The CEO and his or her executive team have to satisfy and balance the demands of various parties. Sometimes these demands are in conflict and one has to be prioritized over another. So what is the pecking order among the company’s stakeholders? When it comes to the crunch whose needs should be met first? Here is a suggested order of preference.
1. Customers. Peter Drucker defined the purpose of a company as this; to create customers. Without customers the company cannot survive so in almost all situations the customer needs have to come first. The customer can always to choose to take his business to a competitor so it is essential that we continue to innovate, to offer good products and good value for money.
2. Employees. The employees are the ones who create and deliver the products or services that the customers consume. If we lose or antagonize our best employees then customer service will suffer so we need to look after them. If we want to attract and retain top talent at all levels then we have to offer terms and conditions that are attractive.
3. Shareholders. The shareholders own the company. They might well have put forward the seed capital which we need to get started so their needs are important. Ultimately the board, acting on behalf of the shareholders, can replace the CEO and the executive team. However, provided we are broadly on plan in terms of revenues and profit the shareholders are generally satisfied and will leave us alone. They will only take action when things are going badly wrong so we do not need to always act to please them.
4. Suppliers, distributors and other business partners. We need to collaborate with our partners to run the business. Many have essential skills that we lack. It is best to build good long-term relationships. However, the partners also have their own agendas and most can be replaced if they underperform or a better partner appears.
5. The local community. We want to be a good citizen with healthy links to the local community. We want to be seen as a responsible employer who is providing a good place to work. This is important but is clearly a lower priority than those above.
6. National Government and regulatory authorities. These are less important stakeholders but we want to keep on the right side of them. We want to be compliant with regulations and avoid disputes and prosecutions.
This order of priority will help us to resolve conflicts. E.g.
• Should we hire cheaper staff to maximize profit even it if means poorer customer service? No; we should hire the best people we can afford in order to deliver better customer service. It might hurt profit in the short term but should deliver better growth and profits long term.
• Should we arrange things so as to minimize corporation tax and thereby increase profit? The answer clearly is yes. The shareholders outrank the national government in priority.
• Should we lay off staff if we are in serious financial difficulty? If it is necessary for survival then we have to take the difficult step of making employees redundant. We cannot serve the customers if we cannot survive.
Difficulties surface when we alter the priority list, e.g. when we put the shareholders first and milk the business of profits. Or when the employees are seen as more important than the customers. We sometimes see this in some offices where staff are too busy with their own affairs to look after the customer. A big problem arises if item 2 on the list above is split and becomes 2a senior executives and 2b ordinary employees. This can lead to a situation where the executive team puts its own requirements first – especially in terms of bonus, stock options and other monetary rewards. We have seen recent examples of how divisive and provocative this can be.
We want staff at all levels from the lowest to the most senior to act as a team, to be motivated and well rewarded – but not overpaid. If we overpay then we increase our cost base unnecessarily and put at risk price competitiveness in the marketplace and profitability. It is essential to strike the right balance between the needs of the different stakeholders, but some are more important than others. If we can be clear about priorities in advance then it will help us to resolve the tricky conflicts that will arise sooner or later.
Comment below posted for a Business Ethics assignment:
I contend that Mr Drucker is incorrect, a CEO and his executive team should not have to balance the demands of the stakeholders, their role is solely to meet the rights of the stockholders which will then allow them to decide how profits from investment can be used to benefit others – therefore there is no need to consider what the pecking order of these stakeholders are.
Stakeholder Concept Theory (developed by Mr R Edward Freeman) would have us believe that businesses have a duty to care for all stakeholders ie those that are affected by the business itself. The concept assumes that the businesses are run by (and decisions made by) management who are separate from the business owners themselves (Management are appointed by the stockholders to represent them and whose main purpose is to maximise profits).
What is a stakeholder you may ask? In a narrow sense, stakeholders include stockholders, customers, employees, suppliers, the local community and Government. In a wider sense this could also include the environment; future employees, suppliers, and customers; and could also include the nation and beyond. In fact the list could be never-ending and that in itself creates a problem with the Stakeholder Concept Theory. The various stakeholders may also be one and the same people, especially in smaller communities (eg employees may also be customers) – how does a business deal with the conflicting needs of one person?
