The terms shareholder and stakeholder can oftentimes be confused or improperly used interchangeably. Every business has shareholders and stakeholders, both of which are essential to the success of a business, but their relationships to the organization are different and therefore it is important to understand the difference between the two. Identifying and understanding the needs of all stakeholders, whether individuals, organizations, or the environment, is crucial for business leaders to understand how their enterprise will impact the greater community. Misaligned interests between stakeholders and shareholders is not uncommon and can threaten the fulfilment of an enterprise’s mission, but fortunately there are measures entrepreneurs can take when forming the legal structure of their enterprise to reduce the chance of misalignment between the two groups. This article defines shareholders and stakeholders, identifies their key differences, and begins to explore how entrepreneurs can consider all stakeholders during the conception of an enterprise to compel their mission.
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As defined by Investopedia, “a shareholder can be an individual, company, or institution that owns at least one share of a company and therefore has a financial interest in its profitability.” Shareholders earn a return on their investment when a company increases shareholder value by growing, becoming more profitable, and/or increasing free cash flow. Here are some key characteristics of a shareholder:
- Own at least one share of the company
- Are not liable for the company’s debts
- Have voting rights to affect the management of a company
- Receive dividends (if paid by the company)
- Can sue the company directors or senior officers for violations of fiduciary duty
As defined by Investopedia, “a stakeholder has an interest in the performance of a company for reasons other than stock performance or appreciation.” Stakeholders can be people, organizations, or the environment, and are affected by the activities of a company or its projects, and therefore tend to have a long-term relationship with the company. Here are some examples of stakeholders:
- Owners and shareholders
- Program beneficiaries
- Employees in supply chain
- The environment
- Bond holders
As you can see, shareholders are listed as stakeholders; it is important to remember that shareholders are always stakeholders, but not all stakeholders are shareholders.
Shareholders can generally sell their ownership or buy more shares at will, whereas stakeholders are usually bound to the activities of a company and the related impacts regardless of choice. This tends to make the relationship stakeholders have with a company more long-term, while shareholders have no long-term need for a company. For example, if a company has to shut down a plant due to a chemical spill, a shareholder may sell their stock and invest in a better company, but members of the community the plant was in will feel the effects of job loss and environmental degradation for years to come. A good way to think about this is that stakeholders are inherently tied to the benefits and burdens of a company’s externalities, while shareholders opt-in to have their finances linked to the financial performance of a company.
The interests of stakeholders and shareholders can conflict as well. Shareholders may want a company to outsource certain production to boost growth and profitability even though many stakeholders like suppliers, employees, and the environment will be negatively affected. Shareholders are typically concerned with stock price, dividends, and financial health, whereas stakeholders are concerned with the impact of a company’s activities.
Shareholder Theory vs Stakeholder Theory
It has been debated whether a company should primarily consider its shareholders or stakeholders when making business decisions and adhering to fiduciary duty. Historically, shareholder theory has been widely accepted and used, noting that a corporation’s duty is to maximize shareholder returns. However, the emergence of corporate social responsibility (CSR) and environment, social, and corporate governance (ESG) has begun to shift the public view of the duty companies have to their stakeholders. Stakeholder theory argues that a firm should create value for all stakeholders, not just shareholders, because of the interconnected relationships between a business and its customers, suppliers, employees, investors, the environment, communities and others who have a stake in the organization.
Making decisions to maximize shareholder value at the expense of other stakeholders is a dangerous principle; its application, although it has benefitted many shareholders who were positioned effectively, has contributed to climate change, systemic inequities, and many of the world’s other problems. The idea that a company’s sole purpose is to make money for shareholders threatens social enterprises and fails to recognize that businesses are part of the very fabric of our society and affect the livelihood of all people and the health of our planet. Appeasing stakeholders is important for securing the capital needed to run a business, but aligning interests with all stakeholders is vital to the overall success of a business.
Entrepreneurs creating a social enterprise can strategically utilize the term stakeholder(s), as well as other impact terms found on the ITP platform, in their governing documents to ensure that the enterprise’s fiduciary duty compels its social mission rather than conflict with it. Representing all stakeholders in the legal structure of a company is an important step towards aligning social enterprises with capital markets, and will help dissolve the myth that fiduciary duty and social mission are mutually exclusive. See the related articles below for strategies being used by entrepreneurs to advance their missions through the legal structuring of their enterprises.
Would you like to add to this article? Please reach out to the Impact Terms team about contributing.
- Including Mission in the Statement of Corporate Purpose
- Including Mission in Company’s Best Interest Statement
- Balancing Purpose and Profit
- Steward Ownership