From The Desk Of

Kamran Abdul Salam

Topic:
Chapter 5:

Stakeholders in a
Business
Stakeholders
Groups/individuals that are affected by and/or have an interest in the operations and
objectives of the business. The interest each stakeholder has in a business will vary
according to the nature of their stake

Most businesses have a variety of stakeholder groups which can be broadly

categorized as follows:

Internal Connected External

Directors Shareholders Government

Managers Customers Community

Employees Suppliers Pressure groups

Owners
A business may be owned by a single individual (a sole trader), partners or by a group
of shareholders forming a company.

Rights

To have high profit and business growth

Responsibilities

They must take care of other stakeholders and avoid negative backlash.

Role of Owners

They must provide the resources that are required for the business to operate efficiently.
These include the employment of workers, identifying suitable premise and procuring
machinery, equipment and raw materials. They must make timely decisions to ensure
that the business remains profitable. They must motivate employees to perform well.

Employees
They are employed to carry out assigned tasks to achieve the company’s objectives.

Rights

Security, Safe working condition and salary in time

Responsibilities

They should be honest and cooperative with management.

Role of Employees

Employees must work efficiently to accomplish tasks assigned. Accomplishing tasks

may require teamwork and therefore employees must have good interpersonal skills.
Employees must adhere to the rules and relations of the company.

Managers
The business’ managers, who take tactical and strategic decisions

Rights

To be rewarded appropriately for responsibilities

To have duties commensurate with seniority

Responsibilities

To carry out duties to best of ability

To be discrete in handling sensitive business data

Customers
They are the supporters of businesses in the economy. They purchase goods and
services to satisfy their needs and wants.

Rights

To receive quality goods

Responsibilities

They also should be honest (avoid making false claims about poor services, under –
performing goods) and pay for the product.

Role of Customers

They assist businesses in indentifying the goods and services to be produced based on
their demands. They also help business to identify changing trends in the market and so
prepare business operators for future demands.
Society
Businesses must be aware of the society as a whole, how its activities affect it and not
only those who are customers.

Rights

To have positive impact on their life, infrastructure and job opportunities

Responsibilities

They should cooperate with the business and meet reasonable requests from the
business.

Role of Society

The production process may cause air pollution and discharge of harmful waste into
rivers and seas. The society keeps businesses in check by making them aware of their
impact on society. They write letters to the company and the media and speak on talk
shows.

Government
They are the managers of the economy within which the business operates.

Rights

To have right amount of taxes

Responsibilities

It should treat businesses equally under the law and prevent unfair competition.

Role of Government

Regulate business activities to protect consumers. Government agencies ensure

product standards as well as that various legislations are adhered to ensure the
protection of consumers’ rights.

Banks and other lenders

The banks and other organisations that provide finance

Rights

To be repaid promptly and on time

Responsibilities

Not to charge excessive interest rates or to withdraw loans without a reasonable period
of notice

Supplier
They supply goods and services to allow the business to offer its products to its own
customers

Rights

The order size should be high that do with high frequency and paid on time

Responsibilities

They should supply goods and services ordered by the business in the time and
condition

Role of Supplier

To supply goods and services by the business in the time and condition as laid down by
the purchase contract or supplier’s service agreements.

The interaction between a business’ decisions and its

stakeholders’ responses
Any business decision can impact on stakeholders. Examples include:

» Employees may be affected by a decision to reduce the size of the business.

» Shareholders will be affected if the profits of the business are low.

» Suppliers may be affected by an increase in orders and be able to grow their

businesses.

» The community may benefit from the expansion of the business and greater income
being earned and spent in the area.

» The government may be affected by the creation of more jobs and more taxes being
paid.

The impact of business activity can be positive or negative. Sometimes one group may
benefit and another may suffer. For example, a decision to cut wages would not be
popular with staff but may enable higher rewards for the investors. A decision to shift
production abroad would not benefit the government of the original country but may
benefit the community where production now occurs. If stakeholders do not welcome
changes, they can take various actions to avoid the effects of them. The following are
examples of possible responses from stakeholders:

» Shareholders can sell their shares and invest elsewhere.

» Banks can refuse to lend more or charge more for businesses to borrow.

» Employees can leave and work elsewhere or, as a group, they may take strike action,
which means they withdraw their labour, hoping to get the business to change its
policy.

» Suppliers can refuse to supply the business or demand better payment terms, such as
payment on delivery.

The impact of stakeholder aims on business decisions

Most stakeholder groups have aims in their relationship with the business. We shall
consider some examples.

