CORPORATE GOVERNANCE MINI-ESSAY

(Discuss-how-stakeholder-conflicts-might-be-resolved-when-a-company-has-a-stakeholder-approach to-
corporate-governance)

Campus: Heriot Watt University

Instructor- Dr. Faizal Haque
Done by: Varun Chirayil Abraham, H00363398

1
 Table of Contents
1. Introduction: - The Stakeholder Approach to Corporate Governance 3

2. Causes of Conflicts 3

2.1. Stakeholder Theory and Value Maximisation 3-4

2.2. Balanced Scorecard 4-5

3. Resolving Stakeholder Conflicts  5

3.1. Stakeholder Theory and Value Maximisation 5

3.2. Mendelow's Matrix 6

4. Conclusion  6
5. Reference List 7

2
1. Introduction: - The Approach of stakeholders towards corporate governance

In the corporate governance approach in which, by taking into account each stakeholder's
interests(internal and external), companies should design their strategies. This concept involves taking
steps to reduce or mitigate conflicts between the interests of stakeholders. In this context, the
stakeholders of the company are described as: "individuals and constituencies who, willingly or
inadvertently, contribute to and thus potentially profit from the wealth and activities that the company
has" (Post, Preston & Sachs, 2002, p. 8);

2. Causes of Conflicts

2.1. Stakeholder Theory and Value Maximisation

A manager should treat value maximization and stakeholder theory as two theories that describe how
to answer several questions. Value maximization is a valuable measure to help managers assess whether
a company performs effectively, but it does not advise how a company should attract or maintain
customers. Stakeholder theory will help the company enhance its brand and boost its consumer
relationship, but it does not show managers whether the company meets its sales potential.

In the stakeholder theory, managers are asked to focus on multiple objectives such as maximizing
market share or profits, but look at Fig 1, and can notice that as the market share increases, the profits
increase, but for the further increase in market share, it should be at the expense of the current year

3
profits. So Basically, Managers can not manage multiple objectives and are not able to make a
reasonable decision for the organization, which in turn will cause conflicts for the organization.
(Jensen,2010)

The theory of stakeholders plays into the hands of managers by enabling them to follow their interests
at the detriment of the financial claimants of the company and society in general. Here the managers
are using power in an unproductive way, which increases agency costs, but due to the newfound power,
they will support the theory.

2.2. Balanced Scorecard

It aimed at aligning business practices with business vision and strategy, improving internal and external
relations, and monitoring business performance against strategic objectives.

For the Balanced-Scorecard Framework Approach, we use multiple performance measures to evaluate
the performance of the organization or its staff; it becomes challenging for managers to maximize the
measures at each dimension. (Jensen,2010)

Argument #1: Balanced Scorecard

Balanced Scorecard Framework has a significant impact on all industry sectors, but not all sectors are
supported1. Different companies have different ways of using the Balanced Scorecard Framework, and it

1) EVIDENCE

4
also depends on how well the Managers know how to use them. If Managers have little knowledge as to
how to use it, then the balanced scorecard will fail, and this, in turn, will cause problems for the
organization.

3. Resolving Stakeholder Conflicts 

The aim of stakeholder groups is undoubtedly different and maybe in direct tension. For example,
employers want fair pay, and working practices may struggle with investors who want more incentives.
Without having any unnecessary issues, such conflicts can be challenging to resolve and enforce.

Jensen claims that the underlying tension between the shareholder value maximization ideology and the
stakeholder principle aims can be overcome by combining "enlightened" versions of these two theories
together:

3.1. Enlighted Value Maximization and Enlighted Stakeholder Theory

Enlightened value maximization understands that it is difficult to connect with and inspire managers,
staff, and partners in a company. Value maximization is not a vision, strategy, or even a goal; it is a
scorecard for the organization. We need to provide people with an adequate framework to grasp what
maximizing value means to be motivated by it and therefore have a chance to achieve it. They must be
turned on by the idea in the sense that it taps into an intrinsic need of their own.

The Enlightened Stakeholder Theory notes that the ultimate target — to increase the company's overall
long-term value. In short, the improvement in the overall long-term market value of the company is the
scorecard that measures performance.

3.2. Mendelow's Matrix

Mendelow's Matrix is a mapping exercise where companies can identify stakeholders from within the
organizational environment. (Mendelow, 1991). This way, companies can identify the essential
stakeholders and identify their interest without any problem of conflict between them

4. Conclusion: 

I consider the Value Maximization and the Stakeholder Theory's approach towards corporate
governance to be obsolete and not useful in the current situation. These always create conflicts for the
companies and confusion between the management and its employees within the company. 

From the above meaning and explanation, we can conclude that, while creating a strategy, if the needs
of each stakeholder are taken into consideration or if we take strategic decisions in such a way as not to
impact the interests of any shareholder adversely, we can reduce the conflict. Mendelow's Matrix is also
an excellent tool for managing conflicts. It identifies all the stakeholder and manages their interests so
that no conflicts occur

5
 

6
5. Reference list

1) Arzamastseva, M., and Khayrullina, M. (2017). PROBLEMS OF IMPLEMENTING A BALANCED

SCORECARD AS A MANAGEMENT TOOL IN UNIVERSITIES. CBU International Conference Proceedings,
5, pp.1–5.
2) Ayuso, S., Rodríguez, M.A., García-Castro, R. and Ariño, M.A. (2012). Maximizing Stakeholders’
Interests. Business & Society, 53(3), pp.414–439.
3) Birkbeck, G. and Kitchin, P. (2009). Stakeholder Management and Sport Facilities: A Case Study of
the Emirates Stadium An investigation into the engagement of disabled people in European football.
View project Studies in (sport) event management View project.
4) Jensen, M.C. (2010). Value Maximization, Stakeholder Theory, and the Corporate Objective
Function. Journal of Applied Corporate Finance, [online] 22(1), pp.32–42. Available at:
https://onlinelibrary-wiley-com.ezproxy1.hw.ac.uk/doi/pdfdirect/10.1111/j.1745-
6622.2010.00259.x [Accessed 1 Oct. 2020].