Differences Between Stakeholders And Shareholders

Many people use shareholder and stakeholder interchangeably, even though they are not the same. Both stakeholders and shareholders invest in a company; however, their role in the corporation is vastly different from one another.

When someone is a shareholder, they are also a stakeholder; however, the other way around is not always true.

Someone who holds shares in a company is a shareholder, but when someone has an interest in the company’s performance beyond the valuation of the stock, they’re called a stakeholder.

With this information, we can understand that a stakeholder has more invested in a company’s success.

What is a Stakeholder?

Stakeholders can be customers that need the company to perform well and provide good services. They can be shareholders or owners, employees in the company, or even any suppliers that serve the company.

Longevity

There’s a very highlighted characteristic with stakeholders of a company – longevity. It might not be as easy for stakeholders to remove themselves from the company or its dependency depending on their role within the company.

If the business is not performing well, the stakeholders can be in deep trouble because of how difficult it can be to remove themselves from the company.

A very common example is when a company closes down. Their employees, also stakeholders, lose their job and income. The same can happen to any vendors or suppliers that supply the company. They might lose a large client, which will automatically interfere with their profits.

However, when the management of stakeholders is done effectively, it can improve many different departments of the company.

This includes communication between the two parties, support during projects which mitigates any potential conflict, or anything else that can cripple the company. It also increases the reputation of the organisation for further operations.

What is a Shareholder?

A shareholder can be an institution, company or individual that owns shares of a particular business. Their interest goes as far as the profitability they can get from the company’s stock in the market.

Unlike stakeholders, shareholders have the right to vote in the company’s management. This usually includes voting on the board of directors and other similar administrative jobs.

Shareholders are always stakeholders, and they own a percentage of the company depending on how many shares they hold. However, even though they are owners of the company, they are not liable for any of its debts.

This only happens when the company is publicly trading. So, if any private company has debts, the owner or shareholders are liable for any incurring debts the business might have. In summary, shareholders can:

  • Vote on the board of directors and nominate them
  • Vote on mergers and other corporate changes
  • Get public information about a company
  • Receive dividends
  • Purchase new shares
  • Sue directors and higher officials

Shareholders Rights

Besides having the right to vote on the company’s management, shareholders can also inspect the company’s books or any other financial records that are usually displayed publicly.

It can go even further if the shareholders suspect lousy performance by the directors or administrators of the company they hold stocks on. They can sue them. Stakeholders can be qualified as:

  • Team members
  • Project leaders
  • Senior managers
  • Customers in a certain project
  • Subcontractors for the project
  • Consultants in the project

Liquidity of the Investment

In theory, when a shareholder invests in a company, that investment is liquid. By purchasing shares from a company, investors hope the shares bought appreciate, and they can in the future sell for a higher amount than the one they purchased.

Corporate Social Responsibility

It used to be that companies only cared and answered to shareholders, while stakeholders would have to expect the unexpected and hope the company performed well.

However, this tendency has changed over the years and started to answer to stakeholders and take responsibility when things don’t go as planned.

For example, companies started to become more aware of how their businesses can affect other companies, people and communities. So they are now creating programs to protect and aid anyone affected by their business ventures.

This can be to protect the social welfare of a community or compensate third party companies if their businesses fail because of bad performance.

Different Theories

Shareholder Theory

This theory says that a company, its managers and administration have the duty to maximise its returns, which means that a company is responsible for its shareholders, as well as the performance of the company.

Stakeholders Theory

Even though stakeholders are a lot less favourable when it comes to business decisions, nowadays, companies have an ethical duty towards stakeholders. The decisions of a company can have consequences in the community and their integrants.

Businesses need to ensure that their activities don’t have consequences for communities.

Main Differences

The main difference is the longevity and how both stakeholders and shareholders can step away from the company.

A shareholder can easily sell their stock if the company is not performing well and buy any other stock. In contrast, the stakeholder is usually tightly bound to the company and their performance. Even if they try to detach themselves from the company, it can take time and have many other negative consequences.

Also, shareholders care about the valuation of the stock. Anything that increases the value of the stock is welcome and will have an increase in their profit. While stakeholders are with the company for a longer-term and that usually translates to a better quality of service.

Conclusion

Shareholders and stakeholders have different roles in the company. A stakeholder is usually more involved in the company’s businesses and can be affected profoundly and without the ability to detach themselves from that company without significant consequences.

Shareholders are more independent and can easily sell or transfer their stocks to other companies that are performing well. They also have more rights than a stakeholder, for example, the right to vote for the board of directors or different administration roles.

Besides that, shareholders can sue their administrators if there’s evidence that they are not carrying out their duties properly and are affecting the valuation of the stock of the company.

However, the emergence of corporate social responsibility brought more commitment to the companies towards their stakeholders.

Nowadays, companies adopt a self-regulating model that allows stakeholders to be compensated if the company performs poorly. This affects how companies make decisions and weigh both shareholders’ and stakeholders’ interests.

Finally, companies are acknowledging the importance of stakeholders. They can bring services and goods that are extremely important for the primary functioning of the business.

Without stakeholders, companies could not perform certain activities, which would probably bring their performance down, which would also affect shareholders.

References

https://www.investopedia.com/ask/answers/08/difference-between-a-shareholder-and-a-stakeholder.asp

https://corporatefinanceinstitute.com/resources/knowledge/finance/stakeholder-vs-shareholder/

https://www.projectmanager.com/blog/stakeholder-vs-shareholder/embed#?secret=0TSa5gRSWD

Book an Info Session

Feeling inspired? Take the first step and book in an info session with one of our team.

Send us a message

Shoot us an email

hello@exodigital.com.au