Agency and

Stakeholders
Chapter Four
Objective

Consider the application of the following in the

context of governance:
 agency theory

 stakeholder theory and

 social responsibility

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1.1 Corporate Governance
● Corporate governance – the system by which business corporations are
directed and controlled.

● Corporate governance is a mechanism for ensuring directors have an

awareness of who they are responsible to and run the organization in the
interest of shareholders and other stakeholders.

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1.2 Agency Theory
● You are reviewing the annual report of a company for a client. The
company, Blue Co, has recently made some changes to its board following
the appointment of a new chairman. The risk committee has been
dissolved and the number of non-executive directors is below the number
required by the stock market on which Blue Co is listed. You also note that
a number of news articles comment on the company pursuing strategies
that are seen as high risk.
Required:
● Explain what “agency relationship”, “fiduciary duty” and ‘agency cost’ are
and discuss the problems that might increase agency costs for your client
in relation to Blue Co.
Aligning Director and Shareholder Interests
● Incentive Schemes – Bonuses, share options, etc

● Active participation in Annual General Meetings (AGMs)

● Board Composition

● Shareholder Resolutions

● Selling Shareholdings

● One-to-One Meetings
2. The Power of Stakeholders
● Stakeholder – "Any group or individual who can affect or be affected by
the achievement of an organisation's objectives."
Typical examples of stakeholders in companies include:
● the original "capitalist institutions: shareholders, managers, employees,
customers and suppliers;
● the Corporate Social Responsibility (CSR) elements: government, local
communities and society; and
● in current thinking, the environment: incorporating animals, vegetables
and minerals and future generations.
2.1 Two basic motivations for companies to respond to stakeholder
concerns (Donaldson and Preston (1995))

● Instrumental Approach: Stakeholder management is something the

company has to do in order to maximise wealth (An instrument to achieve
better image and profitability (shareholders value)).

● Normative (Intrinsic) Approach: the firm has a moral obligation to promote

the interests of stakeholders. These interests enter a firm's decision
making prior to strategic considerations, and they form a moral foundation
for corporate strategy itself.
2.2. Stakeholder Risk
● Business risk is "the risk that the business will not achieve its objectives".

● Stakeholder risk (as a subset of business risk) the risk that the business
will not maximise its wealth because of the lack of understanding of the
impact of stakeholders on the business by the directors.

● Under stakeholder theory, it is essential for directors to identify all

stakeholders, assess their level of interest and their level of power when
developing the company's strategy
Mendelow Stakeholder Analysis
 Mendelow – stakeholders analysis
● H/H (Key Players)

 they have the ability (interest and power) to prevent the organization from
achieving its strategy.
 demand greatest attention ( the orgn can not manage w/o them)

● L/L (Minimal Effort)

 can be largely ignored when considering strategic objectives.
 However, from an ethical/moral view, L/L stakeholders should still be
considered because to ignore them could result in negative
consequences in the future if their power and interest increase.
 Mendelow Stakeholder analysis…
● H/L (Keep Informed);
 need to be kept informed and not underestimated ,
 they care a lot and can be useful in forming positive lobby groups OR
 they may join forces to form a stronger grouping and become lobbyists
against the organization.

