Shareholders versus stakeholders 3.4.3

Question 1

What is a stakeholder?

Answer 1

Is any individual or group with an interest in the actions and decision-making of the business

Question 2

What are the 2 types of stakeholders?

Answer 2

• Internal
• External

Question 3

What are examples of internal stakeholders?

Answer 3

• Employees
• Managers
• Owners
• Shareholders

Question 4

What are examples of external stakeholders?

Answer 4

• Customers
• Suppliers
• Shareholders
• Government
• Local community
• Society
• Creditors

Question 5

What are the main interests of shareholders/owners?

Answer 5

• Return on investment and profits and dividends
• Success and growth of the business
• Proper running of the business

Question 6

What are the main interests of managers/employees?

Answer 6

• Rewards, including basic pay and other financial incentives
• Job security and working conditions
• Promotion opportunities and job satisfaction and status – motivation, roles and responsibilities

Question 7

What are the main interests of customers?

Answer 7

• Value for money
• Product quality and customer service

Question 8

What are the main interests of suppliers?

Answer 8

• Continued, profitable trade with the business
• Financial stability – can the business pay its bills?

Question 9

What are the main interests of banks and other finance?

Answer 9

• Can the business repay amounts loaned or invested?
• Profitability and cash flows of the business
• Growth in profits and value of the business

Question 10

What are the main interests of the government?

Answer 10

• The correct collection and payment of taxes (e.g. VAT)
• Helping the business to grow – creating jobs
• Compliance with business legislation

Question 11

What are the main interests of society?

Answer 11

• Success of the business – particularly creating and retaining jobs
• Compliance with local laws and regulations (e.g. noise, pollution)

Question 12

What is a shareholder?

Answer 12

Defined as any person, company or other institution that owns at least one of a company’s shares. They’re often one of the sources of finance for the business; their financial risk is limited to the value of their shareholding.

Question 13

Stakeholder: that the business considers all of its stakeholders in its business decisions/objectives

Answer 13

• The stakeholder concept suggests that a business’ responsibilities are towards all of its stakeholders. Therefore the business must consider all of its stakeholders in its decisions and objectives, for example, consult with stakeholders before making strategic decisions. They must also treat stakeholders fairly e.g. prompt payment to suppliers, fair pay and conditions for employees, as well as addressing the business’ impact on the wider community such as environmental footprint. Stakeholder influences should be seen as a genuine concern and not just a PR exercise.
• Stakeholders are increasingly being seen as important to the business and certainly can influence corporate strategy. Unlike shareholders, stakeholders; objectives are more diverse and can be less focused on the short-term and more on the long-term goals of the business.

Question 14

Stakeholder: that the business considers all of its stakeholders in its business decisions/objectives: PROS AND CONS

Answer 14

• Benefits of a stakeholder approach include higher levels of motivation among staff and managers, improved perception of the brand by customers and the wider community, greater research and innovation, sustainable organic growth and, in the longer term, improved profits and dividends.
• Drawbacks include slower decision-making, a risk of losing competitive advantage in the short term, and lower profits and dividends.

Question 15

shareholder: the business should focus purely on shareholder returns (increasing share price and dividends) in its business decisions/objectives

Answer 15

The shareholder concept suggests that a business’ responsibilities are solely aimed at meeting the requirements of the shareholders. Shareholders have a direct influence on the business as they can attend the company’s annual general meeting and voice concerns and can appoint directors to the board running the company. Therefore, it has profit maximisation as its main corporate objective. Higher profits will lead to higher dividends and shareholders will receive income growth (an increase in the income received from dividends). Good performance of the company will see its share price rise and shareholders will receive capital growth (a rise in the value of their assets).

Question 16

shareholder: the business should focus purely on shareholder returns (increasing share price and dividends) in its business decisions/objectives: PROS AND CONS

Answer 16

• Benefits of a shareholder approach can be increased short-term profits, consistent decision-making, higher revenue and lower investment costs.
• Drawbacks are that this approach can end up ignoring and isolating all other stakeholders, including customers, it can be seen as a short-term approach, growth tends to be inorganic, which risks a lack of long-term sustainability, and a lack of investment in research and innovation may ultimately lose the company its competitive advantage.

Question 17

How can shareholder and stakeholder objectives be in conflict?

Answer 17

Shareholder and Stakeholder objectives can clearly be in conflict, as when wages rise at the expense of lower profits and dividends, organisational growth is at the expense of short-term profits, and expansion of production may cause disruption to the local community.

Additionally, conflict can occur between stakeholders and for a business, this can be a hard task to meet all of the needs of the stakeholders. This occurs when the actions or objectives of one group of stakeholders may weaken the power of another.

However, stakeholder needs may also overlap in which case they can join together to increase their power, for example the community may support the employees when taking industrial action in order to strengthen their voice.

Question 18

What are examples of conflicts between stakeholders?

Answer 18

• Cut jobs and reduce costs
• Add extra shifts to increase factory capacity
• Introduce new machinery to replace manual work
• Increase selling prices significantly to improve profit margins

Question 19

How can cutting jobs and reducing costs lead to conflict?

Answer 19

Likely to be supported by:
- Shareholder
- Banks

Possible opposed by:
- Employees
- Local community

Question 20

How can adding extra shifts to increase factory capacity lead to conflict?

Answer 20

Likely to be supported by:
- Management customers and suppliers

Possible opposed by:
- Local community

Question 21

How can introducing new machinery to replace manual work lead to conflict?

Answer 21

Likely to be supported by:
- Customers
- Shareholder

Possible opposed by:
- Employees

Question 22

How can increasing selling prices significantly improve profit margins and lead to conflict?

Answer 22

Likely to be supported by:
- Shareholders
- Management

Possible opposed by:
- Customers