What differentiates the Stakeholders from the Shareholders?

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What differentiates the Stakeholders from the Shareholders?

All companies have their fair share of stakeholders, and most of these companies also have their share of shareholders. Even though these two words are central to the business, many people are not aware of their actual definitions. Shareholders and stakeholders have different roles that impact everyone around the globe. 

You might already be a stakeholder in the world’s largest corporations under some definitions. Shareholders are those who own financial stocks in the company and are interested in its gains/profits. Stakeholders have other concerns that are impacted by the practices of a company. These concerns or ‘stakes’ might be economic, social, environmental or related to politics.

If you’re wondering whether someone can be a shareholder and a stakeholder at the same time, the answer is yes, certainly. To know more about the key differences between these two groups, continue scrolling!

What Is A Shareholder?

When someone tells you that they’re a shareholder of a company, they mean that they own shares in it. It is not only a person who can be a shareholder. It is possible for companies and institutions to be shareholders as well. Once they have invested their money in shares, they become partial owners of the company and are represented by the Board of Directors. A shareholder invests his money voluntarily and wants the company to succeed for financial gains.

For many decades, shareholders have been at the forefront of trade. Until very recently, the shareholder theory otherwise known as the Friedman Doctrine was the guiding principle in business. In 1970, Friedman had argued that the CEO is employed in a company so that the shareholders can make a profit. As a result, it is generally better for the company to stick to making money and let its customers or clients decide how to spend that money.

However, with time, this view has become less common. In the 21st century, there is less focus on the finance of shareholders as compared to the 20th century. Many people have the belief that the purpose of a business should be more than just increasing the profits (even though this is also important). Although shareholders do have financial interest in a business, they are generally not committed for a long period. This is because they are not attached to the values of a particular company because they generally own shares in multiple companies, instead of a single one. Also, they can easily sell their shares in line depending on the stock price changes and then finally move on. Shareholders, as a general rule, are not responsible for debts for a company unless the company is private or owned by a person. This simply means that their desire for the success of a company can be traded away easily.

What Is A Stakeholder?

The stakeholders represent a much broader group as compared to the shareholders. The term ‘stakeholder’ includes anyone holding a stake in a company or who is affected by the actions taken by a company. Shareholders are actually one type of internal stakeholders because they are affected by the profitability and performance of a company just like any other stakeholder. However, there are other types of stakeholders in a company such as the employees, clients and suppliers. The CEO of a company is one key stakeholder whose income and reputation both depend on the company’s success. The CEO may step down, but for some time, they will still be linked to the company after having moved on.

In recent times, the definition of stakeholder has begun to include an even wider group. Stakeholders include anyone who is affected by the environmental and social decisions taken by a company. These decisions may be local, such as a company’s contribution to the local community or they can be global decisions, such as a company’s agenda to promote sustainability and reduce pollution. Due to this reason, we could all be referred to as the stakeholders to the world’s largest companies as we all have a vested interest in their practices.

The notion that stakeholders are an integral part of a business has become increasingly common. Since we’ve discussed the shareholder theory, we must also discuss the Stakeholder Theory as promoted by Edward Freeman. These theories may have similar names but are completely different. In his book about the stakeholder theory, he argues that the company’s main responsibility is to the stakeholders (not the shareholders). This means that a company exists not just for the sole purpose of making profit but more than that. The companies should also pay attention to the ESG concerns. In 2019, US-based NPO the Business Roundtable declared that they would put a list of stakeholders for the very first time. High-profile CEOs including Tim Cook of Apple, Jeff Bezos of Amazon are a part of this association. Before this statement, they had prioritized shareholders since 1997. Unlike the case of shareholders, some stakeholders are committed to the company for the long-term. Sometimes, they don’t even have a choice but to be involved in the matters of a company. For example, the communities affected by the decisions of a company do not necessarily ‘opt in’.

What Are The Key differences?
Here is a table to help you remember the differences between a stakeholder and a shareholder:

We hope this article helped you in providing a clarification regarding the differences between shareholders and stakeholders. If you need further clarification about these business terms, you can always get in touch with Registrationwala in your free time. Helping our clients makes us happy! 

Conclusion

Shareholders and stakeholders have their own roles and interests in a company’s affairs. Shareholders are more concerned with the company’s financial gains and performance while stakeholders are driven by a wider range of concerns which can be economic, social, political and environmental in nature. Since the stakeholder has a broader meaning, it could be argued that we’re all stakeholders to the world’s largest companies. Whether a business prioritizes shareholders or stakeholders, it is always a good idea to learn more about its ethos.

Frequently Asked Questions (FAQs)

Q1. What are some examples of typical stakeholders of a company?

A. A stakeholder is someone who has a vested interest in a company and can either impact or be impacted by the company’s performance and decisions. Typical examples of stakeholders include the investors, customers/clients, suppliers, communities, trade associations and the government.

Q2. What rights do stakeholders have in a company?

A. Stakeholders have the right to seek additional information from the company’s management about any aspect of the business of the company at any point. They also have voting rights in significant matters of a company.

Q3. What are the rights of a shareholder of a company?

A. The aim of a shareholder is to make profit out of a company he has invested in through capital appreciation and dividend payments. A common shareholder has been granted 6 rights which are voting power, ownership, the right of transferring the ownership, dividends claim, the right of inspecting corporate documents, and the right for suing the company for unethical acts.

Q4. What are the risks and benefits associated with being a company’s shareholder?

A. Whenever a shareholder buys shares of a company, he takes a risk in doing it. When a shareholder purchases shares, the fate of his money and that of the company become connected to each other. The company may double its revenue or have an increase in debt in the next quarter but the shareholder doesn’t know what’ll happen in advance. The shareholders may never get the value of their shares back but in some cases, they might get more profit than they’d expected. It all depends on the risk appetite.

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