A Concise Note on Business Stakeholders

Business stakeholders refer to various parties who are interested in, are influenced by, or affect the company’s strategic decisions and operations. They include shareholders, employees, management, customers, suppliers, creditors, governments, local communities, and special interest groups (or pressure groups).

Stakeholders have different interests in the business. They want the company to serve their interests.

Some stakeholders want the business to do well because they will benefit from its success in some way. For example, shareholders receive dividends when a company makes a profit. Then, the creditor gets regular payments according to the debt agreement when the business is healthy.

However, these interests are not always aligned. In fact, they are often polar opposites, which can lead to disagreements and can lead to conflict.

The stakeholder concept emphasizes accountability to various stakeholder groups, not just shareholders.

Types of business stakeholders

There are several ways to classify stakeholders and their types. For example, there are two stakeholders based on whether they are directly involved in running the business. They are:

Internal stakeholders, sometimes called primary stakeholders, including those within the organization. They include:

Owner or shareholder
Manager
Employee

Internal stakeholders are involved in running the business and significantly influence its success. For example, shareholders contribute to equity capital. They also take part in critical business decisions such as changing directors.

Meanwhile, managers and employees run the day-to-day operations. As a result, they affect businesses through the decisions they make and the work they produce.

External stakeholders are outside the organization. They include:

Customer
Supplier
Creditors, such as banks and bondholders
Government
Local community
Pressure group
Special interest groups
Competitor
Stock analyst
Stockbroker

External stakeholders are not directly involved in running the business, making decisions, or other business matters. And they may only affect or be affected by business activity.

For example, stock analysts use financial and business information to evaluate a company’s stock. Meanwhile, stockbrokers observe companies for profit or to advise clients or potential investors.

Internal stakeholders: their interests and influence

Owner or shareholder

Owners or shareholders invest money into the business. They provide equity capital. In return, they have an ownership interest.

Shareholders expect their investments to generate returns. Where do they get their returns from? There are two sources:

Dividend
Capital gains

Shareholders are entitled to receive dividends paid. Dividends are profits the company decides not to keep as retained earnings. Instead, the company distributes it to shareholders. How much dividend they get depends on how many shares they hold.

Meanwhile, the capital gain comes from the company’s stock price increase. If the stock price goes up, they profit when selling it.

Long story short, shareholders have an interest in the following:

Receive high dividends
Get capital gains

High dividends correlate with business profits. Thus, shareholders try to encourage the company to generate increased profits from time to time.

Shareholders can influence a business by:

Add or withdraw their investment
Influence other critical decisions at the corporate level, such as changes in management

Management

Management is responsible for planning, organizing, leading, and controlling resources within the company. Management includes those in managerial positions, including:

Director
Manager

The Director is the highest person in charge of the overall company’s performance and operations. They receive authority from shareholders to operate the business and work in the best interest of shareholders. They may fill positions as:

President director
Finance director
Marketing director
Operations director
Human resources director

Directors are involved in running the day-to-day business. For example, they engage in and monitor business activities. They also make vital decisions and corporate strategies.

Directors have a business interest in:

Earn bonuses
Safe position

Compensation to directors is usually associated with business performance. The better the business’s performance, the higher their chances of getting a bonus or being promoted back to a board position.

Directors affect business in several ways, including:

Defining business direction and goals
Making critical decisions at the corporate level
Designing corporate strategy
Developing policies and rules
Making organizational changes

Meanwhile, managers are responsible for setting goals in their area, managing resources, and motivating staff to achieve set goals. They can include:

Middle-level manager
Lower-level manager

Middle and lower-level managers carry out activities at the business function level. For example, they supervise and motivate employees to be productive. Managers must also report to managers in higher positions or the Director in charge (for managers one level below the Director).

Managers have an interest in the business to:

Promoted to a higher level;
Win bonuses;
Have job security.

Employee

Employees refer to those who are not in managerial positions. They work under a manager in return for a wage or salary. They carry out daily work and tasks to achieve the targets set.

Staff usually refers to full-time white-collar workers whose working conditions, pay grades, and additional benefits are generally higher than those of blue-collar workers.

Company performance affects employee income and job security, which is determined by their performance. If they perform well, they may be promoted to a managerial position.

On the other hand, if they perform poorly, employees are often the first to be fired. Likewise, during efficiency, they are also commonly targeted for, such as a reduction in pay or layoffs.

