The different stakeholder groups have different interests some in common with other stakeholders and some in conflict.
Examples of common interests:
- Shareholders and employees have a common interest in the success of the organisation.
- High profits which not only lead to high dividends but also job security.
- Suppliers have an interest in the growth and prosperity of the firm.
Examples of conflicting interests
- Wage rises might be at the expense of dividend.
- Managers have an interest in organisational growth but this might be at the expense of short term profits.
- Growth of the organisation might be at the expense of the local community and the environment.
Thinking about stakeholder power
The study of stakeholders should not be limited to a description of the way in which the organisation impacts upon the stakeholders.
In the context of strategy, what is more important is the power and influence that a stakeholder has over the organisation and its objectives.
Stakeholder influence:
Current and future strategies of the organisation are affected by:
- External pressure from the market place, including competitors, customers, suppliers, shareholders, pressure groups threatening a boycott, the government (through taxation and spending).
- Internal pressures from existing commitments, managers, employees and their trade unions.
- The personal ethical and moral perspectives of senior managers
(adapted from Newbould and Luffman, Successful Business Policies 1979).
The importance of profit maximisation
Traditional economic theory is based on the assumption that firms seek to maximise profits.
It must be appreciated that this does not mean “any old level of profits” or even a certain target level of profits but it means squeezing the last penny of profits out of the firm’s operations.
This assumption was based on the circumstances of 19th century business where owners acted as managers and could ignore the interests of stakeholders such as the employees and the community.
Stakeholder theory
The profit maximising theory of the firm that characterised Neo-Classical Economics has to be modified to taken into account the power and influence of stakeholders.
Various writers have put forward theories based on an alternative to the profit maximising aim:
- Baumol (1959) put forward a theory based on a sales maximising objective.
- Williamson (1964) offered a theory based on managers setting the objectives to maximise their personal satisfaction.
- Marris (1964) offered theory based on growth as the key concern.
In all three cases:
- The objective the result of managerial power over decision making.
- Reflected the interests of managers rather than shareholders.
- There was a limiting factor- these objectives are pursued subject to producing a satisfactory level of profits.
Behavioural theory
In “A Behavioural theory of the Firm” (1963) Cyert and March argued the goals of an organisation are a compromise between members of a coalition made up of the stakeholders.
The outcome of decision making is a compromise or “trade off” between the interests of the various stakeholder groups.
In the process leading to compromise much will depend on the relative power of the different stakeholder groups.
Satisficing
The Cyert and March theory of decisions being a compromise between the different stakeholders has certain features in common with the idea of satisficing behaviour which is associated with Herbert Simon.
Simon argued that decisions are taken in conditions of uncertainty and ignorance.
Rather than an exhaustive search for the best or ideal solution, decision makers seek an acceptable or satisfactory outcome.
This is chosen because of the internal and external constraints such as time pressure, lack of information and the influence of powerful stakeholder.
Shareholders influence
In small private firms shareholders are in direct contact with managers and in, many cases, are directors of the company. They have the ability to influence the objectives and directions of the organisation.
But the individual shareholder in a large public company has very little influence.
In theory they can exert influence through voting at the annual shareholders meeting but unless individuals group together their votes will have little impact.
In any case they are likely to be outvoted by the big institutional investors (e.g. pension funds) who own large blocks of shares.
However, shareholders can exert influence through threatening to “vote with their feet” by selling shares. As a result, managers and directors must at least keep shareholders satisfied.
Determinants of stakeholder power
For stakeholders to have power and influence the desire to exert influence must be coupled with the means to exert leverage on the company.
How much power the stakeholder can exert will reflect the extent to which:
- The stakeholder can disrupt the organisations plans.
- The stakeholder causes uncertainty in the plans.
- The organisation needs and relies on the stakeholder.
Levers operated by internal stakeholders
Internal stakeholders have their own interests which they might pursue - e.g. managers might seek organisational growth over profits, employees seek high wages and favourable working conditions.
Managers make decisions and therefore have extensive power.
Internal stakeholders
- Have negative power to impede the implementation of strategy.
- Can threaten industrial action
- Can threaten to resign
- Might refuse to relocate.
Levers operated by connected stakeholders
- Shareholders have voting rights and can sell shares thus making the company vulnerable to take over.
- Creditors can refuse credit, charge high interest rates, take legal action for non-payment and, in extreme cases, initiate moves to liquidate the company.
- Suppliers can refuse future credit.
- Customers can seek to buy goods/services elsewhere and enjoy consumer protection rights.
Levers operated by government & pressure groups
The government can exert influence through taxation, government spending, legal action, regulation and threatened changes in the law.
Community and pressure groups can exert influence by:
- Publicising business activities they regard as unacceptable.
- Political pressure for changes in the law
- Refusing to buy goods/services fro named firms
- Illegal actions such as sabotage
Stakeholder analysis
“All animals are equal but some are more equal than others” [George Orwell, Animal Farm]
Inequality of influence:
It is naïve to believe that the stakeholders have equality in terms of power and influence.
Managers have more influence than environmental activists.
At the same time the institutional investor with 25% of shares will have a greater influence that the small shareholder.
Banks have a considerable impact on firms facing cash flow problems but can be ignored by a cash rich firm.
Primary and secondary stakeholders
A distinction can be drawn between the two groups of stakeholders.
Primary stakeholders;
- Those most vital to the organisation.
- A group without whose continuing participation the company cannot survive as a going concern.
- e.g. customers, suppliers.
Secondary stakeholders:
Those without whose continuing participation the company can still exist. e.g. the community.
Active and passive stakeholders
This is an alternative categorisation of stakeholders.
Active stakeholders
Seek to participate in the organisation’s activities. e.g. managers, employees, pressure groups.
Passive stakeholders
Do not normally seek to participate in an organisation’s policy making. e.g. most shareholders, government, local communities.
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