Stakeholder vs. Shareholder: How They’re Different & Why It Matters

The words stakeholder and shareholder are often used loosely in business. The two words are commonly thought of as synonyms and are used interchangeably, but there are some key differences between them. These differences reveal how to appropriately manage stakeholders and shareholders in your organization.

For example, a shareholder is always a stakeholder in a corporation, but a stakeholder is not always a shareholder. The distinction lies in their relationship to the corporation and their priorities. Different priorities and levels of authority require different approaches in formality, communication and reporting.

It’s important that these terms are well-defined to avoid confusion. Even if you think you know what they mean, take a moment to refresh yourself.

What Is a Shareholder?

A shareholder is a person or an institution that owns shares or stock in a public or private operation. They are often referred to as members of a corporation, and they have a financial interest in the profitability of the organization or project.

Depending on the applicable laws and rules of the corporation or shareholders’ agreement, shareholders have the right to do the following (and more):

· Sell their shares

· Vote on those nominated for the board

· Nominate directors

· Vote on mergers and changes to the corporate charter

· Receive dividends

· Gain information on publicly traded companies

· Sue for a violation of fiduciary duty

· Buy new shares

Shareholders have a vested interest in the company or project. That interest is reflected in their desire to see an increase in share price and dividends, if the company is public. If they’re shareholders in a project, then their interests are tied to the project’s success.

The money that is invested in a company by shareholders can be withdrawn for a profit. It can even be invested in other organizations, some of which could be in competition with the other. Therefore, the shareholder is an owner of the company, but not necessarily with the company’s interests first.

What Is a Stakeholder?

We’ve written about what a stakeholder is before, and the definition still stands. A stakeholder can be either an individual, a group or an organization impacted by the outcome of a project. Therefore, they have an interest in the success of a project. They are either from the project group or an outside sponsor.

There are many people who can qualify as a stakeholder, such as:

· Senior management

· Project leaders

· Team members on the project

· Customers of the project

· Resource managers

· Line managers

· User group for the project

· Subcontractors on the project

· Consultant for the project

Therefore, stakeholders can be internal, such as employees, shareholders and managers—but stakeholders can also be external. They are parties that are not directly in a relationship with the organization itself, but still the organization’s actions affect it, such as suppliers, vendors, creditors, the community and public groups. Basically, stakeholders are those who will be impacted by the project when in progress and those who will be impacted by the project when completed.

Stakeholders tend to have a long-term relationship with the organization. It’s not as easy to pull up stakes, so to speak, as it can be for shareholders. However, their relationship to the organization is tied up in ways that make the two reliant on one another. The success of the organization or project is just as critical, if not more so, for the stakeholder over the shareholder. Employees can lose their jobs, while suppliers could lose income.

Differences Between Stakeholders and Shareholders

Before getting into the differences, there is a similarity between stakeholders and shareholders. That similarity is their importance: in recent years, corporations have begun to be answerable to their stakeholders and shareholders alike. Unlike in the past, where corporations were mostly interested in issues related to their shareholders.

There has been a rise in something called corporate social responsibility (CSR), which encourages companies to take the interest of all stakeholders into consideration when making decisions, rather than just the interests of its shareholders.

Differing Viewpoints

CSR is important because in most cases, stakeholders and shareholders have different viewpoints. Stakeholders are more concerned with longevity of their relationship with the organization and a better quality of service. That is, people working on a project or for an organization are likely more interested in salaries and benefits than profits.

Shareholders, on the other hand, are more concerned with stock prices, dividends and results. They have a financial interest in the success of the organization, not the individuals who work there. Shareholders are more likely to advocate for growth, expansion, acquisitions, mergers and other acts that will increase the company’s profitability.

How They’re Categorized

Shareholders are a subset of the larger stakeholders’ grouping, but don’t take part in the day-to-day operations of the company or project. Shareholders do have some rights as owners of the company, which are detailed in the company’s charter, such as the right to inspect financial records—especially if they’re concerned about how the company is being run by its top-tier executive suite.

There are some organizations that don’t have shareholders, such as a public university, which has many stakeholders. These include students, families, professors, administrators, employers, state taxpayers, the local and state communities, custodians, suppliers and more.

In Summary

The shareholder, again, is a person who owns shares of the company. A stakeholder has a stake in the company. Therefore, shareholders are owners and stakeholders are interested parties. As stated earlier, shareholders are a subset of the superset, which are stakeholders.

Shareholders include equity shareholders and preference shareholders in company. Stakeholders can include everything from shareholders, creditors and debenture holders to employees, customers, suppliers, government, etc.

The biggest difference between the two is that shareholders focus on a return of their investment. Stakeholders are more concerned about the performance of the company.

Should You Focus on Shareholders or Stakeholders?

That’s not so easy a question to answer, and one that has been a debated forever by business analysts. Should businesses be solely focused on increasing profits or do they have an ethical responsibility to the environment? These two paths are called the shareholder theory and the stakeholder theory.

Shareholder Theory vs. Stakeholder Theory

Shareholder theory claims corporation managers have a duty to maximize shareholder returns. Economist Milton Friedman introduced this idea in the 1960s, which states a corporation is primarily responsible to its shareholders.

Stakeholder theory, on the other hand, notes that it’s the business managers ethical duty to both corporate shareholders and the community at large that the activities that benefit the company don’t harm the community.

This doesn’t mean that shareholder theory is an “anything goes” drive to lift profits. This process must be legal and done through non-deceptive practices. It doesn’t necessarily exclude charitable works, either. However, social responsibility is structured into the stakeholder theory, but the benefits must also meet the corporation’s bottom line.

Therefore, the best theory for you and your company or project is dependent on what your main interests are. But it’s most likely that you’ll proceed with a hybrid, as both theories serve different aspects of business.