Though the words “shareholder” and “stakeholder” are sometimes used interchangeably in conversations about investing, there are important distinctions between the two.
A shareholder owns shares of stock in a company while a stakeholder has a financial interest in the company’s operations. Shareholders can also be stakeholders and stakeholders can also be shareholders, though that isn’t always the case.
Both may have a vital interest in how a company is run. But the perspective, priorities, and rights of someone who owns shares of stock in a business can be very different from those of a person who has a stake in the company’s operations as an employee, community member, or through some other connection.
Analysts and academics are split on whether a company has a greater responsibility to stakeholders vs. shareholders when doing business. The shareholder vs. stakeholder debate continues to evolve as the push for good corporate citizenship and social responsibility gains momentum nationally and globally.
What Is a Shareholder?
A shareholder, also known as a stockholder, is a person or organization that invests in a public company. They own one or more shares of stock in the business and thus have an interest in how its success or failure might affect the value of their investment.
So why become a shareholder or stockholder? Individual shareholders might buy stock intending to hold on to the investment for the long term as part of an overall portfolio strategy. Or they might plan to sell within a few days, weeks or months, hoping to make a quick profit in the bargain.
Shareholders may also buy different types of stock depending on their goals. For example, those who buy common stock are more likely to be interested in the potential for higher profits, albeit with more risk.
Those who purchase preferred shares are typically looking for reliable dividend income with less risk. An investor can also become a shareholder by investing in an Initial Public Offering (IPO).
The rights and privileges of shareholders may also vary, depending on the company and the type of investment they make. Owners of common stock, for example, have shareholder voting rights, which can give them a say in electing board members and in some corporate policy decisions.
Preferred shareholders don’t have voting rights, but they do have priority when it comes to receiving dividend payments. They’re also more likely to get some money back if a company goes belly-up, as they take priority over common stockholders.
Either way, their investment in the company is liquid. Stockholders can sell some or all of their shares in a company and get out at any time.
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What Is a Stakeholder?
Shareholders are technically stakeholders — since they have a stake in the company’s profitability. In that context, they care about its financial performance and its reputation. But not all stakeholders are shareholders.
There are other stakeholders — people and organizations that don’t necessarily own a single share of stock in a company — that still may be affected by how the business operates. For instance, stakeholders might be vendors who supply the business with goods or services. Or they might be employees who depend on the steady wages and benefits they receive.
Stakeholders can also be bondholders who’ve purchased company debt with the expectation that they’ll receive interest payments as promised. Or they may be community members who rely on the revenue the business brings to their city or town, or who are concerned about the environmental impact (good or bad) they’ll see over time.
One of the key differences between these stakeholders vs. shareholders is that stakeholders may not have the option of severing their ties and moving on quickly if they’re unhappy with how the business is doing. In other words, they can’t cash out of their investment by selling off shares. Nor do they have voting rights, so they don’t have the same opportunity to influence corporate policy that shareholders do.
Stakeholders do, however, have an interest in how the company operates and if it succeeds long term. In fact, their livelihood and lifestyle may depend on it.
Viewpoints of Stakeholders vs Shareholders
While both shareholders and stakeholders have an interest in how a company operates, they can sometimes have conflicting perspectives about what success looks like. That’s why it’s important to understand the lens through which a company is viewed by a shareholder vs. stakeholder.
In a nutshell, shareholders generally want to see a company they’ve invested in do what it takes to increase share price, provide robust dividends, and improve profitability.
Stakeholders usually want the company to stay financially healthy as well. But their concerns might also be focused on employee wages, safety and working conditions, ethical practices, community outreach, charitable giving, and other factors. And stakeholders may be more likely to value long-term stability over short-term profits.
These differing perspectives between shareholders vs. stakeholders are often referred to as “shareholder theory” and “stakeholder theory.”
What Is Shareholder Theory?
Introduced by economist Milton Friedman in a 1970 New York Times article , shareholder theory (also known as the Friedman Doctrine) argues that the primary responsibility of a corporation’s executives is to satisfy the desires of the company’s shareholders.
