Professional Documents
Culture Documents
Stakeholders in Business
Organisations
FOCUS
This session covers the following content from the ACCA Study Guide.
Session 2 Guidance
Know that classical theory (agency theory) considers that the duty of directors is to maximise
the wealth of the shareholder (s.1). The current approach, stakeholder theory, considers that this
maximisation cannot be achieved without taking into account the impact on and by stakeholders.
Learn the definition of stakeholders and understand the description and examples of the three main
categories of stakeholderinternal, connected and external (s.2). Expect a question in the exam
on this area. Be sure that you can identify/classify stakeholders in a given situation and/or identify
what their particular interest might be.
STAKEHOLDER STAKEHOLDER
CATEGORIES POWER AND
CONFLICT
Internal
Stakeholders Risk
Connected Mendelow
Stakeholders Stakeholder
External Conflict
Stakeholders
Session 2 Guidance
Understand Mendelow's grid as a classic example of the Boston Consulting Group matrix, its
structure and how it can be used to categorise stakeholders and their impact (s.3).
Solution
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Solution
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2 Stakeholder Categories
There are many ways in which stakeholders are classified, but the
initial classification relates to their "relative position" within the
organisation, for example:
internal;
connected; and
external.
2.1 Internal Stakeholders
Internal stakeholders are intimately connected to the
organisation. Their objectives are likely to have a strong
influence on how it is run.
They usually have an operational role in the company, will
be involved in the corporate governance procedures of the
company or will have a number of interests in being connected
with the company.
They include directors, company secretary, managers and
general employees.
2.1.1 Directors
Directors are responsible and accountable to stakeholders
(including shareholders) for the strategic direction of a
company, its day-to-day operations and for the company's
moral and corporate social behaviour. Their powers are
usually laid down in the company's constitution or articles
and supported by relevant corporate laws and corporate
governance codes.
Under corporate governance, there is usually a distinction
between executive directors (who manage the business on a
full-time basis) and non-executive directors (who oversee and
monitor the executive function).
As stakeholders, their interest covers, for example,
remuneration, bonuses, share options, retirement benefits,
status, reputation and power.
2.2.1 Shareholders
Shareholders are usually classified into three categorieslisted
institutional, listed small and unlisted.
1. Institutional shareholders
Institutional shareholders (e.g. pension funds, insurance
funds) in today's corporate governance and corporate
social responsibility environments take a keen interest
in the performance and objectives of the directors of the
organisation. It used to be that all they were interested in
was short-term dividend growth and capital value growth
(market capitalisation) and they basically left the directors to
run the business as they saw fit.
Now, although they still take a keen interest in maximising
shareholder wealth, they have recognised their responsibilities
to actively participate as shareholders. For example:
to question the directors about policies;
to use their voting power (rather than hand over a proxy
vote to the directors); and
to challenge directors' decisions, especially recognising the
effect which poor directors and business direction will have
on the value of the business.
In addition, institutional shareholders are beginning to look for
long-term sustained growth in their investments.*
Directors also have recognised the power this group of
shareholders can use to demonstrate their points of view.
For example, voting against resolutions (e.g. to appoint a
director), proposing their own directors and ultimately being
able to sell their shareholdings, which are usually significant
enough (e.g. 5%) to affect the market. Directors hold regular
meetings with institutional shareholders to ensure open and
clear communications between them.
2.2.2 Suppliers
The suppliers of resources have an obvious stakeholder
interest in an organisation. Depending on the nature of the
relationship, they may be able to affect the organisation or be
affected by the organisation.
Ideally, the supplier wishes to establish a long-term relationship
with an organisation. Suppliers require frequent and regular
high-value orders at fair prices which are profitable for them to
be able to reinvest. They also require prompt payment from
their customers to be able to manage their cash flows. Lastly,
they wish that their customers can grow, be successful and thus
continue to do business with them.
Businesses wish to have a consistent supply of high-quality
resources from reliable suppliers. They wish to be able
to manage their costs and not to become over-dependent
on one resource or a limited number of suppliers of that
resource. Many organisations aim to ensure that they have an
appropriate number of reliable suppliers which can deliver the
right quality at the right price at the right time.
2.2.3 Customers
The other side of the coin is the customer as a stakeholder
(every supplier has a customer). Organisations should wish to
maintain a strong and loyal customer base. They should aim
to deliver what the customer wants, at an optimum price, of
suitable quality and on time.
Customers look for low prices, value for money, high-quality
products, good service, innovation, certain and regular supply,
variety, and clear and accurate information on product choice.
If they do not get the right mix of these elements, then
the risk to the organisation is that the customer will go
elsewhere (Internet searching is a successful price- and
service-comparison tool).
If there are a limited number of suppliers in the market for
a particular product/service or if customers do not get the
right service, they will turn to a competitor.
If an organisation fails to maintain good customer relationships
and to deliver what the customer wants, the organisation will
have no customers and will go out of business.
2.3.1 Governments
Governments are involved in just about all aspects of individual
and corporate life.
Taxessales taxes, value added tax ("VAT"), profit taxes,
capital gains taxes, employment taxes and withholding taxes
on dividends are just a few of the taxes levied on companies.
In most cases, companies are expected to also act as unpaid
tax collectors.*
Solution
3.1 Risk
Business risk is the risk that a business will not achieve its
objectives. Such risks must be managed by the managers of
all organisations.
Stakeholder risk (as a subset of business risk) can be
considered as the risk that the business will not achieve its
objectives (e.g. maximise wealth and value) because of the
lack of understanding of the effect of stakeholders on the
*Managers must
organisation by its managers.* identify stakeholders
Under stakeholder theory, it is essential for all organisations who may act
to be able to identify all stakeholders, and assess their level negatively against
of interest and power to hinder or support the organisation, the organisation, as
when developing strategy and objectives. well as those that can
assist the organisation
3.2 Mendelow achieve its objectives.
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Solution
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POWER
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Session 2 Quiz
Estimated time: 15 minutes
EXAMPLE SOLUTIONS
Solution 1Agency Costs
1. External audit fees
2. Control and risk management systems
3. Governance procedures (e.g. internal audit)
4. Shareholder meetings (e.g. annual general meeting)
5. Risk sharing
*In January 2008, a British Airways Boeing 777 lost power to both
engines while on its final approach to Heathrow Airport. The pilots
managed to glide the aircraft for two miles and crash-landed on
the perimeter grass of the airfield, unable to make the runway. No
passengers were seriously injured. Unofficial signs saying "Please
keep off the grass" were later placed on the approach to the runway
being clearly visible to pilots and passengers (British humour!).
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INTEREST