A Company’s Stakeholder Groups

Corporate governance systems can be influenced by several stakeholder groups which may or may not have conflicting interests. A company’s primary stakeholder groups include its shareholders, creditors, managers, other employees, customers, suppliers, governments or regulators, and its board of directors.

Shareholders

By providing a company with equity capital, the shareholders of a company are considered its owners. Their interests lie primarily in the profitability of the company and anything which leads to an increase in the company’s equity. In the event of bankruptcy, shareholders receive proceeds only after all creditors’ claims have been paid. Controlling shareholders hold sufficient shares in a company to control the election of its board of directors and to influence company resolutions. Minority shareholders, on the other hand, have far fewer shares and limited ability to exercise control in voting activities.

Creditors

The creditors of a company are the stakeholders who provide the company with debt financing. Included in this category are bondholders and banks who expect to receive periodic interest payments and principal repayments arising from the money that they lent to the company.

Creditors generally prefer stability in a company’s operations and performance since this tends to increase the likelihood that a company will generate sufficient cash flow to meet its debt obligations. In contrast, shareholders tend to accept higher risks in return for a higher return potential from strong company performance.

Managers

Managers and other employees tend to benefit when a company performs well. Conversely, they are adversely affected when the company’s financial position weakens. They seek to maximize the value of their total remuneration while securing their jobs. Their interests are therefore not surprisingly different from those of shareholders, creditors, and other stakeholders. Something of potential benefit to other stakeholders may be disadvantageous to them.

The Board of Directors

The board of directors is elected by the shareholders of the company and is charged with the responsibility of protecting shareholders’ interests, providing strategic direction, and monitoring company and management performance.

Customers

Customers of a company expect to receive value when they purchase its goods or services. They tend to be more concerned with the stability of a company than its financial performance.

Suppliers

Suppliers, just like creditors, are concerned with a company’s ability to generate sufficient cash flows to meet its financial obligations.

Governments and Regulators

Governments and regulators seek to ensure that companies comply with the law and act in a manner that safeguards the interests and well-being of the public.

Question

Corporate governance is a system that provides a framework that defines the rights, roles, and responsibilities of various groups. Which one is least likely one of these group?

A. Directors

B. Shareholders

C. Employees

Solution

The correct answer is C.

Corporate governance is a system that provides a framework that defines the rights, roles, and responsibilities of board members, shareholders and managers, but it does not include employees as major stakeholders.

Reading 31 LOS 31b: 

Describe a company’s stakeholder groups and compare the interests of stakeholder groups