According to John Hasnas (“Normative Theories of Business Ethics”) a business person’s ordinary responsibilities are to manage the business and expend business resources so as to accomplish the specific purposes for which the business was organised”. Of course if a business was set up by stockholders to satisfy the needs of some/all stakeholders Mr Drucker’s discussion is valid. In reality businesses are not generally organised for such purposes
The alternative to Stakeholder Concept Theory is Stockholder Concept Theory (or Profit Maximisation Theory) and was developed by Milton Friedman. This theory will have us believe that the stockholder is the only person(s) whose needs should be considered when making decisions. The basis behind this is that the stockholder is the one that has invested their money in the business and use of that by management for anything other than is required by law or is considered ethical (by engaging in open and free competition without deception or fraud) that does not lead to profit maximisation, is in effect “theft” or a “tax” on the stockholders investment. Even taking into account the good that such use of these funds might have (as would be considered by Utilitarian’s) what right does management have to decide who should benefit from these funds, what knowledge do they have of where social spending is required – it is our elected Government’s role to decide where and how taxes are spent.
As stated above the theory states that business must operate within the law and ethically. Effectively this means that companies cannot do whatever they want just to increase profits. New Zealand laws are being continuously developed to cover the rights of stakeholders: employees – covered by Employment Laws and the ever increasing Health and Safety Laws; customers are covered by the Sale of Goods Act which includes ensuring they get a safe and “suitable for purpose product”. The various stakeholders all have a free choice whether or not to deal with the business which in itself gives them more options than a stockholder. Some would argue that stockholders can also choose whether or not to invest in businesses – it can be much more difficult for stockholders to get their money out of a business and, if they wish to do so quickly, may make a loss on their investment.
Note the Profit Maximisation theory does not prevent management from making decisions which concern stakeholders if they are decisions that would help increase profits for the business. For example the BNZ’s “Closed for Good”. Every branch is closed and the employees go out and do ‘good deeds” – the employees choose what they will do and where they will do it. Is this an example of management deciding that the stockholders money will be used to help others in the community? Can this be considered a fair and ethical use of their money – what about the inconvenience to the bank’s customers, the fact that suppliers are missing out on the use of their services? Could the money used to pay the staff be used for what others would consider a better use? Is this type of “charitable work” done solely for the goodness it provides or is it just a form of business “pulling on New Zealanders” heartstrings as a means to boost their profits by encouraging clients to trade with a “Bank that cares for others” in which case the Stockholder Concept Theory would find it acceptable – such social spending ie getting on side with the community can have a positive effect on profits but the reason for such expenditure should first and foremost be to maximise profits.
Some may argue that businesses have greater representation at Government level and may move their business to countries where labour is cheaper and there are less environment laws – I would argue that the Profit Maximisation theory still require businesses to act ethically – and who is to say that providing employment in countries that have a vast population and low levels of living standards is any less ethical.
If business profits are not maximised then stockholders may withdraw their funds to invest in more profitable businesses. This in turn would have an effect on the stakeholders – company share prices may fall thus making it difficult for them to raise funds which could further reduce the businesses profitability. The effect is spiralling and the end result may mean the closing down of the business, if it is an essential product/service this may cause difficulty for customers, if it is a big venture (especially in small towns) it may affect the livelihood of its employees and suppliers which may affect the community and even the Government
In 21st Century when the world in which we live has become so populous and so varied that for every cocievabale innovative idea of a product or services there seems to be a market availale.With the advent of technology and digital age the accessibility to markets has also become easier too. And I beleive the time has come to put the honourable Drucker order of stakeholders as follows i.e.
1.Employees:
Happy and satisfied employees are the ones that can deliver your product or services in a manner so that you may go to the bank laughing always.
The conducive culture enabling optimum performance from employees shall ensure success of an organisation in meeting the other stakeholder needs and sustain the same over long periods of time.
