Contents
What’s it? Stakeholder conflict occurs when different stakeholders have incompatible goals. This creates a “problem” for the company because it can affect its performance and success.
Conflict requires companies to manage stakeholder interests effectively. Not all stakeholders are strategic for the company. Thus, companies must identify which ones should be prioritized. By placing priorities and dealing fairly with them, the company minimizes their negative impact on the company. This ultimately supports a good relationship with them and the long-term company’s success.
Why does stakeholder conflict matter?
Stakeholder conflict is a fundamental challenge in the business world. It arises when different groups with vested interests in a company, known as stakeholders, have competing goals. These disagreements can significantly disrupt a company’s operations and hinder its ability to achieve success. Let’s delve into how stakeholder conflict can negatively impact business performance:
- Hinders decision-making: Stakeholder conflicts can create an environment of gridlock, making it difficult for companies to reach timely decisions. When various stakeholders push for opposing priorities, reaching a consensus can be a lengthy process. This indecisiveness can lead to missed opportunities or delays in critical projects.
- Decreases productivity and morale: Unresolved stakeholder conflicts can create tension and friction within a company. Employees caught in the crossfire may become disengaged and less productive. This low morale can ultimately translate into a decline in the quality of work and output.
- Damages reputation and customer relationships: Public disputes between stakeholders can cast a negative light on a company. Customers may be hesitant to do business with a company perceived as being divided or unfair in its practices. This damaged reputation can lead to a loss of customers and market share.
- Increases costs: Conflicts can be expensive to resolve. Legal battles, negotiations, and implementing solutions to appease stakeholders all come at a financial cost. These expenses can eat into a company’s profits and limit its resources for growth and innovation.
- Impedes long-term sustainability: Unmanaged stakeholder conflict can create an environment of instability. Investors may become wary of a company embroiled in constant disputes. This lack of confidence can lead to a decline in stock price and hinder a company’s ability to attract new investment for future endeavors.
By effectively managing stakeholder conflict, companies can create a more harmonious and productive environment. This, in turn, fosters better decision-making, collaboration, and overall business performance.
Reasons for conflict among stakeholders
Examples of stakeholders in a company are shareholders, employees, customers, suppliers, creditors, stock investors, local communities, and governments. Who are the primary stakeholders? It depends on the business model and industry in which the company operates.
But, for sure, they have different interests in the company. Let’s take a few examples.
Shareholders are interested in dividends. They also have the potential to obtain capital gains by investing in the company. They want the company to continue growing and generating more profits, positively affecting dividends distributed and capital gains.
Employees and management are interested in high salaries and benefits. In addition, they are also interested in a healthy work environment, promising career paths, and adequate training and development programs. They affect the company with their performance. And, for management, the decisions they make have a significant impact on the company’s success.
Customers have an interest in the company’s products, customer service, and privacy protection. They want the company to offer quality but cheap products.
Another aspect is business ethics, which has become increasingly popular and has received increasing attention lately. People like it when companies are socially and environmentally responsible, not just for profit.
Suppliers have an interest in the purchase of inputs by the company. They want companies to pay on time, keep ordering from them, and buy in bulk. They don’t like it when companies switch to other suppliers, reducing their revenue.
The government is interested in companies paying taxes on time and complying with regulations. It also requires companies to run environmentally responsible businesses, refrain from anti-competitive behavior, and adopt fair employment practices. Another interest is the jobs and income businesses create in the economy.
Creditors want the company to pay principal and interest on time. They don’t want the company to default on its debt. Therefore, they pay attention to aspects such as the company’s liquidity and solvency.
Credit rating is another indicator to look at to determine the default rate. If the company’s repayment capacity is good, they also want to sign new contracts for loans.
Local communities are concerned about the jobs created by the company. They want the company to recruit local workers. They also want the company to carry out environmentally responsible business practices, not generate negative externalities, and support local community programs.
Each stakeholder seeks to protect their own interests. They want to make sure their interests are met and their goals are achieved. However, for companies, fulfilling all their wishes is impossible. They often have to make priorities; which interests should come first?
Types of stakeholder conflict
Stakeholder conflicts can arise from various sources, stemming from the inherent differences in priorities and goals among various stakeholder groups. Here’s a breakdown of some common types of stakeholder conflict:
- Goal conflict: This is the most fundamental type of stakeholder conflict. It occurs when different stakeholders have opposing objectives. For example, shareholders may prioritize maximizing profits and dividends, while employees may prioritize job security, fair wages, and healthy work environments. These conflicting goals can create tension when companies make decisions that favor one group over another.
- Resource allocation conflict: Companies have finite resources—financial, human, and physical. Disagreements erupt when stakeholder groups compete for these resources. For instance, a company considering expansion may face opposition from employees concerned about training costs or potential job cuts. Investors, on the other hand, might favor the expansion because it has the potential to generate higher returns.
