how and why a business needs to be accountable to its stakeholders

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1.5 Stakeholders – Relative Importance and Influence

Learning objective

Explain how and why a business needs to be accountable to its stakeholders.

Key definitions

  • Stakeholder: any individual or group that can affect, or is affected by, the activities and performance of a business.
  • Accountability: the obligation of a business to explain, justify and take responsibility for its actions towards its stakeholders.
  • Relative importance: the degree to which a stakeholder’s needs and expectations influence business decisions.
  • Influence (power): the ability of a stakeholder to affect the achievement of the business’s objectives.

Stakeholder groups – internal vs. external

Cambridge distinguishes between internal (inside the organisation) and external (outside the organisation) stakeholders.

Stakeholder Internal / External Typical role in the business Key rights Key responsibilities
Owners / Shareholders Internal Provide capital; expect returns; appoint directors. Voting rights, dividends, right to information. Vote responsibly, monitor performance, comply with corporate‑governance rules.
Directors & Managers Internal Set strategy; oversee day‑to‑day operations. Right to make decisions within authority, right to accurate reports. Act in the best interest of the company, uphold fiduciary duties, ensure legal compliance.
Employees Internal Carry out production, sales, services and support functions. Safe work environment, fair pay, freedom from discrimination. Perform duties competently, follow policies, contribute to improvement.
Customers External Purchase goods or services; give market feedback. Safe, fit‑for‑purpose products; truthful information; redress. Pay for goods/services, give honest feedback, respect contracts.
Suppliers & Lenders External Provide inputs, credit and finance. Timely payment, clear contract terms. Supply quality goods/services, honour credit agreements.
Government / Regulators External Set legal framework; collect taxes; enforce standards. Right to enforce legislation, levy fines. Comply with laws, file returns, pay taxes, cooperate with inspections.
Local community & NGOs External Live near the business; may campaign on social or environmental issues. Healthy environment; right to be consulted on projects that affect them. Engage constructively, provide accurate information, respect local customs.
Media External Disseminate information about the business to the public. Access to public information; right to report news. Report accurately, avoid defamation, respect confidentiality where required.
Trade unions External Represent employee interests in negotiations. Right to organise, bargain collectively. Negotiate in good faith, avoid industrial action that harms the business without cause.

Why accountability matters

  1. Maintains trust and protects reputation.
  2. Reduces risk of conflict, legal action or loss of market share.
  3. Improves access to resources (finance, talent, information).
  4. Supports sustainable long‑term performance.
  5. Meets legal and ethical standards.

Identifying stakeholders

  • Internal: owners/shareholders, directors, managers, employees.
  • External: customers, suppliers, lenders, government, local community, NGOs, media, trade unions.

Assessing relative importance and influence

1. Power‑Interest Grid (mandatory)

Plots each stakeholder on two axes – Power (influence) and Interest (relative importance). The four quadrants dictate the strategic approach.

Stakeholder Power (high/medium/low) Interest (high/medium/low) Strategic approach
Shareholders / owners High High Manage closely – regular financial reporting, AGM communication.
Customers Medium High Keep satisfied – quality assurance, after‑sales service, loyalty programmes.
Employees Medium Medium Keep informed – internal newsletters, training, improvement teams.
Local community Low Medium Monitor – CSR projects, environmental statements, liaison.
Regulators / government High Low Keep satisfied – compliance audits, timely filing, lobbying where appropriate.
Suppliers Low Low Monitor – fair payment terms, reliable ordering, performance reviews.

2. Salience Model (optional extension)

Three attributes – Power, Legitimacy, Urgency – create seven stakeholder categories (e.g., Dominant, Dependent, Dangerous). Use it when you need a deeper analysis of why a stakeholder demands immediate attention.

How stakeholder aims influence business decisions

For each major decision, identify the most relevant stakeholder(s) and the tension that may arise.

