CH2: Stakeholders Flashcards
Definition: Stakeholder
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.
Give some general examples of stakeholders
Customers, suppliers, employees, creditors, debtors, the community, government and unions
What are the 3 groups that stakeholders can be classified into and why is this important?
Importance: to help the organisation make informed decisions and policies regarding all it’s stakeholders
Stakeholder groups: Internal, External and Connected
Give examples of Internal stakeholders and their objectives
note. internal stakeholders are Primary stakeholders (ie. have a direct interest in the business)
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
Give examples of External stakeholders and their objectives
note. external stakeholders are Secondary stakeholders (i.e. have an indirect interest in the business)
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
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)
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
How does stakeholder power impact organisations?
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
What is the objective of Mendelow’s matrix (in regards to stakeholder mapping)?
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
Minimal Effort
e.g. small suppliers, temporary employees
Low power
low interest
Keep informed
e.g. employee, community groups
Low power
High interest
Keep satisfied
government departments, tax authorities
High power
Low interest
Key players
major shareholders, key customers
High power
High interest
Why does stakeholder conflict arise?
stakeholders have different needs and expectations. it is crucial for organisations to understand the needs of varying stakeholders to resolve conflicts wherever possible.
What did Cyert and March propose?
4 ways in which companies can look to resolve stakeholder conflict
What are the 4 ways to resolve stakeholder conflict as proposed by CYERT and MARCH?
1) ‘Satisficing’
2) Sequential attention
3) Side payments
4) Exercise of power
What is ‘Satisficing’?
satisfying+sacrificing - involves holding negotiations between key stakeholder groups and arriving at an accepted compromise
What is Sequential attention?
Taking in turns focusing on the needs of different stakeholder groups
What are side payments?
Providing compensation in someway to compromise for when a stakeholder’s needs cannot be met initially
What is exercise of power?
A senior figure exercises their power to force a decision, when a compromise/action cannot be agreed upon
What is the Agency problem?
aka Principal-agent problem
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.
Who is the principal and agents in the context of the principal-agent problem?
principal - business owners/shareholders
agent - managers/directors, agent employed by the company
What is one general cause of the agency problem?
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.
What are two models which highlight the agency problem?
1) Baumol’s theory of sales maximisation
2) Williamson’s Model of Managerial discretion
What are issues caused by the agency problem?
- it limits the control of one layer of management over another
- it can lead to dubious managerial practices within the company
Explain Baumol’s theory of sales maximisation
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.
Explain how Williamson’s model of managerial discretion observe misalignment of managerial and shareholder interest?
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
What are possible solutions to the agency problem?
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
Whats a difference between stakeholders in profit seeking vs. not for profit organisations?
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.
Definition: Corporate governance
The set of rules and procedures put in place to determine how organisation is controlled and managed
What methods are used in corporate governance and their outcomes?
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
What is the main objective of corporate governance?
To balance the demands of ALL stakeholders (ie. internal, external, connected) including legal requirements set by the government
