Business Stakeholders 5 flashcards

5.1 Business stakeholders

• The main stakeholders of a business are:
  • Owners (shareholders in a limited company)
  • Customers
  • Suppliers
  • Employees, including managers and their families
  • Local communities
  • Government and government agencies
  • Special interest groups
  • Lenders
• Most of these groups are external stakeholders.
• Owners, managers, and other employees are referred to as internal stakeholders.
• Stakeholders: Individuals or groups who can be affected by, and have an interest in, any action taken by an organization.
• External stakeholders: Individuals or groups who are separate from the business but are affected by or interested in its operations.
• Internal stakeholders: Individuals or groups who work within the business, or own it, and are affected by the operations of the business.
• Businesses have responsibilities towards stakeholders.
• Stakeholders also have important roles and responsibilities towards businesses.

Stakeholders’ roles, rights, and responsibilities

• Customers:
  • Roles: To purchase goods and services, to provide revenue from sales, which allows the business to function and expand.
  • Rights: To receive goods and services that meet local laws regarding health and safety, design, and performance; to be offered replacements, repairs, or compensation in the event of failure of the product or service to at least the minimum levels laid down by law.
  • Responsibilities: To be honest, to pay for goods bought or services received when requested, not to steal, not to make false claims about poor service, underperforming goods, or failed items.
• Suppliers:
  • Roles: To supply goods and services to allow the business to offer its products to its own customers.
  • Rights: To be paid on time as stated in the service agreement between the business and suppliers; to be treated fairly and not to be exploited by the customer business.
  • Responsibilities: To supply goods and services ordered by the business in the time and condition laid down by the purchase contract or supplier's service agreements, to be honest.
• Employees:
  • Roles: To provide manual and other labor services to the business, in accordance with the employment contract, to allow goods and services to be provided to customers; to provide the labor services required by the business.
  • Rights: To be offered employment contracts that meet legal standards, e.g., minimum wage rate; to be treated and paid in the ways described in the employment contract; in most countries, to be allowed to join a trade union if desired.
  • Responsibilities: To meet the conditions and requirements of the employment contract; to cooperate with management in all reasonable requests; to observe the ethical code of conduct.
• Local community:
  • Roles: To provide local services and infrastructure to the business to allow it to operate, produce, and sell within legal limits.
  • Rights: To be consulted about major changes that affect it, e.g., expansion plans or changing methods of production; not to have the community's lives badly affected by the business's activities.
  • Responsibilities: To cooperate with the business, where reasonable to do so, on expansion and other plans; to meet reasonable requests from the business for local services such as public transport for employees and waste disposal.
• Local government:
  • Roles: To pass laws that restrain many aspects of business activity; to provide law and order and economic stability to allow business activity to take place.
  • Rights: To expect the business to meet all legal constraints, such as producing only legal goods and to pay taxes on time.
  • Responsibilities: To treat businesses equally under the law; to prevent unfair competition that could damage chances of business survival.
• Government:
  • Roles: To provide finance to the business in different forms.
  • Rights: To be repaid on the agreed date; to be paid finance charges, e.g., interest on loans.
  • Responsibilities: To establish good trading links with other countries to allow international trade; to provide the agreed amount of finance on the agreed date for the agreed time period.
• Lenders:
  • Roles: to provide finance
  • Rights: to be repaid on the agreed date; to be paid finance charges, e.g. interest on loans
  • Responsibilities: to provide the agreed amount of finance on the agreed date for the agreed time period
• Managers
  • Roles: to control, command and direct resources
  • Rights: to have contract of employment, to have sufficient authority to fulfil roles
  • Responsibilities: to report to stakeholders; to act legally and ethically
• Owners/shareholders
  • Roles: to provide finance
  • Rights: to receive a share of profits; to receive accurate reports on business performance
  • Responsibilities: to set targets for managers; give managers adequate time and resources to meet targets

5.2 Importance and influence of stakeholders on business activities

• Business activity always has an impact on at least one stakeholder group.
• Some stakeholder groups are so powerful and influential that they can influence business activities and business decisions.
• Trade union: An organization of working people with the objective of improving the pay and working conditions of its members and providing them with support and legal services.

Impact of business decisions on stakeholders and their reactions

• The traditional view of business is often called the shareholder concept.
• The shareholders are the owners of the company and the company has a legally binding duty to put their needs first - to take actions and to make decisions that will increase shareholder value.
• Directors and managers ultimately owe their positions to shareholders, so it is important to keep them satisfied.
• The stakeholder concept is that there are many other parties involved and interested in business activity than just the owners.
• The interests of groups such as local communities, the public, government, and environmental pressure groups should also be considered by business decision-makers.
• If this does not happen, negative reactions from stakeholder groups can be damaging.
• Stakeholder concept: The view that businesses and their managers have responsibilities to a wide range of groups, not just shareholders (also known as stakeholder theory).

