Stakeholders vs shareholders: the crucial differences
With the rise of stakeholder capitalism and a greater appreciation of corporate impacts on the wider world, organisations are moving away from the concept of shareholder centricity towards a wider perspective on stakeholder priorities. To achieve this, it is vital that they recognise the differences between shareholders and stakeholders, and their various roles and stakes in the business.
The shareholder concept versus the stakeholder concept
Shareholder theory has held dominance for decades, gripping tight to the belief that the primary purpose of corporations is to act in the interests of the owners of the company – generating profits in order to pay dividends to the investors who have bought a stake in the business. In following this model, business decisions will preference shareholders and their financial interest in the company.
Recently, however, the theory of stakeholder pre-eminence has started to take hold within businesses. Its resurgence is part of a wider social shift towards models of stakeholder capitalism driven by a growing focus on corporate social responsibility (CSR). In the wake of the worldwide Covid outbreak, urgency over the climate emergency, increased recognition of environmental, social and governance (ESG) issues and popular movements calling for corporations to honour their social contracts, stakeholder priorities are becoming the new business imperative.
Stakeholder theory is based on long-term value creation for all. To achieve this, the needs of all stakeholders have to be considered, weighed and prioritised.
Keeping the activities of the company aligned with the interests of all stakeholders is central to generating sustainable success. Businesses therefore need to be very clear on who their stakeholders are, and the differences between stakeholder versus shareholder demands, in order to ensure they are acting in a way that serves broader stakeholder priorities.
The definition of a shareholder
A shareholder is a party with a definable financial interest in an organisation. Any individual, company or institution that owns a single share in a business is classed as a shareholder.
Shareholders’ focus is financial, and centres on business growth, profitability and the distribution of dividends. The role of the shareholder is to drive that financial success.
Some shareholders work within the company, while others are external entities. They might be an individual selecting investments for a pension portfolio, an institutional investor, an employee who receives shares as part of their remuneration package, or an outside organisation looking to grow its profits or sector influence.
Owning shares doesn’t confer the right to make business decisions, or be otherwise involved in the running of the company, but shareholders can nonetheless impact the management of the business. For example, shareholders might exert influence by voting at AGMs on executive appointments and pay, mergers and acquisitions, and investor pay-outs.
Shareholders who do not work within the company may have a short-term relationship with it, limited simply on the purchase and subsequent sale of shares when the price is right. Shareholders are also not liable for a company’s debts should it go into liquidation – although they will suffer a loss in the value of their portfolio when that company’s share price is wiped out.
Who are the stakeholders?
While all shareholders are by definition stakeholders in an organisation, there are many stakeholders who are not shareholders.
A stakeholder is anyone with a vested interest in the performance of the company, financial or otherwise.
The role of the stakeholder depends on their relationship with the company, as different types of stakeholder have various impacts on the operation of the organisation. They can be broadly divided between internal stakeholders and external stakeholders. The former are primary stakeholders with a direct relationship with the business, and include employees, board members and investors. The latter are more diverse, encompassing secondary stakeholders such as suppliers, the local community, and regulators.
In addition to shareholders as detailed above, corporate stakeholder groups include, but are not limited to:
- Employees: Their stake in the performance of the business is economic – continued employment – and purpose driven – desiring an employer aligned with their own sense of what success means.
- Customers: Their willingness to purchase products and services impacts the bottom line, and their opinions influence others to do the same.
- Suppliers: An effective supply chain is essential to business continuity. Unbroken supply requires the maintenance of good communication and supplier relationships.
- Government regulators: Regulation directly impacts the ability of the business to operate legally, and failure to do so can result in fines, litigation, or suspension of trading.
- Trade bodies and professional associations: Membership of these, which adds legitimacy to business operations, is dependent on meeting set professional standards.
- NGOs and advocacy groups: Such organisations can damage the corporate reputation of businesses falling foul of their campaigns, or enhance that of those they support.
- Local communities: The local community can support a company in terms of sales and providing talent, but can also hinder operations if they oppose how and where it does business.
- Media outlets: Coverage in the media can impact how other stakeholder groups view the organisation, and how they behave towards it.
The future of shareholders versus stakeholders
As shareholder theory is increasingly overtaken by stakeholder capitalism, shareholder focus is being replaced by a wider perspective on stakeholder priorities. The traditional roles of various stakeholder groups are also changing. In the super-connected, hyper-transparent digital world, stakeholder opinions are publically broadcast and carry greater weight. Their expectation is that corporations will hear them, and act accordingly.
Business which do not will struggle to remain sustainable in the long-term.
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