Stakeholders demand certain favours from a business either directly or indirectly. If a business fails to meet these demands it may have a negative impact on brand name and profitability. This article explains the impacts and solutions of stakeholder claims.
What are shareholders' claims
These are demands from individuals and stakeholder groups that an entity must realise. These demands are requested directly or indirectly by the stakeholders. There are different types of stakeholders and stakeholder groups. The claims from them can have an impact on the company.
The demands from stakeholders depend on the types. The impact on the company relates to the influence of each group. For example, the government's influence as a stakeholder is more powerful than that of shareholders.
Therefore, to proffer solutions to stakeholders' impact, finance professionals must consider their influence and power. In addition, the company’s ethical policies must align with stakeholders who have more influence and power.
Direct claims from stakeholders
A direct claim is the demand from stakeholders through their voices and actions. To illustrate, in shareholder meetings, major stakeholders may want a director to leave the company. This is a direct claim.
Other areas of direct claims are stated below:
- Employees' agitation for more pay and good working conditions.
- Shareholders who are demanding more dividends and capital gains from the company's shares.
- Customers demand high-quality goods and better customer service.
- The community members where the company is located are requesting environmental protection.
- And the government demands higher taxes from the company.
Indirect Shareholders' claims
These are claims made on behalf of a stakeholder or a group. Probably by someone with influence. Or an individual or group that believes that the company's activities will affect the future generation.
A problem with an indirect claim is that the impact is unknown. Another issue is that it is not clear whether those fighting for the claims are genuine. For example, an activist group demanding environmental protection for a community may have personal interests rather than those of future generations.
Impact of stakeholders' claims
Actions of direct stakeholders are legal and moral. Therefore, it can have an impact on the company. Note that the impact is a function of the power and influence of the stakeholder.
Business liquidation
A claim from a stakeholder can lead to the liquidation of a business. For example, if a company owes creditors and cannot pay the sum owed due to a lack of funds, the creditor can file for bankruptcy. The bankruptcy proceedings can result in the liquidation of the company.
Ban in the company
This can be from the government. If a company continues to fail to comply with government regulations, it can be banned from doing business. This is true with highly regulated companies in the capital and money markets.
Reputation
A company's reputation can be affected by customers' reviews. A company's lower revenue may be due to a bad reputation. Labour group agitation can reduce the company's reputation. It will make it difficult for the company to employ professionals.
Profitability
A community can disrupt business activities if its demands on the company are not satisfied. This will affect the business's sales and profit. For example, a community is agitating for the upgrade of its road network from an entity. Their indigenes mount roadblocks to prevent the company's trucks from leaving the community.
Solution to Stakeholders' claims
Stakeholders' claims can be resolved by considering how their demands can be satisfied. The Mendelow theory is a widely used method of reducing the impact of stakeholders. You can read about it here.
The theory explains the power and interest of stakeholder groups. It advises company management to settle with stakeholders who have more power and interest than those who have less power. To illustrate, the government has more power but less interest in a company. But its actions can lead to business closure or payment of fines. So the government must be kept satisfied.
Another solution is through the company's ethics. Management can include in the company's ethical policies statements that help reduce the impact of stakeholders' claims. For example, an ethical policy to produce sustainable products that will reduce environmental degradation.
Finance professionals lead in areas of corporate governance. In a company, they are called upon to resolve issues relating to stakeholders' claims. This is because failure to satisfy stakeholders can have an impact on the entity. Therefore, the ethical aspect of the entity must be balanced alongside stakeholder engagement.