2. Customers and the rest of the order remains the same.
Cheers to a Growth!!!!!
U wot m8
Tesco
Introduction
The first business that I am investigating is Tesco. Tesco was founded in 1919 as a group of market stalls in London. The first own label Tesco product was made in 1924, the first shop opened in 1929, the first warehouse opened in 1934, the first 100 branches were open by 1939 and it came to central Europe in 1994. It has now become the UK’s market leader in the food retailing sector.
What they do
Tesco sells a wide range of products and services such as food, clothes, a mobile phone service and a banking service. They also have different types of stores from large stores like Tesco extra to smaller ones like Tesco local and Tesco metro. Additionally, Tesco owns other brands such as Dobbies garden centre and the restaurant Giraffe, they are also profit making as they have earned £162 million in 2016.
Ownership
Tesco is a PLC (Public Limited Company) which means they can sell shares to the public on the stock market. Being a PLC means that Tesco is owned by shareholders but is run by a board of directors who have to publish accounts annually. Tesco keep 51% of the shares so that they can keep control. Because Tesco is such a large PLC this means that decision making can be slow, however, an advantage of them being a PLC is that they have limited liability which means that they can only lose the money that they have invested into the business.
Size and scale
Tesco is a large, multi-national company with stores around Europe, America and Asia. It is the second largest retailer in the world based on revenue and it is the 28th largest company in the world and has over 476,000 employees across the 11 different countries that Tesco operates in. Additionally, Tesco’s turnover in the UK is approximately £6000 per minute.
Sector
Tesco operates in the private sector, this means that they are owned by private individuals and not the government. They operate in the tertiary sector which means that they buy and sell other people’s goods or provide a service to the public. You could also argue that they are in the secondary sector as well because they do manufacture some of their own goods.
Aims and objectives
Tesco aims to give customers great products at great value that they can buy easily the way they want. They have chosen ‘Serving Britain’s shoppers a little better every day’ to be their core purpose because serving customers is at the heart of everything they do. They aim to understand customers, be the first to meet their needs and to act responsibly for their communities. They also aim to work as a team, trust and respect each other and share knowledge and experience.
McDonald’s
Introduction and what they do
The second business that I am investigating is McDonald’s. It was founded in 1940 and started out as a barbeque restaurant and in 1948 it became a hamburger restaurant. It is now the world’s largest fast food restaurant and serves around 68 million customers each day. McDonalds mainly sells burgers, different types of chicken, chicken burgers, chips, soft drinks, breakfast items and deserts.
Ownership
Some of the McDonald’s stores are a PLC (Public Limited Company) which means that they can sell shares to the public on the stock market. Being a PLC means that McDonald’s is owned by shareholders but is run by a board of directors who have to publish accounts annually. McDonald’s keep 51% of the shares so that they can keep control. Because McDonalds is such a large PLC this means that decision making can be slow, however, an advantage of them being a PLC is that they have limited liability which means that they can only lose the money that they have invested into the business. Some of their other stores are Franchises which means some people pay McDonald’s so that they can own their own store which means they will have a strong brand identity when they open which will attract a lot of customers straight away. However, there are some disadvantages, for example, they have to buy all of their supplies from McDonald’s and some of the profits have to go to McDonald’s as well.
Size and scale
McDonald’s have restaurants in 118 different countries and operates over 36000 restaurants worldwide that serve around 68 million customers each day. They are the world’s second largest private employer as they employ over 1.9 million people. Their revenue in 2015 was around $25 billion.
Sector
McDonald’s operates in the private sector, this means that they are owned by private individuals and not the government. They operate in both the secondary and the tertiary sectors which means that they manufacture some of their own goods (secondary) but they also buy and sell other people’s goods and provide a service to the public (tertiary).
Aims and objectives
Above all, serving quality food that their customers can trust is McDonald’s number one priority. They aim to get their ingredients from local farms and to have lots of their restaurants owned and operated by local businessmen and women. They also try to lead and support a variety of community activities from litter picking patrols to charity events. McDonalds focuses on consistent delivery of quality, service and cleanliness through excellence in their restaurants and they optimise restaurant performance through the selection of the most appropriate operating, management and ownership structures.
