Shareholders versus stakeholders — Edexcel A-Level Business
Test yourself on Shareholders versus stakeholders with PEARSON EDEXCEL A-Level practice questions.
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Shareholders versus stakeholders explained
A stakeholder is any group affected by what a business does or able to affect it, and the split matters because the two halves apply pressure through completely different channels.
Read the full explanation
Inside are employees and managers, who act through productivity, cooperation, resignation and industrial action. Outside are customers, suppliers, lenders, government, the local community, pressure groups and competitors, who act through spending, credit terms, planning permission, regulation, fines and publicity. Owners sit on the boundary as the group with the legal claim on profit. Sorting is only the first step; ranking is what earns marks, and Mendelow's power and interest grid does that job, since a bank able to withdraw an overdraft must be satisfied while a distant campaign group may only need to be kept informed.
b) Stakeholder objectives
Each group wants something specific and measurable, and naming that thing is what turns a list into analysis. Owners want dividends and a rising share price; employees want pay, security, conditions and progression; managers want status, bonuses and growth, which is why the divorce of ownership from control matters; customers want quality, price and availability; suppliers want prompt payment and repeat orders; lenders watch gearing and interest cover; government wants tax revenue, employment and compliance; the community wants jobs without noise, traffic and pollution. These aims are not all opposed. Paying suppliers on time secures continuity of supply, and paying staff properly can cut labour turnover and recruitment costs, so the real work is deciding which aims genuinely clash in this case.
c) Stakeholder and shareholder influences: stakeholder: that the business considers all of its stakeholders in its business decisions/objectives; shareholder: that the business should focus purely on shareholder returns (increasing share price and dividends) in its business decisions/objectives
Two rival answers to the question of what a company is for. Milton Friedman argued that managers are agents of the owners, so spending profit on causes the owners did not choose is spending other people's money, and the firm's proper job is returns earned within the law. Freeman's alternative treats the firm as a web of relationships whose long run returns depend on the goodwill of staff, suppliers, customers and regulators. The difference shows up in real decisions, with dividends, buybacks and cost cutting on one side and reinvestment, better supplier terms and a slower payback on the other. The two views converge over a long horizon, which is why an honest judgement usually turns on timescale, on who owns the business, and on how patient those owners are.
d) The potential for conflict between profit-based (shareholder) and wider objectives (stakeholder)
Clashes here are usually about timing rather than about values. Cutting jobs, offshoring, stretching supplier payment terms, trimming maintenance or environmental spending, and paying profit out rather than reinvesting all lift returns this year and push the cost onto somebody else. Over a longer horizon those same choices rebound through higher labour turnover, lost custom, regulatory fines and dearer finance, which is why an owner with a ten year view and an investor judging quarterly results reach opposite answers. How sharp the clash becomes depends on margins, competitive intensity, media and regulatory exposure and who controls the votes, so the strongest answers weigh those conditions instead of announcing that one side is simply right.
Your focus
- a) Internal and external stakeholders
- b) Stakeholder objectives
- c) Stakeholder and shareholder influences: stakeholder: that the business considers all of its stakeholders in its business decisions/objectives; shareholder: that the business should focus purely on shareholder returns (increasing share price and dividends) in its business decisions/objectives
Show all 4 objectives
- d) The potential for conflict between profit-based (shareholder) and wider objectives (stakeholder)
Shareholders versus stakeholders exam tips
Marking Points
- Sort them correctly, with employees and managers inside the business and customers, suppliers, lenders, government, the community and pressure groups outside it, noting that owners sit on the boundary.
- Say what each group can actually do, that a supplier can shorten credit terms, a bank can withdraw an overdraft, a council can refuse planning permission and a campaign group can reach the media.
- Rank by power and interest, using Mendelow's grid to argue which groups this particular decision must satisfy and which can simply be kept informed.
- Apply to the named business and the decision in the extract rather than reciting a general list of groups.
- State the aim in the group's own terms, that owners want dividends and capital growth, staff want pay and security, suppliers want prompt payment and repeat orders, and lenders want interest comfortably covered.
- Show how each is measured, using dividend per share and share price for owners, days taken to pay for suppliers, and gearing, which is non-current liabilities divided by capital employed multiplied by one hundred, for lenders.
