Shareholder vs. Stakeholder: An Overview
When it comes to investing in a corporation, there are shareholders and stakeholders. While they have similar-sounding names, their investment in a company is quite different.
Shareholders are always stakeholders in a corporation, but stakeholders are not always shareholders. A shareholder owns part of a public company through shares of stock, while a stakeholder has an interest in the performance of a company for reasons other than stock performance or appreciation. (They have a "stake" in its success or failure.) As a result, the stakeholder has a greater need for the company to succeed over the longer term.
- Shareholders are always stakeholders in a corporation, but stakeholders are not always shareholders.
- 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.
- Shareholders don't need to have a long-term perspective on the company and can sell the stock whenever they need to; stakeholders are often in it for the long haul and have a greater need to see the company prosper.
Understanding the Role of the Shareholder
A shareholder can be an individual, company, or institution that owns at least one share of a company and therefore has a financial interest in its profitability. A shareholder can also be known as a stockholder.
For example, a shareholder might be an individual investor who is hoping the stock price will increase because it is part of their retirement portfolio. Shareholders have the right to exercise a vote and to affect the management of a company. Shareholders are owners of the company, but they are not liable for the company’s debts. For private companies, sole proprietorships, and partnerships, the owners are liable for the company's debts.
A sole proprietorship is an unincorporated business with a single owner who pays personal income tax on profits earned from the business.
A shareholder is interested in the success of a business because they want the greatest return possible on their investment. Stock prices and dividends go up when a company performs well and increases its value, which increases the value of stocks the shareholder owns.
The more stock a shareholder owns, the more they have invested in the company and the more stake they have in it. The votes of shareholders who own more stock have more weight within the company.
There are generally two different types of shareholders.
- Common shareholders: Anyone who owns common stock in a company. Common stock gives you part ownership of the company and often has higher rates of return over the long term. Common shareholders can vote on board members or other company policies.
- Preferred shareholders: Anyone who owns preferred stock. Preferred stock has lower rates of return in the long term but guarantees a yearly dividend. Preferred shareholders can't vote on policies or board members, but they can claim assets before common shareholders if a company fails and its assets are liquidated.
Understanding the Role of the Stakeholder
Stakeholders are those who either affect or are affected by a project or company. They have a "stake" in its success or failure. Stakeholders might be shareholders or owners. They can also be:
- Employees of the company
- Bondholders who own company-issued debt
- Customers who may rely on the company to provide a particular good or service
- Suppliers and vendors who may rely on the company to provide a consistent revenue stream
- Community members who are impacted by the company's decisions and actions
- Partners in events, promotions, or other activities that the company engages in
In general, stakeholders can be divided into two types:
- Internal stakeholders: Those who are employed by the company or have a direct relationship with it. These are usually employees, shareholders, executives, and partners.
- External stakeholders: Those who are impacted by your company but don't have a direct relationship with it. These are usually customers, suppliers, and community members.
What Is Stakeholder Theory?
Stakeholder Theory is a recent theory of business that argues against the separation of economics and ethics. It states that short-term profits—prioritizing shareholders—should not be the primary objective of a business.
Under this theory, prioritizing the needs and interests of stakeholders over shareholders is more likely to lead to long-term success, both for the business and for the communities that it is a part of. This stakeholder mindset is, in turn, likely to create long-term value for both shareholders and stakeholders.
A shareholder can sell their stock and buy different stock; they do not have a long-term need for the company. Stakeholders, however, are bound to the company for a longer term and for reasons of greater need.
|May not have any long-term need for the success of the company||Often interested in the actions and success of the company over the long-term|
|Own part of the company through the purchase of stock||May or may not have an ownership stake in the company|
|May not be personally impacted by the company's day-to-day decisions||Often personally impacted by the company's day-to-day decisions|
For example, if a company is performing poorly financially, the vendors in that company's supply chain might suffer if the company no longer uses their services. Similarly, employees of the company, who are stakeholders and rely on it for income, might lose their jobs.
Stakeholders and shareholders also may have competing interests depending on their relationship with the organization or company. For example, shareholders may want a company to maximize profits, which could be done by keeping wages low, reducing employees' hours so the company does not have to pay them benefits, or using less expensive manufacturing processes even if they pollute the local ecosystem. But these ways of increasing profits go directly against the interests of stakeholders such as employees and residents of the local community.
Stakeholder vs. Shareholder in CRS Companies
The emergence of corporate social responsibility (CSR), a self-regulating business model that helps a company be socially accountable to itself, its stakeholders, and the public, has encouraged companies to take the interests of all stakeholders into consideration. 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. Under CSR governance, the general public is now considered an external stakeholder.
When a company's operations could increase environmental pollution or take away a green space within a community, for example, the public at large is affected. These decisions may increase shareholder profits, but stakeholders could be impacted negatively. Therefore, CSR encourages corporations to make choices that protect social welfare, often using methods that reach far beyond legal and regulatory requirements.
Are Shareholders or Stakeholders More Important?
Shareholders have the power to impact management decisions and strategic policies. However, shareholders are often most concerned with short-term actions that affect stock prices. Stakeholders are often more invested in the long-term impacts and success of a company. Stakeholder Theory states that ethical businesses should prioritize creating value for stakeholders over the short-term pursuit of profit, as this is more likely to lead to long-term health and growth for both the business and everyone connected to it.
Are Employees Shareholders or Stakeholders?
Are employees are stakeholders in a business, since they are impacted by its decisions and actions. Some employees may also be shareholders if they own stock in the company that employs them.
Are CEOs Stakeholders?
A CEO is a stakeholder in the company that employs them, since they are affected by and have an interest in the actions of that company. Many CEOs of public companies are also shareholders, especially if stock options are a part of their compensation package. However, if a CEO does not own stock in the company that employs them, they are not a shareholder. A CEO may be an owner of a private company without being a shareholder (as there are no shares to buy).
The Bottom Line
A stakeholder is anyone who is impacted by a company or organization's decisions, regardless of whether they have ownership in that company. Shareholders are those who have partial ownership of a company because they have bought stock in it. All shareholders are stakeholders, but not all stakeholders are shareholders.
Both shareholders and stakeholders are important, but ethical business ownership and management recognizes that the short-term profit goals of shareholders may not always be in the best long-term interest of either the company or the community that it is a part of. Stakeholder Theory suggests that prioritizing the needs and interests of stakeholders over those of shareholders is more likely to lead to long-term success, health, and growth across a variety of metrics.
U.S. Securities and Exchange Commission. "Shareholder Voting."
U.S. Small Business Administration. "Sole Proprietorship."
University of Michigan. "Stakeholder Theory and "The Corporate Objective Revisited"," Page 1-3.
UVA Darden Ideas to Action. "Principles and Purpose: A Statement on Stakeholders."