Stakeholder vs. Shareholder - What's the Difference?

One of the most important important distinctions when discussing business practices and business ethics is that between stakeholders and shareholders. While the two sound interchangeable, they are two differentiated concepts, with concern for stakeholders becoming an important point of consideration for increasingly socially conscious businesses and business models.

Shareholder

The definition of a shareholder has remained mostly the same for the greater part of the last few centuries.
Shareholders are those who have invested in a business or company by purchasing shares of that business, and now presumably have a financial interest in that company's success. Shareholders, then, are investors in a company, and can be anyone from active mega-investors who hope to influence the actions of the company they are investing in to passive investors who are throwing a few weeks salary into a company in preparation for retirement.

Shareholders, then, are very interested in the monetary valuation of a company or business, as that monetary valuation directly affects that shareholder's investment. They would prefer the company take actions that will increase its share price, increase dividends, and generally take actions that improve their own financial positions.

Perhaps the most important aspect of shareholders is that their investment in the company is liquid, and often temporary. An investor can buy a share in a company today, and then that share off tomorrow in hopes of a quick profit. That investor can then invest their money in any other company, then becoming a shareholder in a perhaps completely unrelated and separate enterprise.

Stakeholder

Stakeholders are those who are invested in a company, but not in the traditional financial sense that one thinks of when thinking of “investing”. Stakeholders can be seen as anyone who has a stake in that company's success for a variety of reasons, that can include stock prices but also can include customers that rely on that company's services; communities that rely on that company to employ its members; suppliers that rely on the a company to contract its services; and employees, who rely on the company to provide them with steady paychecks and gainful employment.

Stakes in a company are also characterized by longevity, that is, that one cannot easily and quickly decide to remove their stake in a company. Stakeholders are bound by a series of factors that make them in some way reliant on a company, including geographic and cultural considerations, that would make the loss or decline of that company a serious detriment for all stakeholders involved. Stakeholders, then, are interested not just in the performance of the company, but the externalities and secondary effects that stem from that company's performance.

Shareholders are Stakeholders, but Stakeholders are not always Shareholders

Shareholders are almost always stakeholders in a company, because they have invested monetarily in a company and have a stake in that company's success. Stakeholders, however, are often not shareholders at all. In today's business environment, employees, community members, and customers of a company (all stakeholders) rarely if ever hold actual stock in a company.

This causes a conflict of interest at times between stakeholders and shareholders of a company. Shareholders may pressure a company to use shortsighted business strategies, in hopes of maximizing profit (and share prices) in the short term but sacrificing a company's profitability in the long term. The shareholder can then sell of their stock in that company for a profit, and move on to their next investment. Stakeholders, however, are on the hook for the company's long term success, and when that company goes belly up or has to lay off workers the next year, it is the long term stakeholders who suffer. The same conflict of interest may push employees to fight against layoffs or automation of labor, despite those actions being required for a firm's long term survival. Stakeholders and shareholders, then, can both act rationally in trying to secure their short term self interest at the expense of an enterprise's long term viability.
By Travis Lindsay

Copyrighted 2016. Content published with author's permission.

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