Stakeholder vs. Shareholder

Two terms in the finance industry commonly believed to be synonymous are “stakeholder” and “shareholder.”

The similarity between the two words is understandable — both refer to people or groups who invest or have an interest in a certain company. Strictly speaking, however, there’s a difference between the two.

This post compares stakeholder vs. shareholder.

What Are Stakeholders?

A stakeholder is any party, group or individual with a special interest — or stake — in a certain company. They can include employees, customers, localities, parts of the supply chain and the government or non-governmental organizations (NGOs).

A group of stakeholders in a company experiences the direct effects of that company’s performance and decision-making.

An employee who gets a raise feels the benefit of that decision, as does their family; a parts manufacturer depends on the company’s orders for new product components; a local water preservation group may be concerned about a new factory being built near an endangered fishing stream. All of these individuals and groups are stakeholders.

Stakeholder management is not to be overlooked. While stakeholders may not impact a stock’s value directly, they influence how the company is perceived and can significantly impact its values and practices. In light of this fact, all companies would do well to communicate with their stakeholders. 

What Are Shareholders?

Shareholders have a direct financial interest in a certain company. They own shares or equity in a corporation and are considered co-owners in a way.

The impact on them is fiscal. Investors, venture capitalists, banks, fund managers and others who own company stock are classified as shareholders.

Shareholders enjoy several unique privileges. Many shareholders in a given company have regular meetings, either virtually or in person. At these meetings, they generally have the option to vote on company business, like appointing candidates to the Board of Directors.

Companies also pay attention to what’s on their investors’ minds. Majority shareholders can steer a corporation’s direction dramatically, but its overall trajectory relies on its many minority shareholders too.

As a group, they can impact the company’s trading volume, which can in turn affect share prices. They hope to drive up share costs, as they’ll earn a bump in their portfolio value (or collect occasional dividends) by doing so.

Differences Between Stakeholders and Shareholders

In business and corporate governance, it is important to understand the difference between stakeholders and shareholders. Both groups have significant roles, but their interests and influences differ. Stakeholders include a wide range of individuals and entities. They are affected by or can affect a company's operations. This group includes employees, customers, suppliers, and the community. In contrast, shareholders are individuals or institutions that own shares of a company's stock. They have a financial investment and a direct interest related to the company's profitability and performance. Understanding these differences helps us appreciate how each group contributes to a company's success. It also highlights the complexities of balancing their often conflicting interests.

Priorities

A shareholder is a stockholder. They earn capital when the shares they hold go up in price and lose it when the price declines. Though a shareholder may care about numerous aspects of business, their primary objective is to earn more money.

By comparison, stakeholders have a broader range of priorities.

Employees, project managers, customers, suppliers and warehouse workers all interact with the company and are affected by the decisions it makes. Stakeholders can also include community groups, activists and government entities that monitor and regulate the industry.

Priorities of stakeholders run the gamut. Employee well-being, social responsibility, environmental impact, compliance and customer fulfillment are just a few areas of stakeholder concern. They can also worry about finances, of course, but their interests go beyond the bottom line.

Short-Term vs. Long-Term Timelines

Two philosophies influence choices in the investment market: short-term gains and long-term potential. The relationship between the two is reflected in the question of stakeholder vs. shareholder.

Many active shareholders have short-term goals: they want to turn a profit, preferably quickly. This involves taking a position that’s short in length. The shares may be in a company experiencing frequent price fluctuations that the short-term investor wants to take advantage of. Short positions are riskier by nature.

Stakeholders have different hopes and desires for the company, and most of them have nothing to do with short-term gains. However, at times stakeholders take the short view. Customers like bargains, so they flock to Amazon on Prime Day. Similarly, employees may be concerned about workplace conditions that arise quickly, and government regulators may be focused on paperwork deadlines on compliance issues.

Shareholders and stakeholders are likely to have similar views on long-term timelines.

Investors who buy and hold shares are betting that the company will remain stable and profitable. Part of their analysis includes considerations of factors and fundamentals besides finances.

Company health, market share, management direction and environmental responsibility are a few of them. Many stakeholders feel strongly about those same four issues.

