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The interests of stakeholders

  • /
  • Old course (N23)/
  • Unit 1/
  • 1.4 Stakeholders/
  • The interests of stakeholders
The interests of internal stakeholders (AO2)

Internal stakeholders are individuals or groups who are part of the organization. Examples include:

  • employees
  • managers
  • directors (executives), and
  • shareholders (the owners of the business).
Employees

Employees are workers within an organization. They have a vested interest in the business organization that they work for. They can have a major impact on the organization and are directly affected by the financial health of the organization. Their level of motivation and productivity have a direct impact on the performance and prosperity of the business.

The interrelated interests of employees include:

  • Improved terms and conditions of employment
  • Better pay and bonuses
  • Equal opportunities
  • Improved job satisfaction
  • Improved job security, and
  • Wider opportunities for career progression.

 

Employees are an internal stakeholder group

Managers

Managers are people hired to be responsible for overseeing certain functions, operations or departments within an organization. Many businesses, especially large firms, tend to have three broad levels of management:

  • Senior management refers to the team of higher-ranking managers or directors that plan and oversee the long-term aims and strategies of the organisation. They are responsible for the middle managers.
  • Middle management refers to the group of managers in charge of running individual departments. They set departmental objectives (which are in line with the firm’s overall aims) and are responsible for implementing strategies to achieve these goals. Middle managers are accountable to the senior management team and are responsible for their departmental staff.
  • Junior management (or supervisory management) refers to lower-ranking managers who are in charge of monitoring and controlling day-to-day and routine tasks. They are accountable to the middle managers and are responsible for their team of workers.

The interests of managers, irrespective of their rank or seniority in the organization, include:

  • Striving to improve operational efficiency, labour productivity and profits as these are all measure of management performance.
  • Aiming to improve customer relations in order to maintain or improve the organization’s competitiveness.
  • Aiming to improve their own salaries, bonuses and other fringe benefits - just like all employees of the organization (see 2.4 Motivation).
Directors

Directors (or executives) are the group of senior managers who are legally responsible for the overall running of a company on behalf of their shareholders (the legal co-owners of the company). In a large company, there is likely to be directors responsible for each key functional area: marketing, human resource management, finance and accounts, plus operations management. 

There are two main types of directors:

  • Executive directors work full-time at the organization and make key strategic decisions.
  • Non-executive directors do not work at the organization but are consultants used for their particular expertise. They advise the Board of Directors on corporate strategy.

Directors must also keep company records and report any changes to the authorities. Other responsibilities of directors include:

  • Advising and supporting the CEO
  • Filing company annual accounts

  • Target setting and devising long term strategic plans

  • Establishing organizational policies and codes of conduct / practice; which in turn means shaping the corporate culture

  • Monitoring and controlling the organization’s overall activities and financial results

  • identifying and recording people with significant control (PSC) in the company. Most PSCs are likely to be people who hold:
  1. more than 25% of shares in the company
  2. more than 25% of voting rights in the company
  3. the right to appoint or remove the majority of the Board of Directors.

Directors also need to be aware that the information of all PSCs is available to the general public, apart from their home address and date of birth.

The interests of directors (or executives) include:

  • They have similar interests to managers, but are also likely to strive to improve their share ownership rights and performance related bonuses.
  • They are concerned with the organization’s return on investment for their shareholders.
  • They strive to improve the competitiveness of the organization as measured by market share and market growth.

 

The CEO is one of the Directors in a company

Shareholders (stockholders)

Shareholders (or stockholders) are people or other organizations that buy shares in the company. They own a part of the business. The interests of shareholders (owners) of a limited liability company include:

  • They have rights to a share of any profits that the company earns (dividend payments); shareholders expect regular payment of dividends.
  • They also have voting rights (based on the number of shares they own) on how the company should be run.
  • As co-owners of the limited liability company, shareholders expect the business to earn a certain (financial) return on their investment.
Top tip!

Students often confuse the terms ‘shareholders’ with ‘stakeholders’. Shareholders (owners of limited liability companies) are a type of stakeholder group, but business have other stakeholders too that are not necessarily shareholders (such as employees, suppliers and the government).

