There are several challenges new investors must overcome to attain financial success. Among these difficulties is the terminology commonly associated with business and financial practices. Those who are first becoming comfortable with the inner workings of accounting and financial business may find the language used in everyday investments to be exclusive or overwhelming. The good news is, with the right education and practice, this barrier can be easily overcome.
A common spot for confusion in the investing world is the difference between a stakeholder vs. shareholder. Each of these terms refers to an essential aspect of company ownership — though they carry different meanings, using these terms interchangeably could lead to numerous confusions. In this article, we’ll explore the roles of stakeholders and shareholders to help enlighten readers about the proper phrasing and correct usage of stakeholders and shareholders and improve your investing education today.
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What Is A Shareholder?
A shareholder is someone who owns one or more shares of a company and therefore has invested in that company’s potential success. Shareholders can be individuals, other companies, or institutions as long as they own at least one share, and they are often referred to as stockholders. Shareholders earn payments from a company’s profits, which are paid through dividends. They are subject to capital gains, though they are not responsible for debts incurred by the company.
In some cases, shareholders have the power to affect the management and decisions of said company (though this will vary based on the type of share). They can buy and sell their shares as they see fit and even walk away from the company completely. For example, if you purchased stocks in a company as part of your investment portfolio you could be considered a shareholder. To get an idea of what a shareholder can anticipate being involved in within a company’s operations, some of the typical shareholder rights include:
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Ability to sell and sell company shares
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Vote on and nominate members of the board of directors
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Gain information on publicly traded companies
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Vote on mergers or changes to corporate systems
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Receive dividends and sue for violation of fiduciary duties
Common vs. Preferred Shareholders
There are two main categories of shareholders: common vs. preferred. A common shareholder owns common stock dividends in a company, which are set by a board of directors. Common shareholders receive voting rights along with their shares and have some control over management. However, if a company were to liquidate its assets common shareholders are among the last to receive payment (after preferred shareholders).
Preferred shareholders, on the other hand, own preferred stock in a company and receive annual dividends. These shareholders do not have voting rights or a say in the company’s operations. While preferred shareholders might have a higher claim to a company’s dividends and quicker access to assets gained during a liquidation, they have more limited rights than common shareholders.
What Is A Stakeholder?
A stakeholder is someone who is affected by or can affect the operations of a company. They have some type of interest in the organization without necessarily owning stocks or shares. Stakeholders can include employees, customers, investors, owners, suppliers, and more. In general, stakeholders are thought to have a more long-term interest in a company when compared to shareholders.
More recently, the definition of stakeholders has even been extended to include governments, trade associations, and local communities. The reason for this is because so many people can be affected by what a company does — regardless of whether or not they have direct ties to ownership. Because of the broad definition of stakeholders, they are generally divided into two main categories: internal and external.
Internal Stakeholder Example
An internal stakeholder is anyone who has direct ties to the company, or who contributes to the internal operations. This typically includes business owners, investors, employees, and volunteers. For example, the marketing department manager inside of a company has a direct impact on the day-to-day operations. They also likely depend on income from the company and work towards organizational goals. This marketing manager would be considered an internal stakeholder.
External Stakeholder Example
The term external stakeholders typically catches anyone impacted by a company, without being involved in its regular operations. This category includes customers, trade associations, communities, and more. For example, the residents of downtown San Diego could be considered external stakeholders in Petco Park. These residents are impacted by the events hosted at the park and may feel attached to its performance. However, their interest in Petco Park is not a direct result of their ownership or involvement.
Stakeholder vs. Shareholder: What’s The Difference?
Now that we’ve explored what a stakeholder and shareholder is, let’s explore the difference between the two. The difference between stakeholders and shareholders is the way a company impacts them. Shareholders have ownership of a company and are directly impacted by its profitability. For the most part, the main interest of shareholders is a high return on investment. For this reason, shareholders are primarily interested in the short-term horizon of the company — which directly impacts stock prices.
On the other hand, stakeholders span far beyond those who own shares in a company and receive dividends. Stakeholders are anyone impacted by the regular operations and performance of a company, and while they can be interested in profitability in many cases, it is not their primary focus. In terms of timelines, stakeholders are more focused on a company’s long-term goals. Essentially, stakeholders want the best for the organization overall instead of focusing specifically on stock prices.
