S8: Stakeholders, Social Responsibility & Corporate Governance

Question 1

What is a stakeholder?

Answer 1

Someone that can be affected by a firm’s performance + who have claims on the performance

Question 2

What are some types of stakeholders? (3)

Answer 2

• Capital market stakeholders (shareholders, banks, etc.)
• Product market stakeholders (customers, suppliers, host communities, unions)
• Organizational stakeholders (employees, managers, nonmanagers)

Question 3

Classifications of capital market stakeholders? (2)

Answer 3

• Expect the firm to preserve and enhance their wealth
• Expect returns, which are correlate with the investments’ degree of risk (low-risk, low returns and vice-versa)

Question 4

Classifications of product market stakeholders? (4)

Answer 4

• Customers want reliable products at low prices
• Suppliers want customers who are willing to pay the highest sustainable price for products
• Host communities (gov. entities) want companies to be long-term employers + provide tax revenue
• Unions want stable jobs and desirable working conditions

Question 5

Classifications of organizational stakeholders? (4)

Answer 5

Employees:
- expect firm to provide a good working environment
- expect firm to grow, which allows them to develop skills

Leaders:
- use firm’s human capital successfully to satisfy stakeholders’ needs
- help employees understand global competition by assigning international tasks

Question 6

Social responsibility: Friedman’s POV?

Answer 6

Primary goal of a business is to maximise profits -> no spending on altruistic goals

Question 7

Social responsibility: Byron & Carroll’s POV?

Answer 7

Economic: be profitable enough to reward creditors and stakeholders
Legal: act legally
Ethical: follow ethical principles
Discretionary: follow discretionary responsibilities (ex: day care, etc. -> activities that are done voluntarily by the business without being pressured into doing it)

Question 8

What is corporate governance?

Answer 8

Set of mechanisms used to manage the relationship with stakeholders + determine & control the strategic direction and performance of organizations; i.e. ensures decisions are made effectively so that the firm remains competitive, improving the relationship between managers and firm’s owner

Question 9

What is an agency relationship?

Answer 9

A relationship where one party delegates decision-making responsibility to a second party for compensation (ex: owners and managers)

Question 10

What are 4 ways to mitigate problems associated with separation of ownership and managerial control?

Answer 10

• Ownership concentration (individual owns a majority of stocks)
• Board of directors
• Executive compensation (more money for managers if their interest align with shareholder’s interests)
• Market for corporate control (buy a firm that is underperforming to improve its strategic competitiveness)