BT Chapter 2 Stakeholders PDF

IVY LEAGUE ASSOCIATES Preci05! © ACCA Chapter 2 Stakeholders © ACCA © ACCA Chapter 2 Stakeholders © ACCA 4 Stakeholders Definition Stakeholder – An entity that can affect or be...

IVY LEAGUE ASSOCIATES Preci05! © ACCA Chapter 2 Stakeholders © ACCA © ACCA Chapter 2 Stakeholders © ACCA 4 Stakeholders Definition Stakeholder – An entity that can affect or be affected by an organisation. © ACCA 5 Stakeholders Stakeholders would include: Entities with a commercial relationship to the organisation, including customers, shareholders, suppliers, and employees. Entities interested in the organisation’s activities, including regulators, local residents, and special interest groups. “Silent” entities that may not have a voice, including the environment and society. © ACCA 6 Example 1 Reflection In a large company, who has more influence over its activities – its shareholders or senior managers? Consider what the shareholders or senior managers might think. The relative importance and influence of a company’s shareholders and managers vary at different companies. However, in a large company with many shareholders, its managers are likely to have more influence and power than the shareholders because they manage the business’s day-to-day operations. © ACCA 7 The Agency Relationship An agency relationship is between a principal and an agent. Empowerment Principal (authority) Agent © ACCA 8 The Agency Relationship An agent is someone who is given the authority to act on behalf of a principal. The principal provides the agent with the power to act on their behalf. An example is the relationship between the managers and owners of a business. The owners (principals) give the managers (agents) authority to run the company on their behalf. Agents have a fiduciary (contractual) duty to act in good faith and protect the interests of the principals. © ACCA 9 The Agency Relationship Some examples of an agency relationship are: Owners and directors Owners or shareholders (principals) appoint directors (agents) to run the company on their behalf. The directors must act in good faith and protect the owners’ interests. The owners authorise the directors to control the company and make any necessary decisions regarding its operations. © ACCA 10 The Agency Relationship Shareholders and auditors Shareholders (principals) appoint the auditors (agents) who report to them on the financial statements produced by the directors. Auditors are accountable to the shareholders for their work. In practice, the directors may appoint the auditors, but the shareholders will approve the appointment at the following annual general meeting. © ACCA 11 The Agency Relationship Directors and employees Directors (principals) employ managers and other members of staff (agents) to carry out the company’s day-to-day operations. The staff are accountable to their immediate managers (and managers to the directors) for the work delegated to them. Corporate governance is implemented to reduce the risk of excessive agency costs (where agents take action in their interest instead of principals’). © ACCA 12 Internal, Connected, and External Stakeholders. Internal Stakeholders Organisation Internal stakeholders © ACCA 13 Internal, Connected, and External Stakeholders. Internal Stakeholders Internal stakeholders in a company are employed by and perform most of the company’s activities. Internal stakeholders include the directors, managers and other employees. © ACCA 14 Internal, Connected, and External Stakeholders. Connected Stakeholders © ACCA 15 Internal, Connected, and External Stakeholders. Connected Stakeholders Connected stakeholders in a company are individuals or organisations that have a contractual relationship with the company. They may have invested in the company or have direct dealings with it. Connected stakeholders include shareholders, lenders, customers and suppliers. © ACCA 16 Key Point Key point Internal and connected stakeholders are often called primary stakeholders. Their existence is essential for the survival of the company. © ACCA 17 External Stakeholders External stakeholders are individuals, groups or organisations that are not directly involved in the company and its activities but may be interested in what the company does. External stakeholders include the government, local communities, environmental pressure groups and the general public. © ACCA 18 Key Point Key point External stakeholders are often called secondary stakeholders. © ACCA 19 Activity 1 Reflection Yadset Synthetics is a company manufacturing plastic bottles for various customers, such as drinks companies, milk producers and baby food suppliers. 1. Who might be an internal stakeholder in Yadset Synthetics? 2. Who might be considered a connected stakeholder in Yadset Synthetics? 3. Who might be considered an external stakeholder in Yadset Synthetics? © ACCA 20 Activity 1 Answer 1. Who might be an internal stakeholder in Yadset Synthetics? Internal stakeholders include people who work inside the company and carry out its activities. These would consist of directors, managers and other workers. © ACCA 21 Activity 1 Answer 2. Who might be considered a connected stakeholder in Yadset Synthetics? Connected stakeholders include people and organisations who are either investors in the company or have direct dealings with it. These will consist of shareholders, lenders (banks and other financial organisations), suppliers and customers who buy the company’s products. © ACCA 22 Activity 1 Answer 3. Who might be considered an external stakeholder in Yadset Synthetics? Examples of external stakeholders might be the local community, who are interested in jobs at the factory; environmentalists, who