Lecture 5

Exploring Strategy
11th edition
Text and Cases
Chapter 5
Stakeholders and governance
Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved
Learning outcomes
• Undertake stakeholder analysis in order to identify the
power and attention of different stakeholder groups.
• Analyse the strategic significance of different
ownership models for an organisation’s strategy.
• Evaluate the implications for strategic purpose of the
shareholder and stakeholder models of corporate
governance.
• Relate corporate responsibility and personal ethics to
purpose and strategy.
Stakeholders, governance
and ethics
Slide 5.4
Who are the stakeholders?

Stakeholders are those individuals or groups that
depend on an organisation to fulfil their own goals
and on whom, in turn, the organisation depends.
Types of stakeholder
Stakeholders can be divided into internal stakeholders (e.g.
managers and employees) and external stakeholders.
External stakeholders are of 4 types:
• Economic (e.g. suppliers, shareholders, banks,customers,
distributors, banks and owners)
• Social/political (e.g. government agencies,policy makers,
local councils)
• Technological (e.g. standards agencies, key adopters,
ecosystem members supplying complementary products or
services-e.g. apps for particular mobile phones)
• Community (e.g. local residents, groups in wider society,
those who live closely to a factory)
Stakeholder mapping
Stakeholder mapping identifies stakeholder power
and attention in order to understand political
priorities.
The power and interest of stakeholders depend on

the particular issue being considered – different
issues require different maps.
Conflicts of stakeholder interests and
expectations (1 of 3)
• Pursuit of short-term profits may suit
shareholders and managerial bonuses but come
at the expense of investment in long-term
projects.
• Family business owners may want business
growth, but also fear the loss of family control if
they need to appoint professional managers to
cope with larger-scale operations.
7
• Investing in growth strategies may require
additional funding through share issue or loans,
but thereby risk financial security and
independence.
• Going public on the stock market may raise funds,
but require unwelcome degrees of openness and
accountability from management.
• Expanding into mass markets may require a
reduction in quality standards.
• In public services, excellence in specialised
services might divert resources from standard
services used by the majority (e.g. heart
transplants come at the cost of preventative
dentistry).
• In large multinational organisations, conflict can
result because of a local division's responsibilities
simultaneously to the company head-office and
to its host country.

Stakeholder mapping: the power/attention
matrix.
Source: Adapted from Newcombe, R. ‘From client to project stakeholders: a stakeholder mapping approach’’, Construction Management and Economics vol. 21, no. 8 (2003): 841-8.
Power
Power is the ability of individuals or
groups to persuade, induce or coerce
others into following certain courses of
action.
Table 5.2 Sources of power (1 of 2)
Table 5.2 Indicators of power (2 of 2)
Attention
Stakeholders vary in the attention they pay to the organisation and
particular issues within it. Even powerful stakeholders may not attend
closely to everything.
Three factors are particularly important:
•Criticality – how much does it matter to the stakeholder?-Stakeholders
will pay more attention where there are good channels of information and
communication.
•Channels – are the communication channels good?- Stakeholders will pay
more attention where there are good channels of information and
communication E.g. Church care passionately about employment
conditions of overseas workers, but lack channels effectively to find out
about them.
•Cognitive capacity – there may be too much information to process
effectively.
Stakeholder mapping issues
• Determining purpose and strategy – whose
expectations need to be prioritised?
• Who are the key blockers and facilitators of
strategy?
• Is it desirable to try to reposition certain
stakeholders?
• Can the level of interest or power of key
stakeholders be maintained?
• Will stakeholder positions shift according to
the issue/strategy being considered?
Ownership, management
and purpose
Ownership models (1 of 5)
Publicly-quoted companies
• Shares are sold to the general public or
financial institutions.
• Such companies are usually managed by
professional managers.
• Their objective is to make a financial return for
the owners (profit focus).
• Unsatisfied shareholders will sell their shares
or seek to remove the managers.
State-owned enterprises
• Organisations wholly or majority owned by national or
regional governments. They are especially important in
developing economies (e.g. China, Russia and Brazil).
• Privatisation has reduced their importance but there are
many quasi-privatised organisations (e.g. Free schools).
• Politicians delegate day-to-day control to professional
managers but may intervene on strategic issues.
• They need a financial surplus to fund investment but also
pursue other objectives in line with government policy.
Entrepreneurial businesses
• Such businesses are substantially owned and
controlled by their founders (e.g. Arcelor Mittal,
Facebook and the Virgin Group).
• With growth, more professional managers and
external investors are required.
• They typically focus on profit to survive and grow but
may also have personal missions favoured by the
founder(s).
Family businesses
• Ownership has been passed on from the founding
entrepreneur to descendants.
• Typically small to medium-sized enterprises (SMEs)
but may be large (e.g. Ford, Walmart).
• The family may retain the majority of shares while
floating some shares on the stock market.
• Professional managers may be employed but
ultimately the family remain in control.
• The need to retain family control may lead to
rejecting high-risk strategies or those requiring
substantial external finance.
There are other types of organisation:
• Not-for-profit organisations (e.g. Mozilla).
Frequently charitable foundations that exist to
pursue a social mission
• Partnerships (e.g. law firms). Organisations owned
and controlled by senior employees
• Employee-owned firms (e.g. John Lewis).
Ownership is spread among all the employees. They
may not be able to raise capital easily and may be
more conservative in terms of strategy.
Corporate governance
Corporate governance is concerned with the
structures and systems of control by which
managers are held accountable to those who
have a legitimate stake in an organisation.
The growing importance of governance
• The separation of ownership and management

