How are shareholders and stakeholders different, and what are their pros and cons?
Shareholders and stakeholders are both invested in their companies, and work toward their company’s success, but they do it in different ways.
What is a Shareholder?
A shareholder is always a stakeholder, but a stakeholder is not always a shareholder. A shareholder is a person, company or organization that owns part of a publicly traded company in the form of shares of that company’s stock. They’re also referred to as stockholders and must own at least one share to be considered a partial owner.
One of every company’s main goals is to create value for their shareholders. Buying one or more shares of a company’s stock makes you a shareholder of that company.
Shareholders can vote on some of the company’s management decisions, particularity ones that directly affect the value of their stock, including elections for the board of directors, changes in the company’s overall strategy and direction, and fundamental structural changes to the way the company operates.
The Pros and Cons of Being a Shareholder
As with most investments, buying stock in a company comes with pros and cons.
Money-making potential. The better a company does, the more its stock is worth. We’ve all heard stories about people “getting in on the ground floor” of a company—buying their stock at a very low rate, when the company is just starting out—only to realize the dream of enormous growth and windfall return on that investment.
Short-term commitment. Owning stock doesn’t have to be a long-term commitment. Shareholders can choose to sell their shares whenever they want.
Dividends. When the company does well, the board of directors determines how some of its earnings will be distributed to their shareholders via dividends. Dividends can be paid in cash or in more stock.
Access to company information. Shareholders can review company records and visit the physical locations.
Company benefits. Shareholders may enjoy perks offered by the company, including special discounts on products or services that are only available to shareholders.
Limited Risk. Unlike other forms of business ownership, shareholders are not responsible for the company’s losses—unlike a sole proprietor, they can’t be sued if the company fails. A shareholder’s risk, while it can be substantial, is limited to what they paid for the shares.
Unstable market. If the value of the stock decreases after a shareholder has purchased it, they’ve lost that money.
Dividends. Even when they’re prospering, companies are under no obligation to the shareholders to offer dividends. They can decide to invest that money back into the business.
Limited rights. The downside of limited risk is limited rights.
What is a Stakeholder?
A stakeholder is a person, group, or company that has an interest in or is impacted or affected by the operation of a specific business. Stakeholders in a company include its investors, employees, and customers, plus all the vendors, suppliers, and operational/logistics people and business that make it possible for the company to function.
A company’s stakeholders can be internal or external. Internal stakeholders have a direct connection to the company, like an employee, an owner, or an investor. External stakeholders are influenced by how the company does business, including its suppliers, customers, creditors, and the communities that the business impacts in its day-to-day operations.
The Pros and Cons of Having Many Stakeholders
Business operations. Businesses need people and other companies to supply, manufacturer, transport, and sell their products and services. Without these stakeholders working together, business would be impossible.
Experienced Board of Directors. Experience is crucial to a company’s success. Board members should be selected for their knowledge base—their holistic view of the company and their strategic direction are key to driving the business forward.
Satisfied customers. The goal of most businesses is to make money and to grow. To do that, they need consumers who are willing to purchase their goods and services.
Human behavior. Some stakeholders may put their own needs before the needs of the company.
Fear of change. Technological advances require companies to be agile and forward-looking. Stakeholders may be hesitant to make any changes—whether it’s a manufacturer who is wary of automation or a customer who won’t like your new packaging. And the labor and management stakeholders are rarely on the same page.
To help keep them accountable to their stakeholders, and to increase transparency, many companies are adopting a Corporate Social Responsibility (CSR) business model. This is a company’s way of recognizing their impact on their communities and the world, from an economic, social, and environmental perspective.
Sometimes a company’s operations may affect shareholders and stakeholders in very different ways, and their interests don’t align. For example, if a company operates with little regard for its overall environmental impact, the shareholders might be happy as the price of their investment goes up. But the stakeholders who live in the communities that being affected by pollution would certainly have a different opinion.
Shareholders and stakeholders have a lot in common, but they’re very different. Shareholders are focused on the company’s success mostly because they want the value of their stock to continue increasing. Stakeholders want the company to succeed for various reasons: employees so they can keep their jobs; suppliers so they have a steady client; and consumers, who want quality goods and services.
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