Stakeholder Objectives and Influences (Edexcel A-Level Business): Revision Notes
Stakeholder Objectives and Influences
Understanding stakeholder objectives
While all stakeholder groups generally want a business to survive and succeed, each group has specific objectives based on their relationship with the organization.
What shareholders want
Shareholders aim to maximize shareholder value – a key performance measure combining dividend payments and share price growth. Shareholders expect this value to increase over time. If external investors become dissatisfied with shareholder value growth, they may sell their shares, potentially causing the share price to fall and making the company vulnerable to takeover.
Shareholder value is a critical metric that reflects both immediate returns (dividends) and long-term growth potential (share price). When shareholder value declines, it signals deeper problems that can threaten the company's independence.
What employees want
Employees seek prosperity from their employer. When businesses grow and remain profitable, employees typically benefit through higher wages, additional perks, and bonus payments. They also enjoy greater job security.
According to Herzberg's motivation theory, employees expect good pay and comfortable working conditions as basic requirements. However, they also want:
- Responsibility and meaningful work
- Positive interaction with colleagues
- Recognition and feeling valued
- Personal development opportunities
- Fair and honest treatment
- Promotion prospects
- Safe working conditions
- Equal opportunities
Overall, employees aim to maximize both their financial rewards and general welfare.
What managers want
Managers and directors share similar needs to employees. Many have performance-related pay, so they want the business to succeed. They may also seek:
- Bonus payments for strong performance
- Expense allowances for business travel
- Benefits like company cars and private health insurance
- Greater flexibility in their working arrangements
Some senior executives pursue power as an objective, engaging in 'empire building'. This can lead to shareholders losing influence over key organizational decisions – a situation known as the divorce of ownership and control.
What customers want
Customers seek good-quality products at fair prices. They also expect:
- Clear and accurate product information
- High-quality customer service
- Choice and variety
- Innovative products
- Flexibility in purchasing
For certain products (machinery, electrical goods, children's products), safety is crucial. If businesses fail to meet customer needs, customers will take their spending elsewhere.
Today's customers have more awareness of available products and their consumer rights. In competitive markets, only businesses that satisfy customer needs survive.
What suppliers want
Suppliers want fair treatment from the businesses they supply. Their specific objectives include:
- Long-term contracts and regular orders
- Fair prices for their goods or services
- Payment within reasonable timeframes
Problems can arise when powerful businesses pressure suppliers. For example, some retailers may demand price cuts from suppliers following commodity price falls, threatening to withdraw products if suppliers refuse. In such cases, bodies like the Groceries Code Adjudicator may investigate potential supplier bullying.
What government wants
Government objectives for businesses include:
- Business growth and increased profitability
- Compliance with all legislation
- Avoiding exploitation of vulnerable groups
What environmental groups want
Environmental stakeholders demand that businesses avoid negative environmental impacts. They want business activity to:
- Protect wildlife and natural habitats
- Prevent atmospheric pollution
- Avoid wasting resources
What local communities want
Local communities seek businesses that contribute to community prosperity and act as good corporate citizens. Community expectations include:
- Creating local employment
- Building links with schools and charities
- Maintaining open communication with residents
- Minimizing or avoiding local congestion and pollution
The extent of these expectations depends on the business's size, nature, and capabilities.
The stakeholder approach to business decisions
Some corporations consider the objectives of all stakeholder groups, not just shareholders, when making business decisions. This stakeholder approach follows principles outlined by the Clarkson Principles.
The Clarkson Principles
The Clarkson Principles define how businesses should engage with stakeholders:
Under the stakeholder approach, corporations should:
- Recognize stakeholder interests: Acknowledge other stakeholders' objectives and consider their views when operating the business and making decisions
- Maintain open communication: Keep communication channels open with stakeholders and consult them before implementing radical changes
- Acknowledge interdependence: Recognize that stakeholders are interconnected, ensuring that enterprise benefits are distributed fairly based on each group's effort and risk contribution
- Minimize adverse effects: Reduce or eliminate negative impacts of business activity. When harm cannot be avoided, provide adequate compensation to those affected
Adoption and reality
Some businesses claim to adopt this stakeholder approach, partly due to increasing pressure from stakeholders, media, and the public to demonstrate social responsibility. However, critics argue that some businesses only appear to consider broader stakeholder needs while actually remaining focused on shareholder interests. For example, a business might adopt an ethical stance primarily to boost sales, revenue, and profit rather than from genuine stakeholder concern.
Benefits of the stakeholder approach
The stakeholder approach offers several potential advantages:
- Employment policies: Good employment practices attract better job applicants and help motivate and retain staff. Improved motivation and retention typically increase profits
- Customer care: Effective customer service policies drive higher sales and profits
- Supplier relationships: Strong supplier relationships enable better value for money and easier problem resolution regarding late deliveries or defective work
- Community engagement: Contributing to local communities (through charitable giving, employment, or training projects) generates positive public relations, potentially boosting sales and attracting quality job applicants
- Environmental responsibility: Being environmentally friendly can reduce overall costs. For example, recycling heat in boilers requires initial equipment investment but quickly saves money through lower fuel costs. Environmental credentials may also increase product sales
- Reputation management: For high-profile companies, greater social responsibility can deflect criticism from pressure groups
Real-World Example: Foxconn's Social Responsibility Response
Foxconn, an electronics company working for Apple and Samsung, pledged action against plants using child labor after media reports. The company recognized that social responsibility was vital to its business context – maintaining contracts with major tech companies required demonstrating ethical manufacturing practices.
This shows how stakeholder concerns can directly impact business relationships and profitability.
