FMF9
Syllabus A. Financial Management Function A3. Stakeholders and impact on corporate objectives

Stakeholders interests 2 / 5

Stakeholders and impact on corporate objectives

We have just seen that the primary objective of a company is the maximisation of shareholder wealth.

However, there is an alternative known as the stakeholder view.

This means balancing shareholder wealth with the objectives of other stakeholders.

Let’s have a look at some stakeholders and their objectives:

Stakeholder Objective
Staff High salaries; safe job
Managers High bonuses
Shareholders High share price; dividend growth
Banks Minimise company risk
Customer Quality service
Suppliers Good liquidity
Government Good accounting records; Training initiatives

Clearly meeting all stakeholders objectives entirely is impossible.

Often they are in conflict with each other. Therefore a degree of compromise is reached.

For example, Performance related pay for example is a means of satisfying both staff and shareholders.

There is a fundamental problem highlighted here. The owners of the business are generally not those who manage the business.

As both parties have different objectives this causes a problem.
The danger that managers may not act in the best interest of the owners is known as….

The Agency Problem

The managers are acting as agents for the owners.

So how can the owners ensure that the agents are working for the owners objectives and not just their own?

  1. Fixed wages

    Not always the optimal way to organise relationships between principals and agents. 

    A fixed wage might create an incentive for the agent to shirk since his compensation will be the same regardless of the quality of his work or his effort level.

  2. Performance related Pay

    When agents have incentive to shirk, it is often more efficient to replace fixed wages with compensation based on the profits of the firm,  since it makes their compensation dependent on their performance. 

    However this can lead to individuals not working for the team as a whole by inflating budgets required etc. 

    Output may also be encouraged rather than quality. It disregards job satisfaction also

  3. Share options

    Seems like a great idea as if the share price goes up then both the managers and the owners benefit. 

    However often shares go up and down in line with market movements regardless of how well the managers have performed so many managers would not like to be measured and paid solely this way. 

    Some element of share options within their pay though would be a good thing and acceptable by all