  • Pricing – Shareholders (high profit) vs. Customers (low price). Typical exam link: value‑based pricing or price‑skimming.
  • Product development – Employees (safety, ergonomics) vs. Investors (speed‑to‑market). Typical exam link: product‑life‑cycle decisions.
  • Investment in technology – Lenders (low‑risk cash flow) vs. NGOs (environmental standards). Typical exam link: capital‑budgeting and CSR.
  • Recruitment & training – Employees (career development) vs. Management (cost control). Typical exam link: human‑resource planning.
  • Location of a new plant – Community (environment, jobs) vs. Shareholders (profit). Typical exam link: site‑selection analysis.

Conflict between stakeholders and its management

  • Shareholder vs. employee: dividend pressure vs. wage demands.
    Management tool – performance‑linked bonuses or profit‑sharing schemes.
  • Customer vs. supplier: low retail price vs. supplier margin.
    Management tool – long‑term partnership agreements, joint cost‑reduction projects.
  • Community vs. business expansion: job creation vs. pollution.
    Management tool – Environmental Impact Assessment, mitigation measures, community liaison committees.

Changing business objectives – impact on stakeholders

  • From profit‑maximisation to CSR: Shareholders may resist short‑term profit loss; NGOs and socially‑aware customers become supportive, leading to enhanced reputation.
  • Entering a new market: New customers and regulators appear; existing suppliers may need to meet different standards.
  • Digital transformation: Employees need new skills; customers expect faster service; regulators may introduce data‑protection rules.

Steps to ensure accountability

  1. Identify all relevant stakeholders (internal & external).
  2. Assess each stakeholder’s power and interest – use the Power‑Interest Grid (mandatory) and, where useful, the Salience Model.
  3. Prioritise stakeholders and decide the appropriate strategic approach (manage closely, keep satisfied, keep informed, monitor).
  4. Develop tailored communication and engagement strategies (e.g., annual reports for shareholders, newsletters for employees, CSR statements for NGOs).
  5. Set measurable performance indicators (KPIs) linked to stakeholder expectations (e.g., customer satisfaction score, employee turnover rate, emission levels).
  6. Report regularly using transparent, verifiable information – annual report, sustainability report, website disclosures.
  7. Review feedback, monitor changes in power/interest, and adjust strategies accordingly.

Benefits of effective stakeholder accountability

  • Enhanced brand loyalty and customer retention.
  • Improved employee morale and lower turnover.
  • Greater access to capital and favourable credit terms.
  • Reduced likelihood of regulatory penalties.
  • Positive community relations → smoother operations.
  • Stronger reputation that supports long‑term competitive advantage.

Case illustration (brief)

Company XYZ – UK apparel manufacturer (2023)

A media expose revealed poor working conditions in an overseas factory, triggering a customer boycott and pressure from NGOs.

Stakeholder mapping (Power‑Interest Grid) highlighted:

  • NGOs – high power, high interest.
  • Customers – medium power, high interest.
  • Shareholders – high power, medium interest (concerned about profit impact).

XYZ’s accountable response:

  1. Commissioned an independent third‑party audit of all factories.
  2. Published a detailed CSR report with findings and corrective‑action plans.
  3. Introduced a Supplier Code of Conduct with clear penalties.
  4. Established a stakeholder dialogue forum with NGOs and consumer groups.

Result: Within six months sales recovered by 12 %, the boycott ended, and the company’s ESG rating improved – a clear illustration of the commercial value of proactive stakeholder accountability.

Summary checklist (exam‑ready)

  • All stakeholder groups identified and classified as internal or external?
  • Rights and responsibilities of each group clearly stated?
  • Power and interest accurately assessed (Power‑Interest Grid)?
  • Strategic approach matched to each quadrant?
  • Performance reports address the expectations of high‑power/high‑interest groups?
  • Systematic process for regular review and adaptation in place?
  • Potential conflicts anticipated and managed with appropriate negotiation tools?

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