There are three key reasons why investors buy shares in a limited liability company, although only the first two apply to most shareholders:

  1. Dividends - Companies listed on a public stock exchange usually pay dividends to their shareholders biannually (twice a year). The dividends represent a share of the company's profits paid on each share that the shareholder owns, so the more shares held the higher the total dividend payment.
  2. Capital growth - Stock brokers and investment bankers argue that over the medium to long term, shares outperform the return from savings in an ordinary bank account. Over time, the market price of shares can increase, so shareholder can sell their shares at a higher price, thereby making a financial gain (known as capital growth or capital gain). However, due to the volatility of stock markets, share prices can indeed fall sharply without any prior warning. Hence, holding shares can be a risky strategy for investors.
  3. Voting power - Shareholders who hold enough shares in a limited liability company can become a major influence in the management and operations of the organization. These people tend to be experienced risk takers and possess high entrepreneurial spirit, such as the senior directors of a company.
The interests of external stakeholders (AO2)

External stakeholders are people or organizations not part of the business but have a direct interest in its decisions, actions and performance. Examples of external stakeholder groups include:

  • customers
  • competitors
  • suppliers
  • financiers
  • labour unions (trade unions)
  • the local community
  • pressure groups, and
  • the government.
Customers

Customers are the firm’s clients who pay for the goods and/or services of the business. The interests of customers include:

  • Customers strive for cheaper and more competitive prices for the goods and services they purchase.
  • They demand products that are of an acceptable quality for the price they pay.
  • They want products that are safe and fit for their purpose.
  • Customer service is paramount, such as the provision of after-sales support.
  • Overall, customers want value for money.

Customers are an external stakeholder group

Competitors

Competitors are the organization’s rival businesses competing in the same industry. The interests of competitors (or rivals) include:

  • Competitors are interested in the organization’s operations, such as its product range and pricing strategies.
  • Competitors are also interested in the finances of the business in question, such as its final accounts (see Unit 3.4) and how competitive its remuneration package is (such as salaries and fringe benefits offered to its employees).
  • Competitors also have a vested interest in the behaviour and operations of the business in question as this can affect the reputation and sales of the industry as a whole.
  • It is not uncommon for rival companies to hold shares in the business in question. For example, Cathay Pacific Airways (CPA) is partially owned by Air China (which holds 30% of the shares in Hong Kong's flagship carrier) and Qatar Airways (which owns 9.4% of the shares in CPA). Porsche own more than 31% of the shares in Audi (which itself is part of the Volkswagen Group).
  • Rivals are also interested in benchmark data to measure their own performance, such as sales turnover, market share, and financial ratio analysis.

Competitors are external stakeholders

Suppliers

Suppliers are the organizations that provide the goods and support services for other organizations. For example, Pepsi Cola supplies its drinks to Pizza Hut and KFC restaurants. Foxconn is Apple’s supplier of iPhones.

The interests of suppliers as an external stakeholder group include:

  • Suppliers are interested in securing contracts for regular orders from their business customers.
  • They demand prompt payment from their business clients for the orders placed and the deliveries made.
  • Whilst they may offer larger business customers price discounts, suppliers strive to achieve reasonable prices for the goods and services they supply.
  • Having a good professional relationship with suppliers means the business is more likely to receive timely deliveries and better credit terms.
Financiers

Financiers (or lenders) are banks, investors, insurance companies and other financial backers that provide finance for businesses (see Unit 3.1). The interests of financiers as an external stakeholder group include the following:

  • They are interested in the financial health of an organization in order to judge its ability to repay debts and to generate profits.
  • They expect regular and prompt repayment of the money lent to the business and also demand a competitive return on their investment funds.
Labour unions (trade unions)

A labour union is an organization that aims to protect the interests of its worker members. In particular, it focuses on the terms and conditions of employment, such as workers’ pay and benefits. A worker becomes a member of a trade union by paying a subscription fee, usually on a yearly basis. The membership fees help to pay for the administrative and legal expenses of operating the trade union.

Labour unions originated in the 19th century in the UK and the USA. People often worked in very poor conditions, so trade unions were created to bargain for better terms and working environments for their members. Labour unions are organizations recognized as legal representatives of workers, thereby serve to act in the best interest of their members. They also lobby the government to pass laws and regulations that protect workers, such as statutory employment rights.

There is often conflict between the interests of employees and employers. For example, an increase in pay and benefits, along with pressures to reduce working hours, will improve the terms of employment for employees but increase costs for employers.

