Stakeholders in business organisations
Every organisation answers to more than one group of people, and those groups rarely want the same thing. Stakeholders run through the whole of BT, reappearing in governance, social responsibility and ethics. Questions ask you to classify a stakeholder as internal, connected or external, to say what a group wants, to spot a conflict between groups, and above all to place a group on Mendelow's matrix and choose how to manage it. Learn the matrix until you can draw it without thinking.
What a stakeholder is
A stakeholder is any person or group that affects, or is affected by, what an organisation does. Stakeholders have an interest in the organisation's decisions, and some of them have the power to change those decisions.
The agency relationship
An agency relationship exists when one party, the principal, appoints another, the agent, to act on its behalf. In a company, the shareholders (principals) appoint the directors (agents) to run the business for them.
The agency problem is that agents may pursue their own interests instead of the principal's: higher pay and perks, an easy life, growth that boosts their status, or short-term results that trigger a bonus. Principals reduce the problem by monitoring agents (annual reports, audits, board oversight) and by aligning interests (for example, rewarding directors partly in shares). Both cost money; these are agency costs.
The relationship varies with the type of organisation:
| Organisation | Principal | Agent | The gap between them |
|---|---|---|---|
| Sole trader | The owner | The owner manages the business personally | None between ownership and management |
| Small owner-managed company | Shareholders, who are mostly the directors | Directors | Small |
| Large listed company | Thousands of shareholders | Professional directors and managers | Wide: ownership and control are separated, which is why governance rules matter (area B) |
| Public sector body | Citizens and taxpayers, through elected government | Ministers, officials and managers | Wide, and objectives are many and hard to measure |
| Charity or NGO | Donors, members and beneficiaries | Trustees and managers | Wide; donors may not see how funds are spent |
| Cooperative | Members, who are also its customers, workers or producers | An elected board or committee | Narrower, because members use the organisation and vote on its leadership |
Internal, connected and external stakeholders
| Category | Main groups | What they typically want | How they affect the organisation |
|---|---|---|---|
| Internal | Employees, managers, directors | Fair pay, job security, good conditions, training and promotion; managers also want status, power and bonuses | Their skill and effort drive performance; they can resist change or withdraw their labour |
| Connected | Shareholders | A return: dividends and a rising share price | They provide capital, vote on directors and can sell their shares |
| Connected | Customers | Quality, value, reliable supply, good service | Their buying decisions determine revenue |
| Connected | Suppliers | Continuing orders and prompt payment | They control the quality, price and reliability of inputs |
| Connected | Lenders | Interest and repayment on time, with security | They can refuse new finance or enforce loan terms |
| External | Government and regulators | Tax paid, laws obeyed, jobs created, policy aims supported | They make the rules and grant licences |
| External | Local community | Jobs, safety, a clean environment | It can protest, object to planning applications or lobby |
| External | Pressure groups and the media | Progress on their cause; a story | They influence public opinion and government |
Internal stakeholders work inside the organisation. Connected stakeholders have a contract or a direct economic relationship with it. External stakeholders have neither, but are affected by what it does or can influence it.
How stakeholder objectives interact and conflict
Stakeholders compete for the same limited resources, so their objectives often clash:
- Shareholders and employees: profit paid out as dividends cannot also be spent on pay rises.
- Shareholders and customers: higher margins mean higher prices.
- Shareholders and the community: the cheapest way to produce may cause noise, traffic or pollution.
- Managers and shareholders: managers may prefer growth and security; shareholders may prefer cash returned now.
- Suppliers and the business: suppliers want to be paid quickly; the business wants to hold on to its cash.
Stakeholders also act through each other. A community worried about pollution may persuade a pressure group to campaign, the media to report and the government to regulate, so a group with little power alone can gain it. Management must balance the claims and decide which groups need most attention. That is what the matrix is for.
Mendelow's matrix
Mendelow's matrix compares stakeholders on two dimensions:
- Power: the ability to influence the organisation's decisions, for example by controlling resources, granting permission or stopping a project.
- Interest: how much the group cares about a particular decision, and so how likely it is to use the power it has.
| Low interest | High interest | |
|---|---|---|
| Low power | A: Minimal effort | B: Keep informed |
| High power | C: Keep satisfied | D: Key players |
- A, minimal effort: monitor the group, but there is no need to engage actively. Minimal effort does not mean ignore.
- B, keep informed: the group cares, but cannot act alone. Explain decisions and consult, because informed groups are less likely to join forces with someone powerful.
- C, keep satisfied: the group could act decisively if it became interested. Give it no reason to: meet its expectations and brief it before it hears bad news elsewhere.
- D, key players: the group must be involved in shaping decisions, consulted early and closely, and its acceptance won before the decision is final.
