Stakeholders Vs. Shareholders: Key Differences

If you follow business news or work in an organization, you’ve likely heard the terms “stakeholders” and “shareholders” used frequently. While they may sound similar, stakeholders and shareholders actually serve very distinct roles. Understanding the differences is important for both managing and investing in companies.

Shareholders are individuals or institutions that purchase shares of a company’s stock, thereby acquiring an ownership stake and percentage of that company.

Stakeholders are parties who have an interest in the company but do not own shares. This includes employees, customers, vendors, nearby communities, industry organizations, and others impacted by the business.

In this article, we’ll unpack the characteristics that set stakeholders and shareholders apart and explain why both groups matter.

Equity: Do They Own Part of the Company?

The most fundamental difference between stakeholders and shareholders involves ownership and equity. Shareholders purchase shares of stock to gain an ownership stake in the company. Their voting rights and financial returns are based on how much of the company they own through shares.

Stakeholders do not actually own part of the company or invest capital through stock purchases. They have an interest in the company’s success but without any claim to profits or corporate control. For example, employees, customers, vendors, and communities are all stakeholders with an interest in the company but no equity stake.

Financial Returns: How Do They Gain or Lose?

Related to the point of equity, stakeholders and shareholders have diverging financial interests when it comes to benefiting from the company’s success or growth. Shareholders aim to maximize the value of their shares and receive dividend payments which hinge directly on profits and stock performance. They gain wealth if stock prices rise and lose if stock prices fall.

Stakeholders do not gain direct wealth from share values going up or receive dividends. However, company success or failure does impact them indirectly. Employees want the business to perform well to keep their jobs secure. Customers need the company to thrive so they have continuity of service. Vendors need the company to profit to ensure continued business.

Influence: How Much Say Do They Have?

Shareholders elect the board of directors who make high-level decisions on policies, executive pay, acquisitions, major initiatives and more that shape the company’s direction. Larger shareholders typically get more sway by voting their shares in unison. This gives shareholders direct power to influence corporate governance.

Stakeholders do not get votes on business decisions just because they have an interest in the company. The only way they influence corporate direction is by advocating for their particular interests. For example, an environmental group (stakeholder) lobbying against a company’s manufacturing practices. But they do not have voting power.

Types: Who Falls Under Each Category?

Shareholders encompass any individuals or entities that purchased company stock, from massive investment firms down to a single retail investor with a few shares. There are also different classes of shareholders, like activist hedge fund investors who acquire large stakes in order to pressure management for changes.

Stakeholders represent a much broader, more diverse group including:

• Employees at all levels
• Customers and clients
• Local communities impacted by the business
• Vendors, suppliers, and partners
• Industry organizations and advocacy groups

While shareholders focus strictly on financial returns, stakeholders can have widely varying interests they want the company to serve, from job security to environmental impacts to product quality.

At times, the priorities of short-term minded shareholders conflict with stakeholders’ interests, like employees wanting job security versus shareholders wanting cost cuts to boost stock price. Companies must balance these competing demands through strong corporate governance and ethical leadership.

The model of stakeholder capitalism is growing in prominence, where company success is measured not just in financial terms but in how well it serves all stakeholders. Understanding this bigger picture of obligations to both shareholders and stakeholders is key to running a responsible and sustainable business.

Summary

In summary, shareholders supply important investment capital and share in profits, while stakeholders interact with and are impacted by the business in different ways. The next time you hear the two terms, remember the key differences, nuances, and relationship between shareholders seeking returns and stakeholders seeking to have their interests represented.