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From the definition, we can guess why stakeholders are important. They are parties who not only have an interest in the company but also affect it.
There are many ways their influence works. For example, customers are primary stakeholders because the business earns money from them. Likewise, suppliers are also primary stakeholders because producing products requires their input.
Stakeholders also have interests. They hope the company can fulfill it. If their interests are unmet, they are disappointed and can hurt the company.
For example, if a consumer refuses to buy a product, no money goes into the business. This situation can be dangerous, as it can lead to business failure.
Who are the stakeholders?
Stakeholders refer to all parties who have a direct or indirect interest in a company. The company’s actions, decisions, or performance can influence them. And conversely, their interest in the company also influences its strategy, decisions, and operations.
Stakeholders include those within the organization, such as employees and management. Other examples are shareholders, customers, suppliers, governments, creditors, local communities, and special interest groups.
The company’s operations affect these stakeholders, for example, the local community in which the factory or company operates. On the other hand, they may be interested in the company’s profits, such as employees, management, and shareholders. Or, they have claims on company assets and earnings like creditors.
Why are stakeholders important to business?
As previously explained, stakeholders are essential because they influence and are interested in the company. A company can be successful if it can build good relationships with them. This requires companies to place and accommodate each other’s interests and influence appropriately.
Stakeholder influence on the company
Each stakeholder has varying influence. How much power they have can depend, among other things, on the industry in which a company operates or the nature of their operations.
For example, local communities may be more important to manufacturers than consulting firms. Operations in manufacturing facilities may pollute the surrounding community and, therefore, demand a higher degree of responsibility.
Then, some stakeholders affect the company directly, while others influence it indirectly. For example, employees, management, shareholders, customers, and suppliers directly impact the company.
Another example is the government. Economic policies may have an indirect effect on firms. For example, the government raises interest rates.
The increase in interest rates has an indirect effect on the company. Instead, it affects banking. A higher benchmark interest rate encourages banks to adjust to increasing the interest rates they charge companies. However, the transmission of a change in interest rate policy to an increase in bank loan interest will take a long time.
The significance of the influence can vary between businesses—for example, banking and clothing companies with the government as their stakeholders.
The government has more influence in the banking industry than in the clothing industry. The government strictly regulates the banking industry because it significantly impacts the economy. In contrast, the clothing industry may have a relatively low economic impact.
The greater the influence of the stakeholders, the greater their impact on the company. Take shareholders as an example. When a shareholder holds significant ownership in a company, making decisions without being influenced by their interests becomes increasingly tricky.
Stakeholder interests in the company
Stakeholders have different interests in the company. And they want the company to serve their interests.
For example, customers are interested in price and product quality. They want the company to sell products at a high quality but low price. However, meeting their demands can result in lower profitability for the company.
Meanwhile, suppliers have an interest in timely payments and regular orders. They are also interested in large purchases because they can save on costs such as warehousing and shipping.
Then, employees have different interests from shareholders. Employees are interested in job security, pay, and working conditions. Meanwhile, shareholders are interested in profits, dividend payments, company stock prices, and good governance.
Finally, creditors have an interest in the company to pay off the principal and interest on time. They can file for bankruptcy against the company if it fails to meet financial obligations.
Stakeholder contribution to the company
As mentioned before, each stakeholder has influence and contribution. For example, a company makes money by selling products to customers. Thus, the company must satisfy them to secure the cash flowing in.
Satisfying customers requires companies to offer superior products. The company may sell a standard product at a lower price than competitors. Or they provide a unique product at a premium price.
Companies use the money they earn for several expenses. They purchase raw materials and capital goods from suppliers and pay wages to employees.
In addition, the company uses the money from sales to pay creditors on time. The remaining money can then be distributed to shareholders as dividends or retained as internal capital in the future (retained earnings).
Sometimes, sales money isn’t enough to sustain future growth, and internal capital is inadequate. Therefore, companies raise funds from investors by issuing stock or debentures.
They can buy capital goods, build new factories, or acquire other companies with these funds. As a result, the company’s business size and operating scale increased.
Stakeholder conflicts
Each stakeholder and goal are different, and they often conflict with each other, which can lead to a conflict of interest.
For example, employees ask for a high salary increase. The shareholders disliked the increase—higher salaries lower profitability, which means less dividends.
Conflicts of interest are common. Companies must be able to handle it and manage it wisely.
For example, companies should not focus solely on their responsibility to shareholders, as is common in conventional thinking. They also have to respect other stakeholders, in the example above, employees.
For example, a company needs employees to operate a business. Refusing an employee’s salary increase can decrease their motivation and morale. Finally, it can decrease productivity and increase retention.
After all, each stakeholder makes a specific and strategic contribution to the company’s success. On the other hand, they expect their interests to be met by the company.
Forging strong relationships with stakeholders may require companies to pay attention to the right portion, depending on how strategic each is. Thus, companies should map stakeholders based on their interests and the significance of their influence on the company before designing policies or programs for each.
Impacts of stakeholder conflict on business
While stakeholders are vital to a company’s success, their differing goals can create conflicts that harm the business. Here’s how:
- Demotivated workforce: Conflicts, such as employee demands for higher salaries clashing with shareholder desires for profitability, can lead to resentment. When employees feel undervalued, their morale and productivity plummet, impacting the bottom line.
- Stalemated decisions: Disagreements between stakeholders can stall critical decisions. Imagine management and environmental groups locked in a battle over a new project. The delays hinder the company’s ability to adapt and seize opportunities.
- Industrial action: Unresolved conflicts can escalate into full-blown disruptions. Strikes by disgruntled employees or protests by community groups can cripple operations, damage customer relationships, and tarnish the company’s reputation.
- Reputational damage: When stakeholder conflicts become public, negative press and social media backlash can erode trust and confidence. This can lead to lost customers, investor flight, and, ultimately, a decline in the company’s value.
- Resource allocation headaches: Balancing the needs of various stakeholders with distinct priorities can be a constant struggle. Companies must decide how to allocate resources – should they prioritize shareholder returns through higher dividends, invest in employee training, or focus on environmental sustainability?
The path forward: Building bridges, not walls
Companies must move beyond a narrow shareholder-centric approach and recognize the value of all stakeholders. Here’s how to navigate this complex landscape:
- Stakeholder mapping: Identify and categorize stakeholders based on their interests and influence on the company. This helps tailor policies and programs to address their specific needs.
- Open communication: Foster a culture of transparency and open dialogue where stakeholders feel heard and respected. Regular communication builds trust and helps identify potential conflicts early on.
- Collaborative problem-solving: Approach conflicts as opportunities for collaboration. By working together, stakeholders can find solutions that address everyone’s concerns and contribute to long-term success.