might be concerned about pollution produced by the plant; local government officials, who are interested in the plant’s contribution to the local economy. © ACCA 23 Managing Stakeholder Groups Internal Stakeholders Internal stakeholders are within the company and perform the company’s operations. © ACCA 24 Internal Stakeholders Board of Directors and Senior Management The board of directors is the primary decision-making body of a company. They are agents of the owners (shareholders) authorised to manage the company’s day-to-day operations. They have a fiduciary (contractual) duty to manage the company in good faith to maximise the owner’s wealth. © ACCA 25 Internal Stakeholders Board of Directors and Senior Management Their interests would include appropriate remuneration, potential ownership interests, and job security. They significantly influence the company’s operations and assets, so their actions must be effectively governed. This is discussed in detail in Chapter 16 © ACCA 26 Internal Stakeholders Managers and Employees Employees are individuals employed by the company for its operations. Managers are employees responsible for the performance of individuals and processes. Their interests include appropriate remuneration, job security, career advancement, work-life balance, and a healthy work environment. If their interests are not met, potential results are poor work performance, resignation (leaving the company), and collective action such as strikes. © ACCA 27 Example 2 Internal Stakeholders The following are examples of Yadset Synthetics’s internal stakeholders: Femi As a company director, I am mainly interested in ensuring the company is operating efficiently and profitably, fulfilling its (Director) objectives, and providing a return to the owners (shareholders). I also have long-term views about the company’s future, such as how it should expand and earn more money. © ACCA 28 Example 2 Internal Stakeholders The following are examples of Yadset Synthetics’s internal stakeholders: Jahanara As a manager in the company, I am concerned with organising the workforce to ensure that the company’s activities – making (Manager) plastic bottles for various customers – are carried out efficiently. If I do this properly, the company will do well, and my job will be safe. I will continue to earn a good salary, and there may be a possibility of promotion. © ACCA 29 Example 2 Internal Stakeholders The following are examples of Yadset Synthetics’s internal stakeholders: Nasir As a worker in the factory, my main concern is getting the work done as well as possible to ensure that my job is safe and that I (Employee) have a secure income. I want to see the company do well so it continues in business and I keep my job. © ACCA 30 Connected Stakeholders Connected stakeholders have a contractual relationship with the company. © ACCA 31 Connected Stakeholders Shareholders Shareholders are owners of the company. Their primary interest would be to maximise the value of their investment. They may also have other interests, such as ensuring the company is sustainable and has good ethical standing. © ACCA 32 Connected Stakeholders Shareholders Shareholders may actively influence the company by managing it themselves or hiring managers and directors aligned with their interests. They will scrutinise the performance of the company’s senior management and may adjust their exposure to the company by buying or selling the company’s shares. © ACCA 33 Connected Stakeholders Providers of Finance (Lenders) Providers of finance have invested in the company by lending money to it. Their primary interest is ensuring that the agreed-upon interest and capital are repaid. © ACCA 34 Connected Stakeholders Providers of Finance (Lenders) They will closely scrutinise the company’s performance and manage their exposure accordingly. If they deem the company as having a high risk of default, they may not provide further financing and may even initiate bankruptcy proceedings in the event of default. © ACCA 35 Connected Stakeholders Customers Customers purchase the company’s goods and services. Their interest is that the company’s products are fit for purpose and will continue to exist in the future to support them. © ACCA 36 Connected Stakeholders Customers Unsatisfied customers may give negative feedback on the company to their contacts and the public and do business with competitors. They may also organise boycotts of the company’s products and take legal action against the company if there is a significant breach of the terms of sale. © ACCA 37 Connected Stakeholders Suppliers Suppliers provide the inputs for the company’s operations. Their interest is that they are promptly paid for provided supplies and to maintain a profitable long-term relationship with the company. If suppliers are not paid promptly, they may withdraw credit facilities and even cease to supply. © ACCA 38 Example 3 Connected Stakeholders The following are examples of Yadset Synthetics’s connected stakeholders: Imena As a shareholder, I want the value of my investment in the company to grow to obtain a good return on my (shareholder) investment. Like many shareholders, I expect the company to provide me with regular dividend payments out of profits, so I want the company to be profitable. © ACCA 39 Example 3 Connected Stakeholders The following are examples of Yadset Synthetics’s connected stakeholders: Sharif As a lender, I want the company to pay me back the money they have borrowed on time and with interest. So (Lender) I am interested in the company’s profitability and also its cash position. (Profitable companies may have a shortage of cash.) Shreya As a customer, I expect the company to provide