Limitations of the stakeholder approach
The main disadvantage is that stakeholder-focused policies typically increase costs and reduce profits for most businesses. If this weren't true, every business would already offer enhanced employee benefits, donate to charities, and pursue environmentally friendly policies. Only certain businesses genuinely benefit from a stakeholder approach.
The shareholder approach to business decisions
Traditionally, many corporations have focused on growth or profit maximization when making important business decisions. Under this shareholder approach, shareholder objectives have greater influence on decision-making than other stakeholder groups' objectives.
This approach stems from the principle that directors and managers are employed by shareholders and should therefore serve their interests first. This means making as much money as possible for business owners while complying with the law.
Some businesses still adopt this approach, with their main objective being to maximize shareholder returns by increasing both dividends paid to shareholders and the share price.
Conflicts between shareholders and other stakeholders
Problems arise between shareholders and other stakeholders when their objectives directly conflict. Understanding these potential conflicts is essential for analyzing business decisions.
Shareholders versus employees
Meeting employee objectives (higher wages, better conditions, more perks, bonuses, training, improved welfare) costs money. Fully satisfying employee needs typically reduces profit and dividends. Conflict occurs when shareholders insist that employee rewards must not come at the expense of dividends.
Employees may pressure businesses through threats of industrial action. However, excessive disruption could jeopardize the business's survival. Employees must balance their demands carefully.
Worked Example: JLR Pay Negotiations (2014)
In 2014, Jaguar Land Rover (JLR) workers in the Midlands received an 'inflation-busting' pay rise after threatening strike action.
The situation:
- Staff had rejected an earlier offer, claiming it didn't reflect workers' contributions to the company's turnaround
- Employees threatened industrial action
- The Unite trade union stepped in to negotiate
The resolution: The union recommended accepting JLR's new offer:
- First year: 4.5% increase plus a $825 lump sum
- Second year: RPI inflation plus 0.5% or 3% (whichever is higher)
This example shows how employees can successfully negotiate better terms through collective action, but also demonstrates the need for compromise to avoid damaging the business.
Shareholders versus customers
Conflict most commonly arises when businesses charge excessive prices. Higher prices boost shareholder returns but reduce customer purchasing power.
Real-World Example: Energy Price Discrepancies (2014)
Many customers complained about rising gas and electricity prices in 2014. The conflict was clear:
- Gas bills rose 3.5% between April and June 2014
- Meanwhile, the cost of gas paid by suppliers fell 21%
- Customers were understandably frustrated by this discrepancy
This demonstrates how businesses can prioritize shareholder returns at the expense of customer satisfaction, leading to public criticism and potential regulatory intervention.
Conflict also occurs when customer service quality is poor or when businesses fail to invest in research and development for new products. However, cutting R&D expenditure allows higher dividend payments to shareholders.
Shareholders versus directors and managers
Senior managers and directors should advance shareholder interests. However, conflict arises when they prioritize their own objectives – maximizing their remuneration, expenses, perks, and benefits. Excessive management rewards reduce profit and dividends.
This problem intensifies when shareholders lose control over the business. A divorce of ownership and control occurs when shares are held by very many different shareholders, with no single shareholder having significant control.
A common conflict involves the balance between paying dividends and retaining profit for investment. Shareholders typically prefer higher dividends, while directors often prefer retaining more profit for investment purposes.
Shareholders versus the environment
In pursuing profit maximization, businesses may neglect environmental responsibilities.
Real-World Example: UK Water Companies (2011)
In 2011, several UK water companies were accused of draining rivers at risk of drying up completely.
The environmental impact:
- Wildlife was destroyed
- Chemical build-up threatened fragile ecosystems
- Rivers risked complete depletion
The business motivation: Reports suggested companies extracted water from these sources because they were cheapest – prioritizing cost savings (and therefore shareholder profits) over environmental protection.
Such activities attract media and environmental group attention, creating conflict between the company and environmentalists.
Shareholders versus government
Conflict between shareholders and government typically occurs when businesses break the law. The judicial system should resolve such conflicts.
During 2013-2014, tension arose between government and large corporations regarding tax avoidance. Some major corporations paid minimal UK tax despite substantial UK sales.
Real-World Example: Amazon Tax Controversy (2013)
Amazon reportedly paid only $4.2 million tax in 2013 on UK sales of $4.3 billion.
The conflict:
- When corporations reduce tax payments, shareholders enjoy bigger profits
- However, if businesses avoid paying taxes, governments face criticism
- Governments may need to pursue such businesses for tax payment or risk losing political support
This demonstrates how legal tax avoidance strategies can create significant tension between shareholder interests and government objectives.
Remember!
Key Takeaways:
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Different stakeholder groups have distinct objectives: Shareholders want maximum returns, employees want good pay and conditions, customers want quality products at fair prices, and other groups have their own specific goals
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Two main approaches exist: The stakeholder approach considers all stakeholder groups' needs; the shareholder approach prioritizes shareholder returns above all else
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Conflicts are inevitable: When shareholder objectives clash with other stakeholder objectives (employees wanting higher pay reducing dividends, environmental protection reducing profits), businesses must make difficult choices
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The Clarkson Principles: Define the stakeholder approach through recognizing stakeholder interests, maintaining open communication, acknowledging interdependence, and minimizing adverse effects
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Real-world impact: Business decisions about wages, prices, investment, and environmental practices directly affect stakeholder relationships and can lead to industrial action, customer complaints, or government intervention
Key Terms to Remember:
- Shareholder value – measure combining dividend size and share price
- Stakeholder approach – considering all stakeholder groups in decisions
- Shareholder approach – prioritizing shareholder returns
- Divorce of ownership and control – when shareholders lose influence over business decisions