Infographic: How U.S. Trade Union Membership Compares | Statista You will find more infographics at Statista
ATL Activity (Research skills)

Investigate the number and types of unions that exist in your country or a country of your choice.

Find a recent example of industrial action that has taken place and determine whether the action was successful or not in achieving its aim.

The local community

The local community refers to the general public and local businesses (not necessarily competitors though) that have a direct interest in the activities of the business in question. The interests of the local community as an external stakeholder group include:

  • Members of the local community try to encourage the business in question to act in a socially responsible way, such as sustainable activities that protect the environment.
  • They expect the business to create jobs in the local area.
  • The local community may also want financial support (such as sponsorships and donations) for local events.
Pressure groups

Pressure groups are organizations consisting of like-minded individuals who come together for a common cause or concern. They are set up as legal business entities to pursue these specialist interests. Examples include:

  • Greenpeace
  • Friends of the Earth
  • World Wildlife Fund, and
  • Oxfam International.

Pressure groups strive to influence government and public opinion in order to create the desired social change, such as protection of the environment, fairer terms of international trade or the upholding of human rights.

They put pressure on organizations to operate in a socially responsible and ethical way, such as the fair treatment of workers. Action from pressure groups help to hold businesses accountable for the impact of their operations and activities on local communities and the natural environment.

Pressure groups campaign for social change

Case Study - Social unrest in France

In 2012, France tried to introduce a 75% income tax rate for individuals earning incomes in excess of €1 million ($1.09m per year). However, the proposals were overturned, with some economists arguing that the government would actually receive more tax revenues by cutting tax rates. This is because lower rates of income tax can create incentives to work and also help to reduce tax avoidance and tax evasion.

Mass demonstrations (under what became known as the yellow vests movement)  began in Paris starting in November 2018 due to protests against the government for its perceived unfair tax system. The protests ended on 1st May 2021 due to the COVID-19 pandemic that resulted in a national lockdown.

The government

The government is an external stakeholder of all organizations operating within the country. The government is keen to see that businesses operate in a legal and socially responsible way. This is enforced by government policies, such as:

  • consumer protection legislation
  • employment laws
  • environmental protection guidelines
  • equal opportunities legislation
  • health and safety standards and regulations
  • taxation policies and laws.
Top tip!

Students often assume that individuals belong to a single stakeholder group so have different interests. In reality, this is not necessarily the case, such as some employees being managers, directors and/or shareholders of the organization.

Stakeholders Vocab Quiz

Read the 9 clues below and identify the relevant key term.

  1. An analytical tool that places different stakeholder groups into quadrants depending on their relative levels of power and interest in an organization.
  2. Individuals or organizations which have a direct interest in the operations and performance of a particular business.
  3. This is often the result of people having disagreements due to differences in their opinions, interests, and preferences.
  4. Organization which aims to support and help its members by protecting their terms and conditions of employment.
  5. An organized collection of people who seek to influence political decisions in their pursuit of a social cause.
  6. Senior members of an organization who are elected to run the business on their behalf.
  7. Also known as stockholders, these stakeholders are the owners of a limited liability company.
  8. Arguably the most important stakeholder group for any organization as they purchase goods and services from the business.
  9. The people in charge of the daily running of a business or a department within an organization.

Answers

  1. An analytical tool that places different stakeholder groups into quadrants depending on their relative levels of power and interest in an organization. Stakeholder mapping
  2. Individuals or organizations which have a direct interest in the operations and performance of a particular business. Stakeholders
  3. This is often the result of people having disagreements due to differences in their opinions, interests, and preferences. Conflict
  4. Organization which aims to support and help its members by protecting their terms and conditions of employment. Trade union
  5. An organized collection of people who seek to influence political decisions in their pursuit of a social cause. Pressure group
  6. Senior members of an organization who are elected to run the business on their behalf. Directors
  7. Also known as stockholders, these stakeholders are the owners of a limited liability company. Shareholders
  8. Arguably the most important stakeholder group for any organization as they purchase goods and services from the business. Customers
  9. The people in charge of the daily running of a business or a department within an organization. Managers

Download a PDF worksheet to the above quiz for students to complete and keep for revision purposes.

