 A conflict can also arise if the board favours a particularly influential shareholder at the expense of

other shareholders. Minority shareholders are usually protected in law to not be treated detrimentally.

 Conflict can occur within the shareholder group.

o Controlling shareholders are more influential in a “one share one vote” system than minority
shareholders. Controlling shareholders often also insist on board representation which can
exacerbate this problem.

If a controlling shareholder also has an additional business relationship with the entity – for
example, they may be a supplier – then this can create further conflict. There is a risk that the
controlling shareholder seeks to influence board operations to protect their interest as a supplier,
and this may not be in the interests of the company or the minority shareholders, for example if
the terms of supply are unfavourable to the company.

o Some businesses have different classes of shares which confer different rights to different
classes of shareholder. This can again create conflict whereby a shareholder with superior rights
enforces their objectives over and above other shareholders.

 Conflict can occur between the board of directors and the management of the business. The board
may well be trying to manage the interests of shareholders and the broader stakeholder community,
whereas management are more likely to focus on their own objectives. For example, the board of
directors may well be interested in taking a calculated risk as shareholders would want them to, but
managers may prefer a less stressful role, more certainty for the future and a rewarding career. These
objectives may not coincide.

 Shareholders and lenders can conflict. Lenders have a contract in place to receive a relatively fixed
return – or at least a return that is not contingent upon the performance of the business. They are keen
to ensure that the business performs well enough to be able to pay their interest and capital, but beyond
that they would probably not be keen for the business to take on too much risk as this may jeopardise
the security of their returns.

Shareholders on the other hand stand to benefit from higher returns generated in the business, so may
well have a higher risk appetite – this difference in risk appetites between shareholders and lenders can
cause disagreements in terms of the amount of risk that is acceptable within the business.

Equally, if dividends paid to shareholders are excessive, lenders may be concerned that this jeopardises
the safety of cash flows to pay their interest and capital repayments.

These are just some examples of conflict that can occur in a typical organisation.

Conflict and cash

Cash is often a source of potential conflict. For example, shareholders want a bigger dividend, employees want
a pay rise and bonus, customers would rather pay less, suppliers would rather be paid more. All these objectives
pull on our relatively limited resources.

Managing the conflicts

As we have seen, stakeholder objectives and interest often come into conflict. It is incumbent upon the board of
directors to try and manage the various different interests and objectives of the stakeholders to ensure their
continued participation in the organisation. The board of directors needs to balance these conflicting objectives
to hopefully find acceptable middle ground - this is a process known as satisficing.
`
The basic tools of stakeholder management involve communication – understanding what stakeholders want,
and ensuring they understand what the organisation’s position is, and active engagement with each of the
various stakeholder groups.
Corporate governance helps to define the rights responsibilities and powers of each group. In addition, the legal
framework that organisations reside in also helps to set boundaries and limits – this is encompassed in
legislation and often in contracts between various parties involved in the business.

Corporate governance systems in the UK and US have tended historically to focus on protecting shareholder
interests. In more recent times the Companies act 2006 has introduced the idea of “enlightened shareholder
value” which requires directors to consider a broader range of stakeholders beyond simply considering the
needs of shareholders. In other countries such as France and Germany a broader range of stakeholders is
already directly considered.

Stakeholder management encompasses these frameworks but also encompasses the operation of the board
and the processes the board uses to manage stakeholder needs and interests and to minimise conflict.

1- Shareholders

 Annual general meetings and extraordinary general meetings

Companies are normally required to hold an annual general meeting, or AGM. These meetings fulfil a
statutory purpose to present the audited financial statements to the shareholders and address shareholder
questions. The AGM is also used usually to elect directors. In addition, shareholders may approve external
auditors and to approve the remuneration of the board.

In addition to the AGM, an extraordinary general meeting can be called by shareholders where significant
issues need to be discussed and resolutions requiring shareholder approval can be voted on. For example,
the sale of a significant part of the business or the business as a whole would usually be deemed significant
enough an issue to call an extraordinary general meeting.