Impact of three business decisions on stakeholders and their possible reactions

• Horizontal integration - Takeover
  • Employees:
    • Impact: combined business is more secure and more career promotion opportunities; rationalization may occur to avoid waste and cut costs - jobs might be lost.
    • Reaction: possible industrial action if jobs are under threat.
  • Customers:
    • Impact: economies of scale could lead to lower prices; reduced competition and choices could have the opposite effect and might result in higher prices.
    • Reaction: consumer boycott if prices are raised due to less competition.
  • Local community:
    • Impact: if business expansion is on the existing site, local jobs and incomes might increase; rationalization of duplicated premises might lead to closures and job losses.
    • Reaction: encourages government to ban the takeover if rationalization is threatened.
• Purchase of IT-controlled automated machines
  • Employees:
    • Impact: training and promotion opportunities might be offered; fewer untrained workers required; those unable to learn new skills may be made redundant.
    • Reaction: industrial action by workers to be made redundant.
  • Customers:
    • Impact: more efficient and flexible production methods resulting in improved quality and more product variety; IT reliability problems could cause supply delays.
    • Reaction: increased demand if product quality is high.
  • Local community:
    • Impact: local suppliers of IT services could benefit from increased orders; only specialist skilled workers needed and fewer unskilled jobs.
    • Reaction: demand retraining programs for unskilled unemployed.
• Build a new factory to expand business
  • Employees:
    • Impact: more job opportunities; new working methods in this factory might require new skills.
    • Reaction: more potential employees seeking a job; trade unions might demand higher pay for more skilled work.
  • Customers:
    • Impact: greater efficiency might result in lower prices; will business focus be on quantity not quality?
    • Reaction: buy more products if prices are lower for the same quality.
  • Local community:
    • Impact: more jobs for local residents and increased spending in other local businesses; disruption caused by increased traffic and pollution and loss of site for amenity use.
    • Reaction: seeks to refuse planning permission; bans large trucks; organizes petition or boycott.

Business accountability to stakeholders and how stakeholder aims impact business decisions

• The increasing importance of corporate social responsibility in business decision-making shows that businesses are becoming more accountable (or responsible) to their stakeholders.
• Businesses can respond to this increased accountability by showing more understanding of stakeholder aims in their decision-making.

Responsibilities to customers

• In a world of increasing free trade and international competition, it is essential to satisfy customers' demands in order to stay in business in the long term.
• Decisions about quality, design, durability, and customer service should consider the customers' aims for well-made, attractive goods that perform as intended, all at reasonable prices.
• Businesses also have responsibilities to customers not to break the law concerning consumer protection and accurate advertising.
• Avoiding taking advantage of vulnerable customers, such as the elderly, and not using high-pressure selling tactics are other policies of responsible businesses.
• The benefits of accepting these responsibilities include consumer loyalty, repeat purchases, good publicity when customers give word-of-mouth recommendations to others, and good customer feedback, which helps to improve further goods and services.

Responsibilities to suppliers

• The quality of a product is only as good as the supplies that the business purchases.
• Good, reliable suppliers must be found and given clear guidance on what is required.
• In return, the purchasing department should take decisions that satisfy suppliers' aims and requirements, such as prompt payment, the placing of regular orders, and the offer of long-term contracts.
• The benefits of accepting these responsibilities include supplier loyalty, the likelihood of securing reasonable credit terms, and a preparedness to meet deadlines and special order requests.

Responsibilities to employees

• All countries have some laws that outline business responsibilities to workers.
• Apart from not breaking these laws, businesses have other responsibilities to employees.
• Business decisions that reflect the aims of employees include providing training opportunities and job security, paying rates above minimum wage, offering good working conditions, and involving employees in some of the decision-making.
• The benefits of accepting these responsibilities include employee loyalty and low labor turnover, ease of recruiting good workers, employee suggestions for improving efficiency and customer service, improved motivation, and more effective communication.

Responsibilities to local community

• Businesses that fail to meet responsibilities to the local community may experience serious problems with opposition to plans or changes to the use of premises.
• The stakeholder concept assumes that businesses will meet responsibilities to the local community.
• Examples of business decisions that focus on the aims of the local community include offering secure employment so that there is less local fear of job losses, using local suppliers where possible to generate more income, reducing the transport impact of the business, and keeping other adverse environmental effects to a minimum.
• The benefits of accepting these responsibilities include local councils being more likely to give planning permission to expand the business and giving contracts only to businesses with a record of community involvement.

Responsibilities to government

• All businesses should meet their legal responsibilities as defined by government legislation.

• Businesses should decide to pay taxes on time, complete government statistical and other forms accurately, and, where possible, seek export markets.

• The foreign currency earned by exports allows a country to pay for important imports of food, materials, new technology, and so on.

• The benefits of accepting these responsibilities include:

  • developing good relations with government, so planning permission for future expansion projects is more likely to be granted
  • more likely to receive valuable government contracts
  • requests for subsidies to expand businesses more likely to win government approval
  • licenses to set up new operations more likely to be awarded to businesses that meet their responsibilities to the government and the wider society.

• When considering the conflict of stakeholder aims, remember that it is difficult for a business to meet all responsibilities to all stakeholder groups at any one time.

• Compromise might be necessary, such as meeting as many stakeholder aims as possible or meeting the needs of the most important group in each situation.

Conflicts arising from different stakeholder aims

• According to the traditional shareholder concept, attempts to meet obligations to other stakeholders will conflict with the business's legal duty to its shareholders.
• Any non-essential costs will reduce profits.
• Taking the stakeholder approach, the objectives of different groups may be satisfied in ways that also result in benefits to shareholders in the long term.
• Conflicts might still arise between the objectives of these different stakeholder groups.
• How do businesses deal with these conflicts of stakeholder aims?
• A compromise is often the answer.
• Senior management must establish its priorities in these situations.
• Taking such difficult decisions, which are based on weighing up the conflicting interests of these groups, is one of the reasons why managers and directors are often paid more than other employees.

Impact on stakeholders of changing business objectives

• The dynamic business environment often means that directors or senior managers might be forced to change corporate objectives.
• When this happens, the impact on stakeholders can be significant.
• When there is a change in the objective set by a business, it must change strategy too - and this can impact on stakeholder groups.
• Different stakeholder groups will be affected in different ways by these changes in objectives.
• However, owners' returns might be safeguarded in the future by the decisions taken above.
• Lenders might be reassured that action is being taken to stop losses or improve reputation, which should mean that they are repaid the loans they provided.