Welcome to Stakeholders and Business Ethics!

In the world of business, it’s easy to think that the only person who matters is the owner or the boss. But in reality, a business is like a giant spiderweb—it is connected to many different people and groups, all of whom can be affected by what the business does. These people are called stakeholders.

In these notes, we will explore who these stakeholders are, how businesses impact them, and the tricky "ethical" decisions managers have to make when trying to keep everyone happy while still making a profit.

1. What is a Stakeholder?

A stakeholder is any individual or group that has a direct interest in, or is affected by, the activities and decisions of a business.

Don't get confused! A common mistake is to think "Stakeholder" and "Shareholder" are the same thing. They aren't!

  • A shareholder owns a piece of the company (they own shares).
  • A stakeholder is a much broader term that includes anyone impacted by the business, including shareholders, but also employees, customers, and even the local neighbors!

Internal vs. External Stakeholders

We can split stakeholders into two main camps:

Internal Stakeholders (People inside the business)
  • Employees: They want job security, fair pay, and good working conditions.
  • Owners/Shareholders: They want the business to be successful so they can earn a profit or see the value of their shares rise.
External Stakeholders (People outside the business)
  • Customers: They want high-quality products at a fair price.
  • Suppliers: They want to be paid on time and have regular orders.
  • Other Creditors (e.g., Banks): They want the business to pay back its loans and interest on time.
  • The Local Community: They want the business to provide jobs and avoid polluting the local area.
  • The Government: They want the business to follow the law and pay the correct amount of tax.

Quick Tip: If you're struggling to remember these, use the mnemonic "C-S-E-G" for external stakeholders: Customers, Suppliers, Environment (Community), and Government.

2. The Impact of Business Activity on Stakeholders

Every decision a business makes has a "ripple effect." For example, if a business decides to move its factory to a different country to save money:

  • Impact on Employees: They might lose their jobs (Negative).
  • Impact on Shareholders: Profits might go up because costs are lower (Positive).
  • Impact on the Local Community: Less money is spent in local shops because people are unemployed (Negative).
Conflicts Between Stakeholders

Because different stakeholders want different things, they often clash. This is a stakeholder conflict. Example: Employees want a pay rise. This makes them happy but increases the business's costs. If costs go up, profit might go down, which makes the shareholders unhappy!

Key Takeaway: Business managers must try to balance these conflicting needs, though it is often impossible to make everyone 100% happy at the same time.

3. Business Ethics: Doing the Right Thing

Business Ethics are the moral principles that guide how a business behaves. It isn’t just about following the law; it’s about doing what is "right," "fair," or "honest."

Ethical Responsibilities

A business has ethical responsibilities toward its stakeholders. For example:

  • To Customers: Not using misleading advertising or hidden charges.
  • To Suppliers: Paying them a fair price and not "squeezing" small suppliers just because you are a big powerful company.
  • To the Community: Reducing waste and noise pollution, even if it costs extra money.
  • To Employees: Paying a "Living Wage" rather than just the legal minimum wage.

Did you know? Some businesses are Social Enterprises. Their main objective isn't just making money for owners; they exist primarily to benefit society or the environment. (You can learn more about this in the Forms of Business chapter!)

4. The Big Dilemma: Profit vs. Ethics

This is the most common challenge in this chapter. Often, being ethical costs money, which reduces profit in the short term.

Imagine a clothing business discovers one of its suppliers is using unsafe working conditions.

  • The Ethical Choice: Stop using the supplier and find a more expensive, ethical one.
    Result: Higher costs, lower profit, but a better reputation.
  • The Profit-Focused Choice: Ignore the problem and keep the low costs.
    Result: Higher short-term profit, but a huge risk of a "PR disaster" if customers find out.

Is Ethics Good for Business?

While ethics might reduce profit today, it can help a business in the long run:

  • Brand Loyalty: Customers are often willing to pay more for products they trust are "ethical."
  • Employee Motivation: People feel proud to work for a "good" company, which can increase productivity.
  • Avoiding Scandals: Ethical businesses are less likely to face fines or boycotts from angry customers.

Quick Review: Think of ethics as an investment. You spend more now (on better wages or cleaner materials) to gain a stronger reputation and competitiveness later.

5. Summary and Key Terms

To succeed in your exams, make sure you can define and explain these concepts clearly:

  • Stakeholder: Anyone with an interest in the business.
  • Internal Stakeholders: Employees and Owners.
  • External Stakeholders: Customers, Suppliers, Creditors, Community, Government.
  • Ethics: Doing what is morally right, not just what is legal.
  • The Profit/Ethics Trade-off: The struggle between making money and doing the right thing.

Common Exam Trap: If a question asks about Shareholders, focus on profit and dividends. If it asks about Stakeholders, make sure you talk about a variety of groups (like employees or the community) to show the examiner you understand the breadth of the topic!

Note: For more information on how these stakeholders influence business planning or share prices, check out the chapters on Entrepreneurs and Business Planning and Forms of Business and Shares.