Chapter 5

Question 1

Who are the stakeholders?

Answer 1

Stakeholders are those individuals or groups that depend on an organisation to fulfil their own goals and on whom, in turn, the organisation depends.

Question 2

What are the 5 Types of stakeholder?

Answer 2

• Economic (e.g. suppliers, shareholders, banks)
• Social/political (e.g. government agencies)
• Technological (e.g. standards agencies)
• Community (e.g. local residents)
• Internal (e.g. employees, local offices)

Question 3

What is stakeholder mapping?

Answer 3

stakeholder mapping identifies stakeholder power and attention in order to understand political priorities.
The power and interest of stakeholders depend on the particular issue being considered – different issues require different maps.

Question 4

What is Power?

Answer 4

Power is the ability of individuals or groups to persuade, induce or coerce others into following particular strategies.

Question 5

Attention

Answer 5

Stakeholders vary in the attention they pay to the organisation and particular issues within it. Even powerful stakeholders may not attend closely to everything.
Three factors are particularly important:
* Criticality – how much does it matter to the stakeholder? * Channels – are the communication channels good?
* Cognitive capacity – there may be too much information to process effectively.

Question 6

Who are Owners

Answer 6

Owners are typically key stakeholders in strategic decisions. However, their power and atten-tion can vary according to different ownership models.

Question 7

What are the four main ownership models?

Answer 7

The four main ownership models are as follows:
Publicly-quoted companies, State-owned enterprises, Entrepreneurial businesses, Family businesses

Question 8

Publicly-quoted companies

Answer 8

Publicly-quoted companies
* Shares are sold to the general public or financial institutions.
* Such companies are usually managed by professional managers.
* Their objective is to make a financial return for the owners (profit focus).
* Unsatisfied shareholders will sell their shares or seek to remove the managers

Question 9

State-owned enterprises

Answer 9

State-owned enterprises
* Organisations wholly or majority owned by national or regional governments. They are especially important in developing economies (e.g. China, Russia and Brazil).
* Privatisation has reduced their importance butt here are many quasi-privatised organisations (e.g. Free schools).
* Politicians delegate day-to-day control toprofessional managers but may intervene on strategic issues.
* They need a financial surplus to fund investment but also pursue other objectives in line with government policy.

Question 10

Entrepreneurial businesses

Answer 10

Entrepreneurial businesses
* Such businesses are substantially owned and controlled by their founders (e.g. Arcelor Mittal, Facebook and the Virgin Group).
* With growth, more professional managers and external investors are required.
* They typically focus on profit to survive and grow but may also have personal missions favoured by the founder(s).

Question 11

Family businesses

Answer 11

Family businesses
* Ownership has been passed on from the founding entrepreneur to descendants.
* Typically small to medium-sized enterprises (SMEs) but may be large (e.g. Ford, Walmart).
* The family may retain the majority of shares while floating some shares on the stock market.
* Professional managers may be employed but ultimately the family remain in control.
* The need to retain family control may lead to rejecting high-risk strategies or those requiring substantial external finance.

Question 12

What are the other types of organisations?

Answer 12

• Not-for-profit organisations (e.g. Mozilla). Frequently charitable foundations that exist to pursue a social mission.
• Partnerships (e.g. law firms). Organisations owned and controlled by senior employees.
• Employee-owned firms (e.g. John Lewis). Ownership is spread among all the employees. They may not be able to raise capital easily and may be more conservative in terms of strategy.

Question 13

what is Corporate governance

Answer 13

Corporate governance is concerned with the structures and systems of control by which managers are held accountable to those who have a legitimate stake in an organisation.

Question 14

What is the governance chain?

Answer 14

The governance chain shows the roles and relationships of different groups involved in the governance of an organisation.
* In a small family business, the governance chain is simple.
*In large publicly-quoted corporations, however, influences on governance can be complex

Question 15

What is the principle-agent model? and its key challenges

Answer 15

Governance can be seen in terms of the principal–agent model.
Principals pay agents to act on their behalf (e.g. beneficiaries/trustees pay investment managers to manage funds, boards of directors pay executives to run a company).
Agents may act in their own self interest.
The key challenges are:
* Knowledge imbalances: agents typically know more about what can and should be done.
* Monitoring limits: it is very difficult for the principal to closely monitor the agent’s performance especially if they have diverse interests.
* Misaligned incentives: without appropriate incentives, agents may pursue their own objectives.

Question 16

What is the shareholder model of governance?

Answer 16

The shareholder model is dominant in publicly-quoted companies. Shareholders have priority in regard to the wealth generated by the company, as opposed to Stakeholders. The shareholder interest in a company is assumed to be largely financial.

Question 17

What is the stakeholder model of governance?

Answer 17

The stakeholder model of governance is founded on the principle that wealth is created by a variety of stakeholders, all of whom deserve a portion. It is not just shareholders who have a stake in the future of a business. Thus in the stakeholder governance model, management need to attend to multiple stakeholders.

Question 18

Which are the advantages and disadvantages of the shareholder model?

Answer 18

Advantages: Higher rates of return, Reduced risk, Increased innovation
and entrepreneurship, Better decision-making.
Disadvantages: Diluted attention, Vulnerable minority, shareholders, Short-termism

Question 19

Which are the advantages and disadvantages of the stakeholder model?

Answer 19

Advantages: Long-term horizons, Less reckless risk-taking, Better management
Disadvantages: Weaker decision-making, Uneconomic investments, Reduced innovation and entrepreneurship

Question 20

What is the role of boards?

Answer 20

boards have the ultimate responsibility for the success or failure of an organisation, they must be concerned with strategy. Two key issues for boards:
* Delegation: how much to delegate without having strategy ‘captured’ by management?
* Engagement: do board members have sufficient time and expertise to engage with the complexities of strategy?

Question 21

Accepted good practice for boards includes:

Answer 21

• Operating ‘independently’ of management – the role of non-executives is crucial.
• Being competent to scrutinise the activities of managers.
• Having time to do their job properly.
• Appropriate behaviours, including ‘constructive friction’.

Question 22

What is Corporate social responsibility (CSR)?

Answer 22

Corporate social responsibility (CSR) is the commitment by organisations to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as the local community and society at large’.