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Mba notes on stakeholder

Updated on October 14, 2011

Mba notes on stakeholder

Stakeholders are all constituencies with a stake in the fortunes or misfortunes of the company who have a significant degree of control, command and interest on company’s activities directly or indirectly. These various stakeholders could be listed as shareholders, debt holder (creditors), customers, government (Regulatory authorities), employees and trade unions, society, civil society and local community, suppliers and supply chain partners etc.

In today’s context, company should work towards the welfare of the society as a whole. In doing so, it will take care of all stake holder’s interest. But this seems to be more abstract and vague statement. Put it simply, there should be positive discrimination attitudes towards stakeholders. There should definitely be a kind of favor to a particular stakeholder group (i.e. towards shareholders) over another since company’s shareholders are ultimate responsibility for all organizations as giving utmost priority to shareholders are umbrella concept. It we take care of stock price then, the stock price would take care of all other stockholder’s interest simultaneously.

To a large extent, the owners of stock are society. Most members of society have an important stake in the stock market, either directly or indirectly. When a manager takes actions to maximize the stock price, this improves the quality of life for millions of ordinary citizens. This is a current example of Nepal too. When there is any IPO offering, then there is long queue in the market to purchase the IPO which ensures the wider participation of consumer or citizens in the company's fortunes. In doing the best for the company itself, company is enhancing its share value and ultimately this all will make a happier society.

Stock price maximization requires efficient, low cost business that produces high-quality goods and services at the lowest possible cost. Companies must develop products and services that consumers want and need. To serve the consumer and civil society best, company should focus on quality and if the company serves its consumers best then it is high probability to increase its stock price as quality has great influence on market share (market penetration or coverage) and its future. Share price is greatly determined by market share. Even if economic returns from attempting to increase customer satisfaction fall below the cost of capital now, this will increase market penetration and brand loyalty in coming days making its share price higher.

Companies that successfully increase stock price also grow and add more employees, thus benefiting the society as a whole. There is high correlation between stock price and employee satisfaction as employees are the one single humane factor that executes the programs and policies of the organization. And employees get higher return if their organization is doing best and its market share is high. One cannot expect to get more if their company is losing its business, profit and growth. Successful companies get the cream of the employee crop and skilled, motivated employees are one of the keys to corporate success.

Stock price is the degree of perceived risk. Higher the risk, lower would be the share price in general. If debtors (creditors) assume high risk in any company then they will tend to either avoid the investment or ask for high return on investment. And if there is low risk then stock price would be higher in general.

Government gets the revenue form profit and income from a company. If a company is making higher profit, then it will pay more tax to the Government and Government would redistribute the tax to the deprived society latter on. And if a company is growing and making profit then possibility of increment in share price is high.

For suppliers and supply chain partners, to make deal with company having high share price is too profitable as high share price indicates growth, profitability and great future opportunity which ultimately ensure timely payments and conducive dealing environment for suppliers and supply chain partners.

In a nutshell, governing objective for all publicly traded companies should be to maximize the value of the company for shareholders. Achieving this objective not only serves the interest of the company’s owners but also serves the economic interests of all stakeholders over time. So there should not be any debate whether to give any kind of favor towards any particular group. Rather if we give single favor to shareholder’s economic value then the rest would automatically be in favor itself.

A company institutionalizes with various strategic objectives to accomplish profit through satisfying every stakeholders that are directly or indirectly involved with the business. Stake holders of a firm consists of different its associated partners to enhance its operation in day to day manners. In general, we can list out those stakeholders as follows.

  • Management and employees:
  • Share holders:
  • Bond holders:
  • Debt holders:
  • Customers:
  • Distribution partners:
  • Suppliers:
  • Government:
  • Society:
  • Supporting agencies:

How does a company satisfy its stake holder’s interest is itself a vague question in today’s decentralized corporation. No one can give proper emphasis on one particular stakeholder group over another, which becomes disinterest for the organization in terms of profit, and shareholder’s focus. Thus, the best concept for today’s world market becomes only the best focus on shareholders value so that it can nourishes economic interests of all stakeholders over time.

