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Significant conflict of interest may exist between different stakeholders of a company; hence it is important to understand the varying influences of different stakeholder groups.
The primary stakeholder groups of a company include shareholders, creditors, managers, other employees, the board of directors, customers, suppliers, governments/regulators, and community in general.
Shareholders have a residual interest in a company which entitles them to receive dividends and vote on a company’s decisions. Their interest lies in growth and profitability. They exercise control/influence on a company through election of board of directors, who are tasked with selecting senior management, providing strategic direction, etc., and voting on important resolutions. In public companies, however, where the ownership is dispersed, an investor or a block of investors called controlling investors may control the election of directors and any resolution. In such a case, all other investors are called minority investors.
Creditors, such as bondholders and banks, provide debt capital to a company and receive interest and principal payments. They can influence a company’s operations through covenants and since they do share any superior performance, they generally prefer stable and low-risk operations, which is in conflict with the interest of shareholders.
Managers are typically compensated through equity options, which aligns their interests with shareholders. Similarly, employees also want a company to perform better while providing stability and job security. However, the interest of managers and employees may conflict with shareholders in a takeover.
The board of directors is elected by shareholders to safeguard their interests. They are either one-tiered, in which there is one board composed both executive (internal) and non-executive (external) members (as common in the US, UK) or two-tiered, in which there a supervisory board comprising of non-executive directors, and a management board consisting of executive directors (as common in Germany, China, etc.).
Customers expect a company’s product to satisfy their needs while meeting applicable standards of safety. Companies are concerned about their customers satisfaction, but customers are not interested in a company’s financial performance, except in long-term relationships where customers are heavily dependent on a company.
Suppliers provide products and services to a company in return for timely payments. They want their relationship with a company to be fair and transparent and the company to be able to generate sufficient cash flows to meet its official obligations.
Government/regulators are interested in protecting the interest of the general public through application of laws and regulations. They want companies to prosper to increase employment, capital flows, social welfare, taxes, etc.
by Obaidullah Jan, ACA, CFA on Wed Feb 26 2020
This article can help you prepare for Reading 31 LOSb.
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