Stakeholder Conflict, the Agency Problem, and Corporate Governance Study Guide
Stakeholder Conflict and Resolution Strategies
Stakeholder conflict arises when the interests or objectives of different groups within or connected to an organization are incompatible. This is a common occurrence that requires strategic management to maintain organizational stability.
Example Case Study of Stakeholder Conflict:
A manager identifies that their department is currently overstaffed and proposes to make of the employees reduntant.
The employees express outrage upon being informed, citing concerns that they will become understaffed and overworked if the redundancy occurs.
This illustrates a direct conflict between the manager’s goal of operational efficiency/cost reduction and the employees’ goals of job security and manageable workloads.
Methods for Dealing with Stakeholder Conflict:
Satisficing:
This term is a portmanteau of "sacrificing" and "satisfying."
It refers to arriving at an accepted compromise where no party gets exactly what they wanted, but all parties accept the outcome.
Specific Application: Instead of making employee reduntant, the manager decides to decrease staff hours across the board. The manager is satisfied because total employee costs have decreased, and the employees are satisfied because job security is maintained. However, everyone has sacrificed aspects of their original goals (e.g., employees sacrificed hours/pay, and the manager may have sacrificed full-time availability).
Sequential Attention:
This strategy involves "taking turns" to meet the needs of different stakeholders over time.
Specific Application: The employees are not made reduntant immediately. However, it is agreed that when the next round of redundancies occurs, of the employees will be made reduntant. In this sequence, the needs of the employees are prioritized first, with the understanding that the manager/stakeholder needs will be prioritized in the future.
Side Payments:
This involves providing compensation to a stakeholder whose needs cannot be met initially as a form of compromise.
Specific Application: An employee is made reduntant, but in exchange, they are provided with a larger redundancy package (monetary compensation) to offset the loss of the position.
Exercise of Power:
This occurs when a compromise or mutual action cannot be reached, necessitating a resolution via seniority.
Specific Application: A senior figure exercises their authority to force a decision. In the overstaffing example, the manager simply decides that redundancy is the best option and pushes the decision through regardless of employee opposition.
Conflict Resolution in Not-for-profit Organisations
In Not-for-profit (NFP) organizations, the primary stakeholders are not shareholders (as they are not the keyholders), leading to a range of competing demands from various community and internal groups.
Case Study: White Valley football club Training Centre
The White Valley football club identifies a nearby large space featuring many trees and a big field.
The club proposes to build a training centre on this site, which triggers a variety of conflicting impacts that must be weighed:
Positive Impacts (Pros):
Provide better facilities for the football club and its members.
Potential for lower fees for club members due to improved infrastructure.
Increased trading and foot traffic for local cafes, as the centre will attract people to the area.
Negative Impacts (Cons):
Short-term and long-term increases in traffic and noise in the local area.
Increased long-term congestion around the club as more people are attracted to the site.
Loss of the rural view for residents whose properties back onto the field.
Environmental loss, specifically the destruction of habitat and impact on local animals due to the development of the field and trees.
Strategic Goal in NFP Conflict:
Determining whose needs to prioritize is challenging because some groups benefit while others suffer losses.
The objective is to balance the needs of all groups as much as possible, though it is acknowledged that some level of compromise from certain groups will be inevitable.
The Agency Problem
The Agency Problem occurs when the objectives of the shareholders (principals) and the managers (agents) become misaligned.
Diverging Objectives:
Shareholders: Primarily focused on maximizing profits and receiving dividends.
Managers: Often more concerned with the size of their paycheck, personal bonuses, and their individual status within the organization.
Baumols theory of sales maximisation:
This theory observes that managers are often motivated to maximize sales rather than profits.
The Conflict: A manager might notice they receive a bonus when sales volume increases. Consequently, they are motivated to increase sales figures even if it does not lead to higher profits.
The Financial Impact: Increased sales do not automatically result in greater profit if costs are not strictly controlled. Since dividends are paid out of profits, shareholders are negatively impacted by a management focus on sales volume at the expense of the bottom line.
Williamson's model of Managerial Discretion:
This model suggests that managers will use their position to satisfy their own needs, which leads to increased management-related costs that may not benefit the firm's performance.
Examples of Managerial Discretion costs:
Paying themselves excessively large wages.
Employing a large team primarily for status, to appear as a leader of a significant department.
Ensuring their office is oversized and equipped with the latest gadgets.
Flying first class ( class) globally to meet business partners.
Performance Implications: If company profits are sufficient to support these discretionary costs, managers have little motivation to actually improve organizational performance or efficiency.
Information Asymmetry and Corporate Governance
Information Asymmetry:
This is identified as a general cause of the Agency Problem.
It refers to a situation where information is available to both parties but is not equal; managers typically possess more detailed internal information than shareholders.
Because shareholders are not always aware of the specifics of daily operations, they cannot effectively hold directors accountable for the decisions being made.
Corporate Governance:
Corporate Governance consists of a set of rules and procedures established to determine how organizations are controlled and managed.
Its primary purpose is to solve the Agency Problem by creating a framework of accountability.
Mechanism of Control: By setting specific levels of reporting and disclosure, stakeholders (including shareholders) are given visibility into the organization’s operations, allowing them to see exactly how their needs and interests are being met.