Mod 11: Stakeholders Flashcards
Describe five categories of stakeholders (categorised by relationship to the company)
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Five categories of stakeholders
- Principal: contribute capital and/or expect a return, eg shareholders, debtholders, customers, government, insurance and financial markets
- Agency: paid by principals to perform a specific role on their behalf, eg directors, pension scheme trustees and administrators, managers, employees, auditors, investment managers
- Controlling: supervise the principals or their agents, eg professional bodies, regulators, industry bodies, the government
- Advisory: advise the principal or their agents, eg actuaries, lawyers, credit rating agencies, investment advisors, shareholder service providers
- Incidental: affected by the behaviour and actions of the principal or their agents, eg creditors, suppliers and other business partners, general public, media
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State the key perspectives of shareholders with regard to RM
Perspectives of shareholders with regard to RM
- concerned with maximising risk-adjusted return (prices and dividends)
2.. desire value creation through the taking of risk - but wish to avoid share price collapse
- may have short-or long-term time horizon
- reliant on directors and auditors to safeguard their investment
- minority shareholders are individually weak and rely on directors and auditors to protect their interests
- may organise into action groups or use shareholder service providers (proxy advisors)
State the key perspectives of customers and policyholders with regard to RM
Perspectives of customers and policyholders with regard to RM
- seek good value for money
- and security of the company so that it provides goods and services as expected (eg if a long-term investment, access to servicing or repair is important, or seeking a replacement product is very expensive)
- individually weak but can be organised into groups, perhaps by consumer advocacy groups – especially after a significant event
- may also be shareholders or owners (eg mutual)
Outline the Key aspects of customer management in RM
Importance of customer management in RM
- acquisition – cheaper to retain than acquire
- loyalty (retention and turnover) – dissatisfied customers lose / destroy value
- know your customer – learning so as to improve retention (within privacy laws)
- effective crisis management – honesty, speed, communication, long-term focus
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State the key perspectives of directors with regard to RM
Perspectives of directors with regard to RM
1. duty of care with regards to risk management on behalf of shareholders
2. ensure full understanding of the business and are willing to challenge management decisions
3. need to ensure compliance with relevant regulation
4. potential conflicts of interests
a. may be both director and employee (if not NED)
b. own objectives (eg remuneration, job security) against those of other stakeholders (eg profit)
State the key perspectives of employees with regard to RM
Perspectives of employees with regard to RM
1. security of employment and hence continued company profitability
2. security and growth of benefits (including remuneration)
3. day-to-day implementation of RM policies
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List the key aspects of employee management in RM ©
Key aspects of employee management
- recruitment and incentives / benefits
- Staff retention, promotion and training
- dismissal and resignations
- alignment with shareholders’ interests (especially the risk management function and the pricing teams)
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State the key perspectives of government and regulators with regard to RM
Perspectives of government and regulators with regard to RM
Government:
1. set regulations and legislation
2. intervene to reduce inappropriate insolvencies, especially. strategically important ‘too-big-to-fail’ organisations (eg lender of last resort, nationalisation), and to prevent contagion
3. minimise costs of intervention
4. generate sufficient tax revenues
5. avoid regulatory arbitrage
6. avoid electoral losses and enhance personal reputations
Regulators:
1. ensure compliance with regulations and protect market stability
2. timely and proportionate intervention process
3. balance between protection of stakeholders (especially customers and policyholders) and maintenance of free and efficient market
List five actions taken by government / regulators to strengthen the regulation of financial institutions since the 2008 financial crisis
Post-2008 changes to regulation of financial institutions
- increased disclosure requirements
- temporary bans on short-selling of certain stocks
- requirements for banks to have an orderly liquidation plan (eg a ‘living will’ as under new US Dodd-Frank Act)
- introduction of new regulators or reorganisation of existing ones (eg new Consumer Financial Protection Bureau in the US / replacement of the FSA with the PRA and FCA in the UK)
- increased regulatory capital requirements ©
State the key perspectives of creditors with regard to RM
Perspectives of creditors with regard to RM
1. security – require repayment of monies owed
2. not concerned about specific risks as long as debt repaid
3. in times of distress, creditors may waive interest or foreclose to secure payment of part of the capital
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State the key perspectives of external auditors with regard to RM ©
Perspectives of external auditors with regard to RM
1. review accounts …
2. … including an assessment of risks and risk management (effectiveness of which depends on degree of disclosure by managers)
3. report openly and honestly on the state of the company on behalf of shareholders and regulators
4. manage own reputational risks (eg arising from conflicts of interests and risk of litigation)
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Outline three principles aimed at ensuring success in business partnerships / alliances
Principles for success in business partnerships
1. only form an alliance if it is the best option (eg fuller control is needed but merger is unnecessary)
2. take care to find the right alliance partner (eg decision making team, developed evaluation criteria)
3.
monitor the progress of the alliance carefully (eg resources, turnover, quality as well as financial measures)
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List potential benefits and pitfalls in business partnerships / alliances
Potential benefits and pitfalls in business partnerships
Benefits:
- faster product development
- access to new markets
- sharing of financial risks
- benefit from economies of scale
Pitfalls:
- conflicts of interest
- waste of resources
- damage to reputation
- loss of intellectual capital
- disputes over intellectual property ©
State three corporate responses to stakeholders having conflicting interests and objectives
Responses to stakeholders having conflicting interests and objectives
1. Companies should develop a clear understanding of each stakeholder’s interests.
2.
Interests should be aligned where possible, with this information recorded and disseminated amongst the stakeholders.
3. Stakeholder interests and requirements should be reflected in the corporate business plan.
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Describe the advantages and disadvantages of the separation of ownership and management
Agency risk and agency costs
Owners benefit from:
1. continuity of management
2. avoiding day-to-day management
3.managers’ expertise
Disadvantages include:
- misalignment of interests
- difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent.
- costs of managing agency risk (mitigating agency risk, developing robust remuneration plans, monitoring and influencing agents’ actions)
- actual losses arising from agency risk