Shareholders can be considered stakeholders, but the opposite statement is not necessarily true. Stakeholders may own shares, such as in cases where employees are given an amount of stock as a sign-on bonus, but in many cases do not. Further, while all companies have stakeholders, not all companies have shareholders. This is because only some companies choose to go public and sell shares. This is especially the case for small businesses that are still expanding their scale of service. For example, the cafe up your street likely does not have shareholders — but it would have stakeholders (customers, neighboring businesses, suppliers).
Stakeholder vs. Shareholder Theories
As one might imagine, the difference between stakeholders and shareholders has been studied by business analysts for years. Many large companies recruit these analysts and financial professionals to seek and identify the right balance of involvement to support business success. While every company will feature unique operations, financial experts have created a few different schools of thought regarding identifying and implementing this balance of shareholders and stakeholders within a business’ operations. Let’s explore a few of these different approaches.
The Stakeholder vs Shareholder Theory
The stakeholder vs. shareholder theory aims to answer the question: What should businesses pay more attention to; shareholders or stakeholders? Financial analysts seek to identify the right balance for businesses, which has resulted in the creation of the stakeholder vs. shareholder theory. This theory aims to answer the question: what should businesses pay more attention to? One side argues that profits (and shareholders) should be the ultimate focus of a company. This viewpoint does not say that companies should be exempt from regulation, but simply that profits should be the main consideration when operating a business. This theory was introduced in the 1960s by economist Milton Friedman and is sometimes called the Friedman doctrine.
While partiality toward this theory might indicate a money-driven work-life, the goal is to make shareholders and, in turn, stakeholders happy all around by increasing their financial returns. Businesses who adopt this viewpoint consider their profit to be a social responsibility to their shareholders. The main criticism of this field of thought is the lack of consideration toward those who may not be experiencing these returns. With the increased popularity of corporate social responsibility, other viewpoints have emerged.
Stakeholder Theory
An opposing viewpoint, called stakeholder theory, was introduced in the 1980s by Dr. R. Edward Freeman and focuses more on business ethics and social responsibilities. This viewpoint focuses on business ethics and states that companies must create value for all stakeholders rather than just focusing on those with shares. Freeman’s theory claims that by focusing on stakeholders, employees will be more motivated to work and customers will be more interested in the services or offerings.
This might mean considering local communities that an environmentally-based project might heavily impact, or ensuring company employees have access to proper training during onboarding. He also states that if companies violate laws or regulations, they will spend time and resources settling lawsuits or other complaints. Instead, focusing on each stakeholder’s business can generate more long-term stability and earnings.
Stakeholder vs. Shareholder: Project Management Influence
Both stakeholders and shareholders can influence project management within a company, though they do so in a few different ways. Stakeholders (remember: employees, customers, or volunteers) can directly impact the outcome of a project by their performance. From a project management perspective, this means stakeholder needs and expectations should be considered when planning. This can help ensure the success of a project while minimizing backlash and opposition. Therefore, a project proposal that considers stakeholders will be more likely to succeed, from the project development stages to the customer experience.
Shareholder influence essentially revolves around the fact that shareholders want a company to be profitable, so they can benefit from the returns. While they are not involved in the day-to-day business operations, they are rooting for the success of each project as long as it aims to boost a company’s value and increase its personal profit. This perspective should be considered throughout each project’s life cycle, as shareholders will be counting on them. At the end of the day, if a company seeks to have well-rounded and positive business operations, it must pay attention to both stakeholders and shareholders when launching a new project or making major business changes.
Summary
Anyone involved in a business or investment should set aside time to learn the terminology used to describe today’s financial landscape. Understanding the difference between a stakeholder and a shareholder can go a long way in terms of successfully navigating current and future investments. For example, when looking at the differences between a stakeholder vs. shareholder investors can identify the motivation behind certain business practices. This knowledge can enable investors to make more informed decisions about project planning, communication, and even portfolio management.
Whether you’re looking to invest in a company with a strong shareholder culture or simply want to know what the definition of stakeholders and shareholders is, Fortune Builders is here to help you learn everything you need about making smart investments within any financial market. Can you think of any other examples of stakeholders we left out? Share in the comments below.
Can you think of any other examples of stakeholders we left out? Share in the comments below.
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