Stakeholder conflict and Managing conflict
Different Stakeholder Interests:
Every project will have several stakeholders; customer, vendors, management, project management team, external contractors, government, etc. Differences in Interest from the perspective of stakeholders may be a major source of conflict throughout a project. The consumer wants a never-before-seen product that will change the way they operate. The production team prefers a basic, uncomplicated product that can be created without problems. The marketing team desires a sophisticated product with ‘interesting’ characteristics that may be promoted to attract clients. Conflicts happen even before the project begins.
Change in scope:
A change in scope throughout the course of a project might generate problems among the project management team. For example, a new mobile manufacturing business is developing a new type of smartphone. All requirements have been established, and the design process has commenced. About three months into the project, management determines, based on market research, that the phone would be Windows-based rather than Android-based. The design team is certain to strongly disagree, resulting in a dispute between management and the design team.
Disagreements about Communication strategies: Effective communication strategies vary by project size and team composition. Larger firms may utilize email for professional conversations to maintain track of documents, and an in-house chat program would be available to all workers. Smaller firms, particularly start-ups and SMEs, employ all accessible channels of communication, including email, SMS, and WhatsApp. As a result, when people join a larger organization, such as a project team, they may struggle to adjust to the formal ways of communication utilized by these multinational corporations. As a result, whether there is a mix of freshers and seasoned professionals, or when there is a mix of persons who have worked in large corporations and those from start-ups or smaller environments, there will undoubtedly be disagreements over styles of communication. It is important to overcome these disagreements and agree on a single means of communication, and then guarantee that everyone on the team uses that mode.
The agency perspective of the corporation holds that the management is entrusted with the company’s decision rights (control) in order to act in the best interests of the shareholders (and other parties). As a consequence of this split, corporate governance measures comprise a set of controls designed to assist managers align their motivations with those of shareholders and other stakeholders.
The principal-agent issue, often known as the agency dilemma, is an economic theory that describes the challenges in persuading one party (the “agent”) to work on behalf of another (the “principal”). The two parties have different interests and asymmetric information (the agent has more information), so the principal cannot directly ensure that the agents are always acting in its (the principals’) best interests, especially when activities that are beneficial to the principal are costly to the agent and elements of what the agent does are costly for the principal to observe. Moral hazard and conflict of interest (COI) may result.
Managers, stockholders, and bondholders are three major stakeholders in the corporation’s operation. While managers run the company and make strategic choices, shareholders are the owners and bondholders are the creditors.
While all three parties have a direct or indirect stake in the corporation’s financial success, each has various rights and benefits, such as voting rights and financial returns.
Shareholders, management, and bondholders all have distinct purposes. For example, shareholders have an incentive to take on riskier projects than bondholders and may prefer that the firm pay out greater dividends. Managers may also be stockholders or select low-risk, empire-building initiatives.
Conflicting areas
There are several locations where conflict emerges. A director who has little or no ownership in the firm may not be driven to make the best choices for it. Sometimes a great risk must be taken or a significant sacrifice made for the good of the firm. A director without ownership will not be motivated to take such a risk.
One of a director’s goals may be to get more control, even if this implies that the company’s value decreases in the long term. Directors may aim to strengthen power by passing resolutions that prolong their tenure despite poor performance.
Another source of contention is the potential requirement for directors to seem in a positive light before shareholders. This may happen in a variety of ways, including misrepresenting performance by doctoring audit reports and financial statements to make the firm look profitable when it is not.
Directors have access to critical corporate information and possess the necessary competence to operate the business, while stockholders often lack such skills. Conflicts may arise over how firm information is maintained.
Direct conflicts between shareholders and directors may arise when directors grant contracts to related parties, even if they may not be the greatest fit.
Directors may also give themselves large packages such as compensation and allowances, to the detriment of the firm.
Shareholders may disagree with directors when they put severe and harsh standards on directors’ performance and advantages, such as salary and others.
Managing disputes
This essay is mostly intended for smaller unlisted firms with a corporate structure that separates shareholders and directors. Larger organizations, particularly those that are publicly traded, have strong corporate governance practices in place to effectively handle conflict. Aside from listed firms, the regulator requires compliance with corporate governance standards. On the other hand, consider a typical Kenyan corporation. In a typical Kenyan corporation, the shareholders also serve on the board of directors. This is intended for smaller firms with distinct ownership and control roles.
One method to deal with this contradiction is to create performance contracts based on projected returns. The performance contract should be realistic, with consequences for nonperformance, such as wage cutbacks.
Another option for resolving this dispute is to draft good engagement contracts for the directors. The contract should clearly define the scope of obligations and responsibilities, as well as the expectations of the shareholders. To eliminate uncertainty, the company’s policies should be clearly stated. It must be stated unequivocally that directors owe a fiduciary obligation to the shareholders, and if this duty is infringed, consequences will apply. It should also be noted that the director must disclose any relevant facts about a conflict of interest. The engagement contract should include penalty provisions if the director fails to fulfill his commitments.
Another strategy to manage conflict is to ensure that the board of directors includes a stakeholder with knowledge and experience in the company’s activities. This shareholder will act as the shareholders’ “watchdog” and will protect their interests.
The best strategy to manage the disagreement is to use incentive mechanisms for the directors. One approach would be to reward successful directors.Perhaps via pay increases, term extensions, and other benefits.
Giving worthy directors some ownership in the firm has shown to be an effective director motivating strategy. A director with a stake in the firm will guarantee that every decision taken is in the company’s best interest..