Exam Practice Question - Rolls-Royce

Rolls-Royce to cut 9,000 jobs as Covid-19 takes toll on airlines

In May 2020, Rolls Royce announced 9,000 jobs losses in the UK due to the airline industry being hit hard by the global coronavirus pandemic. Rolls-Royce employs 23,700 staff in the UK, with most of the aerospace employees working in Derby, England. Rolls-Royce – known for its super luxury cars – is also a major jet engine manufacturer for the world’s largest aircraft manufacturers (Airbus and Boeing) and services the engines of major airline carriers. The company announced the job losses in order to save £1.3 billion ($1.7bn) in annual cost savings due to the worldwide crisis.

The Covid-19 pandemic grounded most of the world’s airlines during the latter part of 2019 and most of 2020, with flights having plummeted by 90% in April 2020 (a month before the job cuts were announced). This meant demand for Rolls-Royce to service and maintain aircraft engines fell sharply. Rolls-Royce also makes engines for fighter jets and ships, as well as reactors for nuclear submarines. The company employs around 52,000 staff in over 50 countries around the world.

Rolls-Royce’s chief executive officer, Warren East, said “Governments across the world are doing what they can to assist businesses in the short term, but we must respond to market conditions for the medium term until the world of aviation is flying again at scale. Governments cannot replace sustainable customer demand that is simply not there.”

The Board of Directors suggested the news would reduce the return on investment for shareholders of Rolls-Royce, at least in the short run.

Source: Adapted from The Guardian

a.    Identify two internal stakeholders of Rolls-Royce.    [2 marks]

Internal stakeholders of Rolls-Royce could include:

  • Employees (9,000 job losses)
  • Shareholders
  • Directors (of Rolls-Royce)
  • The chief executive officer (CEO), Warren East.

Award 1 mark for each appropriate internal stakeholder identified, up to the maximum of 2 marks.

b.    Identify two external stakeholders of Rolls-Royce.    [2 marks]

External stakeholders of Rolls-Royce could include:

  • The UK government

  • Customers (Boeing, Airbus, and major airline carriers)

  • Suppliers (for the production of Rolls-Royce engines)

  • Financiers

  • Local communities (such as Derby, England).

Award 1 mark for each appropriate external stakeholder identified, up to the maximum of 2 marks.

c.    Explain two conflicts following Rolls-Royce’s decision to reduce its workforce.    [4 marks]

Conflicts following Rolls-Royce’s decision to reduce it workforce in the UK could include:

  • Employees and labour unions protesting against mass job losses whilst Rolls-Royce’s directors strive to cut costs ($1.7bn per year)

  • Shareholders experiencing a decline in the return on their investment in Rolls-Royce (largely due to the 90% drop in airline travel and compensation for employees made redundant).

  • Suppliers and related industries experience a significant drop in their business due to lower demand for Rolls-Royce jet engines and lower demand for maintenance / servicing of engines from the major airline carriers (due to most flights being grounded).

Award up to 2 marks for each stakeholder conflict identified and explained, up to the maximum of 4 marks.

Download a PDF version of the exam practice question here.

Glossary of key terms
  • Competitors are the organization’s rival businesses competing in the same industry.
  • Customers are the firm’s clients who pay for the goods and/or services of the business.
  • Directors (or executives) are the group of senior managers who run a company on behalf of their shareholders (the legal co-owners of the company).
  • Employees are the workers within an organization. They are an internal stakeholder group with a vested interest in the survival and financial prosperity of the organization that they work for.
  • External stakeholders are people or organizations not part of the business but have a direct interest in its decisions, actions, and performance. Examples include customers, competitors, suppliers, financiers, the local community, pressure groups, and governments.
  • Financiers (or lenders) are banks, investors, insurance companies and other financial backers that provide finance for businesses.
  • The government is an external stakeholder of all organizations operating within the country.
  • Internal stakeholders are individuals or groups who are part of the organization, including employees, managers, directors (executive), and shareholders.
  • The local community is an external group of stakeholders consisting of the general public and local businesses (not necessarily competitors though) that have a direct interest in the activities of the business in question.
  • Managers are people hired to be responsible for overseeing certain functions, operations or departments within an organization.
  • Pressure groups consist of individuals or organizations who have a common interest or cause that they collectively pursue. These external stakeholders have particular interests such as the protection of small-scale and local businesses, the natural environment and ecosystems, human rights, and fair trade.
  • Shareholders (or stockholders) are people or other organizations that buy shares in the company. They own a part of the business.
  • Suppliers are the organizations that provide the goods and support services for other organizations.

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