What’s the Difference? • Benzinga

Two terms in the finance industry commonly believed to be synonymous are “stakeholder” and “shareholder.”

The similarity between the two words is understandable — both refer to people or groups who invest or have an interest in a certain company. Strictly speaking, however, there’s a difference between the two.

This post compares stakeholder vs. shareholder.

A stakeholder is any party, group or individual with a special interest — or stake — in a certain company. They can include employees, customers, localities, parts of the supply chain and the government or non-governmental organizations (NGOs).

A group of stakeholders in a company experiences the direct effects of that company’s performance and decision-making.

An employee who gets a raise feels the benefit of that decision, as does their family; a parts manufacturer depends on the company’s orders for new product components; a local water preservation group may be concerned about a new factory being built near an endangered fishing stream. All of these individuals and groups are stakeholders.

Stakeholder management is not to be overlooked. While stakeholders may not impact a stock’s value directly, they influence how the company is perceived and can significantly impact its values and practices. In light of this fact, all companies would do well to communicate with their stakeholders. 

Shareholders have a direct financial interest in a certain company. They own shares or equity in a corporation and are considered co-owners in a way.

The impact on them is fiscal. Investors, venture capitalists, banks, fund managers and others who own company stock are classified as shareholders.

Shareholders enjoy several unique privileges. Many shareholders in a given company have regular meetings, either virtually or in person. At these meetings, they generally have the option to vote on company business, like appointing candidates to the Board of Directors.

Companies also pay attention to what’s on their investors’ minds. Majority shareholders can steer a corporation’s direction dramatically, but its overall trajectory relies on its many minority shareholders too.

As a group, they can impact the company’s trading volume, which can in turn affect share prices. They hope to drive up share costs, as they’ll earn a bump in their portfolio value (or collect occasional dividends) by doing so.

Beyond the dictionary definitions, other disparities characterize the stakeholders vs. shareholders distinction.

A shareholder is a stockholder. They earn capital when the shares they hold go up in price and lose it when the price declines. Though a shareholder may care about numerous aspects of business, their primary objective is to earn more money.

By comparison, stakeholders have a broader range of priorities.

Employees, project managers, customers, suppliers and warehouse workers all interact with the company and are affected by the decisions it makes. Stakeholders can also include community groups, activists and government entities that monitor and regulate the industry.

Priorities of stakeholders run the gamut. Employee well-being, social responsibility, environmental impact, compliance and customer fulfillment are just a few areas of stakeholder concern. They can also worry about finances, of course, but their interests go beyond the bottom line.

Two philosophies influence choices in the investment market: short-term gains and long-term potential. The relationship between the two is reflected in the question of stakeholder vs. shareholder.

Many active shareholders have short-term goals: they want to turn a profit, preferably quickly. This involves taking a position that’s short in length. The shares may be in a company experiencing frequent price fluctuations that the short-term investor wants to take advantage of. Short positions are riskier by nature.

Stakeholders have different hopes and desires for the company, and most of them have nothing to do with short-term gains. However, at times stakeholders take the short view. Customers like bargains, so they flock to Amazon on Prime Day. Similarly, employees may be concerned about workplace conditions that arise quickly, and government regulators may be focused on paperwork deadlines on compliance issues.

Shareholders and stakeholders are likely to have similar views on long-term timelines.

Investors who buy and hold shares are betting that the company will remain stable and profitable. Part of their analysis includes considerations of factors and fundamentals besides finances.

Company health, market share, management direction and environmental responsibility are a few of them. Many stakeholders feel strongly about those same four issues.

Even with overlapping long-term concerns between the two, the primary difference goes back to motivation. Shareholders are driven by profits, while stakeholders are focused on fairness and change.

Shareholder theory was popularized in the early 60s by economist Milton Friedman. However, it’s been around in some form since the advent of public stock ownership.

The premise is simple: a corporation is required to make policies and practices that will boost its shareholders’ profits.

The measures a company takes must be legal, but the bottom line is increasing share prices (a concept known as shareholder primacy). Shareholder capitalism drives management actions like hiring and layoffs, price-cutting, budgeting and expansion.

There is a reciprocal stakeholder theory, of course. According to stakeholder capitalism, everything a corporation does must align with ethical, social and practical directives. However, it’s fair to say that for the vast majority of corporations, shareholder theory is much higher in mind.

A public company is owned by its investors, who hold shares in its stock. Even if a majority shareholder reaps the most reward from profits, every shareholder gets a piece of the pie.

Stakeholders don’t have to be shareholders, though many are. They can have a deep interest in and feel the effects of company strategy, but they don’t have to own shares to do so.

Stakeholders and shareholders may have conflicting interests, but the two sides don’t have to be at odds. In fact, it’s wise for companies to acknowledge both. Making money for shareholders may be priority number one for most corporations, but stakeholder issues affect that profitability.

For example, having happy workers helps to attract and retain talent; positive relationships with other links in the supply chain can improve efficiency and attract customers; and working toward social and environmental aims suggests that a company intends to be around for the long haul.

Just as investors look to balance and diversify their portfolios to maximize capital, companies benefit from balancing financial goals with business ethics. Successful companies can’t have one without the other.

When evaluating the differences between stakeholders and shareholders, one might be tempted to say there’s no right or wrong answer. That’s true in that neither side deserves to be judged solely for its motivations or principles.

However, there actually is a right answer: for a company to be successful, its leaders must take both standpoints into consideration. Stakeholders and shareholders may take different approaches, but they both want companies to endure and thrive.