The terms “stakeholder” and “shareholder” are often used interchangeably in the business environment. Looking closely at the meanings of stakeholder vs. shareholder, there are key differences in usage. Generally, a shareholder is a stakeholder of the company while a stakeholder is not necessarily a shareholder. A shareholder is a person who owns an equity stock in the company, and therefore, holds an ownership stake in the company. On the other hand, a stakeholder is an interested party in the company’s performance for reasons other than capital appreciation.
What is a Shareholder?
A shareholder is any party, either an individual, company, or institution, that owns at least one share of a company and, therefore, has a financial interest in its profitability. Shareholders may be individual investors or large corporations who hope to exercise a vote in the management of a company. If the company’s share price increases, the shareholder’s value increases, while if the company performs poorly and its stock price declines, then the shareholder’s value decreases. Shareholders would prefer the company’s management to take actions that increase the share price and dividends and improve their financial position.
The investments that shareholders hold in a company are usually liquid and can be disposed of for a profit. Investors typically buy a portion of a company’s shares with the hope that these shares will appreciate so they will earn a high return on their investment. The shareholder may sell part or all of his shares in the company, and then use the money to purchase shares of another company or use the money in an entirely different investment.
Liability for the Company’s Debts
Although shareholders are owners of the company, they are not liable for the company’s debts or other arising financial obligations. The company’s creditors cannot hold the shareholders liable for any debts that it owes them. However, in privately-held companies, sole proprietorships, and partnerships, the creditors have a right to demand payments and auction the properties of the owners of these entities.
Rights of a Shareholder
Although shareholders do not take part in the day-to-day running of the company, the company’s charter gives them some rights as owners of the company. One of these rights is the right to inspect the company’s books and financial records for the year. If shareholders have some concerns about how the top executives are running the company, they have a right to be granted access to its financial records. If shareholders notice anything unusual in the financial records, they can sue the company directors and senior officers. Also, shareholders have a right to a proportionate allocation of proceeds when the company’s assets are sold either due to bankruptcy or dissolution. They, however, receive their share of the proceeds after creditors and preferred shareholders have been paid.
What is a Stakeholder?
A stakeholder is a party that has an interest in the company’s success or failure. A stakeholder can affect or be affected by the company’s policies and objectives. Stakeholders can either be internal or external. Internal stakeholders have a direct relationship with the company either through employment, ownership, or investment. Examples of internal stakeholders include employees, shareholders, and managers. On the other hand, external stakeholders are parties that do not have a direct relationship with the company but may be affected by the actions of that company. Examples of external stakeholders include suppliers, creditors, and community and public groups.
One of the characteristics of stakeholders in a company is longevity. Stakeholders cannot easily decide to remove their stake in the company. The relationship between the stakeholders and the company is bound by a series of factors that make them reliant on each other. If the company is facing a decline in performance, it poses a serious problem for all the stakeholders involved. For example, if the company’s operations are terminated, employees will lose their jobs, and this means that they will no longer receive regular paychecks to support their families. Similarly, the suppliers will no longer provide the company with essential raw materials and products, and this results in not only a loss of income but also forces the suppliers to look for new markets for their products.
Stakeholder vs. Shareholder Corporate Social Responsibility
Traditionally, companies were only answerable to their shareholders. However, this scenario has changed in recent years. Many corporations have started to accept the fact that, apart from shareholders, the company is also answerable to many other constituents in the business environment. For example, if a company is involved in business activities that take away the green space within a community, the company must create programs that protect the social welfare of the community and the ecosystem. The company may engage in tree-planting exercises, provide clean drinking water to the community, and offer scholarships to members of the community.
Viewpoints of Stakeholders vs. Shareholders
Stakeholders and shareholders have different viewpoints, depending on their interest in the company. Shareholders want the company’s executives to carry out activities that have a positive effect on stock prices and the value of dividends distributed to shareholders. Also, shareholders would want the company to focus on expansion, acquisitions, mergers, and other activities that increase the company’s profitability and overall financial health.
On the other hand, stakeholders focus on longevity and better quality of service. For example, the company’s employees may be interested in better salaries and wages, rather than on higher profitability. The suppliers may be interested in timely payments for goods delivered to the company, as well as better rates for their products and services. The customers will be interested in receiving better customer service, as well as buying high-quality products.
CFI is the leading provider of the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful: