Lecture-1

Business organisations and

their stakeholders
 An organisation can be defined as:
“A social arrangement which pursues collective goals, which controls its own performance, and which has a boundary separating it from its environment.”
 How Organizations Differ:
• Ownership (private vs. public sector)
• Control (owners vs. employees)
• Activity (products vs. services)
• Profit or non-for profit orientation
• Legal status (sole trader, partnership, LLC)
• Size (family business vs. multinational corporation)
• Source of finance (own capital, borrowings, issuing shares,
government funding)
• Technology (big manufacturer vs. small shop)
 Different activities and industries:

And also: Agriculture, Energy Sector, Intellectual Property

Commercial organisations are usually be classifies as:
• Primary sector: the extraction and production of raw materials.
• Secondary sector: manufacturing.
• Tertiary sector: provision of sales and services.
• Quaternary sector: intellectual services (R&D, publishing, software, music, films)
Cooperatives (mutual associations):
• All members have equal votes and enjoy a democratic control (differ from commercial organisations).
• Jointly owned and controlled by employees or consumers who use their services.
• Examples: agricultural cooperatives, electric cooperatives, retail cooperatives,
housing cooperatives and credit unions.
Public Sector:
• Limited resources, high demand (e.g. schools, hospitals, army, service departments)
Non-Governmental Organizations:
• Work towards a social, cultural, economic or educational cause
• Usually started and run to provide a good or service that the government is not providing or for the
 Stakeholders
Stakeholders are entities and individuals that can affect and are affected by
an organization’s activities. Stakeholders depend on the organization to
fulfill their own goals and on whom in turn the organization depends.
Agency Theory:
• Shareholders are the owners or principals in an organization and are the
primary fund providers.
• Directors are the agents who are hired by shareholders to run the
company on their behalf.
The theory suggests that interests of the company and its stakeholders
should be given preference over self-interest of directors. Directors should
ensure as agents that they are considering all stakeholders and their interests
when taking decisions.
Type of stakeholders Objectives Actions if dissatisfied
Internal Stakeholders • Fair wages and Authority • Resigning
(employees, directors) • Promotions and Benefits • High labour turnover
• Good working conditions • Demotivated employees
• Job Security • Poor performance

Shareholders • Maximization of wealth • Sell their shares

• Security of investment value

Banks/Loan Providers • Timely payment of dues • Immediate repayment of loan

• Adherence to loan terms and conditions • Discontinuing relationship
• Legal action

Customers • Fair prices • Stop buying products

• Good quality • Negative reputation
• After sales services (warranties) • Legal action

Suppliers • Timely payments • Stop supplying raw material

• Long term relationship • Demand cash payments

Government • Prosperity • Fines

• Increase in employment • Penalties
• Compliance with law and regulation • Suspension of operations

Pressure Groups • Protection the environment from pollution • Unpleasant social media articles
• Ensuring employee rights are fulfilled • Negative reputation
 Conflicting Stakeholder Objectives
Stakeholder needs are vastly different and directors have a tough decision to
make. Taking decisions to fulfill one stakeholder groups’ needs usually
compromise on another stakeholder groups’ objectives. This leads to conflict
among stakeholders.

• Directors vs. Shareholders (personal goals vs. corporate goals)

• Employees vs. Management (higher wages, less work vs. cheaper labor force)
• Shareholders vs. Government (process automatisation vs. raising
unemployment)
• Shareholders vs. Local community (business expansion vs. air pollution)
• Managers vs. Customers (high profits, low costs vs. low prices, high quality)
Mendelow’s Framework

Example:
HH – major customers
HL – shareholders,
government
LH – society, employees
LL – cheap labour force,
suppliers in competitive
market
 Homework:

• BPP ”CCOUNTANT IN BUSINESS”

Chapter – 1 (Business organizations and their stakeholders)
• Practice & Revision Kit (Pages 3-6)