- Value conflict: Stakeholders may hold different values about how a company should operate. This can lead to conflict, particularly around issues like social responsibility and environmental impact. Communities may advocate for sustainable practices, while shareholders might prioritize short-term profits even if they come at an environmental cost. Investors increasingly consider a company’s environmental, social, and governance (ESG) practices when making investment decisions.
- Information asymmetry conflict: Unequal access to information can breed mistrust and fuel conflict. Stakeholders who feel uninformed about company decisions may become suspicious and resistant to change. Companies can mitigate this by proactively sharing relevant information and fostering open communication channels.
- Relationship conflict: Past grievances, personality clashes, and a lack of trust can sour relationships between stakeholders and the company. This can hinder collaboration and make it difficult to find solutions to new conflicts. Building trust and fostering positive relationships through clear communication and fair treatment is crucial for preventing relationship-based conflicts.
Examples of stakeholder conflicts
Conflicts often arise because stakeholders have different and often conflicting interests. It often makes companies face a dilemma when making decisions. They must prioritize and make choices that some stakeholders may not like.
In the following, we present some examples.
Higher wages vs. higher dividends. Shareholders generally want the company’s profits to increase because this affects dividends and capital gains. So, they are reluctant to see businesses pay high wages to employees.
Higher short-term earnings vs. Business expansion. The expansion increases the business size and scale of the company’s operations. It creates new jobs, and of course, the local community and government love it.
- However, the expansion brings lower short-term profits, and shareholders with a short-term investment horizon may not like it. Companies must spend more to buy capital goods such as machinery and equipment or build new factories. It all results in less profit and, therefore, lower dividends.
Efficiency vs. Loss of a Job. In difficult times such as a recession, companies must be more frugal and take efficiency measures. Thus, they can still operate healthily. One option is to reduce layoffs of staff. However, that may be an option preferred by shareholders and management but not by staff.
Quality and cheap products vs. less profit. Customers want higher-quality but cheaper products. However, this means higher costs and lower profits for the company, an option that shareholders and management do not want.
Foreign business relocation vs. Domestic employment. For example, a company may decide to relocate production facilities overseas to increase efficiency. This choice benefits the owner because the company’s profits improve.
But, it is against the interests of the existing staff who will lose their jobs. The government and local communities also dislike it because it reduces job opportunities in the domestic economy.
Stakeholder conflict management
While the specific solutions for stakeholder conflict will vary depending on the company and situation, key strategies can be employed to manage these disagreements effectively and achieve positive outcomes.
Stakeholder Analysis
The first step is to conduct a thorough stakeholder analysis. This involves identifying all the groups with a vested interest in the company, such as shareholders, employees, customers, suppliers, communities, and regulators. Once identified, companies should assess each stakeholder’s:
- Interests: What are their priorities and concerns? (e.g., Shareholders seek profit, employees seek job security)
- Bargaining power: How much influence do they have on the company? (e.g., Large investors hold significant sway)
- Impact: How significantly do their actions affect the company? (e.g., Disgruntled employees can disrupt operations)
By understanding these factors, companies can prioritize stakeholder needs and develop targeted solutions.
Open communication and transparency
Clear and consistent communication is essential for resolving stakeholder conflict. Companies should establish open communication channels and actively engage with stakeholders.
This allows for early identification of potential conflicts and facilitates a collaborative approach to problem-solving. Transparency, by sharing relevant information and explaining the rationale behind decisions, builds trust and fosters goodwill among stakeholders.
Collaborative negotiation and compromise
Finding common ground is key to resolving stakeholder conflict. Companies should facilitate discussions between stakeholders to explore mutually beneficial solutions. This often involves negotiation and compromise.
While some stakeholders may not get everything they desire, a focus on shared goals and long-term benefits can lead to win-win outcomes.
Implementing conflict resolution mechanisms
Establishing processes for addressing conflict can help companies navigate disagreements efficiently. These processes may involve internal mediation teams or utilizing external consultants to facilitate communication and guide stakeholders toward solutions.
Examples of conflict resolution techniques:
- Arbitration: An impartial third party makes binding decisions on the dispute.
- Profit-sharing: Linking employee compensation to company performance can incentivize alignment with shareholder interests.
- Employee ownership: Granting employees stock options or shares fosters a sense of ownership and shared success.
- Stakeholder engagement committees: Formal platforms for regular dialogue and collaboration between stakeholders and company leadership.
By proactively managing stakeholder conflict through effective communication, analysis, and established resolution mechanisms, companies can create a more collaborative environment, foster better decision-making, and ultimately achieve sustainable success.
