Stakeholders, ethics and corporate responsibility

6.1 · Free notes

Shareholders and stakeholders: influence and conflict in strategic decisions

Key points

• A stakeholder is any individual or group affected by, or with an interest in, a business's activities. Internal stakeholders are owners, managers and employees. External stakeholders are customers, suppliers, lenders, government, local community and pressure groups.
• Shareholders own a limited company. They gain through dividends and capital gain (a rising share price), and they vote at the AGM. Their liability is limited to the amount invested.
• Dividend per share = total dividends ÷ number of shares. Dividend yield (%) = dividend per share ÷ share price × 100. For example, 20p on a £5.00 share gives a 4% yield.
• The shareholder concept (Friedman) says the main aim is to maximise shareholder wealth within the law. The stakeholder concept (Freeman) says managers should balance the interests of all affected groups, because long-term success depends on their support.
• Mendelow's matrix maps stakeholders by power and interest. High power and high interest means manage closely (key players). High power and low interest means keep satisfied. Low power and high interest means keep informed. Low power and low interest means monitor.
• Stakeholder power comes from legal rights (shareholder votes, regulation), economic control (a key supplier or customer), expertise, or the ability to damage reputation through media and social campaigns. Power and interest change over time, so mapping must be reviewed.
• Typical conflicts include shareholders wanting dividends against employees wanting higher pay. Customers want low prices while shareholders want margins. The local community opposes expansion that managers see as growth. Shareholders may push for short-termism (cuts to R&D and training) at the expense of long-term investment.
• The principal–agent problem arises from the separation of ownership and control. Managers (agents) may pursue their own goals, such as bonuses or empire-building, rather than shareholders' (principals'). Remedies are performance-related pay, share options, non-executive directors and the UK Corporate Governance Code.
• Institutional investors (pension funds, asset managers) and activist investors hold large voting blocks and can challenge the board. ESG investing increases pressure on strategy. Section 172 of the Companies Act 2006 requires directors to promote the company's success for its members while having regard to employees, suppliers, customers, community, environment and reputation.
• Evaluation: the best strategy often balances stakeholders, because many interests are win-win in the long run, for example a trained, well-paid workforce improving productivity. The balance depends on the firm's ownership (plc, family firm, social enterprise), the time horizon, the strength of the stakeholder and the scale of the decision (for example a plant closure).

In more detail

• Worked dividend yield: a 15p dividend on a share priced at £3.00 gives a yield of 5%.
• Principal–agent example: executives paid bonuses on the short-term share price may favour share buybacks over long-term investment, against the owners' long-term interests.
• Say on pay: shareholders in UK quoted companies vote on directors' pay policy, giving them a direct check on executive rewards.
• Win-win example: paying a real Living Wage raises costs, but it can cut staff turnover and recruitment costs, benefiting both employees and shareholders.