Even with overlapping long-term concerns between the two, the primary difference goes back to motivation. Shareholders are driven by profits, while stakeholders are focused on fairness and change.

Shareholder Theory

Shareholder theory was popularized in the early 60s by economist Milton Friedman. However, it’s been around in some form since the advent of public stock ownership.

The premise is simple: a corporation is required to make policies and practices that will boost its shareholders’ profits.

The measures a company takes must be legal, but the bottom line is increasing share prices (a concept known as shareholder primacy). Shareholder capitalism drives management actions like hiring and layoffs, price-cutting, budgeting and expansion.

There is a reciprocal stakeholder theory, of course. According to stakeholder capitalism, everything a corporation does must align with ethical, social and practical directives. However, it’s fair to say that for the vast majority of corporations, shareholder theory is much higher in mind.

Company Ownership

A public company is owned by its investors, who hold shares in its stock. Even if a majority shareholder reaps the most reward from profits, every shareholder gets a piece of the pie.

Stakeholders don’t have to be shareholders, though many are. They can have a deep interest in and feel the effects of company strategy, but they don’t have to own shares to do so.

Importance of Balancing Interests

Balancing the interests of stakeholders and shareholders is crucial for business success. Focusing only on shareholder value can bring short-term gains but may cause long-term problems. These issues include unhappy employees and poor customer relationships. Engaging with stakeholders—like employees, customers, suppliers, and the community—encourages collaboration and innovation. This boosts morale and productivity. It also helps businesses adapt to market changes and improves risk management. A good reputation, built on stakeholder satisfaction, attracts customers and investors. Therefore, it is vital to balance these interests for both immediate financial gains and long-term sustainability.

Sustainable Growth

Balancing stakeholder and shareholder interests is vital for long-term growth. Engaging with stakeholders like employees, customers, suppliers, and communities helps build strong relationships and loyalty. A motivated workforce is more productive and innovative, which improves product quality and customer satisfaction. A good reputation within the community can lead to better brand loyalty and market share. When a company balances these interests well, it enhances its reputation and drives consistent revenue growth. This ultimately benefits shareholders with sustained profits and increased stock value.

Risk Management

A balanced approach to stakeholder and shareholder interests is important for risk management. Companies that engage with their stakeholders can identify potential conflicts or crises. For example, negative public relations from poor labor practices or environmental issues can harm a company’s reputation. This, in turn, can affect shareholder value. By considering stakeholder perspectives, such as community concerns and employee feedback, companies can create strategies to address these issues early on. This approach protects shareholder interests and fosters accountability and transparency in the organization.

Enhanced Innovation

Incorporating input from diverse stakeholders can boost innovation and competitiveness. Collaboration with customers offers valuable insights into their preferences and needs. This helps companies tailor their products and services effectively. Engaging with suppliers can create more efficient processes and save costs. Involving employees in decision-making encourages creativity and idea sharing. This collective approach can lead to unique products, services, or business models that distinguish a company from its competitors. Ultimately, improved innovation can increase market share and profitability. This benefits shareholders and meets stakeholder expectations.

Stakeholder vs. Shareholder Capitalism: Coexisting is the Way

Stakeholder capitalism and shareholder capitalism are two approaches to corporate governance. Shareholder capitalism focuses on maximizing financial returns for shareholders. This can drive efficiency and innovation. However, it may lead to short-term thinking and neglect of social responsibilities. On the other hand, stakeholder capitalism prioritizes the interests of all stakeholders. This includes employees, customers, communities, and the environment. It promotes sustainability and ethical practices. However, it may lack the financial discipline needed for long-term shareholder value creation.

Companies can achieve a balance by combining both models, emphasizing not just shareholder profit but also social responsibility. This mixed strategy promotes ethical decision-making, encourages sustainable practices that improve brand loyalty and employee satisfaction, and ultimately benefits shareholders.

Companies can strengthen their resilience and adjust to changing societal expectations by adopting a strategy that considers both profit and purpose. Balancing the needs of stakeholders and shareholders can improve corporate governance, align interests, and promote long-term success in a market that values responsibility.

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