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. Stakeholders represents the entire micro-environment of the business.
While shareholder own the company’s share by paying the price for it, hence they are the owners of the company. In contrast, stakeholders, are not the owners of the company, but are they are the parties that deal with the company. In the given article excerpt, we’ve broken down all the important differences between shareholders and stakeholders.
Shareholder vs. stakeholder theory explained
Shareholder vs. stakeholder theory looks at how companies interact with and hold themselves accountable to shareholders and stakeholders. One viewpoint is that a company’s first responsibility is to its shareholders, and therefore its number-one priority should be to increase profits as much as possible. Shareholder theory was first introduced in the 1960s by Milton Friedman. Friedman argued that the cyclical nature of business hierarchy meant that corporations are primarily responsible to their shareholders.
On the other hand, stakeholder theory suggests that companies prioritize ethics and create value for all stakeholders, not just those who hold shares. Stakeholder theory was first put forth by Dr. Edward Freeman in the 1980s. Along with the rise of corporate social responsibility or CSR, stakeholder theory has helped create better working environments and benefits for employees, particularly in industries with poor working conditions.
Viewpoints of Stakeholders vs. Shareholders
Stakeholders and shareholders have different viewpoints, depending on their interest in the company. Shareholders want the company’s executives to carry out activities that have a positive effect on stock prices and the value of dividends distributed to shareholders. Also, shareholders would want the company to focus on expansion, acquisitions, mergers, and other activities that increase the company’s profitability and overall financial health.
On the other hand, stakeholders focus on longevity and better quality of service. For example, the company’s employees may be interested in better salaries and wages, rather than on higher profitability. The suppliers may be interested in timely payments for goods delivered to the company, as well as better rates for their products and services. The customers will be interested in receiving better customer service, as well as buying high-quality products.
How They’re Categorized
Shareholders are a subset of the larger stakeholders’ grouping, but don’t take part in the day-to-day operations of the company or project. Shareholders do have some rights as owners of the company, which are detailed in the company’s charter, such as the right to inspect financial records—especially if they’re concerned about how the company is being run by its top-tier executive suite.
There are some organizations that don’t have shareholders, such as a public university, which has many stakeholders. These include students, families, professors, administrators, employers, state taxpayers, the local and state communities, custodians, suppliers and more.
How stakeholders and shareholders influence a company’s decision-making process
Shareholders and stakeholders often have divergent interests based on their relationship with the company or organization. This can lead to conflict during negotiations for mergers and acquisitions, as shareholders often support the move because of the higher dividend they will receive. However, company stakeholders like employees, suppliers and management may not support such deals because it can lead to job losses and disruption of supply chains.
In the past, shareholders had an overwhelming influence on their corporation’s policies because they have ownership and voting rights. Most companies emphasized profit maximization at the expense of other stakeholders. However, the growing importance of corporate social responsibility has given stakeholders more input in the affairs of organizations.
Corporate social responsibility demands that a company consider the interests of shareholders and other stakeholders when making decisions. Nowadays, many companies consider the input of different stakeholders who will be affected by their actions before they make a final decision.
For example, a company whose plants will pollute a community’s water supply may invest in a treatment plant to provide safe drinking water to affected areas. Corporate social responsibility can also motivate a firm to set up a college scholarship in the name of a retired executive.
- Shareholders of a company are always stakeholders, but stakeholders are not necessarily shareholders.
- Employees, company executives, and board members are internal stakeholders because they have a direct relationship with the company. Suppliers, distributors, or community members are types of external stakeholders.
- Shareholders primarily focus on a company’s profitability and share price. Stakeholders generally care about a company’s overall health.
- Shareholders’ interest in a company can cease the minute they no longer own shares. Stakeholders, on the other hand, typically have a more long-term interest in a company because their ties are more complex and not broken as easily.