Task 2 – Stakeholders
Customers
Customers are external stakeholders because even though they affect the day to day running of the business, they do not work within the business. Customers have an interest in Tesco because they want to buy their products (food, clothing, electronics etc.) and services (banking, mobile, clubcard etc.) that are a good quality and a reasonable price. Tesco have an interest in customers because they need customers to buy their products and services so that they can make money. Customers have an interest in McDonald’s because they want to buy their food products fast and for a reasonable price. McDonald’s have an interest in customers because they need them to buy their food and be satisfied enough to come back again so that they can make money. I think that customers have the highest influence on these businesses because without them the businesses wouldn’t exist.
Employees
Employees are internal stakeholders because
How’s that for a comment
Thank you, Mr, Drucker
As I am writing a paper on the “Voice of the Customer” process in my Quality Management, Bachelor Science courses I am having a difficult time determining who IS the customer. From reading your article as well as your detailed comments back to your detractors, I see now that Customer (end users), Employees and Shareholders are all really customers. An organization just has to figure out how to prioritize and manage all their expectations.
Thank you for explaining it all!
It’s appreciated
After reading it a second time I do agree.
cooneen group
I want to be part of this, for me to get more understanding in different modules I be happy if you permit me. thanks
If environment was given in the situation, do you consider environment more important than consumers?
I wrote the following piece after the GFC fiasco and believe it still holds true today …
15 Years In The Making!
Actually, it probably started a little earlier than 15 years ago. In 1974 the US Securities and Exchange Commission introduced deregulation of brokerage commission costs. Prior to this, it would cost a broker or trader approximately $1 commission per traded share. Today that figure is somewhat like $0.01 per share. So, one can readily see that trading in shares today is a far less expensive way to bolster one’s finances than it was all those years ago.
“So, what’s been 15 years coming? It’s the recession. A recession we had to have. But what has that got to do with the cost of share trading? And why did it have to happen?”
Approximately fifteen years earlier the internet really took off. People could now not only communicate instantly across the globe, but they could also do most, if not all, financial transactions without leaving their desk (or home for that matter).
Combine the two facts – negligible commission costs on trading of shares and the ability to trade shares on line – and you suddenly have a new industry, share trading. Note; this is ‘share trading’ not investing. Gone are the days when people made investments for something they believed in, it was now “how much can we make on each trade?”
Prior to 1974, you needed a broker to buy or sell shares for you. Now everyone, you and I included, can trade shares. It’s no longer only people genuinely investing in companies for long-term benefit (their own and the company’s) – it’s how much money we can make in the shortest possible time.
Given this, it’s easy to see why CEOs have set targets that are at a minimum – double digit annual increase return on investment (ROI is one key indicator that influences share price), and rather than annual reports, companies are now judged on quarterly results. Shares even move up or down based on a company’s projected earnings for the next quarter.
So, why did such changes eventually lead to a recession?
Organisational development practitioner, Dennis Pratt, suggests that every organisation – public or private, large or small – has six key stakeholders: customers, suppliers, owners, staff, industry and the community. Whenever the needs of one or more of these stakeholder groups are consistently exceeded at the expense of the needs of the other stakeholders, the focus of the organisation changes and can ultimately lead to its downfall.
So, if that happens to a number of organisations within the one industry sector, say finance and banking, then the entire industry may crash. As finance and banking is such a pivotal industry in our economic community, its crash led to crashes in other industries (such as housing and motor manufacturing to name just two). Ultimately, we have a recession.
In the 2008 recession, the two stakeholder groups whose needs were focused on at the expense of others, were shareholders and senior staff.
Today, shareholders are no longer ‘shareholders’ in the true sense of the word – people who have a genuine interest in the long-term benefit of the company, i.e. ‘owners’ who ‘hold’ shares. Shareholders today for the most part, are made up of institutions (investment funds, pension funds etc. – these are the large ‘traders’) together with the small traders, the people who are trading shares, often online.
