Stakeholder conflict and Managing conflict

6th February 2021 1 By indiafreenotes

Different Stakeholder Interests:

Every project will have several stakeholders; customer, vendors, management, project management team, external contractors, government, etc. Differences in interest from the point of view of the stakeholders can be a significant cause of conflicts during a project. The customer wants a never-before-seen product which will transform the way they function. The manufacturing team wants a simple and straightforward product which can be manufactured without complications. The marketing team wants a fancy product with ‘cool’ features which can be marketed to attract customers. Conflicts arise even before the project has begun.

Change in Scope:

Change in scope during the progress of a project can cause trouble in the project management team. For example, a new mobile manufacturing company is working on a new model of smartphone. All specifications have been put in place and the designing has begun. About 3 months into the project, based on market research, the management decides that the phone will be a Windows-based smartphone instead of an Android-based smartphone. The design team is bound to vehemently disagree to this and there is going to be a conflict between the management and the design team.

Disagreements over Communication Methods:

Communication methods vary in different projects depending upon the size of the organization and the project team. Bigger organizations may use email for formal communications to keep track of records and there would be an in-house chat software which all employees would have access to. Whereas, smaller organizations, especially start-ups and SMEs use all available modes of communication; email, SMS, whatsapp, etc. So, when individuals join a bigger organization, for example, and are put in a project team, they might have a difficult time adapting themselves to the formal modes of communications used in these MNCs. Therefore, when there is a team which is a mix of freshers and experienced professionals or a team which is a mix of individuals who have worked in big corporate and individuals from a start-up or smaller environment, there are bound to be conflicts with regards to the modes of communication. It is best to resolve these differences and decide on a single mode of communication and also ensure that everyone in the team follows that mode.

The agency view of the corporation posits that the decision rights (control) of the corporation are entrusted to the manager to act in shareholders’ (and other parties’) interests. Partly as a result of this separation, corporate governance mechanisms include a system of controls intended to help align managers’ incentives with those of shareholders and other stakeholders.

The principal–agent problem or agency dilemma, developed in economic theory, concerns the difficulties in motivating one party (the “agent”), to act on behalf of another (the “principal”). The two parties have different interests and asymmetric information (the agent having more information), such that the principal cannot directly ensure that the agents are always acting in its (the principals’) best interests, particularly when activities that are useful to the principal are costly to the agent, and where elements of what the agent does are costly for the principal to observe. Moral hazard and conflict of interest (COI) may thus arise.

  • Three parties key to the functioning of the corporation are the managers, shareholders, and bondholders. While managers control the corporation and make strategic decisions, shareholders are owners, and bondholders are creditors.
  • While all three parties have an interest, whether direct or indirect, in the financial performance of the corporation, each of the three parties has different rights and rewards, for example voting rights and forms of financial return.
  • Shareholders, managers, and bondholders have different objectives. For example, shareholders have an incentive to take riskier projects than bondholders do and may prefer that the company pay more out in dividends. Managers may also be shareholders or prefer risk-averse, empire-building projects.

Areas of conflict

There are many areas in which the conflict arises. A director with little or no ownership in the company may not feel motivated to take the best decisions for the company. Sometimes a high risk needs to be taken or a huge sacrifice done for the benefit of the company. A director with no ownership will not feel motivated to undertake such risk.

One of the interests of a director may be to increase control for himself, even if this means that the company value will go down in the long run. Some of the ways that directors would seek to increase control is pass resolutions extending their term notwithstanding the fact that their performance is below par.

Another area of conflict is the possible need for directors to appear in good light before the shareholders. Some of the ways this may happen is by misrepresenting performance by doctoring audit reports and financial statements to make the company appear as if it has been making a profit whereas this may not necessarily be the case.

Directors control vital information of the company…they have the expertise and skill to run the company while the shareholders are seldom skilled. How company information is managed may be a source of conflict.

There are other areas of more direct conflicts between shareholders and directors…for example when contracting with third parties, directors may award contracts to parties affiliated with them and who are not necessarily the best placed.

Directors may also award themselves high packages like remunerations and allowances to the detriment of the company.

Shareholders may conflict with directors when they impose strict and stringent rules on directors in regards to performance and benefits like remuneration and others.

Managing the conflicts

This article is geared more for smaller unlisted companies that have a corporate structure separating shareholders and directors. Larger companies especially listed companies have sound corporate governance policies that manage the conflict adequately. Besides for listed companies, the regulator has regulations on corporate governance that must be adhered to. On the flip side is the typical Kenyan company. The shareholders in the typical Kenyan company are the same ones who form the board of directors. This is therefore for smaller companies whose ownership and control functions are separated.

One of the ways of managing this conflict is to come up with performance contracts based on expected return. The performance contract should be realistic and should contain penalties for non-performance for example salary cuts.

Another way of managing this conflict is by drawing up sound engagement contracts for the directors. The contract should contain the scope of duties and responsibilities and also set out the expectation of the shareholders ‘clearly. The policies of the company should be highlighted to avoid ambiguity. It must be made clear that the directors owe a fiduciary duty to the shareholders and where this duty is breached then some penalties apply. It should also be made clear that the director must disclose all pertinent information regarding conflict of interest. There should be penalty clauses in the engagement contract if the director fails to meet his obligations.

Another way of managing the conflict is by ensuring that the board of directors includes a shareholder with skills and expertise in the affairs of the company. This shareholder will serve as the shareholders “watchdog” and will safeguard the shareholders’ interests.

The best way of managing the conflict is by employing motivation mechanisms for the directors.  One way would be by awarding the directors who perform…maybe by salary increment, extension of terms and other perks.

A method of employing motivation tools for directors’ that has worked is by giving deserving directors some ownership in the company. A director who has a stake in the company will ensure that every decision made is in the company’s best interests.