

Answer 24

• it limits the control of one layer of management over another
• it can lead to dubious managerial practices within the company

Question 25

Explain Baumol’s theory of sales maximisation

Answer 25

Management are often more concerned with maximising sales because:

• bonuses are more likely to be related to sales vs. profits
• higher sales give the perception of company growth which helps to 1) raise funds from banks and 2)secure more jobs

v.s Shareholders want higher profits, do not necessarily result from higher sales hence the stakeholder conflict.

Question 26

Explain how Williamson’s model of managerial discretion observe misalignment of managerial and shareholder interest?

Answer 26

In satisfying their own needs, management may incur costs (e.g. bonuses, elaborate offices etc). As long as the profits support these costs, they will have little motivation to improve company performance beyond this.

Focusing on sales over profits also applies here

Question 27

What are possible solutions to the agency problem?

Answer 27

1) link bonuses to profit levels
2) employee profit sharing schemes
3) management given company shares as part of their remuneration package hence become owners themselves
4) management shared by a number of directors so less likely that objectives will be dominated by the interest of one party
5) corporate governance

Question 28

Whats a difference between stakeholders in profit seeking vs. not for profit organisations?

Answer 28

profit seeking - shareholders are key stakeholders

not for profit - other stakeholders will be more important. the challenge is that there is lots of different important stakeholders. the goal for the organisation should be to try and balance the needs of competing groups of stakeholders which may involve some compromise.

Question 29

Definition: Corporate governance

Answer 29

The set of rules and procedures put in place to determine how organisation is controlled and managed

Question 30

What methods are used in corporate governance and their outcomes?

Answer 30

Sets level of reporting and disclosure - all stakeholders see how their needs are being met e.g. director’s pay and bonuses have to be publicly disclosed

setting rules for how board of directors is run/managed and decisions are made - ensures adequate knowledge and experience within a company’s management so required duties can be successfully completed

Compulsory regular communication with shareholders - timely, clear info is delivered to shareholders

Independent directors (non-executive directors) sit on the board - ensures the business is operated in a legal and ethical way

Question 31

What is the main objective of corporate governance?

Answer 31

To balance the demands of ALL stakeholders (ie. internal, external, connected) including legal requirements set by the government