Stakeholder vs. Shareholder: Definitions and Key Differences
By Indeed Editorial Team
Published 6 May 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
People often use the terms stakeholder and shareholder interchangeably in business environments. While they sound similar, they serve different functions, and both directly contribute to the overall success of an organisation. If you're in a position that requires interacting with both stakeholders and shareholders, learning more about the different roles they play may help you understand their importance and recognise how engaging effectively with stakeholders and shareholders benefits an organisation. In this article, we define the terms stakeholder and shareholder, outline the key differences and explore the role each plays in an organisation's success.
Why understanding the difference between stakeholder vs. shareholder is important
There are several reasons why understanding the differences between stakeholder vs. shareholder is important for anyone within an organisation that interacts with both parties. A primary reason for the distinction is to help an organisation make better decisions. In the past, many companies focused on maximising shareholder value. Because their ownership of company stock gives them voting rights, large shareholders often influence decisions, which may not align with the interests of stakeholders. With the growing importance of corporate social responsibility, companies and management now consider input from stakeholders including customers and employees before making a decision.
In some cases, management decisions benefit one party and not the other. For example, a company may reduce its headcount to cut costs, which directly affects stakeholders, such as employees who lose their jobs and salaries. Conversely, shareholders may benefit from the layoffs if the lower costs translate to higher profits, thereby increasing the rate of return on their investment. Clarifying the relationship a stakeholder or shareholder has with a company helps to ensure the adoption of the most appropriate communication and reporting strategy. This may help a company to effectively manage the interests of both parties.
What is a stakeholder?
It's important that employees, executives and management involved in the day-to-day operations of a company know what a stakeholder is. Stakeholders are individuals with an interest in the company's long-term success. Although stakeholders often own company shares, their interest may or may not relate to the financial performance of the company. Some stakeholders are from within the organisation, while others are external parties. Some common examples of stakeholders include:
Employees: Employees are important internal stakeholders directly employed by a company. The success of the company may determine their continued employment and salary.
Customers: Customers are valuable external stakeholders who consume the products or services of a company and may provide feedback that directly impacts business performance.
Suppliers and vendors: Suppliers and vendors are third-party external stakeholders who provide goods and services to a company. Due to their business relationship, suppliers and vendors typically stand to profit from the company's continued success.
Regulatory authorities: Although regulatory agencies are independent bodies and don't own company stock, as external stakeholders, the company's performance may impact them. A thriving company may validate the efficacy of regulatory rules to the rest of the industry and build public trust.
What is a shareholder?
A shareholder is an individual or organisation that owns shares or equity in a company. They invest in a company through the stock market and seek to make financial gains through the company's earnings and profits. They receive these through cash dividends paid by the company or through an increase in the company's share value. Shareholders' interests lie with the profitability and success of the companies they invest in. While shareholders own part of a company, they're not responsible for any debt or legal liability within the organisation.
Their partial ownership also entitles shareholders to certain rights, such as:
buying and selling shares
voting to elect board members
voting on major business issues, such as a takeover, merger and acquisition or liquidation
attending the company's annual general meetings
receiving a proportion of the company's profits in the form of a dividend
Businesses typically specify these rights in the shareholders' agreement or the company's constitution signed by the shareholders of the company. There are two types of shareholders: common and preferred. The voting rights and power of common shareholders are in direct proportion to the number of shares they own. Preferred shareholders may not receive voting rights, but they receive dividends before common shareholders. After distribution to preferred shareholders, common shareholders share the remaining dividend income.
Key differences between stakeholders and shareholders
The fundamental distinction between stakeholders and shareholders lies in their respective relationship and interest in the company. This includes:
Investment vs. profitability
Both stakeholders and shareholders hold an interest in a company's financial performance and success. Stakeholders work to ensure a company remains profitable, while shareholders focus on maximising the return on their investment. Shareholders desire profitability because it may lead to a higher stock price, which translates to higher dividends or an increase in the value of their investment. They support activities with the potential to grow the business and increase the opportunities for profits, which may include expanding into new markets or the launch of new products and services.
Although stakeholders may not invest in company shares, they benefit from a company's profitability in other aspects. For instance, suppliers and vendors may continue to enjoy business relationships, and employees often receive promotions and sustained job security if the company performs well financially.
Stakeholder theory vs. shareholder theory
Certain conflicts exist between the stakeholder theory and the shareholder theory. Stakeholder theory states that managers owe a duty to the stakeholders that contribute to the company's success. It believes that managers aim to make decisions that create long-term value and benefit both stakeholders and shareholders of the company. Conversely, under shareholder theory, managers aim to maximise shareholder returns as much as possible to reward them for their investment in the company. Under this theory, managers make business decisions that prioritise shareholders and their financial interest in the company.
Long-term vs. short-term success
Due to the important roles they play in an organisation, stakeholders focus on the long-term success of the company. They work to maintain professional long-term relationships with the organisation and contribute positively to company operations and management. This allows them to benefit from the company's continued success—financial or otherwise.
Many shareholders invest for the short-term instead. They typically benefit from business growth and the company's success as it leads to higher profits and larger dividends. Their investment horizon may change if they deem these returns insufficient or if they determine that the company cannot meet their financial expectations and investment projections. If so, they may sell their shares in the company and reinvest in another entity—even a competitor.
Owners vs. interested parties
When they purchase stock and equity in a company, shareholders become partial owners with certain rights, such as voting power and the ability to sue management if they don't fulfil their responsibilities and obligations. Unless they're the direct business owners, stakeholders rarely have claims to the company they have interests in.
Shareholders may own and represent a segment of the company's stakeholders. Conversely, not all stakeholders are shareholders. There are often external stakeholders with interests in a company, such as partners, charities and government agencies. These organisations don't own any shares in the company but may have an interest in the continuity of the business.
Public vs. private companies
Private businesses may not issue shares, while companies that choose to go public typically sell shares to investors. The primary interest of the shareholder is the financial success of the public company they own shares in. Shareholders are only present in companies that issue shares, whereas stakeholders are present in every organisation. They may not own shares but still benefit from the success of both public and private companies. In some cases, employees as stakeholders may receive stock options as an incentive. Their interest may extend beyond profitability to other business goals, such as sustainable development or corporate social responsibility.
How the stakeholder vs. shareholder differentiation affects project management
By learning how stakeholders and shareholders affect project management, companies and project managers can better manage the interests of all parties and ensure that they make progress. Shareholders provide the funding that allows companies to invest in new projects, while stakeholders have a stake in the company's long-term performance. There are two important factors to consider when handling stakeholders and shareholders in a project:
Identify stakeholder expectations and demands
It's important to identify stakeholder expectations and demands early. This allows project managers to brief the team and understand how much influence these stakeholders exert over the project. This valuable information may prove helpful when drafting a roadmap to address their requirements and demands.
Outline the financial benefits to shareholders
Shareholders aren't usually involved in the organisation, operation or management of a company's projects, but they typically maintain an interest in their financial viability. Analysing projects from a financial position to account for shareholders' perspectives is important. Highlighting positive financial projections for projects may help to address any shareholder concerns about budget or company performance.
The motivations of shareholders and stakeholders may not always align, and project managers who understand the expectations and influence of each group are better positioned to lead their teams and projects to success.
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