What Is a Stakeholder?

A stakeholder is a party that has an interest in a company and can either affect or be affected by the business. The primary stakeholders in a typical corporation are its investors, employees, customers, and suppliers. However, with the increasing attention on corporate social responsibility, the concept has been extended to include communities, governments, and trade associations.

Key Takeaways:

  • A stakeholder has a vested interest in a company¬†and can either affect or be affected by a business' operations and performance.
  • Typical stakeholders are investors, employees, customers, suppliers, communities, governments, or trade associations.
  • An entity's stakeholders can be both internal or external to the organization.
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Stakeholder

Understanding Stakeholders

Stakeholders can be internal or external to an organization. Internal stakeholders are people whose interest in a company comes through a direct relationship, such as employment, ownership, or investment. External stakeholders are those who do not directly work with a company but are affected somehow by the actions and outcomes of the business. Suppliers, creditors, and public groups are all considered external stakeholders.

Example of an Internal Stakeholder

Investors are internal stakeholders who are significantly impacted by the associated concern and its performance. If, for example, a venture capital firm decides to invest $5 million in a technology startup in return for 10% equity and significant influence, the firm becomes an internal stakeholder of the startup. The return on the venture capitalist firm's investment hinges on the startup's success or failure, meaning that the firm has a vested interest.

Example of an External Stakeholder

External stakeholders, unlike internal stakeholders, do not have a direct relationship with the company. Instead, an external stakeholder is normally a person or organization affected by the operations of the business. When a company goes over the allowable limit of carbon emissions, for example, the town in which the company is located is considered an external stakeholder because it is affected by the increased pollution.

Conversely, external stakeholders may also sometimes have a direct effect on a company without a clear link to it. The government, for example, is an external stakeholder. When the government initiates policy changes on carbon emissions, the decision affects business operations of any entity with increased levels of carbon.

Problems With Stakeholders

A common problem that arises for companies with numerous stakeholders is that the various stakeholder interests may not align. In fact, the interests may be in direct conflict. For example, the primary goal of a corporation, from the perspective of its shareholders, is to maximize profits and enhance shareholder value. Since labor costs are unavoidable for most companies, a company may seek to keep these costs under tight control. This is likely to upset another group of stakeholders, its employees. The most efficient companies successfully manage the interests and expectations of all their stakeholders.

Stakeholders vs. Shareholders

Stakeholders are bound to a company by some type of vested interest, usually for a longer term and for reasons of need. Meanwhile, a shareholder has a financial interest, but a shareholder can sell a stock and buy different stock or keep the proceeds in cash; they do not have a long-term need for the company and can get out at any time.

For example, if a company is performing poorly financially, the vendors in that company's supply chain might suffer if the company limits production and no longer uses their services. Similarly, employees of the company might lose their jobs. However, shareholders of the company can sell their stock and limit their losses.