What is a stakeholder?
A stakeholder is any entity that has a vested interest in the company and can affect or be affected by the decisions and activities of the company. In simple terms, stakeholders have a ‘stake’ in the success or failure of the company. Stakeholders can be employees, management, customers, suppliers, investors, community, and even shareholders. For instance, shareholders are also stakeholders because the outcome of a company project or decision will impact its share prices and, thereby, its profits.
Types of stakeholders
Depending upon their placement, stakeholders of a company can be grouped into the two following categories:
1. Internal stakeholders
Internal stakeholders are those with a direct relationship with the company, like employment, ownership, or investment. Their interest stems from these direct ties. Common examples of internal stakeholders include employees, executives, and shareholders.
2. External stakeholders
External stakeholders are individuals or organisations that are affected by the actions of the company but do not have a direct relationship with the said company. This includes customers, suppliers, creditors, and the general public. While external stakeholders are located outside the company, they have an interest in the company because its decisions and projects affect them in some way.
Main differences between shareholders and stakeholders
Here’s a list of differences between shareholders and stakeholders to help clarify the stakeholder vs. shareholder debate further:
Different priorities
Stakeholders and shareholders differ greatly in terms of their priorities. Shareholders command a financial interest in the company, whereby they want the company to perform well so that stock prices rise. Their goal is to earn the best returns on their investment through capital appreciation and high dividends. In short, shareholders prioritise revenue increases to safeguard their own financial gains.
Stakeholders, on the other hand, have a varied set of priorities. Apart from financial gains, stakeholders have other vested interests. For instance, internal stakeholders like employees want projects to succeed and the company to perform well so that they can earn incentives and promotions. Certain external stakeholders like customers and end-users may want a good product and great customer service. It is also important to note that sometimes, a company’s stakeholders may have conflicting interests. For instance, shareholders may want the company to maximise profits by underpaying employees or using less expensive technology that pollutes the environment. This goes against the priorities and interests of other stakeholders, like the employees and the general community.
Different timelines
The difference in timelines is another crucial point of contention in the stakeholder vs. shareholder debate. Stakeholders and shareholders have different timelines when it comes to achieving their set goals. Shareholders operate with a short-term profit motive and do not think about the company’s long-term success. They remain invested in its performance only as long as they hold company stock. Shareholders can easily sell their stake in the company and invest in a different company.
Stakeholders operate with a long-term time horizon. They are more focused on the overall performance of the company in the long run rather than short-term stock price fluctuations. For instance, customers want to keep enjoying good products and services, vendors and suppliers want to maintain a stable relationship and profit from a consistent demand, and employees want to work in a company where they are well-treated and have opportunities to grow. This is yet another significant difference between stakeholders and shareholders.
Who’s more important: Shareholders or stakeholders
The stakeholder vs. shareholder debate is not just about highlighting the differences between the two. This debate has long puzzled business analysts - Should companies prioritise shareholder interests and focus on financial gains? Or should companies focus on championing the interests of all stakeholders? Here are the two schools of thought central to the stakeholder vs shareholder debate:
- Shareholder theory
The shareholder theory was introduced by the American economist Milton Friedman in the 1960s. This theory states that it is the duty of a company to maximise profits for its shareholders. Since the company management is working on behalf of the shareholders, they have a responsibility to generate maximised returns for the shareholders. According to this doctrine, decisions regarding any social responsibility must be made by the shareholders and not the company management. In other words, the company is not required to perform any social responsibility duties unless its shareholders deem the action fit.
- Stakeholder theory
The stakeholder theory is a relatively recent one that states that prioritising short-term profits - or shareholder interest - should not be the primary focus of companies. This theory was introduced by business professor Dr. R. Edward Freeman in 1984 and primarily argues against the separation of profits and ethics. It states that instead of creating value for just shareholders, companies should strive to champion the interests of all stakeholders. The theory argues that companies need to acknowledge the interconnected nature of relationships between shareholders, employees, executives, customers, suppliers, and the community. Doing so will help them achieve long-term success instead of just short-term gains.
Why should you prioritise stakeholder theory?
Now that you know the nuances of the stakeholder vs. shareholder debate and the two primary theories guiding governance, it's time to understand which one should be prioritised. According to business analysts, managers, business heads, and executives in charge of leading the company and its projects should give more weight to the stakeholder theory. The reason is simple. Shareholders are more concerned with the short-term performance of the company. They care about actions and policies that will boost share prices and increase revenue.
However, this viewpoint neglects the long-term health of the company. Prioritising revenue and profits can hamper the company’s work culture, business relationships, and customer satisfaction levels. Focusing on the stakeholder theory allows businesses to grow with a holistic outlook that prioritises not just shareholders but also other stakeholders like employees, business partners, and customers. For instance, implementing the stakeholder theory can help companies build a conducive work environment with good employee retention rates. Prioritising the stakeholder theory ensures long-term sustainability for the organisation.
Conclusion
From the above stakeholder vs. shareholder debate, it's clear that shareholders are always stakeholders, but stakeholders may or may not be shareholders. While both shareholders and stakeholders play a crucial role in a company, each operates with a different purpose. Differences between a shareholder and a stakeholder primarily stem from the former’s focus on profits and the latter’s focus on a range of interests—from financial to social. Shareholders are more focused on short-term actions that impact share prices, while stakeholders are focused on the actions of the company with long-term impact. According to stakeholder theory, prioritising the interests of all stakeholders can help companies secure long-term success across different metrics.
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