However, there are some important differences between the two. Understanding these can help businesses plan better and do more for both their shareholders and stakeholders. Shareholders are always stakeholders, but stakeholders are not always shareholders.
What Is a Shareholder?
A shareholder is any entity that owns a share of the business. Publicly traded companies offer shares on the stock market, and an individual, company or institution can buy a share and essentially become a part-owner of a business (albeit a very small part). The board of directors represents shareholders, and through their ownership of at least one publicly traded share, they have certain rights regarding the way the company is run. They can buy and sell their shares without interruption, and they receive dividends based on the success and profitability of the business. They can also nominate board members and vote in board elections and have a say when it comes to mergers, acquisitions, takeovers and any changes to a company’s rules. Although shareholders are partial owners of the company, they are not liable for any of the company’s debts, nor do they need to stay with the company. They can choose to sell their shares whenever they want to. Shareholders, therefore, do not need to be in it for the long term, although they do want to see the company succeed for their own financial success; the more profitable the business is, the more their dividends are worth, and the higher the share price will go.
What Is a Stakeholder?
Stakeholders, on the other hand, is a much broader term to describe anyone who has a ‘stake’ in the company. This can include:
Owners Shareholders Board members Employees Customers Suppliers Distributors
It can also include the local community around the business and the government. Corporate social responsibility (CSR) rules mean that businesses now have to consider the wider world in terms of impact on a local and global scale. Stakeholders can be internal, like employees or board members, or external, like suppliers and distributors. Both of these types of stakeholders are reliant on the long-term success of the business for mostly financial reasons. In short, a stakeholder is anyone with a vested interest in the success of the organization. Stakeholders even exist in companies that do not have shareholders, like public universities.
What Are the Similarities?
Both shareholders and stakeholders have an interest in the company being successful. They want the business to grow and develop because they will both benefit from this financially. They also both need to be considered when decisions about the company are being made. The interests of both stakeholders and shareholders have to hold value, especially when it comes to questions that might affect profitability and growth (or takeovers and buyouts). While their level of personal involvement might differ, shareholders and stakeholders will both have an interest in and an awareness of how well the business is doing and an idea of the company’s direction.
What Are the Differences?
The differences between shareholders and stakeholders form a much bigger list, so it can be a bad idea to lump them all together when considering the wider group of people to whom the company is answerable.
Short-Term/Long-Term Investment
Shareholders are more likely to be in it for the short-term, looking for dividends and growth that make their financial investment grow. If the business is not performing well, or the company moves in a direction that the shareholder is not happy about, they can sell their shares and walk away at any time. Shareholders will maintain a relationship with a company for as long as that company can meet its expectations. Stakeholders, on the other hand, are usually in it for the long term. Due to the nature of their relationship with the business, some might not even have the option to ‘choose’ to be a stakeholder, and it is not as easy to walk away from a business when you are physically or financially tied to it, like an employee or a member of the local community.
A Focus on Stock Price vs Longer-Term Success
For the shareholder, the immediate priority is the stock price. Shareholders want the business to grow to increase the value of their portfolio, so they only want to see positive moves in the business to protect their investment. Receiving dividends on their shares can only happen if the business is profitable, and the more profit that the organization can make, the more dividends the shareholder will receive. This short-term view could cause profitability to suffer; therefore, shareholders are more likely to be concerned with what the stock market is saying. Stakeholders, on the other hand, tend to be less interested in the stock price and more invested in long-term success. This means that stakeholders are less likely to be concerned about short-term price movements on the market and more likely to be amenable to decisions that could negatively affect that price, such as a merger or takeover. Stakeholders have that stake in the business, which makes it more beneficial to them if there is long-term success, so slow growth or a period of uncertainty following an acquisition or a buyout is preferable to a quick rise on the stock market. Because there is a broader range of criteria for success, the stakeholder is more likely to sacrifice profit for more long-term benefit. Shareholders can be completely hands-off in the running of the business, just receiving their dividends as and when they become due. They have the right to vote and be involved in the business, but they don’t have to be. Stakeholders are not always directly involved either. This is true of suppliers or distributors as well as the community. They don’t necessarily make any decisions in the business, even when those decisions have a direct effect on them. In general, it can be said that shareholders tend to have an indirect relationship with an organization, whereas stakeholders tend to have a more direct relationship. Shareholders can choose whether to have a relationship with the business by buying a share (or selling one, of course). This is one of the most important differences when it comes to relationships – the idea of it being voluntary. A shareholder volunteers to be involved with the company. Stakeholders, in several ways, are not always able to ‘opt out’ in the same way. In theory, an employee can leave if they don’t like the direction a company is going, but in practice, that is not always the case. For some external stakeholders, like the local or wider community where the business is based, they cannot just decide not to be stakeholders. They need the business to survive, whether that is to provide jobs or a specific product or service. The CSR rules mean that, globally, we are involuntary stakeholders in every business. The companies making decisions about reducing their carbon footprint or planting trees directly affect our environment; therefore, we could be considered to be involuntarily invested in their success.
Level of Decision-Making Input
Shareholders would appear to have the most power here, with the shareholder rules stipulating that they can nominate and vote on board members and have a say in decisions that could affect their profit levels. However, in practice, the general consensus is that businesses tend to make their decisions based on what is best for the stakeholders in general – remembering that shareholders are a subset of the stakeholder category. Stakeholders do not usually have direct power to influence decisions, but their opinions are often sought before big changes are made. Shareholders, therefore, are part of the wider group of stakeholders, which includes employees, suppliers and the board of directors for a business. To be a shareholder, you need to own at least one publicly traded share of a company. To be a stakeholder, you need to be personally invested in the business, whether financially (like a shareholder, employee or supplier) or involuntarily (for example, because the business is in your local community). However, the shareholder wants the stock price to go up and the profits to increase so that their investment portfolio has more value and they receive more in dividends. Stakeholders, on the other hand, are more invested in long-term success, which might mean sacrificing short-term profits and a few points on the stock exchange for robust changes into the future. In this way, they are not conflicting interests, but they are slightly divergent. Put forward in 1970, the shareholder theory was considered the way to do business, based on the idea that the success of a business could only be gauged by how much profit they made. It is now considered an outdated view. Stakeholder theory is a more modern convention created by Edward Freeman. It states that a company’s main responsibility is to its stakeholders and that a business should exist for more than just making a profit. This viewpoint is backed through the wider net of stakeholders in a business that has been introduced thanks to CSR (corporate social responsibility) and more global accountability in things that matter, like pollution, carbon footprints and local community impact. They can nominate people to the board of directors and help decide on whether there should be any mergers or acquisitions, whether a buyout should go ahead, and any changes in the direction a company is taking. However, as shareholders are also stakeholders, and modern businesses are invested in working for all stakeholders, it could be seen that stakeholders are actually more influential.
The owner Board of directors Shareholders Employees Suppliers Distributors Bondholders (control the debt of a company) Customers/clients Local community (job availability, local charity work through corporate social responsibility) Government (collects taxes) Wider community (reducing carbon footprint and protecting the environment)
While both shareholders and stakeholders want a company to be successful, the shareholder is more likely to be involved for short-term profit to increase their investment portfolio and receive increasing dividends. The stakeholders are more interested in long-term success and are therefore more willing to sacrifice short-term profit for long-term growth.
