1.4. Stakeholders

What are stakeholders

A stakeholder is defined as any group or individual who can affect or is affected by the performance of the organisation. They are persons or groups that have a legitimate interest in a business’ conduct and whose concerns should be addressed as a matter of principle. Stakeholder theory puts forward the view that the objectives of organisations will take account of the various needs of different interested parties who will represent some type of informal coalition. The relative power of the different stakeholders is the key issue and organisations will sometimes trade-off one against the other, establishing a hierarchy of relative importance.

There are three broad types or constituencies of stakeholder in an organisation

▪ Internal stakeholder such as employees and management

▪ Connected stakeholders such as shareholders, customers, suppliers and financiers

▪ External stakeholders such as the community, government, trade unions and pressure groups

Interests of internal and external stakeholders

Stakeholder conflict

Conflicts of expectations of stakeholders

Johnson & Scholes (1989) suggest that in the area of strategy, stakeholders are often in conflict with one another. For example, there may be conflict between a cost efficiency programme and job security. Other typical examples include:

• A long-term growth objective may conflict with a short-term one of project performance, pay levels and cash flow.
  • The desire of the company to extend its activities into mass markets may conflict with the desire of other stakeholders for quality products and good customer service.
  • Investment in new technology and automation may lead to job losses
  • The public ownership of shares may conflict with a desire to keep profit performance levels and capital structure a secret
  • Investments in new capital and equipment may conflict with management’s desire to be independent of financiers. Funds will usually be required to finance these investments.
  • The appointment of professional expertise by a small company may conflict with the desire of the owner/manager to retain control.
  • Shareholders demanding rising profits and customers wanting higher quality (more costly) products
  • Employee demand for pay rises against the need for management to maximise profit (to achieve their bonuses)
  • The community wanting minimal environmental impact from the organisation but shareholders want the least costly option for disposing of waste chosen
  • Directors may recommend that the business is taken over by another but shareholders want to remain independent.

Directors usually give priority to those stakeholders which have the most power, but decisions are usually a compromise between the various stakeholder groups.

Mendelow classifies stakeholders on a matrix whose axes are power/influence and degree of interest in the organisation’s activities.

Resolving stakeholder conflicts

Ultimately stakeholders all have an interest in the performance of the business and this is not helped by stakeholder conflict which can be extremely damaging. Poorly motivated staff, for example will lead to lower productivity, efficiency and lower profits. Even worse, would be conflict between management and the workforce leading to action industrial such as strikes.

The outcome of negotiations will be influenced greatly by the relative strengths of the stakeholder groups. Large multinationals, such as supermarket chains are able to impose cheaper prices on suppliers fearful of losing large orders. Employees, backed by powerful unions, may be in a position to force small firms into improving terms and conditions of employment. International pressure groups can exert considerable pressure to change behaviour on even the largest of organisations fearful of the effects on their brand and corporate image if they do not comply.

Potential Solutions

Businesses or governments will sometimes hire respected individuals, or groups, to:

• investigate the circumstances behind the disputes and to produce a report with potential solutions
• offer conciliation services and attempt to bring the conflicting stakeholders together in the same room or to liaise between the groups if this is not possible
• to arbitrate between the factions. Here both sides agree to accept the judgments of the independent body.

Other possible solutions include:

Rewarding stakeholders in a way that links their performance to the success of the business. This can be achieved through:

• Share option schemes for staff - as shareholders, staff may be motivated to perform more effectively as employees, because increased profits should lead to higher dividends and increases on share value
• Performance related pay (PRP) - this may be a compromise between the desires of the shareholder to retain a lower wage base and the desire of the workforce to improve their terms and conditions. Employees will be rewarded if they increase the profitability of the business and the dividend payout for staff.
• Involving more stakeholders in the decision making process. For instance, representatives of individual stakeholders may be appointed as Directors of the business. It is not uncommon for employees to have a representative on the Board of Directors, and for major investors, such as banks to have the same. Some firms even appoint community Directors.

Improving channels of communication between the stakeholder groups. Companies may keep their stakeholders informed of new developments through company magazines and websites. New technologies allow for the easy gathering of views through regular questionnaires. Even small firms may be able to afford this as simple, and free questionnaires can be produced using tools such as Survey Monkey. Alternatively the firm may hire Public Relations (PR) consultants or hire an internal PR team to keep the community and other stakeholders informed of the positive aspects of the business operations and attempt to minimise any negative impacts of their operations or planned changes.

Task 3: Question on management of stakeholder conflict

Cornbridge is a large region in T Country with a beautiful coastline and large areas of natural habitat, which include the nesting grounds of rare birds. However, the region is suffering from high unemployment and unsightly derelict buildings. D Company, an international mining company, has discovered substantial mineral reserves in Cornbridge. It is looking to obtain government permission to undertake a mining project in the area which would provide jobs and boost the economy.

There is pressure from the Cornbridge Protection Alliance (an organisation which includes wildlife protection representatives, residents worried about noise and pollution, environmentalists and anti-capitalist groups) to stop the Government from granting permission to D Company. The Alliance has also expressed concerns about the safety of workers given that there has been recent publicity about fatalities in the mining industry. The main union representing the workers of D Company has suggested that it has no concerns regarding this project as D Company has an exemplary record for health and safety.

Identify why these stakeholders have been classified the way they have according to Mendelow's Matrix

Stakeholder groups