Shareholder vs. Stakeholder: Key Differences and Examples
JA
Summary:
Shareholders are investors who own stocks in a company, and stakeholders are everyone else who has a vested interest in the company. This can include employees, customers, trade unions, suppliers, the government, as well as the local community around the company. While shareholders have a financial stake in a company, stakeholders can have either financial or non-financial interests.
When it comes to the world of business and finance, there are a few terms and phrases that everyone should be familiar with. Two of those are “shareholders” and “stakeholders.” While these terms sound similar, the two represent different financial interests. But what do these terms mean, and more importantly, what are the key differences between them?
In this article, we’ll break down the definitions of stakeholders and shareholders and outline the major differences between the two.
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What are shareholders?
When a company goes public, it offers shares of ownership to the public through an initial public offering (IPO). When the public buys stocks from the company, they become shareholders of that business. This means they now have a financial stake in the company and are financially affected by the company’s profits and losses.
There are two types of shareholders: common and preferred shareholders.
- Common shareholders. Common shareholders typically have a right to vote on corporate matters and receive dividends (when they are common dividends), which are payments from the profits of the company. However, if the company were to go bankrupt, common shareholders are the last in line to receive the company’s assets.
- Preferred shareholders. Though preferred shareholders do not have voting rights, they receive priority when it comes to getting paid back if the company goes out of business. In other words, they’re entitled to a company’s profits before common shareholders. They also have priority over common shareholders regarding the company’s income, meaning they receive dividend payments before common shareholders.
Ultimately, being a shareholder gives you a claim on the company’s earnings. Common shares give you some voting power to dictate the direction of a company, though this depends on how many shares you own. On the other hand, preferred stock offers less risk than normal shares and could be a viable option for risk-averse investors.
Pro Tip
There are many ways to benefit financially by investing in a company’s stock. You could do so by day trading, swing trading, holding the stocks long term, etc. Make sure to assess your risk tolerance level first to determine which investment method is best for you, or reach out to an investment advisor to get a second opinion.
What are stakeholders?
Stakeholders are individuals or groups that have an interest in a company’s success or failure. They can be divided into two types: internal and external.
- Internal. Internal stakeholders are people directly involved in the company’s operations on a day-to-day basis, such as investors, employees, and company executives. In other words, they are anyone within the organization that can be directly affected by management decisions.
- External. External stakeholders are those who are not directly involved in the company, but who still have an interest in its success or failure. Though they don’t participate in the company’s internal activities, they can still be affected by the company’s actions. This includes groups such as suppliers, creditors, trade unions, communities, and customers.
External stakeholders cover a broad group of people. Even the cities or towns were a company is located may be considered external stakeholders due to the environmental impact a company may have on its surroundings. Similarly, an external stakeholder could have an impact on how the company functions without holding a direct relationship, such as the government.
Shareholder vs. stakeholder: Key differences
There is a lot of confusion among avid investors and everyday people alike when it comes to the difference between shareholders and stakeholders. Most people use the terms interchangeably. However, these two terms actually have different meanings.
Short term vs. long term interest
At the heart of every successful business are its shareholders and stakeholders. Shareholders are those who own a portion of the company and stand to benefit from its profitability, while stakeholders are those with a vested interest in the company’s ongoing success.
In general, shareholders tend to be concerned with short-term profits and gains, while stakeholders tend to have a more long-term outlook on the company.
Example:
For example, suppliers — which are stakeholders — care about the long-term prosperity of the company. After all, they’re supplying materials to this company because it directly affects the success of their own business. Employees also want their company to succeed because their employment is directly tied to the prosperity of the business.
On the other hand, shareholders — especially those who hold their stocks for less than a year — aren’t interested in the company’s performance or the company’s profitability beyond a certain timeframe.
However, it’s important to note that both groups ultimately have the same goal: to see the business succeed. After all, as shareholders enjoy their profits, so too do the stakeholders who depend on the company for their livelihoods and other non-financial reasons.