Employees have an interest in the following:

Job security
Higher salary
Promotion
Better working conditions
Opportunity for self-actualization

Employees can affect business performance in the following aspects:

Achievement against targets
Quality in providing services to customers
Productivity at work
Their influence on the work environment
Their actions, such as strikes

External stakeholders: their interests and influence

Customer

Customers are the most essential stakeholders. Several reasons explain this.

First, businesses exist to meet customer needs and wants. So, there is no business if there are no customers.

Second, customers are the source from which the business makes money. They hand over money by buying products. So, without them, the company cannot make money.

Third, changes in their values, tastes, and preferences can expose opportunities and risks. For example, if a business cannot adapt to these changes, it will lead to failure.

Customers have an interest in the following:

Quality product
Low price
Convenience when buying
Superior customer service

Customers influence the business through the following:

Their purchases: new and repeat
Their loyalty
Recommendation to others
Changes in values, tastes, and preferences

Supplier

Suppliers provide products for companies. They supply:

Goods such as raw materials, machinery, production equipment, and office equipment.
Services such as insurance, consulting, and training services

Suppliers like it when companies pay faster and order more frequently and in large volumes. Quality is also important to them in building a reputation.

Suppliers have an interest in the business to:

Get repeat orders
Securing long-term contracts
Get orders in large volumes
Want the company to pay immediately

Suppliers can influence the company through the prices they charge for the inputs they provide. In addition, their quality is also crucial to the business. This is because price and quality ultimately affect quality and operating costs.

In addition to these two aspects, suppliers can influence the business through the following:

Credit terms imposed
Timeliness in delivery
Their reputation and image

Reputation and image are important because they can impact the company. For example, a company may only want to deal with suppliers with the same values. If the supplier’s reputation is destroyed, it can affect the company’s reputation.

Take Unilever as a case. Companies only deal with suppliers with similar shared values to reduce their carbon footprint to achieve net zero emissions by 2039. This policy requires their suppliers to operate in an environmentally friendly manner and maintain this reputation over time.

Creditor

Creditors provide loans to companies. They may be:

Bank
Bondholders

Creditors provide debt capital for the company, with which the company can finance working capital or investment. They want their money back plus the interest to be paid on time. If the company fails to pay, they may file bankruptcy against the company in court.

The creditor has an interest in and wants the business to:

Paying off debt: principal and interest
Pay on time
Apply for a new loan

Creditors can influence a business by:

Rejecting or accepting loan applications
Changing the interest rate charged
Changing the payment term
Filed a bankruptcy suit
Decided to restructure credit

Creditors have claims on company assets at a higher priority than shareholders. Thus, if a business goes bankrupt and its assets are sold, they receive payment first before being distributed to shareholders.

Government

The government has an interest in business performance because it has an impact on prosperity in the economy. Business activity influences jobs and income creation in the economy. In addition, businesses also contribute to tax revenue. The government also wants businesses to positively impact society and the environment through social responsibility.

Long story short, the government has an interest in businesses and wants them to:

Paying corporate taxes
Providing goods and services to society
Creating jobs and income for the community
Raising production to increase the availability
Operating ethically and socially responsible
Comply with applicable regulations

On the other hand, the government influences business through changes in regulations and policies taken such as related to:

Taxation
Labor practices
Product Safety
Minimum wage
Consumer protection
Law enforcement
Economic policy
Business competition
Trade protection
Subsidies and incentives

Unlike other stakeholders, in general, government influence on business applies to all, not just individual companies. For example, changes to tax regulations apply to all companies.

However, in specific cases, regulations may only affect individual companies or at least a few. For example, the government provides subsidies to state-owned companies. Alternatively, the company offers incentives to private companies to operate in designated areas.

Local community

Local communities are those living in the area around the business location. They may be business customers, and they may not.

The local community’s interest in business is generally related to employment and prosperity in the local area. Communities want companies to provide jobs for the people around them.

In addition, local communities also pay high attention to issues such as local infrastructure and the environment. They also want businesses to pay attention to aspects such as socially responsible products and ethical practices.

Local communities can influence businesses by protesting and petitioning when displeased with company behavior.

Pressure group

Pressure groups have an interest in companies supporting the issues they voice. An example is Greenpeace.

