Shareholders expect a return on their investment and are typically focused on maximizing profits and increasing the value of their shares. Shareholders and stakeholders play a critical role in the success of a business. However, there are distinct differences between the two groups, and understanding these differences is essential for a company to thrive in today's business world. In this article, we will discuss how to understand the differences between shareholders and stakeholders and their importance for business success.
Shareholders own part of a public company through shares of stock; a stakeholder wants to see the company prosper for reasons other than stock performance. Although stakeholders do not have a direct relationship with the company, they may be affected by the company’s actions or performance. Compared to the more socially forward stakeholder model, this more traditionally corporate methodology values the fact that people buy shares to earn money. On the other hand, companies that prioritize the interests of stakeholders can benefit from increased customer loyalty, improved employee morale, and a positive brand reputation.
Shareholders can be individuals, institutional investors, or other businesses. As owners of the company, shareholders have the right to vote on important issues, such as the election difference between shareholders and stakeholders of the board of directors, mergers and acquisitions, and other major decisions. Stakeholders are people who have an interest in the company either directly or indirectly.
If they do not hold shareholder interest, they are still fixed on strong dividend payouts as dividend payouts can affect their personal wage earnings and future career outlook. External stakeholders may be secondary stakeholders who have indirect connections to the company, such as suppliers, customers, and lenders. Internal stakeholders are often thought of as primary stakeholders who have a direct connection to the company, such as employees, managers, and board members. In the business world, there are many terminologies that can be easily confused and construed.
Why you should prioritize stakeholder theory
The distinction lies in their relationship to the corporation and their priorities. Different priorities and levels of authority require different approaches in formality, communication and reporting. Very good knowledge sharing and can learn differences shareholder and stakeholder. The scope of stakeholders is comparatively wider than the shareholders because there are other constituents also apart from shareholders. Shareholders lay emphasis on the return on their investment made in the company.
Reducing expenses will improve the bottom line and make the company more efficient while repurchasing shares will reduce the number of shares outstanding and make each one worth more. The shareholder theory is also known as the stockholder theory or the shareholder primacy theory. It is opposed to the stakeholder theory, which takes into account the interests of all stakeholders when making business decisions. In some cases, majority shareholders are organizers of the company or their descendants. Other than the decision-making process, the majority shareholders can take part in the company’s executive decisions such as appointing or replacing board members, and chief executive officers. A company’s stock valuation is a strong indicator of its success to stakeholders, even if they’re not direct shareholders.
Distributors and community members, however, are examples of external stakeholders. They have a stake in the company's long-term success and are concerned with issues such as corporate social responsibility, environmental impact, and ethical behavior. Stakeholders may exert pressure on a company to act in their best interest, but they may not have the same voting power as shareholders. They are investors who have a financial interest in the company and its success.
- Secondly, shareholders have a financial stake in the company and want to see it generate profits so that they can get a return on their investment.
- In the US, UK, etc., wealth maximization of shareholders is the main corporate objective whereas, in countries like Germany, the interest of the workers is the first priority.
- Employees, customers, creditors, suppliers, etc., who will suffer from what happens in the company, are all company stakeholders.
- The management is able to serve the shareholder’s objective with the help of other stakeholders of the business, and stakeholders are also not doing it for charity.
When all the stakeholders share the input required for growth, the outcome in the form of wealth and welfare should also be shared among all the stakeholders. The third is that stakeholder management is a process of creating value for all stakeholders, not just shareholders. Preferred shareholders have no voting rights, but they are typically guaranteed a fixed dividend and they have priority over common shareholders if the company is liquidated. While Friedman’s theory has been highly influential, it has also been criticized for putting profits ahead of other important considerations. Critics argue that companies have a responsibility to wider society, and that maximizing shareholder value may not always be in the best interests of long-term growth or sustainable profitability.
Types Of Shareholder
Internal stakeholders are those who are directly involved with the company and its operations. This includes owners, shareholders, board members, employees, and management. They have the most direct impact on the decisions and actions of a company.
Stakeholders come in many different forms, from independent contributors to company executives. And they don’t have to be within your organization either—for example, an external agency you work with might be a stakeholder on an upcoming event. Similarly, your customers can be stakeholders when their preferences directly influence your product.
Depending on the type of company, shareholders may have different rights and duties. For example, in a public company, shareholders elect a board of directors to oversee the management of the company. External stakeholders are the ones who don’t have a direct interest in the company but are somehow affected by the company’s performance.
Public groups, creditors, and suppliers are examples of external stakeholders of the business. Anyone who owns common stock in a company can vote, but the number of shares you own dictates how much power your vote carries. That means big investors hold the most sway over a company’s overall strategic plan. The main difference between shareholders and stakeholders is the focus of their interests.
Types of Stakeholder
The stakeholder vs shareholder theory explains how the organization should treat these two entities. Usually, corporations are supposed to give preference to their shareholders, for they provide funds to help the business grow and expand. ShareholderA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. That interest is reflected in their desire to see an increase in share price and dividends if the company is public. If they’re shareholders in a project, then their interests are tied to the project’s success.
Shareholders include equity shareholders and preference shareholders in the company. Stakeholders can include everything from shareholders, creditors and debenture holders to employees, customers, suppliers, government, etc. Therefore, shareholders are owners and stakeholders are interested parties.
Internal stakeholders are the board’s directors and employees involved in corporate governance. Whereas external stakeholders might be creditors, auditors, customers, suppliers, government agencies, and the surrounding community. The shareholder theory has been criticized for its single-minded focus on shareholder wealth and for ignoring the interests of other stakeholders. This can lead to decisions that may be good for shareholders in the short term but bad for employees, customers, suppliers, and society in general in the long term. Shareholders can be either natural persons or legal entities such as corporations.
This includes employees, suppliers, customers, lenders, and the community at large. Every business has both shareholders and stakeholders, but how exactly do these two groups differ? In this article, we’ll delve into the difference between shareholder and stakeholder, as well as present a helpful table to guide you in understanding their respective roles.
Shareholders of a company are always stakeholders, but stakeholders are not necessarily shareholders. Shareholders are more concerned about the short-term success of an entity, whereas stockholders focus on an entity’s long-term success. Really, choosing the ideal model of corporate governance primarily depends on the people involved as well as what kind of organization is being discussed. Specifically, stakeholders are often divided into internal and external categories. Improving shareholder value is not always easy, but it is important for both shareholders and companies.
In the given article excerpt, we’ve broken down all the important differences between shareholders and stakeholders. Shareholder is a person, who has invested money in the business by purchasing shares of the concerned enterprise. On the other hand, stakeholder implies the party whose interest is directly or indirectly affected by the company’s actions. The scope of stakeholders is wider than that of the shareholder, in the sense that the latter is a part of the former. The relationship between the stakeholders and the company is bound by a series of factors that make them reliant on each other. If the company is facing a decline in performance, it poses a serious problem for all the stakeholders involved.
Shareholders are part owners of the company only as long as they own stock, so they’re usually focused more on short-term goals that influence a company’s share prices. That means your organization’s long-term success isn’t always their top priority, because they can easily sell their stocks and buy shares from another company if they want to. During their decision-making processes, for example, companies might consider their impact on the environment instead of making choices based solely upon the interests of shareholders.