Two points matter in the exam. First, the analysis is for a particular decision: the same group may sit in different boxes for different projects. Second, positions change: a passive major shareholder (C) becomes a key player (D) when a decision threatens its investment, and a community (B) gains power when it wins government support.
Worked example
Sahel Cement Plc, a fictional producer, plans a new quarry and plant beside a farming community in Nasarawa State. The project will be financed by a large bank loan. The stakeholders are described below. Place each on Mendelow's matrix and decide how to manage it.
| Stakeholder | Power | Interest | Box | How to manage it |
|---|---|---|---|---|
| The bank lending for the project | High: it can refuse the loan | High: its money is at risk | D: key player | Involve it in the plans, share forecasts and risk assessments, agree conditions early |
| The state government, which must grant the licences | High: it can withhold permission | Low for now: one of many applications | C: keep satisfied | Meet every regulatory requirement, brief officials in advance, avoid surprises |
| A large institutional shareholder that rarely votes | High: a big block of shares | Low: the plant is a small part of the business | C: keep satisfied | Explain the return the project will earn in normal investor reporting |
| The farming community losing land | Low on its own | High: livelihoods and health affected | B: keep informed | Hold meetings, explain dust and traffic controls, agree compensation |
| A national environmental pressure group | Low on its own | High: quarrying is part of its cause | B: keep informed | Publish the environmental assessment and respond to concerns openly |
| Small individual shareholders | Low | Low | A: minimal effort | Ordinary shareholder communications |
The conflict to manage. Shareholders want the plant built at the lowest cost; the community wants dust controls and fair compensation, which cost money. If Sahel Cement ignores the community, the pressure group may take up its case and lobby the state government. The government's interest would rise, moving it from C to D, and the project could be delayed or refused. Keeping box B informed is how the company stops box C becoming a problem.
Common mistakes
- Swapping "keep satisfied" and "keep informed". High power with low interest means keep satisfied; high interest with low power means keep informed.
- Treating a stakeholder's position on the matrix as permanent. It depends on the decision and changes over time.
- Classifying shareholders as internal stakeholders. They are connected: they have a financial relationship with the company but do not usually work in it.
- Reading "minimal effort" as "ignore". The group is still monitored.
- Thinking the agency relationship exists only in companies. It exists wherever someone acts on another's behalf, including in the public sector and charities.
Exam technique
When a scenario describes a stakeholder, judge power and interest separately. Clues to power: controls money or permission, holds many shares, could stop the project, is a major customer or sole supplier. Clues to interest: directly affected, has complained or campaigned, has a lot at stake in this decision. Only then pick the box. If the question asks how a group may move, look for an event that raises its interest (a threat to its money) or its power (an alliance with someone powerful).
Study with AI
I am studying ACCA Business and Technology (BT), stakeholders and Mendelow's matrix.
Give me a short fictional business decision, then list six stakeholders one at a time.
For each, ask me whether its power and interest are high or low, which box of the
matrix it belongs in, and how it should be managed. Correct me after each answer, then
ask me which stakeholder could move to a different box and why.AI sometimes mislabels the boxes of the matrix: check its answers against the grid in these notes.
Lecturer's note: Let the box names do the work. Powerful people must be kept satisfied, because their displeasure hurts; interested people must be kept informed, because information is what they want and what stops them looking for allies. Key players get both, and the rest get your attention only if something changes. Then remember that the matrix is a snapshot of one decision, and ask yourself what would make each group move.
Key points
- A stakeholder is anyone who affects or is affected by the organisation; the agency relationship exists where a principal appoints an agent to act for it.
- The agency gap is widest in large listed companies and public bodies, and absent between ownership and management for a sole trader.
- Internal stakeholders work in the organisation; connected stakeholders have a contract or economic link with it; external stakeholders have neither.
- Stakeholder objectives conflict because they compete for the same resources, and weaker groups can gain power by acting through stronger ones.
- Mendelow's matrix: minimal effort (low power, low interest), keep informed (low power, high interest), keep satisfied (high power, low interest), key players (high power, high interest).
Quick check
- A bank has lent a company a large sum and its loan comes up for renewal next month. Where does it sit on Mendelow's matrix for the renewal decision?
- Are a company's customers internal, connected or external stakeholders?
- Why is the agency problem usually greater in a large listed company than in a small owner-managed company?
Answers
- Key player (high power, because it can refuse to renew; high interest, because its money is at stake), so it must be closely involved.
- Connected: they have a direct economic relationship with the company but do not work in it.
- In the large company, ownership and management are separated: many shareholders own it and professional managers run it, so managers' interests can drift from the owners'. In the small company the shareholders are mostly the directors themselves.