Stakeholder Relations and Financial Performance Term Paper

Pages: 6 (1733 words)  ·  Bibliography Sources: 5  ·  File: .docx  ·  Level: Master's  ·  Topic: Business

Stakeholders Relations and Financial Performance

Stakeholders and corporations are intertwined in many ways. On one hand, corporations exist because of the presence of stakeholders and on the other hand, stakeholders stand to gain or lose from the actions and performance of corporations. Friedman and Miles (2006), have categorized stakeholders into five groups and they are shareholders, customers, suppliers and distributors, employees and local communities. These stakeholders affect all aspects of a corporation's operations and in turn, are affected by its performance.

Stakeholders include shareholders as well as non-shareholders who have a stake in the good performance of a company like employees and suppliers. It is the duty of the CEOs and other managerial personnel to balance the needs of various stakeholder groups and come up with sound policies that will benefit these different groups.

Stakeholder Model

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There are two different models in strategic management and they are the shareholder model and the stakeholder model. The shareholder model states that the management of a company should focus on maximizing wealth so that all the different stakeholder groups enjoy the benefits that come from it. "The stakeholder view, in contrast, argues that stakeholder welfare is maximized when managers attend directly to all stakeholders without prioritizing the interests of some over the others" (Kacperczyk, 2007, p.63). While some companies take the shareholder model, most companies opt for the stakeholder model because of the benefits that accrue from it. When firms work only towards maximizing wealth for the shareholders, they lose the benefits they get from the efforts of the other groups.

Positive Impact of stakeholders relations

Term Paper on Stakeholder Relations and Financial Performance Assignment

When a firm has good relations with different stakeholders, it presents many advantages for the firm. When the employees are satisfied with the company and the benefits they get from it, they will tend to work harder and this will directly lead to higher productivity. Good relations with customers will result in more demand for the products and services offered by the company and satisfied customers may even be willing to pay a higher price for procuring the company's products. When suppliers and distributors are happy with the company, they will tend to supply the goods on time and distributors will work harder to sell the products. Suppliers will also be more than happy to share knowledge and this can be vital for the company's future. Finally, the support of the local community is essential for the company's success because the members will allow the company to use the local infrastructure and they will work towards retaining the company within their area (Choi and Wang, 2008).

Another benefit is the competitive advantage that a firm enjoys because of good relations with its stakeholders. Building trust is not easy and it takes many years to develop. Also, consistency is they key to maintaining good relations with stakeholders. It becomes difficult for the competing company to take the best employees from the existing firm because the employees are more likely to be loyal and committed because of the superior relations they enjoy with the company (Choi and Wang, 2008). This makes it difficult for a competing company to build the same level of relations and so the threat level is reduced to a significant extent. All these will boost the productivity of the company in many ways and so, good relations with various stakeholder groups have a positive impact on the performance of the company.

Problems in stakeholders' relations

While a good relationship with stakeholders have numerous benefits to the company, it is not without problems. It is common to encounter conflicts between different stakeholder groups and the management is forced to do certain trade-offs. A good case in point is when a firm has to downsize its staff or procure materials from low cost destinations in order to survive tough economic times. In this case, the shareholders are benefited because they continue to get fairly good returns on their investment, while the employees who are laid off and the suppliers who have lost the business, suffer. In such cases, it may not be possible for the company to balance all the groups and the stakeholders relationship with the company suffers.

Another problem is that the management may allocate more resources than necessary to manage stakeholders relations effectively. When a manager has to manage resources across a wide group of people, he or she tends to use all available resources to satisfy all of these groups and create a broader value. Some examples of such allocation include higher salaries and benefits for the employees, sharing of cost savings with suppliers, financial allocations for the development of the local community and lower cost and better service for customers. These are likely to cost more money for the company and this will reduce their overall earnings. This leads to a situation known as over-investment. On the other hand, when a manager has to satisfy only the shareholders, the resources are used more efficiently. These are some of the problems that arise with maintaining good relations with stakeholders.

Stakeholders' impact on the financial performance

The positive and negative impact of the stakeholders resonate across all aspects of the company including its financial performance. Stakeholders can prevent the company from going in for the changes that it needs to survive in this dynamic business environment. As a result, there is a possibility for the company to lose out on favorable opportunities. Another impact on the financial performance is the resources that the company has to spend to keep all its stakeholders happy. This can become costly for the company especially when it has to go through a turbulent period. Along with maintaining stakeholders relations, comes a rigidity that the company will be unable to cope during difficult financial times and this will affect the performance of the company in the long-run.

Despite these negative aspects, stakeholders help the company in innumerable ways. Firstly, a poor financial performance is an indicator that a strategy implemented by the company is not working the way it should and so, this has to be revised. It can be anything, ranging from a wrong acquisition to outdated operational processes. This has very little to do with stakeholders and it is up to the management to identify the issue and fix it right away. "A firm's need to make strategic adjustments in order to recover from poor performance is unlikely to reduce the benefits of maintaining good relations with its stakeholders" (Choi and Wang, 2008, p.897).

Secondly, positive relations with stakeholders can help the company to rebound quickly from its financial difficulties. When good relations are maintained, stakeholders will continue to trust the company and they will be willing to share knowledge and resources with the company. This will help the company to turn around its performance within a short period of time. It can also help the company to make changes to its strategy by getting the right inputs from customers, suppliers and the local community. This information is likely to be crucial for the company to change its strategy or to explore a new line of business. Another advantage is easy accessibility to local infrastructure or other licenses that the business needs because of its good relation with the local community.

An example of a company that benefited from superior relationship with stakeholders is Malden Mills, a company based in Massachusetts. This company went into a big financial crisis in 1995 because of an industrial accident and it rebounded within a year, thanks to its employees, suppliers, customers and the local community (Choi and Wang, 2008). This is a good example of how the different stakeholders supported the company to help to bring it back into business.

In short, good relations with stakeholders boosts the financial performance of the company and helps it to rebound quickly from its financial losses.

How to maintain good relations

One good way to boost and maintain relations with different stakeholder groups is to introduce the concept of reciprocity where there is a mutual benefit and understanding between the stakeholder groups and the company. According to Harrison, Bosse and Philips (2008), there are three kinds of reciprocity and they are negotiated, reciprocal and generalized. In a negotiated exchange, the terms are negotiated and the benefits that accrue from this exchange is mutual and direct to both the parties. Reciprocal exchange is a bilateral exchange in which the benefits accrue over a period of time and there is no immediate reciprocity. While the company may benefit at one time, a stakeholder group will benefit at a different point in time. Nevertheless, the benefit will be accrued by both the parties. A generalized exchange is one in which a stakeholder group is willing to forgo something in the hope that their views will be addressed in the future. A good example is the temporary pay cut taken by the employees in the hope that their salaries will be restored when the company weathers the financial problems. These exchanges help a company and the different… [END OF PREVIEW] . . . READ MORE

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