What are Stakeholders in Business?

ByMunyaradzi Mafaro

A stakeholder is any individual, group, or party interested in a company and can affect or be affected by the business. The primary stakeholders in a typical corporation are its investors, employees, customers, and suppliers. However, the concept has been extended to include communities, governments, and trade associations.

Stakeholders are bound to a company by some type of vested interest, usually for the long term and reasons of need. These vested interests can be either financial, such as banks and investors, or non-financial, such as employees and communities where the business operates.

Types of Stakeholders

There are several types of stakeholders in a business:

Internal Stakeholders

Internal stakeholders are entities within a business. Examples include:

  • Employees
  • Managers
  • Owners
  • Investors
  • Board members

These stakeholders directly relate to the company and are integral to its operations and success. Their interests are aligned with the company’s performance and growth.

External Stakeholders

External stakeholders are entities outside a business who are still interested in the company. Examples include:

  • Customers
  • Suppliers and vendors
  • Creditors
  • Communities where the business operates
  • Government (local, state, federal)
  • Competing firms

These stakeholders can influence or be impacted by the business’s actions. They don’t have a direct stake like internal stakeholders, but they are still important to consider.

Primary and Secondary Stakeholders

Stakeholders can also be classified as primary or secondary:

Primary stakeholders have a direct stake in the business and its success. They are usually internal stakeholders like employees, managers, and investors.

Secondary stakeholders are indirectly affected by how the business operates. They include external entities like suppliers, creditors, and public groups. They often have a social, environmental, or economic interest.

Difference Between Stakeholders and Shareholders

While stakeholders and shareholders may seem similar, there are key differences between them in a business context. Understanding these distinctions is essential.

Shareholders Explained

A shareholder is an individual, company, or institution that owns shares in a company, also known as equity. Shareholders are essentially the owners of the company. The percentage of shares they own determines their ownership stake.

Shareholders are a subset of stakeholders with a financial interest in the business. They provide capital by purchasing shares and expect a monetary return on their investment. This return comes in the form of increased share value or dividends.

Stakeholders Explained

As mentioned earlier, a stakeholder is interested in the company’s performance for reasons other than just stock appreciation or dividends. Employees, for example, have their income and benefits tied to company performance. Suppliers rely on the company’s success to place orders. Governments collect taxes from profitable businesses.

Key Differences

Here are the main differences between shareholders and stakeholders:

  1. Role in the company
    • Shareholders are owners of the company through stock ownership
    • Stakeholders have an interest in the company’s performance for various reasons
  2. Financial stake
    • Shareholders have a direct financial stake and expect returns
    • Some stakeholders, like employees and suppliers, have a financial interest, but it’s not from stock ownership. Others, like communities, have a non-financial interest.
  3. Decision-making power
    • Shareholders can vote on corporate decisions and elect the board of directors.
    • Stakeholders can influence business decisions but don’t have voting rights
  4. The time horizon of interest
    • Shareholders focus on financial returns, which are often short-term in nature.
    • Stakeholders often prioritize long-term interests over short-term profits
  5. Level of involvement
    • Shareholders are not involved in day-to-day operations
    • Some stakeholders, like employees and managers, are directly involved in running the business

So, while shareholders and stakeholders both have an interest in the company, the nature of their interest and level of involvement differ significantly. Not all stakeholders are shareholders, but all shareholders are stakeholders.

Importance of Considering All Stakeholders

Traditionally, businesses prioritized shareholder interests and worked to maximize profits and stock returns. However, in recent years, there has been a growing realization that focusing solely on shareholders while ignoring other stakeholders is short-sighted and can be detrimental in the long run.

Companies are increasingly adopting a stakeholder mindset, which involves considering the interests of all parties with a stake in the business, not just those with equity. Let’s explore why this shift is happening and why it’s essential.

Ethical and Social Responsibility

Firstly, there’s a growing expectation that businesses should operate ethically and contribute positively to society beyond just making profits. Consumers and the general public increasingly want companies to be socially responsible corporate citizens. Focusing only on shareholders at the expense of employees, customers, communities, and the environment is no longer acceptable to many.

Treating employees reasonably, supporting local communities, being environmentally sustainable, and producing safe, high-quality products are now seen as essential ethical responsibilities of businesses. Companies prioritizing these will likely build trust, loyalty, and a positive reputation.

Long-Term Sustainability and Risk Management

Secondly, considering stakeholder interests is essential for the business’s long-term sustainability and risk management. Shareholders tend to focus on short-term financial returns, which can lead to decisions that deliver quick profits but damage long-term prospects.

On the other hand, stakeholders like employees, suppliers, and communities have a vested long-term interest. Treating them well can lead to a more stable, successful business in the long run. Happy employees are more productive. Reliable suppliers ensure smooth operations. Supportive communities provide the social license to operate.

Ignoring stakeholder interests can lead to reputational, legal, and financial risks. Mistreating workers can lead to strikes and high turnover. Unethical practices can result in boycotts and legal issues. Environmental damage can lead to fines and remediation costs. Managing stakeholder relationships effectively is critical to mitigating many risks.

Shared Value Creation

Lastly, a stakeholder approach recognizes that a business doesn’t operate in isolation. It is part of a larger ecosystem and is tied to all stakeholders’ success. By aligning shareholder and stakeholder interests and creating value for all, companies can unlock new sources of innovation, growth, and competitive advantage.

For example, investing in employee training and well-being can boost productivity and retention, benefiting both shareholders and employees. Developing sustainable and affordable products for underserved markets can drive sales while improving community well-being. Partnering with suppliers to improve quality and efficiency creates mutual benefits. The most successful companies find ways to create shared value.

Final Remarks

To round off, stakeholders are a broad group of people and organizations interested in a company’s performance. They include shareholders, employees, customers, suppliers, communities, governments, and more. While shareholders have a financial stake through equity ownership, stakeholders have diverse interests tied to the company’s long-term success.

Companies are increasingly realizing the importance of considering all stakeholder interests, not just those of shareholders. This stakeholder mindset recognizes that businesses have ethical and social responsibilities, helps ensure long-term sustainability and risk management, and creates opportunities for shared value creation.

Balancing the needs of different stakeholders is a crucial challenge for business leaders in the 21st century. However, when done effectively, a stakeholder approach can lead to more successful, trusted, and sustainable companies that create value for all. As such, understanding who the key stakeholders are and how to engage them is a critical skill for any business leader today.

Munyaradzi Mafaro is a music enthusiast and he also likes to tackle topics of business, productivity, and the possibilities for growth in the digital world.