goods or services that I want to buy and give me value for the (Customer) money I spend. I may be dissatisfied if the company increases its prices or reduces the quality of its products or services. © ACCA 40 Example 3 Connected Stakeholders The following are examples of Yadset Synthetics’s connected stakeholders: Ajay As a supplier to the company, the company is my customer. I want the company to buy my goods at a price and on (Supplier) terms that give me a satisfactory profit. I expect the company to pay for its purchases promptly, at the agreed time. © ACCA 41 External stakeholders External stakeholders do not have a direct link to the company. © ACCA 42 External stakeholders Government The government rules the company’s region and enforces laws and regulations. It represents the people’s interest in the region. The government’s interest would be to ensure the company’s operations are legitimate and comply with applicable laws and regulations, provide jobs to the people, and ensure the appropriate corporation tax is paid. There are various penalties and punishments for breaches of regulations, including criminal prosecution of individual directors. © ACCA 43 External stakeholders Special Interest (Lobby) Groups Special interest groups promote a cause, including social, environmental, or political agendas. Their interest would influence the company’s operations to support or further their cause. Their activities may range from awareness campaigns to promote their agenda and lobbying for government intervention to direct action against companies, including legal suits, protests, disruption of company operations, and boycotts. © ACCA 44 External stakeholders Local Communities and General Public A company exists within a local community, which will want to ensure their way of life, rights, environment, jobs, and other interests are protected. The general public will be interested in the prevailing trends, including climate change and ethical business conduct. © ACCA 45 Activity 2 Reflection 1. What would be a manager’s main concerns about his employment? 2. What would be an employee’s interests and expectations? © ACCA 46 Activity 2 Answer 1. What would be a manager’s main concerns about his employment? Managers of a company are employees, as is the workforce. Managers will want to be paid well (‘remuneration’). Many will also be thinking about promotion (career progression) and status. Some may want to become successful in business themselves. Others may be concerned about job security – whether they can keep their job. All managers will be interested in the company doing well and being successful – then they will be more secure, and there will be better pay increases and promotion prospects. © ACCA 47 Activity 2 Answer 2. What would be an employee’s interests and expectations? Employees below management levels are likely to want a fair wage or salary, good working conditions and job security. They will also be concerned that the company should be successful so that their jobs are secure and they can earn extra money for overtime (extra work outside normal hours). © ACCA 48 Stakeholder Objectives, Conflicts, and Interactions A company’s directors and senior managers may have difficulty keeping all stakeholders satisfied, as some stakeholders’ interests may conflict with others’ interests. The problem can be severe when the company’s business is going through a challenging period. For example, when a company borrows money from a bank, the shareholders will want it to do so as cheaply as possible so that profits, and therefore their dividends, are maximised. On the other hand, the bank will want to charge a rate of interest that gives it a fair return for the risk it is taking in lending the money. © ACCA 49 Activity 3 Conflicts Match the conflict of interest with the stakeholder groups involved. Conflict of interest Stakeholder groups Retaining profit for Employees and managers investment vs Paying vs Shareholders dividends Job security for part-time Management vs General employees vs Job cuts to public save money Growing the business vs Employees vs Protecting the Management environment More wages and salaries Management vs vs Higher dividends Shareholders © ACCA 50 Activity 3 Answer Conflict of interest Stakeholder groups Retaining profit for Management vs Shareholders investment vs Paying dividends Job security for part-time Employees vs Management employees vs Job cuts to save money Growing the business vs Management vs General public Protecting the environment More wages and salaries vs Employees and managers vs Higher dividends Shareholders © ACCA 51 Stakeholder Objectives, Conflicts, and Interactions There are other potential conflicts of interest between stakeholders. For example, the government may want companies to employ more people, but company managers might want to invest in automation. Customers wish to have prices lowered, while management wants to raise prices. Directors and senior management need to decide how to respond to the conflicting demands of stakeholder groups. © ACCA 52 Example 4 Responding to Conflict 1. A group of workers demand a pay rise. What options are available to the manager? A. Refuse the demand B. Agree to the demand C. Negotiate and agree to higher wages in return for productivity improvement measures. © ACCA 53 Example 4 Responding to Conflict 2. Shareholders demand an increase in dividend payments. How should the board of directors respond? A. Refuse and say the company can’t afford it B. Agree to the demand C. Refuse the demand but indicate future dividend growth plans. There is no correct answer to these questions. The circumstances surrounding each conflict are different; a manager must evaluate