Pressure groups try to influence company policies and behavior for specific purposes. To do this, they may lobby the government to change policies or practices at a company, for example, by issuing petitions or writing letters to parliament members. Or they persuade consumers to boycott.

Another way is publicity or campaigns through the media. In addition, they can also do it through demonstrations.

Competitor

Competitors aim to beat the company to make more money. They compete for profits in the same market as the company because they serve the same customers. So, if the company is successful, it is a failure for them. Long story short, competitors are happy with adverse events or developments in the company, and vice versa.

Competitors influence the company through their strategies and tactics to direct the company. For example, they lower prices to attract customers and divert purchases away from the company. In addition, their top management may have close ties to politicians and governments and lobby for their benefit.

But, sometimes, competitors and companies can work together to achieve a common goal (called coopetition). For example, they have the same aspirations in industrial relations when dealing with trade unions.

Stakeholder interdependence

There is interdependence with each other between business stakeholders. Here are some examples:

Shareholders and directors. Shareholders appoint directors to run the day-to-day business. They want directors to work in their best interest by producing superior performance, which translates to high profits.

On the other hand, directors need shareholder support when a business, for example, requires additional new capital. Or, directors want shareholders to reappoint them and give bonuses.

Management and employees. Management encourages employees to work harder and be more productive to help the business turn a profit. In addition, they want employees to give their best to satisfy customers and increase sales.

On the other hand, employees want management to pay them a fair salary. In addition, they want a promotion when they perform well. And good working conditions are also what they need to improve their performance and be more productive.

Managers and suppliers. Managers need suppliers to provide them with high-quality stock. They also want suppliers to deliver goods on time.

On the other hand, suppliers want managers to order large quantities and award long-term contracts. Thus, their business continues to run and earn big profits. In addition, they also wish for timely payments because it is crucial for their cash flow.

Customers and management. Customers need management to ensure the business provides the goods and services they need. They expect companies to provide quality products and sell them at fair prices.

On the other hand, management needs customers to buy the company’s products. They also want customers to remain loyal and not switch to competitors. That way, the business can continue to generate sales.

Conflicts between the stakeholders’ interests

Stakeholder conflicts arise due to differences in purposes and interests in the business. In some cases, stakeholder interests influence each other but in a negative way. In other words, their goals and interests conflicted. As a result, it could trigger a conflict between them.

Let’s take a few examples.

Shareholders want the business to generate high profits so it can pay more dividends. They do not like high salary increases because it reduces profits.
Customers enjoy higher quality products at lower prices. But, for the company, high quality consumes more costs. Meanwhile, low prices reduce profit margins per product, leading companies to book lower revenues. As a result, those customer interests reduce profits for the business and, therefore, dividends available to shareholders.
Managers want to pay later and use the cash for more important purposes. In contrast, suppliers wish managers to pay as quickly as possible.

Handling conflicts of interest

Companies have an interest in satisfying stakeholders. However, satisfying all stakeholders all the time is nearly impossible. Due to conflicts of interest, companies must make priorities, which interests should take precedence without upsetting other stakeholders.

The first step before providing a solution is to analyze and map the stakeholders. It is important to specify which stakeholders are strategic and which are not.

Stakeholder analysis

Stakeholder analysis identifies and evaluates how strategic each stakeholder is towards the company. It is crucial to assist management in making decisions and prioritizing policies and strategies to deal with them. The analysis produces a stakeholder map.

A stakeholder map answers whose interests should be considered and prioritized when developing or implementing a strategy. Companies must systematically collect and analyze information about the company’s stakeholders, how they influence the company, and how significant their influence is.

The stakeholder map is made into a two-dimensional matrix based on the following:

How strategic they are for the company; and
How significant their influence on the company is

Then, each stakeholder is assigned to the matrix, as shown below. The greatest priority should be allocated to stakeholders who are strategic to the company’s success and significantly impact the company.

Solutions for dealing with conflicts of interest

Solutions for dealing with conflicts of interest can vary and may involve:

Arbitration to resolve industrial disputes between employees and management.
Workforce participation in reducing potential conflicts between employees and managers by improving communication, decision-making roles, and motivation.
Profit-sharing scheme to minimize conflicts between employees (and managers) and shareholders.
Share-ownership plan to reduce conflicts between employees, managers, and shareholders by allowing employees and managers to own company shares.

A Concise Note on Business Stakeholders

Types of business stakeholders