While those who trade in shares may argue “Yes, but we also look closely at the fundamentals of the company as a guide to investing”, they will also readily admit that they follow the market, industry sector and company trends to buy and sell irrespective of their genuine interest in a particular company. It’s all about making money in the shortest possible time.
Testament to this is the strategy of buying or selling short, which was banned in some countries for a period, as it is a genuine form of gambling. For example, in 2008 the US Securities and Exchange Commission banned what it called “abusive naked short selling” as a method of driving down share prices.
Short selling also fell under heavy scrutiny during the global financial crisis when Australia, Canada and several European nations placed bans on short selling of financial stocks. Since that time, regulations have been lifted or amended in some countries, but generally speaking the United States has more liberal laws on short selling than most of the world.
Such moves are government attempts to reign in the excesses of these two stakeholder groups – shareholders (traders) and senior executive staff. But is it too little too late?
An article at the time highlighted the issue. The International Herald Tribune, (June 9th 2009) talked about the staff stakeholder excesses: “In the past, banks had free reign to determine the base salaries and bonuses they gave their employees. When the economy was riding high, bonuses for top Wall Street executives and traders soared to tens of millions of dollars. Critics say the bonuses often encouraged risk-taking, since star bankers could walk away with huge amounts of money, even if bets they took failed to take off.” (Note the use of the word “bets” in this article)
The US government (like governments elsewhere) commenced proposing guidelines to curb executive pay. The regulations passed by Congress limits bonuses of the top 25 executives to no greater than a third of their salary. The problem is, these executives are not likely to be subject to a salary cap. The legislation ends up being meaningless. And as for guidelines – who is likely to follow them?
In other countries, legislation has been passed to have shareholders monitor the salaries and bonuses of senior executives. For example, in Australia the Australian Corporations Act, sates that if 25% or more of votes cast at two consecutive AGMs oppose the adoption of a remuneration report (for senior executive salary and bonuses), then the company must formally respond by asking all board members except the managing director to stand for re-election within 90 days. In addition, key management personnel whose remuneration is disclosed in the remuneration report are excluded from voting, ensuring those with an obvious interest in the outcome cannot vote.
However, to me these types of regulations do not address the issue. It still leaves the decision with the two most powerful stakeholder groups – owners and staff. After all, if the company is doing well and share prices are high, why would shareholders want to curb executive pay? It’s in their best interests to keep the staff stakeholder happy.
In the case of legislation (such as that in Australia), it only appears to bite when something goes wrong – either the share price takes a major dive, or the executives are found to be undertaking illegal or fraudulent practices (as happened in May 2018 when the Australian royal commission enquiry into the banking and financing industry, forced many board members and senior executives to lose their jobs).
These methods appear to be retrospective rather than proactive. So what’s the answer?
First, a new approach to executive compensation and fairness and equity for all those included in the staff stakeholder group, from the CEO to the newest hire, is needed. Such an approach would be based on fixed salary, organisation success, team success and personal performance in descending order of value. Implementing this would ensure that the staff stakeholder needs are met, not consistently exceeded.
Turning to the shareholder stakeholder group, they are now no longer owners, rather traders. We cannot return to the pre – 1970s. So, why not have two classes of shareholder? The first class would be those who trade shares over the short term. They would be ineligible to vote as shareholders. In the strictest definition of the term, these traders are not part of the shareholder group anyway, they are more like suppliers providing capital to the organisation.
The second class would be those who hold the shares for a minimum of two years. They would have full shareholder voting rights and be “owners” in the true sense of the word as they have shown a long term interest in the company. In this way, CEOs would have to answer to genuine owners, not fly-by-night gamblers.
As a result of the recession, the community stakeholder now has a voice that is being listened to more closely and more often. It’s up to you and I as part of the community stakeholder, to suggest ways to our politicians that will ensure there is a balance between the needs of all six organisational stakeholders.
I agree to an extent with the writer of this text. However, my question is, doesn’t the degree and power/influence of each stakeholder group sometimes tell you which group you should prioritize?