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9609 · 1.5.2

The relative importance and influence of stakeholders on business activities — practice questions

Practice and worked examples for 9609 The relative importance and influence of stakeholders on business activities. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Mining company faces pressure: shareholders want dividend rise, environmental NGO demands mine closure, government offers tax break for local jobs. Advise how management should prioritise.

Show solution outline

Map power/interest:

  • Government: High power (licence to operate) + high interest — manage closely.
  • Shareholders: High power (capital) + high interest — cannot ignore dividend demand entirely.
  • NGO: Lower formal power but high media influence — reputation risk (3.3.5 promotion).
  • Local employees/community: Medium power via votes and protests.

Strategy: Negotiate phased environmental improvements (CSR 1.4.1) to satisfy government/NGO; modest dividend increase funded by efficiency not closure; community investment programme.

Avoid: Maximising short-run dividend while ignoring licence risk — destroys long-run shareholder value.

Worked example 2

A manufacturing firm, 'Component Co.', is considering a $12 million investment in new robotic machinery. This would increase annual profits by $3 million but would lead to 60 employee redundancies. The total one-off redundancy payment would be $1.5 million. The firm currently makes an annual profit of $8 million and pays 50% of profits as dividends to shareholders. Analyse the financial impact of this decision on shareholders and employees, and advise management.

Show solution outline

Step 1: Calculate the financial impact on shareholders.

  • Current Annual Dividend: 50% of 8,000,000=8,000,000 = 4,000,000
  • New Annual Profit (with investment): 8,000,000+8,000,000 + 3,000,000 = 11,000,00011,000,000
  • New Annual Dividend: 50% of 11,000,000=11,000,000 = 5,500,000
  • Annual Gain for Shareholders: 5,500,000−5,500,000 - 4,000,000 = 1,500,0001,500,000
  • Payback Period: Investment Cost / Annual Profit Increase = 12,000,000/12,000,000 / 3,000,000 = 4 years. This is an attractive return for shareholders.

Step 2: Quantify the impact on employees.

  • Job Losses: 60 employees will be made redundant.
  • Financial Cost: The business incurs a one-off cost of $1,500,000. While this is a cost to the business, the primary negative impact is the loss of livelihood for the 60 employees.
  • Wider Impact: This action will likely decrease morale and feelings of job security among the remaining workforce, potentially impacting productivity.

Step 3: Advise Management, considering the conflict.

  • The Conflict: There is a direct conflict. The investment significantly benefits shareholders (high power, high interest) with a $1.5m annual increase in dividends, but severely harms the 60 employees (medium power, high interest) who lose their jobs.
  • Recommendation: Management must balance these competing interests. A purely shareholder-focused approach would approve the investment immediately. However, to manage the stakeholder conflict, management should consider:
    • Negotiation: Discuss the changes with employee representatives or unions to agree on the process.
    • Mitigation: Offer enhanced redundancy packages, outplacement services, or retraining opportunities to soften the blow for affected employees.
    • Phased Implementation: Introduce the automation gradually to allow for natural attrition and redeployment, reducing the number of compulsory redundancies.
  • Conclusion: The financial case for the investment is strong (4-year payback). However, ignoring the employee impact risks industrial action and reputational damage. The best strategy is to proceed with the investment while implementing measures to mitigate the negative consequences for employees, demonstrating corporate social responsibility.
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