Chapter 58- Shareholders vs Stakeholders

Question 1

Stakeholder

Answer 1

Those with a vested interest in the activities of a business. Stakeholders can be directors, employees, owners, suppliers, unions and customers.

Question 2

Internal stakeholders

Answer 2

Some groups of people inside the business have a direct interest in its survival and well-being. These may be referred to as internal stakeholders.

• Business owners – A business is the property of the owners. Owners are stakeholders because they stand to gain, or lose, financially from the performance of the business. They will also benefit if the value of the business increases. However, if the business fails owners may lose the money they invested in the business.
• Employees – internal stakeholders because they work for businesses. Employees depend on businesses for their livelihood. Most employees have no other sources of income and rely on wages to live on. Some worker are represented at work by trade unions. If this is the case, then trade unions also become stakeholders.
• Managers and directors – in small businesses managerial tasks, such as organising, decision making and planning, it is undertaken by entrepreneurs themselves. However, in large companies, the key decisions relating to company policy and strategy are made by the board of directors. It is then the responsibility of managers to ensure that the policies and strategies are implemented. Managers are accountable, his means they are responsible for the actions of their subordinates.

Question 3

External stakeholders

Answer 3

A range of groups outside of business may have an interest in its activities. Such groups are called external stakeholders.

• Shareholders – most shareholders in large companies are not involved in the day-day running of the business. They are investors and have a purely financial interest. External shareholders, who might be individuals, or more likely, large financial institutions, invest their money to get a financial return.
• Customers – Customers buy the goods and services that businesses sell – through their purchases they provide the revenue and profit that businesses need to survive.
• Creditors – Creditors lend money to business. They may be banks but could also be individuals such as private investors or venture capitalists. These stakeholders have a financial interest in a business and will be keen for it to do well.
• Suppliers – Businesses that provide raw materials, components, commercial services and utilities to other businesses are called suppliers. Relations between businesses and their suppliers need to be good because they rely on each other. Businesses want good-quality recourses at reasonable prices. They also want quick delivery, trade credit and flexibility. There is a mutual dependence between suppliers and businesses as with businesses and customers.
• Local community-most businesses are likely to have an impact on the local communities Pro- local jobs, over time higher pay. Cons- Noisy, polluting , if it shut down lots of unemployment etc.
• Government – the government has an interest in all business. They provide employment, generate wealth and pay taxes. Taxes from businesses and their employees are used to fund government expenditure. It helps to pay for benefits such as NHS, schools and other services. If businesses fail, the government loses tax revenue and has to pay benefits to the unemployed. However, governments also propose a significant amount of legislation to protect those who might be exploited by businesses.

Question 4

Stakeholder objectives

Answer 4

Shareholders: maximise shareholder value. Over time shareholders want this company performance to grow. If the growth in shareholder value is not to the satisfaction of external investors, they may sell their shares. This could result in a fall in the share price, which might make the company vulnerable to takeover.

Employee objectives – Employees want the business that they work for to prosper. If a business Is growing and profitable, employees are likely to get higher wages, more perks and perhaps a bonus.

Managerial objectives – Mangers may press for benefits if the business is doing well such as bonus payments and expenses allowances when travelling on company business.

Customer objectives – Customers want good quality products at a fair price. They also want clear and accurate information about products and high-quality customer service. They may also want choice, innovative products and flexibility. Customers have a powerful influence on businesses. In competitive markets only those that meet customer needs are likely to survive

Supplier objectives – Suppliers want to be treated fairly by businesses. They would prefer to have long-term contracts and regular orders. They also want a fair price for their goods or services and to be paid in reasonable time.

Question 5

Stakeholder approach-

Answer 5

• Recognise their interests and try to accommodate them
• Maintain open communication channels between other
  stakeholders and consult with them before making radical
  changes
• Recognise the interdependence that exists between different
  stakeholders, ensuring that the benefits of enterprise are
  distributed fairly after taking into account the level of effort
  and risk each group contributes.

Question 6

Shareholder approach

Answer 6

Focuses on getting more money for the shareholders, done in any way

Question 7

Shareholder value

Answer 7

A measure of the company performance which combines the size of dividends and the share price

Question 8

Think about conflicts between stakeholders and shareholders

Answer 8

Shareholder and employee – Employees might try to put pressure on the business to ensure their objectives are met by threatening industrial action. However, if this action is too disruptive it may jeopardise the survival of the business. Employees have to be careful not to push their claims too far.

Shareholders and customers – Conflict between shareholders and customers is most likely to arise if a business chargers prices that are too high. Higher prices will help to boost shareholder returns but reduce the purchasing power of customers.

Shareholder and directors and managers – Conflict might arise if managers start to prioritise their own interests over shareholders, such as maximising perks and benefits. It these are too high, profit and dividends may suffer. There may be a divorce in ownership and control – where if shares are held by a very large number of different shareholders where no single shareholder has any significant control. Shareholders may prefer to have higher dividends while the directors may prefer to retain more profit for investment.

Shareholders and the environment – In an effort to maximise profits, a business might neglect its responsibilities towards the environment.