According to Friedman, a public company’s executives are employees or “agents” and, as such, should be prioritizing and delivering what the company’s owners — its stockholders — want.
In most cases, Friedman said, that means maximizing profits. And executives shouldn’t feel obligated or motivated to spend company resources on social responsibilities unless the shareholders tell them to or it benefits the bottom line.
Under the shareholder theory, managers are still expected to operate legally and ethically as they strive to increase returns. But the shareholders’ wants and needs supersede those of other stakeholders connected to the business.
That doesn’t mean corporate executives can’t contribute their own time or money in socially responsible ways. “As a person, (an executive) may have many other responsibilities that he recognizes or assumes voluntarily — to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country,” Friedman wrote in the Times.
But those actions should be taken as an individual, Friedman wrote, not as an agent of a public company using stockholder money.
Stakeholder Theory
Stakeholder theory, usually credited to Dr. R. Edward Freeman, a professor of business administration at the University of Virginia, takes an alternative view to the Friedman Doctrine. In his 1984 book, Strategic Management: A Stakeholder Approach, Freeman said that to be successful, a business must create value for all stakeholders — not just those who own stock but all those who might be affected by company decisions.
That might mean considering whether to move forward with a merger or acquisition that could result in layoffs. Or rethinking a decision to relocate and take jobs to another state or country.
It could also mean deciding whether to use an overseas supplier that can provide goods or services at a lower cost to customers but also with a lower quality. Increasingly, it may mean keeping in mind how a decision might affect the environment — by taking away green space, for example, or creating more traffic or pollution.
Considering the needs of all stakeholders doesn’t require executives to ignore profitability, proponents of the stakeholder theory argue — it’s just that profitability shouldn’t be the only factor of significance.
But critics of the stakeholder theory counter that a company that tries to please everyone ultimately pleases no one, and the business could be damaged in the effort.
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Stakeholder vs Shareholder Corporate Social Responsibility
As the idea of good corporate citizenship continues to gain ground globally, a growing number of companies have begun assessing decisions based on their responsibilities to society as a whole, not just their shareholders.
In 2010, for instance, the International Organization for Standardization created voluntary standards (guidelines, not rules) designed to help companies that wish to put corporate social responsibility policies in place.
And in 2019, the Business Roundtable, a nonprofit association of U.S. CEOs, grabbed headlines when it announced a new commitment to delivering value to all stakeholders, not just shareholders.
For decades, the Business Roundtable has endorsed the principle of shareholder primacy. But the group’s Statement on the Purpose of a Corporation widened that approach, outlining specific commitments to customers, employees, suppliers, communities, and shareholders. It was signed by 181 CEOs.
Individual investors also appear to be moving toward making portfolio decisions that take broader stakeholder needs into account.
Those who might wish to invest in companies whose socially conscious policies align with their own values can do so with specific stocks. Or they may invest in a growing number of exchange-traded funds and mutual funds that follow environmental, social, and governance (ESG) criteria.
A shareholder’s primary goal may still be to get the best return possible from an investment. But with an ever-widening range of choices available, investors who prefer socially responsible companies don’t necessarily have to accept lower returns in exchange for following their heart.
And if their stock gives them an opportunity to vote for board members or on policy, those shareholders also may enjoy the satisfaction of having a small say in how a company is run.
When discussing corporate social responsibility, stakeholders can refer to individuals who have a direct interest in company operations. But it can also be expanded to include the general public as well, who may be affected by corporate decision-making.
How these groups of stakeholders vs. shareholders are impacted can be influenced by the company’s actions. Projects that encourage the use of renewable energy or promote water conservation, for example, can yield positive benefits to financial stakeholders if the end result is a boost in company profits. And the general public stakeholders can also benefit from a cleaner environment.
The Takeaway
Shareholders and stakeholders often have similar goals — to see a given company thrive — but their focuses may differ, depending on whether they have money or other resources invested in the company.
However, it’s not always an either-or situation. For instance, the growing corporate social responsibility movement could give investors more opportunities to invest in companies that align with their personal and social values, and in which both shareholders and stakeholders may both benefit.
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