Every business has its stakeholders. These are defined as people or groups of persons who affect and are affected by the decisions or actions of the business. They also have a legitimate interest in the business, and are generally grouped into two; the internal and external stakeholders. Our primary focus in this article will be on the external stakeholders, who are defined as those who, even though they do not form part of the internal running and activities of the business, are affected by its actions and decisions.
External stakeholders are different from internal stakeholders. They also outweigh the number of internal stakeholders. Most people refer to them as the stakeholders with ‘no skin in the game’. They are concerned with the company decisions and can meet with the top management of an organization to drive review of ideas, community concerns, and several issues.
Most of the time, their roles reflect the community, government, or environmental concerns and, if ignored, can cause a severe stall or block of a project if. External stakeholders must therefore be given a voice for the smooth flow of a project.
For external investors, we will talk about our suppliers, customers, government, local community, and even creditors. Let us delve right into these:
The government is an external stakeholder in all businesses. In fact, it is considered one of the major stakeholders since it collects taxes from these establishments in the form of corporate income tax and income tax from the employees of the company.
Other forms of taxes include sales tax, which is obtained from other spending that the company incurs. Governments also benefit from the Gross Domestic Product that the companies are significant contributors in.
The government’s stake in companies, therefore, exists in the taxes and GDP. It encourages firms to invest and create jobs and, in some instances, even introduce tax reliefs for companies in select sectors. However, what is the role of the government as an external stakeholder?
The government protects the employees in the organization. Each government has its labor laws and uses internationally recognized labor laws to ensure that employee welfare is taken care of.
Therefore, as it collects taxes from these businesses, it ensures that they do not infringe the rights of employees, and in instances where this happens, employees are compensated. The government also offers development opportunities for businesses. It improves infrastructure, which is needed for the movement of resources from place to place, funded by the taxes paid by these businesses.
The government also ensures that these businesses do not harm the general public. Companies are expected to adhere to several rules regarding the protection of the environment and the general public.
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The government, therefore, ensures that every business adheres to these set guidelines before, during, and after its incorporation. It also ensures that businesses adhere to ethical business practices aimed at fair competition and consumer protection.
The government’s interest in the doing well of a business stems from the fact that these entities pay corporation tax, create jobs and wealth for the general population, and provide goods and services.
However, it is also worth noting that the government can also influence how a business operates in several ways. It can either raise or lower the corporation tax. Lowering of corporation tax is usually occasioned by the desire to encourage investments and the establishment of more firms. In contrast, a raise is usually occasioned by the need to collect more revenue.
The government can also introduce or repeal laws that affect business. In case of introduction of a new law, the business is expected to comply, which calls for substantial change management culture in the organization.
The government can also offer grants and incentives to firms located in rural or depressed areas to encourage more investment in those areas.
The Customers can be considered as the most important external stakeholders. These are the people who will consume the end products or use the services of the company. They, therefore, decide whether a business succeeds or not, even though they are not concerned with its day-to-day running.
Customers’ loyalty is not guaranteed as they will always be loyal to the company or organization they like. Therefore, a firm that does not satisfy a customer’s needs continuously cannot win them over.
Given the number of businesses that produce the same products, the customer is usually guaranteed better services elsewhere. Therefore, companies and organizations are advised to be more invested in customer satisfaction and improve based on their feedback, or else they will lose in the long term.
The main question that we should therefore answer regarding customers being stakeholders in the interest they have in the doing well of a business. Customers are guaranteed quality services and products whenever a business thrives. They also enjoy low prices and value for their money.
However, they can also influence how a business operates in many ways. The main way is through deciding whether or not to purchase the product or use the service that a business produces. This will lead to losses and the ultimate closure or restructuring of the business.
Customers can also heavily affect t the reputation of a business simply by word of mouth. The greatest form of advertisement a business can get is via satisfied customers. A dissatisfied customer can easily lead others into boycotting or avoiding the products of a given company.
A business must also conduct market research, identify the needs of their targeted customer base, and develop products that satisfy these needs. The easiest way of achieving customer loyalty is continuously satisfying their needs and adapting to the different market needs.
Therefore, the primary role of the customer is to help the company drive profits by buying its goods and services and increasing its reach through word of mouth. Remember, every business needs profits for successful operation.
