Stakeholder Conflict: Reasons, Examples, Solutions

What’s it: Stakeholder conflict is a condition in which different stakeholders have incompatible goals. It creates a “problem” for the company because this can affect its performance and success.

Conflict requires companies to effectively manage stakeholder interests. 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 its negative impact on the company. Then, it ultimately supports a good relationship with them and the long-term company’s success.

Reasons for conflict among stakeholders

Examples of stakeholders in a company are shareholders, employees, customers, suppliers, creditors, stock investors, local communities, and governments. Which are the primary stakeholders? It depends on the business model and industry in which the company operates. But, for sure, they have different interests towards the company, for example:

• 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 is getting more and more popular and attention lately. They 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 has an interest in companies paying taxes on time and complying with regulations. The government 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. On the other hand, 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?

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 it affects the 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. But, it 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, the company decides 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.

Resolving stakeholder conflicts

Solutions for dealing with stakeholder conflicts can vary widely between businesses. To reach an optimal solution, they should conduct a stakeholder analysis by:

• List who their stakeholders are,
• Identify their interests and assess their bargaining power, and
• Determine how significantly they affect the company.

Once identified, the company makes priorities and determines solutions to deal with them. The following are examples of solutions for dealing with stakeholder conflicts:

• Arbitration resolves industrial disputes between management and employees by presenting an independent third party (the arbitrator) to make decisions binding on both parties.
• Profit-sharing schemes distribute a portion of the profits to employees and management, potentially to ease their tensions with shareholders.
• Share-ownership schemes have the same goals as profit-sharing schemes but allow employees and management to own shares in the company.
• Employee participation improves communication, decision-making, and motivation systems to reduce potential conflicts between employees and managers.