Stock price performance vs. broader success
Shareholders, as the name suggests, are interested primarily in how a company’s stock is performing. They’re typically interested in profits and return on investment, and often base their decisions on whether to buy or sell shares on those factors.
In contrast, while stakeholders may also be concerned with the financial success of a business, they consider factors such as employees’ wages and working conditions, environmental impact, and community involvement as well.
What is the stakeholder theory vs. shareholder theory?
The stakeholder vs. shareholder debate has been ongoing for many years and has been a source of disagreement among business analysts, leaders, and managers. At its core, the debate is about which group of people should be prioritized when it comes to making business decisions: stakeholders — who are those affected by the business in some way — or shareholders, who own shares in the company and expect to receive financial returns from it.
Business Roundtable, an association of CEOs of America’s leading companies, has supported the idea of Shareholder Primacy since 1997. They believed that shareholders’ financial interest should be prioritized relative to all other stakeholders in a company.
However, in 2019, they released an updated statement declaring that they’ve decided to move away from Shareholder Primacy, and begin leading their companies for the benefit of all stakeholders instead. Tricia Griffith, CEO of Progressive Corporation, says that this modern standard for corporate social responsibility “is the most promising way to build long term value.
It’s evident that many companies are beginning to prioritize the duty of making the world a better place instead of maximizing profits for shareholders.
Pro Tip
Before investing your hard-earned money into a business, it’s important to do thorough research on the company beforehand. This means reading public documents such as the company’s most recent press releases, annual report (Form 10-K), and company presentations.
FAQs
Is a shareholder an owner of the company?
Technically, a shareholder may be a part owner because they own a piece of the company’s stock. However, in legal terms, shareholders are not owners of the company’s debts and assets.
Instead, they’re owners of the company’s stock and therefore have a claim on the company’s earnings. And though shareholders do not have the right to directly manage the company, they do have the ability to appoint the person to do so. For example, it’s the shareholders that ultimately decide who gets to sit on the board of directors.
Who is a shareholder of a business?
A shareholder is someone who owns at least one share of company stock. This can include individuals, groups, and corporations. By investing their money into a business, shareholders can potentially reap high rewards if the company’s stock rises in the future. But if the company’s stock plummets, then the shareholder could likely end up with worthless holdings.
Being a shareholder of a business has its pros and cons. On one hand, owning shares entitles you to a portion of the company’s profits — particularly if the company does well. On the other hand, being a shareholder also entails some risk. If the company goes bankrupt, you might lose your investment entirely. Overall, being a shareholder can be a great way to invest your money, but it’s also important to be aware of the risks involved.
What are examples of stakeholders?
Stakeholders include anyone with a vested interest in a company. For example, customers, suppliers, investors, communities, employees, government and taxation departments, creditors, and trade unions are all stakeholders of a company.
Key Takeaways
- Shareholders own at least one share of a company’s stock, whereas stakeholders are those who have a vested interest in a company’s overall success.
- The key difference between common shareholders and preferred shareholders is that common stock provides voting rights to shareholders while preferred stock doesn’t. However, preferred shareholders also have priority over common shareholders regarding when they receive dividend payouts.
- There are two types of stakeholders: internal and external. Internal stakeholders are those who have a direct relationship in terms of the daily operations of the company, such as employees and the board of directors. External stakeholders are those outside the company who can be impacted by its actions, including suppliers and customers.
- Shareholders are typically more interested in the short-term financial success of a company, whereas stakeholders are interested in the company’s broader success.
- Companies are starting to move away from the idea of Shareholder Primacy and instead prioritize the needs of all of the stakeholders in the business.
Invest with the right brokerage
Before becoming a shareholder of a company’s stock, it’s important to find the right brokerage for you. First, you’ll want to think about your investment goals and objectives. Do you want to day trade, or are you looking for a more hands-off approach? Do you need access to extensive research resources and tools, or are customer service and fast execution more important?
Once you know what’s important to you, you can begin the process of finding the best online brokerages based on those criteria.
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