A stakeholder in business refers to anyone, including a person, group, organization, government, or any other entity with a direct or indirect interest in its operations, actions, and outcomes. They can be external or internal based on their relationship with the company that serves their interests.
Typically, they impact the firm’s performance, i.e., success or failure, or themselves get affected by it. As a result, they become vital to the growth of every company. Stakeholder examples include employees, managers, investors, customers, trade associations, governments, etc.
Table of contents
- Stakeholder meaning describes someone who has a direct or indirect interest in the company’s operations, activities, or consequences, such as a person, group, organization, government, or other institution.
- They can be internal (primary) or external (secondary), depending on their association with the company that serves their interests.
- Primary or direct stakeholders may include board members, employees, and investors. Whereas secondary or indirect ones may involve customers, creditors, governments, labor unions, etc.
- They are different from shareholders as the latter has a financial interest in the firm, can own and sell company stock, and vote on crucial business decisions.
How Does Stakeholder Work?
A stakeholder plays a crucial role in various business processes, such as strategic planning, administration, corporate social responsibility, and organizational goals. While ignoring them can result in loss, managing them can lead to profits.
Furthermore, they take great interest in or possess special rights influencing business decisions affecting operations and finances, whether positively or negatively. Likewise, a company’s performance might have an impact on a stakeholder’s financial or professional status. That is why many businesses practice stakeholder management to align their interests with that of concerned parties to make profits.
Much like individuals and entities, when a corporation is half-governed or controlled by the government, the state is said to be a stakeholder in the business. It means the enforcement of any law or policy will impact the respective industry.
R. Edward Freeman, an American philosopher, was the first to propose the stakeholder theoryStakeholder TheoryStakeholder theory refers to the ethical concept that addresses business decisions, trends, profits and their collective impact on all stakeholders, including the shareholders, employees, financers, government, customers and suppliers. in 1984. The identity of these individuals or entities remains inextricably linked to the company in which they have invested interest, which works both ways.
If a stakeholder is a proponent of a business, it will support its marketing, promotion, and goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price.. At the same time, when the firm expands, they grow as well. Similarly, an employee or customer can benefit in the form of a paycheck or product. So in a way, their relationship with the organization is directly proportional, and vice versa as events like consumer activism can affect a business.
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Stakeholders may vary based on their involvement in the company. They are not the same as shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. because the latter is a subset of the former. Furthermore, shareholders have a financial stake in the company. They can own and sell company shares, vote on critical business decisions, elect board membersBoard MembersBoard members comprise the individuals whom the shareholders elect as their representatives. They are responsible for taking crucial corporate decisions regarding the company's policies, dividend payouts, top-level managers' recruitment or layoff and executive compensation., and may have a short-term relationship with it. However, they can be internal (primary or direct) or external (secondary or indirect):
#1 – Internal Stakeholders
These are primarily associated with a business, such as owners, managers, board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. , employees, and investors. They also actively engage in financial transactions with the firm. As a result, they directly benefit or suffer a loss from the company’s success or failure. That is why they pay attention to the business activitiesBusiness ActivitiesBusiness activities refer to the activities performed by businesses to make a profit and ensure business continuity. , decisions, reports, history, and future growth.
#2 – External Stakeholders
These seek to profit from the firm while remaining outside, yet they are unconcerned about its output or performance. Examples include customers, creditorsCreditorsA creditor refers to a party involving an individual, institution, or the government that extends credit or lends goods, property, services, or money to another party known as a debtor. The credit made through a legal contract guarantees repayment within a specified period as mutually agreed upon by both parties. , governments, labor unions, communities, support groups, media, etc. However, they do not directly associate or involve in any financial exchange with the firm or play a part in its administration or working. Still, they can indirectly impact or get affected by its actions.
Let us consider the following stakeholder examples to understand the concept better:
Melinda works at a mobile phone manufacturing company. Her friends, family, relatives, and neighbors are all aware that she works there. Melinda uses the same mobile phone that her company makes. When Melinda attends a party, a gathering, or a meeting, she advertises her firm by encouraging others to check for the features of her cellphone.
Melinda is an employee and, in a sense, a company promoter in this case. The corporation has a legal obligation to serve the interests of the people associated with it. As more individuals develop an interest in devices her company produces, it increases sales revenueSales RevenueSales revenue refers to the income generated by any business entity by selling its goods or providing its services during the normal course of its operations. It is reported annually, quarterly or monthly as the case may be in the business entity's income statement/profit & loss account.. And as an employee, she grows along with it.
Unlike public benefit corporations, which focus on striking a balance between stockholder and stakeholder interests, JPMorgan Chase & Co.’s board of directors recently chose to advance the interests of its shareholders and investors. The board stated that doing so will aid in the creation of a business-friendly economy that benefits everyone.
The decision came following JPMorgan’s chief executive officer (CEO) Jamie Dimon’s initiative that the companies should consider the needs of their employees, customers, communities, and shareholders equally.
Peter is an investor in a car manufacturing company, has purchased a large number of shares. So if the company does not perform well and its stock price falls, he, as a stakeholder, will have to shoulder the losses.
Frequently Asked Questions (FAQs)
A stakeholder in a business is a person, group, organization, government, or other institution with a direct or indirect interest in the company’s operations, activities, or results. Depending on their relationship with the company responsible for informing, involving, or serving their best interests, they can be internal (primary) or external (secondary). Board members, employees, and investors are direct stakeholder examples. Customers, creditors, governments, labor unions, and other parties may belong to indirect ones.
Stakeholders play a crucial role in various business processes, such as strategic planning, administration, corporate social responsibility, and organizational goals. They are typically those who impact or are affected by the firm’s performance, i.e., its success or failure. They are vested in or have specific powers to sway business decisions that affect operations and finances, whether positively or negatively.
Shareholders and stakeholders are not the same things because the former is a subset of the latter. Furthermore, shareholders have a financial interest in the firm, can own and sell company stock, vote on important business decisions, elect board members, and have a short-term relationship with the firm.
This has been a guide to Stakeholder and its meaning. Here we discuss who is Stakeholder, how it works, its importance, types, and some examples. You can learn more from the following articles –