1. Employees This stakeholder group is likely to have aims such as improving working
conditions, maximising pay and other benefits, and seeking secure employment.
Businesses have to take these aims into account when making decisions. For
example, Google employs many highly skilled people. When taking decisions on
investing in expansion, the company would ensure that it budgets for attractive
pay rates, provides working conditions that encourage and promote creativity
and that it offers job security. If Google failed to take these decisions, it would
experience difficulties in recruiting the most talented and productive employees.
2. Customers Arguably this stakeholder group has the greatest impact on business
decisions, particularly when the customer has a wide choice of suppliers of a
product. If, for example, a supermarket takes a decision to raise prices, it may
find that many of its customers buy their groceries elsewhere. The decisions taken
by many managers in businesses will be intended to provide the best possible
value and service to their customers. In this way, customers are a major force
shaping business decisions.
3. Suppliers Businesses depend on suppliers to deliver raw materials, components
and other services. Without receiving the correct supplies at the right time, a
business may not be able to continue trading. Businesses would normally seek to
take decisions which do not impact adversely on suppliers, such as delaying
payments or changing orders at short notice. A supplier is more likely to have a
significant impact on business decisions if it is a major supplier and if there are few
or no alternative sources of supply.
4. Owners and shareholders Shareholders can be a very influential group on
business decisions taken by companies. Shareholders in the UK can vote to
remove directors of a company if the directors take decisions of which the
shareholders disapprove. The owners of small businesses (sole traders and
partners) are more likely to be the people who are taking the business decisions.
Thus, there is less chance of any disagreement occurring.
How and why a business needs to be accountable to
its stakeholders
The shareholder concept

Businesses have certain legal responsibilities to their stakeholders. For example, there
are laws controlling the ways in which businesses can promote their products and, for
food manufacturers, the ingredients that can be used. Some businesses simply do what
they have to by law and no more. They focus mainly on rewarding their owners. They
will pay employees what they need to get the job done but do not think they have any
more responsibilities other than this. They will try to get the lowest price

for supplies, perhaps by threatening to use different suppliers. They will pay
governments the taxes they have to but will not think they have any obligation to invest
more in their region or country. This is known as the shareholder concept, where
rewarding owners is the key business objective.

The stakeholder concept

However, increasingly, organisations are trying to work with their stakeholders and
regard them much more as partners. This co-operative approach is known as the
stakeholder concept. This view believes that it is better in the long term to treat
stakeholders well. For example, working closely with suppliers and paying them a fair
reward for their work (even if this is more than the business would have to pay) will lead
to better quality suppliers and much greater flexibility by suppliers to help out when
needed. Focusing on employees’ careers and showing concern about their welfare
could lead to greater loyalty and commitment and, as a result, a better quality of work.
Being interested in the environment could help save costs through initiatives such as
recycling, but it could also make the business more attractive to employees, customers
and investors. The stakeholder concept fits in with corporate social responsibility in that
it stresses the benefits of accepting obligations to stakeholders over and above what
the law requires.

How changing business objectives might affect

stakeholders
As the objectives of a business change, this may well affect the way it treats its
stakeholders. For example, a greater emphasis on environmental issues may lead to
more concern for society as a whole and future generations, in addition to a focus on
recycling, reusing and less waste and pollution. A focus on better quality might lead to
better treatment of suppliers. On the other hand, greater pressure for profits may mean
managers start to cut back on training, career development and wage increases in
order to reduce costs; they might also bargain hard to push down suppliers’ prices.

It is very difficult for managers to take decisions to satisfy all stakeholders simultaneously,
especially at a time of change when major strategic decisions may be forced upon
them. It may be that the best they can do is to satisfy as many stakeholders as possible.

Conflicts between different Stakeholders

It is important for a business to balance the interest of its various stakeholders. Different
stakeholder groups have different priorities, for example:

 Shareholders expect the business to make a profit and receive a return on their
investment.

 Employees require good working conditions if they are to be retained.

 Investors may want to see evidence of how a company responds to

environmental issues before committing money to the business.

Stakeholder conflict arises when the needs of some stakeholder groups compromise the
expectations of others. A business has to make choices which some stakeholders might
not like. For example, the cheapest supplier goods, which can help keep prices down
for customers, must not come at the expense of ethical practice by suppliers.

Some activities may not give immediate financial return on investment but support the
business’ ethical standards. Such policies need to be communicated and explained to
all stakeholders involved, so they understand the longer-term value they provide. For
example, investment in ‘green’ energy (such as from solar or wind farms) may be more
expensive but can help the company reduce its environmental footprint