While the terms shareholder and stakeholder sound similar and are sometimes even used interchangeably, it’s important to understand their differences. While both groups have a financial interest in a company’s success, they may have very different priorities regarding exactly what they’d like to see it achieve and how.
One of the most foundational things to understand is that shareholders are a type of stakeholder, but stakeholders aren’t always necessarily shareholders.
Got it? Awesome! Let’s jump in and take a closer look at what it means to be a shareholder vs stakeholder and why it matters in the business world.
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What Is a Shareholder?
A shareholder, also known as a stockholder, owns a company’s stocks or shares. A shareholder can be anyone, from an individual to an entire company or institution. If you have an active brokerage account, you, too are a shareholder in any company or companies you’re currently investing in.
As you may already know, a stock share is actually a small piece of ownership in a business. If you’re a buy-and-hold investor, you may remain a shareholder in a certain business for years. If you’re a day trader, on the other hand, you may only remain a shareholder for a few minutes or seconds.
As long as you maintain ownership of a company’s stock, however, you enjoy certain ownership benefits without worrying about the company’s debts. You might receive dividends, for instance, or profit off of selling the company’s stock when it rises in value.
Shareholders may also be able to vote concerning things like the company’s board of directors or company policies. The more shares you own, the more weight your votes will carry when directing certain aspects of the company.
Types of Shareholders
Anyone who purchases even one share of a company on the stock market is technically considered a shareholder. Whether individual retail traders, companies, or other organizations, shareholders come in all shapes and sizes. In general, however, there are two basic classes of shareholders:
The Common Shareholder
Common shareholders are those who own common vs. preferred stocks in a company. Common stockholders enjoy voting rights and the potential for higher long-term rates of return. The trade-off is that if a company should liquidate, they have to wait in line to collect assets after preferred shareholders, as well as debt and bondholders.
The Preferred Shareholder
Preferred shareholders are those who own shares of (you guessed it) preferred stock in a company. While they don’t enjoy voting rights and lower long-term gains, the trade-off comes with its own perks.
They enjoy a guaranteed annual dividend payment that’s paid out before common stock dividends. If the company should liquify, preferred shareholders are also first in line when claiming assets.
What Is a Stakeholder?
As mentioned, shareholders are a type of stakeholder, but the term is far more encompassing. Stakeholders are anyone with a vested interest in seeing the company succeed. Stakeholders may also want to see the company’s stock prices do well.
But stakeholders are typically more interested in seeing the company succeed for reasons beyond mere stock valuation. They tend to be more interested in a company’s profitability from a project management perspective.
In other words, while shareholders may be happy with increased dividends or rising stock prices, stakeholders are more concerned about the company’s future.
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Types of Stakeholders
Stakeholders are not just shareholders alone but anyone interested in seeing the company succeed. This interest usually stems from a financial motive, such as a direct relationship with the company. In general, there are two different types of stakeholders: internal stakeholders and external stakeholders.
Internal stakeholders are those who directly rely on the company financially. Their interests in the company are more obvious because its success directly affects their own. They may include:
- Company executives
- Board members
External stakeholders are those who stand to be affected by the company’s performance, but usually in an indirect way. While they may not work at the company itself, they might be suppliers or subcontractors who count the company as clients.
The company’s customers or members of its community can also fall into this category. The government and regulators could be considered external stakeholders, as the company’s advancements equal more jobs and a better economy.
While “external stakeholder” tends to be a much broader term, examples include:
- Community members
- The company’s customers
- Shareholders and Investors
- Governments and regulators
- Local community
Shareholder vs Stakeholder: Key Differences
Now that we’ve established a broad overview of a stakeholder vs a shareholder, it’s time to dig deeper into why the distinction is so important. Shareholders and stakeholders both want to see a company succeed. But they sometimes have very different ideas about what exactly that success should look like and how it should be achieved.
Some main differences between shareholders and stakeholders are their motivations and timeframe.