control – defining different roles in governance.
• Corporate failures and scandals (e.g. Enron) –
focusing attention on governance issues.
• Increased accountability to wider stakeholder
interests and the need for corporate social
responsibility (e.g. green issues).
The governance chain (1 of 2)
The governance chain shows the roles and
relationships of different groups involved in the
governance of an organisation.
•In a small family business, the governance
chain is simple.
•In large publicly-quoted corporations, however,
influences on governance can be complex –
Figure 5.4.
The governance chain (2 of 2)
Source: Adapted from David Pitt-Watson, Hermes Fund Management.
The principal–agent model (1 of 2)
• Governance can be seen in terms of the
principal–agent model.
– Principals pay agents to act on their behalf (e.g.
beneficiaries/trustees pay investment managers
to manage funds, boards of directors pay
executives to run a company).
– Agents may act in their own self interest.
The principal–agent model (2 of 2)
The key challenges are:
• Knowledge imbalances: agents typically know more
about what can and should be done.
• Monitoring limits: it is very difficult for the principal
to closely monitor the agent’s performance
especially if they have diverse interests.
• Misaligned incentives: without appropriate
incentives, agents may pursue their own objectives.
Issues in governance
• Who are the shareholders – should boards respond
to the demands of institutional investment
managers or the needs of the ultimate
beneficiaries?
• The role of institutional investors – should they
actively intervene in strategy?
• Establishing the specific role of the board – in
particular the role of non-executive directors.
• Scrutiny and control – statutory requirements and
voluntary codes to regulate boards.
Different governance models
Shareholder model Stakeholder model
Advantages  Higher rates of return  Long-term horizons
 Reduced risk  Less reckless risk-
 Increased innovation taking
and entrepreneurship  Better management
 Better decision-making
Disadvantages  Diluted monitoring  Weaker decision-
 Vulnerable minority making
shareholders  Uneconomic
 Short-termism investments
 Reduced innovation
and entrepreneurship
The role of boards (1 of 3)
A single-tier board (typical of the shareholder model in UK
and USA):
– A majority of directors may be non-executives.
– Non-executives represent the interests of shareholders.
– BUT choice of non-executives may be influenced by
executives.
A two-tier structure (typical of the stakeholder model in
Germany, France and the Netherlands):
– A supervisory board represents a wider range of
stakeholders.
– A management board plans strategy and has operational
control.
– Major strategic decisions have to be approved by both
boards.
Two key issues for boards:
• Delegation: strategy can be delegated to
management but it is easier to ensure other
stakeholders are protected with a supervisory
board.
• Engagement: The board can engage in the
strategic management process but board
members may have insufficient expertise.
Accepted good practice for boards includes:
• Operating ‘independently’ of management – the
role of non-executives is crucial.
• Being competent to scrutinise the activities of
managers.
• Having time to do their job properly.
• Behaving appropriately given society’s
expectations for trust, role fluidity, collective
responsibility and performance.
Corporate social responsibility
Corporate social responsibility (CSR) is the
commitment by organisations to ‘behave ethically
and contribute to economic development while
improving the quality of life of the workforce and
their families as well as the local community and
society at large’.1
1
World Business Council for Sustainable Development.
Table 5.3 Corporate social responsibility
stances
The ethics of individuals
and managers
Ethical issues have to be faced at the individual level:
• The responsibility of an individual who believes
that the strategy of the organisation is unethical
– resign, ignore it or take action
• ‘Whistle-blowing’ – divulging information to the
authorities or media about an organisation
if wrong-doing is suspected.
Texas instruments’ guidelines
• Is the action legal? . . . If not, stop immediately.
• Does it comply with our values? . . . If it does not, stop.
• If you do it would you feel bad? . . . Ask your own
conscience if you can live with it.
• How would this look in the newspaper? . . . Ask if this
goes public tomorrow would you do it today?
• If you know it’s wrong . . . don’t do it.
• If you are not sure . . . ask; and keep asking until you get
an answer.
Table 5.4 Some questions of corporate social
responsibility (1 of 2)
Table 5.4 Some questions of corporate social
responsibility (2 of 2)
Summary (1 of 2)
• The purpose of an organisation will be influenced by the
expectations of its stakeholders. Different stakeholders exercise
different influence on organisational strategy, dependent on the
extent of their power and attention. Managers can assess the
influence of different stakeholder groups through stakeholder
analysis.
• The influence of some key stakeholders will be represented
formally within the governance structure of an organisation.
This can be represented in terms of a governance chain,
showing the links between ultimate beneficiaries and the
managers of an organisation.
Summary (2 of 2)
• There are two generic governance structure systems:
the shareholder model and the stakeholder model,
though there are variations of these internationally.
• Organisations adopt different stances on corporate
social responsibility depending on how they perceive
their role in society. Individual managers may also be
faced with ethical dilemmas relating to the purpose of
their organisation or the actions it takes .

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Exploring Strategy

Who are the stakeholders?

The power and interest of stakeholders depend on

• The separation of ownership and management

Source: Adapted from David Pitt-Watson, Hermes Fund Management.

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