the situation carefully to decide on an appropriate response. © ACCA 54 Power and Influence Definitions Power – The ability to control another entity’s actions. Influence – The ability to affect another entity’s thinking, decisions, and actions. © ACCA 55 Power and Influence Stakeholders have certain levels of power and influence on a company. For example, directors hold high power and influence on a company’s operations, whereas shareholders generally do not. However, shareholders can remove and appoint directors, and certain investors or investor groups have significant influence over directors. © ACCA 56 Key Point Key point Power may be challenging to exercise, especially if collective action is required. For example, shareholders have the power to remove and appoint directors. However, it may be challenging to coordinate sufficient votes to do so. © ACCA 57 Example 5 Power and Influence © ACCA 58 Example 5 Power and Influence 1. Who can decide where the cement factory should be built? The directors have the power to decide where the factory will be built. © ACCA 59 Example 5 Power and Influence 2. How are customers influencing the decision? The customers can influence where the new factory should be built because they can get their cement from another supplier if the new factory location is not convenient for them. In this case, the influence of the customers comes from their ability to switch to an alternative supplier. If the customers cannot switch suppliers, the customer will have less influence on the decision. © ACCA 60 Exercising Power and Influence The management of a company must consider two aspects of how their stakeholders might impact their decisions: 1. The possible actions the stakeholder might take in response to a decision/action. 2. What impact these actions might have on the organisation. © ACCA 61 Exercising Power and Influence For example, customers may buy less of a company’s products if prices are raised. This decision may hurt the company’s profits. A company may need to estimate the probability of a stakeholder’s response and quantify its impact. © ACCA 62 Exercising Power and Influence Internal Stakeholders Internal What they might do Effect on the organisation stakeholders Junior managers Resign Loss of staff Lose motivation Loss of efficiency Be reluctant to do what Loss of control their managers want Workers Take strike action Strike action could result in Resign lost output and sales Go slow at work Loss of staff Resist change Other actions would reduce efficiency © ACCA 63 Exercising Power and Influence Connected Stakeholders Connected What they might do Effect on the organisation stakeholders Shareholders Use their voting powers, Directors’ jobs may be at for example, the power risk to dismiss directors The board of directors may Refuse to provide not get the extra money it additional funding when needs the company needs more money © ACCA 64 Exercising Power and Influence Connected Stakeholders Connected What they might do Effect on the organisation stakeholders Lenders Take legal action if the If the company is in company falls behind financial difficulty, lenders with payments can have considerable Refuse to lend more powers. The future of the money when the business may be at risk. company needs it © ACCA 65 Exercising Power and Influence Connected Stakeholders Connected What they might do Effect on the organisation stakeholders Customers Stop buying the Loss of sales and loss of company’s goods or profit services © ACCA 66 Exercising Power and Influence Connected Stakeholders Connected What they might do Effect on the organisation stakeholders Suppliers Refuse to supply the Actions by important company with any more suppliers could disrupt the goods or services business through loss of Demand immediate supplies payment on delivery Adverse consequences for Raise their prices cash flows and profit © ACCA 67 Exercising Power and Influence External Stakeholders Connected What they might do Effect on the organisation stakeholders Government Make new laws Increased cost of Raise taxes compliance with laws Less retained profit for investment Restrictions may reduce effectiveness/competitivene ss © ACCA 68 Exercising Power and Influence External Stakeholders Connected What they might do Effect on the organisation stakeholders Pressure groups Attract publicity in the May lead to management media, for example, by deciding to change business demonstrating practices Raising the awareness of Loss of revenue and profit if other stakeholders, such customers stop buying the as customers or goods or services suppliers Business disruption caused by lack of supplies © ACCA 69 The Mendelow (Power-Interest) Matrix Management has limited time and resources and cannot completely satisfy the interests of all stakeholders. To support management in prioritising which stakeholders it should respond to, Mendelow proposes using a power-interest matrix. The amount of effort management takes to satisfy the needs of a stakeholder depends on the stakeholder’s power and interest relative to other stakeholders. © ACCA 70 The Mendelow (Power-Interest) Matrix Interest A stakeholder’s level of interest in the company depends on its circumstances. © ACCA 71 Activity 4 Level of Interest Determine whether the stakeholder has a high or low interest in the company. Stakeholder Level of interest (High or Low) A shareholder owns 75 per cent of the shares in a company. A customer buys a company’s products occasionally. The product is not expensive. © ACCA 72 Activity 4 Level of Interest Determine whether the stakeholder has a high or low interest in the company. Stakeholder Level of interest (High or Low) An investor owns a few shares in the