Transcript
1 Further notes for Lecture 1 Stakeholders in corporate governance 1. Stakeholders are people, groups or organisations that can affect or be affected by the actions or policies of an organisation. Each stakeholder group has different expectations about what it wants, and therefore different claims upon the organisation. 2. Stakeholders can be classified by their proximity to the organisation. Stakeholder group Members 3. Mendelow classifies stakeholders on a matrix [below] whose axes are power held and likelihood of showing an interest in the organisation’s activities. These factors will help define the type of relationship the organisation should seek with its stakeholders, and how it should view their concerns. 2 | Page 4. Clearly, an organisation must keep its main stakeholder groups happy whether active or passive. 5. Passive stakeholders may still be interested and powerful. If corporate governance arrangements are to develop still further, there may be a need for powerful, passive stakeholders (eg institutional investors ) to take a more active role. 6. Practice Required Who are the main stakeholder groups in a commercial company, and how should they be considered with respect to the role and scope of corporate governance? Answer: Corporate governance reports worldwide have concentrated significantly on the roles, interests and claims of the internal and external stakeholders involved. (a) Directors : The powers of directors to run the company are set out in the company’s constitution or articles. Under corporate governance best practice there is a distinction between the roles of executive directors, who are involved full-time in managing the company, and the non-executive directors, who primarily focus on monitoring. However under company law in most jurisdictions the legal duties of directors apply to both executive and non-executive directors. (b) Employees play a vital role in an organisation in the implementation of strategy; they need to comply with the corporate governance systems in place and adopt appropriate culture. Their commitment to the job may be considerable involving changes when taking the job (moving house), dependency if in the job for a long time (not just financial but in utilising 3 | Page skills that may not be portable elsewhere) and fulfilment as a human being (developing a career, entering relationships). (c) Suppliers . Major suppliers will often be key stakeholders, particularly in businesses where material costs and quality are significant. Supplier co-operation is also important if organisations are trying to improve their management of assets by keeping inventory levels to a minimum; they will need to rely on suppliers for reliability of delivery. If the relationship with suppliers deteriorates because of a poor payment record, suppliers can limit or withdraw credit and charge higher rates of interest. They can also reduce their level of service, or even switch to supplying competitors. (d) Customers have increasingly high expectations of the goods and services they buy, both from the private and public sectors. These include not just low costs, but value for money, quality and service support. In theory, if consumers are not happy with their purchases, they will take their business elsewhere next time. With increasingly competitive markets, consumers are able to exercise increasing levels of power over companies as individuals. (e) External auditors . The external audit is one of the most important corporate governance procedures; it enables investors to have much greater confidence in the information that their agents, the directors/managers are supplying. However, the main focus of the external audit is on giving assurance that the accounts give a true and fair view. Because of the significance of the external audit, the external auditors must be independent. (f) Regulators . A key interest of regulators in corporate governance is maintaining shareholders - stakeholder confidence in the information with which they are being provided. Problems with stakeholder theory 7. A principle of company law in most jurisdictions remains the fiduciary and legal obligations that managers have to maximise shareholder wealth. Therefore, if managers are to fulfill responsibilities to a wider stakeholder base, it must not jeopardise long term profitability. 4 | Page 8. Some commentators have tried to reconcile stakeholder and agency theory by arguing that managers are stakeholders, responsible as agents to all other stakeholders. Although stakeholders have divergent interests that may be difficult to reconcile, this does not absolve management from at least trying to reconcile their interests. 9. There are two motivations for considering stakeholders. An instrumental view justifies considering stakeholders because of the economic benefits to the company. A normative view is based on the idea that the company has moral obligations towards stakeholders Major issues in corporate governance 10. The scope of corporate governance is vast and we shall expand on the following key issues during this course of study. 11. Major issues pertaining to corporate governance, that could arise in any exam question, are illustrated below.