The money paid by the customer when purchasing the product or services of a company is more of a reward for the company’s operating prowess. This also enables the business to focus on the production of more goods.
Therefore, business owners are expected to feel the economic pulse in the marketplace and review the general price trends to help adjust their company’s prices effectively. This is the best way of ensuring that a company stays competitive and continues raking in profits.
Suppliers and vendors form part of the external stakeholders. Their reputation relies on the quality of goods or materials of production that they offer their companies of engagement. To be retained, they have to offer suitable quality materials, deliver them on time and match the required quantity.
A company that engages excellent suppliers will end up with high-quality goods that meet the needs of consumers. Therefore, even though suppliers do not form part of the internal management of the business, their actions can affect how the business performs. If they delay providing the required factors of production, then the company will not make timely production.
Suppliers are interested in the excellent performance of the business since it assures them of regular orders and prompt payments, which keep them in business. They, therefore, have a legitimate interest in these businesses, which make them stakeholders.
They can also influence the operation of a business by raising or lowering the prices of goods. In case of a raise, the business has to adjust accordingly to ensure its profitability.
The supplier can also influence business by changing the credit terms, delivery times and increasing or decreasing the quality of their materials. All these affect the performance of the business.
Some of the roles of the supplier include sourcing and looking for better alternatives in regards to raw materials as well as complying with all the relevant laws and standards. They also offer equal opportunities for retailers to conduct business with them and guarantee the best price and quality for organizations so that they can also make some profits from the end products.
Therefore, companies must build a good supplier management relationship as the suppliers play essential roles in all the stages of production. A good relationship ensures that the company gets the best out of all its products.
4. Local Communities
Businesses are generally located around communities that form the major external stakeholders. Therefore, they have a duty to ensure the safety, health, and economic development of the communities around them.
These communities are usually impacted by a number of business activities. Whenever a company enters or exits a community, it affects employment, incomes, and the overall spending in the area.
Some industries also present serious health concerns to the communities around them as their production processes may alter the environment. From this discussion, it is easy to identify the role of the community as major stakeholders. They offer the human resource needed for production as well as a market for the products and services offered by the company.
A strong business-community relationship also ensures a smooth flow of activities.
Creditors such as banks have a stake in the business, even though they are not usually involved in operations. These institutions lend finances to the businesses in the form of loans or mortgages to be fully paid with interest on top.
Creditors are interested in the successful operation of the business since it guarantees that their loans will be paid fully and timely, earning them a profit in return. They can also influence business operations by changing their repayment lengths, changing the interest rates on loans, and extending loans to businesses or not.
6. Junior shareholders
Junior shareholders are generally considered external stakeholders because even though they have a legitimate interest in the company’s returns, they do not participate in the direct running of the activities and have limited say in the company operations. They have a minimal stake in the financial returns of the business or organization and are often affected if the business performs poorly. On the other hand, they are rewarded if the business performs well and brings in more profit.
They usually invest capital into the business for a given rate of return on the invested capital. They inject money or assets into the business and are rewarded from the business returns, depending on the business’ performance.
These can either be an individual or organization interested in the concept of shareholder value. This is the financial worth that they get by owning shares in the business. This is continuously increased when the return on invested capital of a company exceeds the weighted average cost of capital.
In simple terms, shareholder value increases when the business brings in more profit. However, this value can also be decreased due to changes in cash flow and discount rates.
However, managers are expected to cushion the effects of the changes in discount rates (which the organization has little influence over) by ensuring that the company’s capital is invested effectively to ensure more cash flows and fewer risks.
They are also concerned with the success of the business. They, therefore, measure the company’s future success by assessing its financial strength and finally evaluating its future cash flows, which, as we mentioned, affects shareholder value.
These individuals analyze the company’s financial statements and look at the different industry trends that are expected to affect the future growth of the company. It is also worth noting that there are different types of investors. The most common are the major investors, made up of investment banks, mutual funds, institutional investors, and retail investors.
From the above discussion, it is clear that the role of shareholders is to drive the success and growth of the company through capital provision. Companies are advised to have a strong investor relations department due to this vital role that investors play. The business must also communicate effectively and honestly with them.
These are some of the external stakeholders that a business must always look out for. They play their distinct roles, which ensures that the business plays afloat and rake in profits.