company. She also owns shares in a large number of other companies. A full-time employee is the only wage-earner in his family, and his wages are just enough to pay for the family’s living costs. © ACCA 73 Activity 4 Level of Interest Determine whether the stakeholder has a high or low interest in the company. Stakeholder Level of interest (High or Low) A supplier to the company sells 30 per cent of its total output each year to the company. © ACCA 74 Activity 4 Answer Stakeholder Level of interest (High or Low) A shareholder owns 75 per cent of the shares in a High company. A customer buys a company’s products occasionally. Low The product is not expensive. An investor owns a few shares in the company. She Low also owns shares in a large number of other companies. © ACCA 75 Activity 4 Answer Stakeholder Level of interest (High or Low) A full-time employee is the only wage-earner in his High family, and his wages are just enough to pay for the family’s living costs. A supplier to the company sells 30 per cent of its total High output each year to the company. © ACCA 76 The Mendelow Power-Interest Matrix Stakeholders are classified into four quadrants, depending on their power level and interest in the company. Low High Keep Low Minimal effort informed Power Key High Keep satisfied players © ACCA 77 The Mendelow Power-Interest Matrix Quadrant Description Key Players When stakeholders have a high level of interest and power, they are key players, and their views will High power and interest strongly influence management decisions. Close attention should be paid to these stakeholders. Keep satisfied If stakeholders have much power that they could use, but their interest in the organisation is low, High power, low interest management should seek to keep them satisfied without involving them much. Management would need to monitor issues that would increase their level of interest and turn them into key players. © ACCA 78 The Mendelow Power-Interest Matrix Quadrant Description Keep informed Suppose stakeholders are interested in what the organisation does, but their power is low. In that Low power, high interest case, management should seek to keep the stakeholders informed as they may alert issues to stakeholders with more power and influence. The stakeholders themselves are likely to have little impact on decisions. Management should monitor situations where these stakeholders may gain power over the company. © ACCA 79 The Mendelow Power-Interest Matrix Quadrant Description Minimal effort If stakeholders have little interest in the organisation and little power, there is no reason for Low power and interest management to concern themselves much with them. Management should monitor prevailing trends and issues that might cause these stakeholders to increase their power and interest in the company. © ACCA 80 Activity 5 Mendelow Matrix Classify the stakeholder with the appropriate quadrant on the Mendelow Matrix: Key player Keep satisfied Keep informed Minimal effort © ACCA 81 Activity 5 Mendelow Matrix Stakeholder Quadrant Founder of the company, who owns 80 per cent of the shares Environmental pressure group A bank that has made a small loan to the company. Occasional customer © ACCA 82 Activity 5 Answer Stakeholder Quadrant Notes Founder of the company, Key player The company’s founder is a key who owns 80 per cent of player: they own 80% of the the shares shares. So they have high power over the company’s activities and interest in the outcomes. Environmental pressure Keep informed The pressure group has a low group level of power because it cannot directly change company policies but a high level of interest because the company’s policies are important to the pressure group. The pressure group could lobby more influential stakeholders for reforms. © ACCA 83 Activity 5 Answer Stakeholder Quadrant Notes A bank that has made a Keep satisfied The bank that has made a small small loan to the loan to the company has a high company. level of power – the loan must be repaid – but a low level of interest as the loan is small and unimportant to the bank. Occasional customer Minimal effort The occasional customer has only a low level of power. Their custom is of low importance to the overall business and may have low interest because they may already use other companies. © ACCA 84 Summary A stakeholder is an entity that can affect or be affected by an organisation. An agent is someone who is given the authority to act on behalf of a principal. The principal provides the agent with the power to act on their behalf. Internal stakeholders in a company are employed by and perform most of the company’s activities. Connected stakeholders in a company are individuals or organisations that have a contractual relationship with the company. They may have invested in the company or have direct dealings with it. External stakeholders are individuals, groups or organisations that are not directly involved in the company and its activities but may be interested in what the company does. © ACCA 85 Summary A company’s directors and senior managers may have difficulty keeping all stakeholders satisfied, as some stakeholders’ interests may conflict with others’ interests. Power is the ability to control another entity’s actions. Influence is the ability to affect another entity’s thinking, decisions, and actions. The amount of effort management takes to satisfy the needs of a stakeholder depends on the stakeholder’s power and interest relative to other stakeholders. A stakeholder’s level of interest in the company depends on its circumstances. Mendelow’s matrix classifies stakeholders into four quadrants, depending on their power level and interest in the company. © ACCA 86