What is shareholders value focus? In general, enhancing the market value of the stock (the gap between market price per share and its original price) so that the value of the stock is treated at higher economic value in the market is called shareholders value focus. Thus, once the organization is concerned with focusing or enhancing shareholders value then obviously other stakeholder’s interest is fulfilled automatically over the time.

From the above point of view, let’s analyze the situation form all the stakeholders’ point of view. First of all, how the employees and management is satisfied with enhancing shareholders value point of view. Employees are the people selected by the owners and management to enhance shareholders value. If they are not satisfied in terms of salaries and wages and other carrier development and motivational program with training and development program then obviously their productivity becomes lower or they show disinterest to work efficiently so that shareholders value may not increase as much expected. But, if organization focuses employee and management more and more, a huge sum of money can loose which may be higher expenses to the management comparing with their productivity. Here, providing value as the market already has its experience will be the best way to enhance the shareholders value which is the major concern of this objective. Thus, once the organization focuses on shareholders value maximization as main objective then automatically employees and management expectation is fulfilled.

Again, from the debt holders prospective, we can analyze as same as above. Shareholders value can be maximized only after the payment of interest that we calculated in income statement to show our net profit in the financial statement. So, a company’s shareholders value is increased means it has paid all interest and has the capacity to pay its principle of debt over the time. Thus, investors feel secure to invest again to that organization because of timely payment of interest and its economic wealth and reputation in the market. It applies same to the bond holders who have the first right over the operating profit.

Again, analyzing from customer prospective, it seems vague but quite as much concern to the customer if the organization focuses on shareholders value maximization concern. It is true that customers are the king and queen. People think that once an organization highly focuses on customers then demand of its products increases so that its market share and its return on assets will take care of themselves. But, we have to see the critical analysis of the events. When an organization highly focuses on customers then we have to see the return on investment to that concern. Investing huge amount to a particular customer is not always good for enhancing shareholders value maximization. Here, what we get in return i.e. capital gain and what amount we invested to those customers i.e. cost of capital play vital role. If our return is lower than what we had invested then obviously it is harmful for us in the case of over investment to the market to satisfy all customers and having negative return. Another case, we don’t invest in the market and don’t expand our operation then obviously our interest will not fulfilled and market becomes limit so that shareholders value will decreases because of no any progress from the company side. Thus, customer focus is also unattractive in the case of shareholders value maximization.

Again, from the supply chain partner’s perspective, either supplier side or distribution partners side, they will automatically favored if the organization is concerned with shareholders value focus. An important part of TQM focuses on consolidating suppliers to increase volumes purchased, working with each supplier to improve quality, and coordinating delivery-production schedules to minimize cost and inventory, each of which is likely to help maximize value for shareholders. Again, efficient distribution channel with effective communication to improve quality of supply is important to maximize shareholders value. Thus, if an organization is highly concern with shareholders value maximization then obviously it is highly concerned with its supply chain partners.

Again, let’s take government perspective to show the importance of shareholders value maximization model. When an organization is highly concerned with shareholders value maximization then it has to adopt the rules and regulation of government and has to initiate a healthy competitive environment in the market. Besides, only after paying tax amount to the government it can achieve its objective. Thus, automatically government will be satisfied if it is able to focus shareholders value maximization concern.

An organization exists within the territory of the society so that it has to be concern for society’s well beings. What does society expect from the organization is as much important as what does customers interest. Society always monitors whether the organization is following the rules and regulation of the society or not; whether the organization is centered with the expectation of the society or not; whether the organization is producing only the right things as society expect or not, etc. which has greater role form the perspective of shareholders value maximization point. Thus, an organization is valued higher means its shareholders value is high, which means it is also concerned with the society so that society ranked the organization as higher in the market.

Lastly, analyzing from the supporting agencies like media partners, ad agencies, different supporting boards and institutions, etc. then they will be satisfied only if the organization is focused on shareholders value maximization through economic concern and relationship concern.

Thus, from above analysis we can conclude that if the organization is highly concern with favoring a particular stakeholder group like customers, society, etc. except to the shareholders concern then obviously it can not satisfy each and every stakeholder’s interest that is required for placing better position to the organization in the market. But, if the organization is highly concerned with only one stake holders i.e. shareholders to increase shareholders value in the market then obviously it can achieve the economic and all other major concern of other stakeholders.




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