Stakeholders in Corporate Governance: Roles, Power, and Influence

Core Concepts: Who Are Stakeholders?

Stakeholders are individuals or groups who can affect or be affected by a company’s actions, objectives, or policies. Unlike shareholders (who focus on financial returns), stakeholders include:

• Internal stakeholders: Employees, managers, board members.
• External stakeholders: Customers, suppliers, governments, NGOs, media, and local communities.

mindmap
  root((Stakeholders in Corporate Governance))
    Internal
      Employees["Workers, unions, HR"]
      Managers["Middle/senior management"]
      Board["Directors, auditors, C-suite"]
    External
      Investors["Shareholders, VCs, banks"]
      Customers["Consumers, clients"]
      Suppliers["Vendors, contractors"]
      Government["Regulators, tax authorities"]
      Society["NGOs, media, local communities"]
    Power Dynamics
      Legitimacy["Social acceptance"]
      Urgency["Time sensitivity"]
      Power["Influence over resources"]

Why does this matter? Stakeholders hold companies accountable for ethical practices. For example:

• Employees demand fair wages (e.g., Nepal’s minimum wage debates in garment factories).
• Investors push for ESG (Environmental, Social, Governance) compliance (e.g., Nepal Investment Bank’s sustainability reports).
• Communities protest against pollution (e.g., Chaudhary Group’s sugar mills vs. local farmers).

Theoretical Frameworks: How Stakeholders Shape Governance

1. Freeman’s Stakeholder Theory (1984)

• Core Idea: A company’s purpose is to create value for all stakeholders, not just shareholders.
• Key Principle: Ethical governance requires balancing competing interests (e.g., profit vs. worker safety).
• Example:
  • Daraz (Alibaba’s Nepal arm) must balance investor demands for growth with employee welfare (e.g., fair delivery partner pay).
  • NTC (Nepal Telecom) must serve customers (affordable internet) while pleasing government regulators (taxes, spectrum fees).

2. Resource Dependency Theory

• Core Idea: Companies rely on external stakeholders for critical resources (funds, labor, technology). Governance mechanisms (e.g., board diversity) reduce dependency risks.
• Example:
  • Nabil Bank depends on depositors (customers) and regulators (Nepal Rastra Bank). Poor governance (e.g., loan defaults) can cut off funding.
  • Pathao (ride-hailing app) relies on driver-partners for service. If drivers strike (due to low pay), the company’s revenue plummets.

Comparison Table: Stakeholder Theories

Power and Influence: Who Has the Most Say?

Stakeholders differ in power, legitimacy, and urgency (Mitchell et al., 1997). Governance structures must address this imbalance.

pie
  title Stakeholder Power in Corporate Governance
  "Investors (High Power)" : 30
  "Government (High Legitimacy)" : 25
  "Employees (Moderate Power)" : 20
  "Customers (High Urgency)" : 15
  "NGOs/Communities (Low Power but Growing)" : 10

Real-World Example: Kathmandu Traffic Chaos

• Stakeholders:
  • Government (high legitimacy): Wants to reduce congestion but lacks funds.
  • Taxi unions (high urgency): Demand better routes but block roads.
  • Ride-hailing apps (Pathao, Yeti) want regulatory support.
• Governance Challenge: Balancing public transport needs vs. private sector profits.

Case Study: Nabil Bank’s Stakeholder Governance

Scenario: Nabil Bank, Nepal’s largest private bank, faces shareholder pressure for higher dividends but must also support SMEs (small businesses) hit by COVID-19.

flowchart TD
  A["Shareholders Demand:\nHigher Dividends"] --> B["Board Debates:\nCut SME Loans or Raise Rates?"]
  B -->|"Option 1"| C["Increase Loan Defaults\n→ Reputation Risk"]
  B -->|"Option 2"| D["Offer Moratoriums\n→ Lower Profits"]
  D --> E["CSR Boost:\nCommunity Praise"]
  E --> F["Long-term Trust\n→ Stable Deposits"]

Outcome:

• Nabil Bank extended loan moratoriums (helping SMEs) while issuing smaller dividends.
• Result: Improved customer trust and regulatory approval.

## In the Real World

1. eSewa (Digital Payments)

   • Stakeholder: Customers (high urgency) demand secure transactions.
   • Governance Role: eSewa’s board ensures PCI-DSS compliance (payment security standards) to protect users from fraud.
   • Conflict: Balancing convenience (low fees) with fraud prevention (high security costs).

2. Daraz (E-Commerce)

   • Stakeholder: Delivery Partners (high power) threaten strikes if pay is low.
   • Governance Role: Daraz’s HR policies now include minimum wage guarantees and insurance to retain workers.
   • Real Example: During lockdowns, Daraz lobbied the government for logistics support, showing stakeholder collaboration.

3. Nepal Investment Bank (NIBL)

   • Stakeholder: Regulators (Nepal Rastra Bank) enforce ** Basel III norms** (capital adequacy).
   • Governance Role: NIBL’s board diversified assets (reduced risky loans) to meet regulatory demands.
   • Outcome: Avoided 2015’s banking crisis (when many banks collapsed due to bad loans).

Exam Tip: How to Score Full Marks

1. Define Stakeholders Clearly

   • Avoid vague answers. Example: ❌ "Stakeholders are people affected by business." ✅ "Stakeholders are individuals/groups (e.g., employees, NGOs) who influence or are influenced by a company’s actions, as defined by Freeman (1984)."

2. Use Real Nepali Examples

   • Examiners love cases from Nepal (Nabil Bank, NTC, Daraz). Always link theory to practice.
   • Example for Resource Dependency Theory: "Like NTC’s reliance on spectrum licenses from the government, companies must manage external dependencies through transparent governance (e.g., public auctions for licenses)."

3. Compare Theories in Tables

   • For 6-mark questions, use a comparison table (like the one above) to contrast Freeman vs. Resource Dependency.

4. Analyze Power Dynamics

   • Questions often ask: "Who has the most power in [X] company?"
   • Structure your answer:
     1. Identify stakeholders (e.g., investors, employees).
     2. Assess power, legitimacy, urgency (Mitchell’s model).
     3. Give a Nepali example (e.g., Pathao vs. taxi unions).

5. Case Study Approach

   • For 10-mark case questions (e.g., Mid-Hill Highway Project):
     • Step 1: List stakeholders (government, contractors, locals).
     • Step 2: Analyze conflicts (e.g., locals vs. contractors over land).
     • Step 3: Propose governance solutions (e.g., public hearings, CSR funds).