Shareholder vs stakeholder (Definitions and differences)

Updated 13 March 2023

In business, people sometimes use shareholder and stakeholder interchangeably. While these two words sound similar, they are distinct and understanding the differences is invaluable to individuals working in the business field. Learning to distinguish between these concepts and their concerns can help you understand their role in an organisation's success. In this article, we explain the difference between a shareholder vs stakeholder and provide an in-depth look at these differences.

Shareholder vs stakeholder

Understanding the difference between shareholder vs stakeholder is integral to various careers, such as project management and investment analysis. These terms represent two groups of people with distinct roles. Each has specific priorities, goals and functions. You can review both definitions below.

Shareholder definition

A shareholder is an individual, company or institution that owns at least one share of a public company's stock, which means they own a portion of the company. The number of shares they own determines the control they may exert on the businesses' decisions. When a company does well, the shareholder sees the stock price rise and shareholder values increase. The inverse is also true. A poor-performing company may see stock prices decreasing and declining shareholder value. Shareholders want to generate a positive return on their investment, so they look for a healthy balance sheet and strong performance.

Profitable companies give shareholders a portion of their profits through dividends when they succeed. Shareholders can usually vote at designated meetings and make decisions about company policies. They can also inspect the company's financial records and elect board members who make management decisions. Shareholders with significant shares can guide the company's strategic direction. Those who sell their shares when the stock price is high may make a significant profit. They can use their profits to purchase shares in another company or invest the money elsewhere.

Related: What is a public limited company (PLC)? (With functions)

Stakeholder definition

A stakeholder is a person or organisation with an interest or 'stake' in the success of a business or the outcome of its activities. This interest may be financial, but it extends beyond the stock price or overall profitability to include issues like employee and customer satisfaction and job security. Stakeholders want the business to succeed without owning any of its stock. While shareholders are always stakeholders, stakeholders are not always shareholders.

Stakeholders play a crucial role in areas like project management. For a plan to succeed, the project manager identifies the various stakeholders and tries to understand their motivations and requirements. In a typical project, the stakeholders may include the project manager, team members, senior executives, investors, customers and the project sponsor. Successful team leaders manage stakeholders effectively by informing them of milestones and general progress, consulting them on major decisions and responding quickly to their issues and concerns.

Related: What does a project manager do? (With key skills for role)

Types of shareholders and stakeholders

Shareholders and stakeholders can have different roles within their groups. There are two main shareholder types:

  • Common: common shareholders own common shares, and these are shares that usually come with voting rights, meaning common shareholders can vote on the company's decisions. Common shares can result in a higher return on investment over the long term but if the company performs poorly, these shareholders carry more risk.

  • Preferred: preferred shareholders own preferred shares, which are shares that come with no voting rights in the company. These shareholders take on less risk and their investment, which usually generates a lower financial return.

Similarly, there are two main stakeholder types:

  • Internal: internal stakeholders have a direct relationship with an organisation which means they experience a direct impact from its performance. This group includes employees, managers, owners and shareholders.

  • External: external stakeholders operate outside the organisation but still feel the impact of the company's success. They include a company's customers, suppliers, vendors and partners.

Related: Stakeholders meaning (And role in the workplace)

Importance of knowing the difference between shareholders and stakeholders

Knowing the differences between shareholders vs stakeholders helps businesses make informed decisions that benefit both parties. Often, situations that benefit a shareholder may impact stakeholders differently or vice versa. For example, if a company lays off a third of its workforce to cut costs, many internal stakeholders may lose their jobs and benefits. At the same time, the shareholders may receive an increased return on their investment because profits can increase with fewer costs.

Additionally, company decisions about shareholders and stakeholders can influence the opinions of potential investors. A technology company may increase its production of particular software even though the demand has been steadily falling for years. This decision might produce a positive outcome for the company's stakeholders by increasing employment opportunities, expanding salaries and boosting the local economy, but shareholders may experience a decrease in their dividends. This reduction may persuade investors to seek opportunities with other organisations to minimise the risk to their capital investment.

Related: How to conduct risk mitigation (Definition and strategies)

3 key differences between shareholders and stakeholders

There are some differences between being a shareholder and a stakeholder. You can understand these differences by remembering the following:

1. They use different underlying business theories

There are contrasting business theories underlying a company's obligations towards its shareholders and stakeholders. According to shareholder theory, an organisation's purpose is to maximise profits and deliver increased dividends or a higher share price. With this theory, the company maintains an intense focus on earning the maximum return for shareholders and acts based on whether it can generate a profit. For example, it may hesitate to support community causes or engage in corporate social responsibilities unless the benefits outweigh the cost.

An alternative is stakeholder theory. This theory suggests organisations have an obligation to create value for all their stakeholders, not just their shareholders. It emphasises the interconnected nature of a company's stakeholders, including its employees, customers, suppliers and others. Stakeholder theory supports the view that unless an organisation treats its employees well and responds to its customer's needs, it can struggle. Many business employees have little contact with shareholders but interact with project stakeholders daily, so it often makes sense to prioritise the needs of stakeholders over shareholders.

Related: Corporate social responsibility: types and examples

2. They have different priorities

Another difference between shareholders and stakeholders is their perspectives and priorities. Shareholders tend to focus exclusively on generating a profit and protecting their investments. They want the management team to do whatever is necessary to increase the company's value and maximise its share price. By voting in favour of major corporate decisions like mergers, expansions and acquisitions, they can move the company in the direction they consider most profitable. They can also vote to remove a board member if they feel that person's contribution negatively impacts the company's financial health.

Stakeholder priorities are broader and encompass more than the company's financial results and profitability. An organisation's employees are likely to prioritise higher salaries, greater work-life balance and more promotional opportunities over the share price. The main priority for clients might be getting a product that meets or exceeds their expectations or receiving high-quality customer service. In the case of suppliers, their main goal might be to receive their pay timely or to get a better price for their goods. It's sometimes challenging to manage competing stakeholder priorities, but when handled efficiently, it can lead to success.

Related: What does a director do? (With responsibilities and salary)

3. They follow different timelines

Shareholders and stakeholders tend to operate on different timelines. Shareholders often have short-term goals that involve quickly increasing a company's value. They might influence the board to pursue an aggressive growth strategy that immediately generates positive results. When the share price goes up, they can sell their shares, recoup their investment and make a healthy profit. Such shareholders have less interest in the organisation's long-term success or viability. They may sell their shares and relinquish their ownership interest within a year.

Stakeholders usually have longer-term goals. They want the company to succeed in the present and the future. They are more willing to overlook temporary market dips or fluctuations. Employees may want to work at the employing company for many years and develop their skills and pursue career progression. Customers are likely to continue demanding products that meet their needs, solve their problems or delight them in some way. Finally, it's in the interest of suppliers and vendors to maintain a mutually successful business arrangement that benefits both parties for as long as possible.

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