Some of us believe that the terms “stakeholder” and “shareholder” are interchangeable. However, the involvement and investment of a stakeholder and shareholder in a company or business differ greatly. So, what is the distinction? A shareholder is always a stakeholder, but a stakeholder is not always a shareholder.
What Is a Shareholder?
A shareholder is a person or an organization that owns stock or shares in a public or private company. They are sometimes referred to as members of a corporation, and they have a financial interest in the organization’s or project’s profit.
Shareholders have the right to do the following (and more) depending on the applicable laws and rules of the corporation or the shareholders’ agreement:
- Nominate directors
- Receive dividends
- Sell their shares
- Buy new shares
- Vote on those nominated for the board
- Vote on mergers and changes to the corporate charter
- Gain information on publicly traded companies
- Sue for a violation of fiduciary duty
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 goes public. If they are shareholders in a project, their interests are tied to the project’s success.
Shareholders’ money can be withdrawn for a profit. It can even be invested in other organizations, some of which may compete with the other. As a result, the shareholder is a shareholder of the company, but not always in the best interests of the company.
Shareholders’ investments in a company are typically liquid and can be sold for a profit. Investors typically buy a portion of a company’s shares, hoping that these shares will appreciate and provide a high return on investment. The shareholder may sell some or all of his shares in the company and use the proceeds to buy shares in another company or make an entirely different investment.
Liability for the Company’s Debts
Although shareholders are the company’s owners, they are not liable for the company’s debts or other financial obligations. Creditors of the company cannot hold the shareholders liable for any debts owed to them. Creditors have the right to demand payments and auction the properties of the owners of privately-held companies, sole proprietorships, and partnerships.
Rights of a Shareholder
Although shareholders are not involved in the day-to-day operations of the company, the company’s charter grants them certain rights as owners. One of these rights is the right to inspect the company’s annual books and financial records. If shareholders have concerns about how the company’s top executives are running it, they have the right to access its financial records. If shareholders notice anything out of the ordinary in the company’s financial records, they have the right to sue the company’s directors and senior officers.
Furthermore, when the company’s assets are sold due to bankruptcy or dissolution, shareholders have a right to a proportionate allocation of proceeds. They, on the other hand, receive their share of the proceeds after creditors and preferred shareholders have been paid.
What Is a Stakeholder?
A stakeholder is anyone who is affected by the project’s outcome, whether they are individuals, groups, or organizations. As a result, the success of a project is important to them. They are either project members or external sponsors. Stakeholders include internal and external stakeholders.
To identify stakeholders, many people can be considered stakeholders, including:
- Project leaders
- Team members on the project
- Senior management
- Customers of the project
- User group for the project
- Resource managers
- Line managers
- Subcontractors on the project
- Consultant for the project
As a result, stakeholders can be internal—for example, employees, shareholders, and managers—but they can also be external. They are parties who do not have a direct relationship with the organization but are affected by its actions, such as suppliers, vendors, creditors, the community, and public groups.
Stakeholders are those who will be impacted by the project while it is in progress and also when it is completed. It is critical to understand the specific needs of each of your stakeholders. A stakeholder map can help you better understand their impact and influence on the project.
Longevity is one of the characteristics of a company’s stakeholders. Stakeholders can’t just decide to sell their shares in the company. Several factors bind the stakeholders and the company together, making them dependent on one another. If the company’s performance deteriorates, it poses a serious problem for all stakeholders. Employees, for example, will lose their jobs if the company’s operations are stopped, which means they will no longer receive regular paychecks to support their families.
Similarly, suppliers will no longer provide the company with essential raw materials and products, resulting in not only a loss of income but also forcing suppliers to seek new markets for their products.
Differences Between Stakeholders and Shareholders
The difference between a shareholder and a stakeholder is determined by the individual’s relationship to the company or organization. A shareholder is, by definition, a stakeholder. The reverse is not always true, i.e., a stakeholder is not always a shareholder.
Shareholders have a shorter relationship with the company than the average stakeholder. A shareholder can sell their shares and thus their stake in the company at any time. This could happen for a variety of reasons. For example, if the stock price of the company rises, shareholders may choose to sell their shares for a profit. Alternatively, if the company’s value declines and the stock price falls, shareholders may sell in order to reduce their losses.
Stakeholders, on the other hand, are typically more invested in the company than shareholders. For example, the average company employee is riskier than a shareholder, who can simply sell their stake in the company whenever they want.
External stakeholders such as community groups and local customers also have a vested interest in how the company operates – an issue covered by Corporate Social Responsibility or CSR.
Corporate Social Responsibility is an important component of a company’s business model because it requires companies to consider how their operations affect the larger community rather than just their shareholders.
Environmental issues, such as disruption to a local ecosystem or a negative impact on local residents, are expected to be prioritized. In contrast, previously, shareholders were the primary focus for company executives.
Shareholders are primarily interested in a company’s stock-market valuation because as the share price of the company rises, so does the shareholder’s value. Different types of stakeholders are concerned about the company’s performance for a variety of reasons.
Employees, for example, want the company to stay financially secure because it is their source of income. Suppliers want to do business with the organization in the future. Civic leaders want the corporation to stay in the area as an employer and a source of tax revenue.
Stock Price Valuation Vs. Broader Success
Shareholders are concerned with the company’s stock price. They want the company to take activities that promote growth and profitability, boosting the share price and any dividends it may give to shareholders because they own stock in the company.
Because stakeholders are often more concerned with a company’s long-term financial stability, their goals may differ from those of shareholders, who are only concerned as long as they own stock. Stakeholders concerned about a company’s environmental, social, and governance (ESG) performance, for example, may be more willing than shareholders to give up a percentage of profit in exchange for a higher ESG score over time.
Short-Term Interest vs Long-Term Interest
Shareholders are typically only interested in a firm’s performance as long as they own stock in the company. Stakeholders, on the other hand, have a longer-term interest in a company’s success, even if they don’t own stock. This could be due to the fact that they work for the firm, own or operate a company that supplies the company, or live in a community where the company works and contributes to the local economy.
Shareholder vs stakeholder theory
Shareholder vs stakeholder theory analyses how companies interact with and hold themselves accountable to shareholders and stakeholders. According to one point of view, a company’s first responsibility is to its shareholders, and thus its top priority should be to increase profits as much as possible. Milton Friedman popularized shareholder theory in the 1960s. Friedman contended that the cyclical nature of business hierarchy meant that corporations were primarily responsible to their shareholders.
Stakeholder theory, on the other hand, suggests that companies prioritize ethics and create value for all stakeholders, not just those who own stock. Dr. Edward Freeman proposed stakeholder theory in the 1980s. Along with the rise of corporate social responsibility, or CSR, stakeholder theory has aided in the creation of better working environments and employee benefits, particularly in industries with poor working conditions.
Again, a shareholder is someone who owns shares in the company. A stakeholder has a financial interest in the company. As a result, shareholders are owners, whereas stakeholders are interested parties. As previously stated about stakeholders vs shareholders, shareholders are a subset of the superset known as stakeholders.
Shareholders in a company include both equity and preference shareholders. Stakeholders can range from shareholders, creditors, and debenture holders to employees, customers, suppliers, the government, and so on.
The primary difference between the two is that shareholders are concerned with the return on their investment. Stakeholders are more concerned with the company’s performance.