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O3 You need to be able to: Demonstrate synthesis and evaluation. Command terms these terms require students
to rearrange component ideas into a new whole and make judgments based on evidence or a set of criteria. Compare
Compare and contrast, Contrast, Discuss, Evaluate, Examine, Justify, Recommend, To what extent

Stakeholder conflict

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Decision-making and ethics - the shareholder v other stakeholders

Whenever decisions have to be made by a business the risk of stakeholder conflict is likely to arise.

It is therefore not surprising that examiners often ask about this. Let's look at it in some more detail. As we saw earlier, being ethical may increase costs in the short run and reduce profits and dividends.

(a) The stakeholder - this wide-ranging group of interested parties have different feelings about how a business should be run. The needs of say employees and suppliers may be rather different. A careful balance will be needed and charting a course that satisfies most stakeholders can be difficult.

(b) The shareholder - they tend to like profits and a return on their investment. They have risked their money and want something for taking such a risk. In their opinion the correct way to run a business is to make profits and may see little reason for the firm to be more ethical than its competitors. The Directors have a legal obligation to the shareholders to act in their best interests. This obligation does not extend as broadly to other stakeholder groups.

So, do ethics pay for shareholders and other stakeholders? Well according to a recent report from the Institute of Business Ethics - they do. Follow the link below for a summary of their findings.

Does ethical behaviour pay?

Resolving stakeholder conflicts

Ultimately stakeholders all have an interest in the performance of the business and this is not helped by stakeholder conflict which can be extremely damaging. Poorly motivated staff, for example will lead to lower productivity, efficiency and lower profits. Even worse, would be conflict between management and the workforce leading to action industrial such as strikes.

The outcome of negotiations will be influenced greatly by the relative strengths of the stakeholder groups.

Large multinationals, such as supermarket chains are able to impose cheaper prices on suppliers fearful of losing large orders.

Employees, backed by powerful unions, may be in a position to force small firms into improving terms and conditions of employment.

International pressure groups can exert considerable pressure to change behaviour on even the largest of organisations fearful of the effects on their brand and corporate image if they do not comply.

Potential Solutions

Businesses or governments will sometimes hire respected individuals, or groups, to:

  • investigate the circumstances behind the disputes and to produce a report with potential solutions
  • offer conciliation services and attempt to bring the conflicting stakeholders together in the same room or to liaise between the groups if this is not possible
  • to arbitrate between the factions. Here both sides agree to accept the judgments of the independent body.

Other possible solutions include:

  • Rewarding stakeholders in a way that links their performance to the success of the business. This can be achieved through:
    • Share option schemes for staff - as shareholders, staff may be motivated to perform more effectively as employees, because increased profits should lead to higher dividends and increases on share value
    • Performance related pay (PRP) - this may be a compromise between the desires of the shareholder to retain a lower wage base and the desire of the workforce to improve their terms and conditions. Employees will be rewarded if they increase the profitability of the business and the dividend payout for staff.

  • Involving more stakeholders in the decision making process. For instance, representatives of individual stakeholders may be appointed as Directors of the business. It is not uncommon for employees to have a representative on the Board of Directors, and for major investors, such as banks to have the same. Some firms even appoint community Directors.
  • Improving channels of communication between the stakeholder groups. Companies may keep their stakeholders informed of new developments through company magazines and websites. New technologies allow for the easy gathering of views through regular questionnaires.
  • Even small firms may be able to afford this as simple, and free questionnaires can be produced using tools such as Survey Monkey. Alternatively the firm may hire Public Relations (PR) consultants or hire an internal PR team to keep the community and other stakeholders informed of the positive aspects of the business operations and attempt to minimise any negative impacts of their operations or planned changes.