- Predict behaviour from the aim, for example a supplier tightening credit terms when payment slows, which lengthens the firm's working capital cycle.
- Rank the aims by how far they affect the decision in the extract and support the ranking with the data supplied.
- Attach the names, that the returns-first view is Milton Friedman's argument that the firm should raise profits within the rules, and the broader view is associated with Freeman and rests on long run relationships.
- Show the influence on actual decisions, that one view pushes towards dividends, buybacks and cost cutting while the other pushes towards reinvestment, better terms for suppliers and a slower payback period.
- Use appraisal language, noting that spending on staff, community or the environment often shows a long payback and a weak average rate of return now while protecting revenue and reputation later.
- Evaluate the convergence, that treating staff and suppliers well can raise returns over a decade, so the two views differ mainly on time horizon rather than on arithmetic.
- Apply to the ownership in the extract, since a family firm, a listed company watched by institutional investors and a cooperative face very different pressures.
- Name a specific clash from the extract, such as a redundancy programme that lifts operating margin while cutting local employment, rather than asserting that aims conflict in general.
- Quantify one side of it, using the cost saved as a share of operating profit, the effect on dividend per share, or the effect on labour turnover and recruitment spending.
- Argue the counter position, that returns taken from staff, suppliers or safety can be repaid later through lost custom, fines and a higher cost of borrowing.
- Prioritise with a tool such as Mendelow's power and interest grid, saying which group the business genuinely cannot afford to lose.
- Conclude on a stated criterion, for example that the clash is severe in the short run and much weaker over a decade, so the answer turns on the owners' time horizon.
Examiner Tips
- 💡Short questions ask for two stakeholders and the effect of a decision on each, so name the group and the consequence in the same sentence.
- 💡In longer answers rank rather than list, because ranking by power is the route into judgement.
- 💡Keep the same stakeholders running from introduction to conclusion so the answer stays on the question asked.
- 💡Objectives questions are usually the springboard to a conflict question, so pick the two groups whose aims clash hardest in the extract.
- 💡Quantify wherever the data allows, such as a pay rise expressed as a share of total costs or a dividend as a share of profit for the year.
- 💡An explain question wants the aim plus a consequence for the business, not a definition of the group.
- 💡This is classic twenty mark evaluate material, and the mark scheme rewards a judgement supported by the extract rather than an opinion about capitalism.
- 💡Set out your criterion early, such as time horizon, ownership structure or competitive intensity, and hold the whole answer to it.
- 💡One short real example, such as a consumer goods group that dropped quarterly reporting to protect long term investment, beats three vague ones.
- 💡Expect an assess or evaluate question where the extract deliberately supplies both a profit figure and an angry quotation from a stakeholder.
- 💡Build one developed chain for the clash and one against, then judge, rather than writing four short disconnected paragraphs.
- 💡Bring in ownership and the state of the economy, because both change how much the clash actually costs this business.
Common Mistakes
- Listing stakeholders without saying what power each holds, which is pure description and sits in the lowest band.
- Sorting carelessly, so the workforce is called external or customers are called internal because the firm depends on them.
- Assuming owners and managers want the same thing, which ignores the divorce of ownership from control in a large company.
- Giving every group the same aim of wanting the business to succeed, which removes the conflict the rest of the question depends on.
- Forgetting that managers hold aims of their own, such as bonuses tied to revenue growth, which is where the principal and agent problem bites.
- Assuming employees care only about pay, ignoring the Herzberg motivators of recognition, responsibility and achievement.
- Treating the returns-first view as self-evidently unethical, when its argument is that owners can give to causes themselves and managers should not choose for them.
- Assuming the broader approach always costs money, which ignores lower labour turnover, cheaper recruitment and the price premium a trusted brand commands.
- Writing about corporate social responsibility in the abstract without connecting it to the objectives, the decision and the returns in the case.
- Assuming every stakeholder interest opposes profit, when higher pay can cut turnover and lift labour productivity, measured as output per worker per period.
- Delivering a moral verdict with no business consequence attached, which earns nothing for analysis or evaluation.
- Ignoring the constraints in the extract, such as thin margins, bank covenants or a competitor that has just cut prices.