Few would be surprised to learn that shareholders are primarily interested in a company’s stock price. While some shareholders may take an active interest in the company’s operations, others could care less if its stock performance is on point.
On the other hand, stakeholders have a long-term interest in the company’s profits. While stock appreciation is certainly nice, their motivation centers more around the company’s long-term health. They may be interested in things like a company’s ESG performance, for instance, and willing to sacrifice short-term profits in favor of long-term goals.
This may not seem like the smartest way to go to shareholders, who are sometimes less concerned with the company’s business ethics and more interested in ways to increase its financial return. Shareholders may think outsourcing to international suppliers or using cheaper distributors is a solid plan to help cut costs.
Stakeholders may completely disagree due to concerns about the quality of the company’s products and the impact such tactics could have on its long-term operation.
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As you may have guessed from the context clues above, some shareholders are less invested in a company’s day-to-day operations. After all, they can always share their stock at any time.
Their involvement with the company may begin and end with its share price. As long as a company can increase profits, keep the dividends flowing, and grow its stock prices, the average investor who owns shares may be content. There can be exceptions, of course, especially for very prominent shareholders who own more shares.
Of course, stakeholders are the far more interested parties regarding how the company’s assets are handled. This is especially true for the average internal stakeholder. From employees and project managers to its board and executives, far more is at stake when making informed decisions about the company.
Its business partners are likewise interested in the company staying afloat so they can continue with a profitable partnership. Stakeholders tend to focus on long-term relationships with the companies they depend on.
Shareholder Theory vs Stakeholder Theory
Since publicly traded companies are responsible to stakeholders and shareholders alike, the challenge becomes figuring out which to focus on. For many years, business analysts have debated over the best approach.
Over time, two different theories have emerged. Here’s a breakdown of the stakeholder vs shareholder theories.
The shareholder theory was first developed in the 1960s by Milton Friedman, a prominent economist. The theory states, “An entity’s greatest responsibility lies in the satisfaction of the shareholders.”
Friedman believed that corporate social responsibility lay in creating the maximum possible profits for shareholders. He also believed that shareholders had a social responsibility to use their voting power to make key decisions about how the company operated and treated its employees and customers.
Under the shareholder theory, aka stockholder theory, company executives were the employees of anyone who had invested in their company. Thus, the company’s managers were duty-bound to generate the highest possible return on each stockholder’s investment.
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In 1984, philosopher and business professor R. Edward Freeman proposed a whole new theory. In his landmark book Strategic Management: A Stakeholder Approach, Freeman questioned the wisdom of considering a company primarily responsible for its shareholders’ interests alone.
Freeman pointed out that shareholders and stakeholders play important company roles and deserve consideration. His stakeholder theory pointed out that not only do companies have certain social responsibilities to each group but that a stakeholder management approach makes sense and offers a better outcome for everyone.
After all, if a company’s employees aren’t happy, they may not bring their best work to the table. If customers’ needs aren’t considered, then the odds are that sales and earnings may slip. Given the effect that this can have on a company’s share price, focusing on stakeholders is actually a key part of ensuring the greatest odds of success for shareholders as well.
The Stakeholder vs Shareholder Debate Today
In recent decades, many companies have realized the wisdom of broadening their stakeholder focus to include considerations beyond mere stock value. Not only did Freeman have some excellent points about the things that make a company’s share value rise in the first place, but the investing world has largely changed since the shareholder theory was first introduced.
With the rise of commission-free brokers, the stock market is far more available to everyday retail investors. While some investors still buy and hold many shares for many years, this is not always the norm among more casual individual investors.
With the rise in popularity of day and swing trading, there are now whole classes of investors with no interest in conducting a company’s long-term operations. Not that there’s anything wrong with that. It’s just an important consideration to consider when considering what a stakeholder vs shareholder can realistically be expected to contribute to a company’s direction.
These days, stakeholder management is becoming much more inclusive to cater to the needs of stakeholders and shareholders alike. This approach allows companies to concentrate less on short-term moves and make more informed decisions that will shape the future of their business and partnerships for years to come.