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. These reasons often mean that the stakeholder has a greater need for the company to succeed over a longer term.
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. 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.
Understanding the Role of the Stakeholder
Stakeholders can be:
- owners and shareholders
- 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
Although shareholders may be the largest type of stakeholders, because shareholders are affected directly by a company's performance, it has become more commonplace for additional groups to also be considered 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.
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 often have competing interests depending on their relationship with the organization or company.
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. The general public is an external stakeholder now considered under CSR governance.
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.
- 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.