● L, H (Keep Satisfied)
 need to be kept satisfied and stay dormant.
 If they become more interested (woken up), they can easily become key
players and, for example, frustrate the adoption of a new strategy.
Uses of the Mendelow Matrix
● To understand whether current strategy is still in line with stakeholders'
interests and power;
● To identify who will support a strategic project and who can, and aim, to
stop it;
● To try to reposition stakeholders to increase support/reduce threats to a
strategic objective;
● To encourage stakeholders to stay in a category or prevent them moving to
another; and
● To identify change within stakeholders that may imply that the current
strategy needs to be re-thought with the possibility of a new strategy being
developed.
Stakeholder Categories
Internal Stakeholders
● individuals or groups, who are directly and/or financially involved in the
organisation. Eg. Directors – H/H Key players and Employees – H/L (Keep
informed)
Connected Stakeholders
● may have an indirect financial stake in the organisation, and are affected
by the organisation's operations.
● Eg. Shareholders, customers, suppliers, creditors.
External Stakeholders
●  have no direct financial stake in the organisation, but are indirectly
influenced by the organisation's operations. Eg. Trade Unions, External
Auditors, Regulators, government,
4.1 Corporate Social Responsibility
● CSR is the continuing commitment by business to behave ethically and
contribute to economic development while improving the quality of life of
the workforce and their families as well as of the local community and
society at large.
● The purpose of CSR is to encourage organisations to conduct business in
an ethical manner and to work towards having a more positive impact on
society through ensuring sustainable growth.
CSR deals with the following areas:
● Treatment of stakeholders – in particular employees, suppliers and
customers;
● Approach to the environment;
● Its interactions with local communities; and
● Transparency and integrity.
 Typical CSR Activities
● Corporate philanthropy – donating to charities.
● Sponsorship – of the local football team or award schemes
● Codes of conduct – state the company's values and standards of corporate
behaviour.
● Social and environmental reporting – aims to show the impact that the
organisation has on the environment and on society as a whole.
● Supporting community projects by providing funds or donating staff time for
projects.
● Eco efficiency – reducing environmental harm caused by operational activities
such as by reducing the organisation’s carbon footprint.
● Diversity initiatives to improve the inclusion of under-represented groups.
● Improving labour policies in the entire supply chain – modern slavery, child
labour, unsafe or abusive working practices in supplier organisations.
 CSR Models (Approaches)
1. CSR Pyramid In this model businesses undertake CSR due to external
pressures – the expectations of society, so CSR should be undertaken to
the minimum level needed to satisfy these expectations.
2. CSR Intersecting circles
● In this model none of the
responsibilities is given more
importance than another.
● This means that CSR is not
seen as a separate ‘good’ but
as a consequence of the
businesses relationship with
the wider world.
3. CSR Concentric circles
● All inner roles have outer aspect but
not vise versa ( all economic
responsibilities also have legal,
ethical and philanthropic aspects.
But not all ethical responsibilities
need to have a legal or economic
aspect.
● Businesses have an obligation to
work for social betterment, and this
obligation should permeate all of
the company's operations.
4.5 Ethical Stance: the extent to which an organization will exceed its
minimum obligation to stakeholders.

1. Laissez-faire (short-term):  2. Enlightened self-interest

● The focus is on meeting short-
term profits with regard to only
the minimum legal social and
ethical obligations.
● This maximises profits in the
short run, but may harm the
organisation in the longer run.
(long-term): 
● Recognises that in order to
increase shareholder wealth
over the longer term, short-term
profits may have to be sacrificed
● CSR activity is undertaken to the
extent that it will increase the
wealth of shareholders
 Ethical Stance:
3. Forum for stakeholder interaction 4. Shapers of society
(multiple obligations): 
● The organization tries to
● recognizes the needs of a wider group of change society for the
stakeholders, not just shareholders, and its
better.
strategies adopt the principle of
sustainability. ● The interests of
● Performance is measured in terms of the shareholders are of
triple bottom line – social and secondary importance.
environmental benefits as well as profits
4.6 Corporate Citizenship
Corporations have the same rights and responsibilities as individuals
Responsibilities
● obeying the laws and social
norms of the societies in which a
company operates.
● This may include acting ethically,
being a good employer, treating
suppliers and customers fairly
and encouraging suppliers to
adopt similar fair practices.
Rights
● corporate citizens should
enjoy the rights afforded to
individuals.
● This includes being protected
by the law and receiving the
support of society in the
pursuit of its business.
 Four core principles
1. Minimise harm: Work to
minimise the negative
consequences of business
activities and decisions on
stakeholders.
2. Maximise benefit: Contribute to
society and economic well-being
by investing resources in
activities benefiting
shareholders as well as broader
stakeholders.
1. Be accountable and
responsive to key
stakeholders: Build
relationships of trust and be
transparent about progress
and setbacks.
2. Support strong financial
results: Return a profit to
shareholders.