Generally speaking all shareholders are entitled to attend AGMs and extraordinary general meetings. They
have to be invited according to specific conditions laid out in corporate law and regulations to ensure fair
notice is given. Shareholders who are unable to attend in person can often send ‘proxies’ in their place to
vote on their behalf. Increasingly, electronic means of attending the meeting are becoming popular

The votes that take place at general meetings can be in the form of ordinary or special resolutions. An
ordinary resolution requires a simple majority to pass, whereas a special resolution requires 75%. Special
resolutions are reserved for nonroutine matters of particular significance.

Minority shareholder interests are often protected in law given their relatively low voting power. The board
of directors acts on behalf of the shareholders to ensure the business is run in their best interests. This helps
to ensure than shareholder objectives are fed through to other stakeholders, such as management and
employees. We will consider the detail of exactly what the functions and responsibilities of the board are.

 Internal and external audit

Audit provides independent assurance That internal controls are reasonable and that information published
by the business has been properly prepared.

o External auditors are appointed by the shareholders (this function is often performed by the audit
committee on behalf of the shareholders) to report on the truth and fairness of the financial statements
as a whole. The external auditors report is published alongside the financial statements presented to the
shareholders for approval.

o Internal auditors are an internal resource of the business. Their scope is broad and varied but generally
speaking includes ensuring that internal controls are in place, adequate and operating. Ideally, internal
audit should clear to the audit committee on the board to maintain their independence in this role.

 Financial statements and other information outlets

The law requires certain information to be produced on a regular basis to ensure transparency – for
example, the annual financial statements.
 However, there are usually many more outlets for information to communicate with the stakeholders such as
the website.

This information helps to reduce information asymmetry and ensure that stakeholders are better
informed to assess the performance of the company and its directors.

 Other ‘voluntary’ disclosures

It’s worth noting in passing that companies often elect to voluntarily disclose much information over and
above the legal required minimum to engender trust and promote sound communications with stakeholders.

o To avoid conflicts of interest, it is common practice for companies to have clear policies relating to
related party transactions. The purpose behind these policies is to ideally reduce any conflicts of
interest that may result, or at least to disclose that any such conflicts exist so that conflict can be
managed when making decisions. For example, directors are usually required to disclose any material
transactions with the business and sometimes to require board approval before any such transactions
are allowed to proceed.

 Remuneration of executives
Remuneration policies should ideally serve to align the objectives of executives to the objectives of the
shareholders. This often involves effectively turning executives into shareholders by offering them shares or
share options contingent upon the performance of the business.

Care needs to be taken however that these options do not promote short-term decision-making. For
example, an executive may be tempted to encourage short-term performance to try and increase share price
and then exercise the options. Often, to prevent this, options are only exercisable several years ahead in the
future.

Stock options have more recently been criticised for promoting risk-taking – if the risk pays off the executive
stands to make a lot of money. However, if the risk doesn't pay off generally speaking the executive would
not be asked to contribute, it just means that their stock options are worthless. So there is potentially huge
upside and very limited downside.

Remuneration increasingly encourages shareholder activism and attracts the interest of the media in
instances where it is perceived that executives and directors have been overpaid. Globally, regulators are
increasingly focused on remuneration policies as a result.

For example, many regulators have “clawback provisions” which enable the business to recover previously
paid bonuses and remuneration subsequently if issues arise relating to the performance that led to that
remuneration.

‘Say on Pay’ refers to shareholders voting on directors’ remuneration. Although a globally applied concept,
this was first introduced in the UK in the early 2000s.

The scope and effect of say on pay depends very much on the jurisdiction in the world you are in. In some
locations, such as Canada, the vote is simply advisory (i.e. non-binding) and is a mechanism to
communicate displeasure with remuneration policies to the board. Elsewhere the vote is binding – such as
the UK, the Netherlands and China.

Opponents to say on pay argue that because of information asymmetry, shareholders are not in the best
position to understand what adequate remuneration should be. However, supporters of say on pay would
say it reduces the risk of excessive or inadequate remuneration being paid to directors without suitable
performance criteria.

2- Creditors