What is a Stakeholder?

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Definition:

A stakeholder is an individual or organization that has a vested interest in a company and is impacted by the firm’s business decisions.

🤔 Understanding stakeholders

Every business has stakeholders — These are the people who are affected by the outcomes of different business decisions. Stakeholders could be employees, managers, investors, or customers, but there are even more possible examples. Stakeholders can be internal or external, meaning some are a part of the company, and some aren’t. They could also be either primary or secondary stakeholders, which simply means some are more directly impacted by the business than others. Often, stakeholders who are affected by the decisions of a particular company will try to influence the firm’s choices to steer things toward the best outcome for themselves. The term stakeholders is not to be confused with the term shareholders, which refers to people who own stock in a company.

Example

Suppose that a local retail store is considering moving their business location to the next town over. Many people are going to be affected by this decision — These people are the stakeholders. The employees and customers would see a direct impact, as they would have to drive to the next town over to get to the store. Because of the impact that it would have on their lives, employees might try to influence the business owner to change their mind so they can be sure to keep their jobs. The town that the store is considering moving to is also a stakeholder since the business would contribute to its economy.

Takeaway

Stakeholders are like dominoes...

When you knock down a single domino, it affects all of the other dominoes nearby. Imagine that every business is like that first domino, and the dominoes surrounding it are like the stakeholders. They are affected by anything that happens to the first domino. When companies make major business decisions, their customers, employees, and other stakeholders will feel the outcomes of those choices.

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What is the role of stakeholders?

Identifying stakeholders is vital for any company. You must be aware of who your business decisions will impact, and what impact they’ll each face. Each stakeholder has unique needs. Sometimes, the needs of different types of stakeholders will conflict. In that case, a company must decide whose needs to prioritize.

For many companies, the customers are the stakeholders put first. However, they also rely financially on investors and the money they put into the company. Weighing the needs of different stakeholders can be a tricky balancing act for companies.

Stakeholders often try to influence the decisions of a particular company in a way that is in their best interest. The roles and activities that a stakeholder takes part in depend on what type of stakeholder they are.

Let’s talk about some of the primary stakeholders that most companies will have and what their roles commonly are:

Customers

Customers are key stakeholders in any company. In fact, some might argue that customers are the most critical stakeholder of them all since without them, you have no business.

All different types of business decisions affect your customers, including financial ones. When you choose to increase or decrease your prices, your customers are the ones who feel that decision.

How your business prioritizes customer service will also impact your customers. If you don’t put customer service at the forefront of your business, you’ll likely lose some of those customers.

In some cases, the needs of the customer are even greater than just the price of goods or customer service. In some businesses, the safety of your customers is your responsibility. If you’re a car manufacturer, for example, producing an unsafe product could be the difference between life and death for your customers.

Customers can influence the decisions of a particular company through their actions. Their purchasing decisions are a significant factor in directing a firm’s future choices.

Employees

Employees are another important stakeholder in any business. The business decisions you make can impact your employees’ quality of life, as well as their ability to pay their bills.

In the example of a small business considering moving to the next town over, this decision could mean unemployment for some employees.

How you treat your employees also has a significant impact on all of your other stakeholders. Treating your employees poorly could result in them treating your customers poorly. This chain of events would likely result in a loss of revenue. This loss, in turn, affects all of your other stakeholders, as well as your wallet. For this reason and others, employee satisfaction is vital.

Investors

Investors (aka shareholders) are certainly an example of stakeholders. Investors have a financial stake in the company. When they buy equity in a company, they want to see the firm’s leadership make the most of it (meaning a high return on equity).

Investors play a key role in business. For many companies, their primary goal is to satisfy the needs of their customers. But as a publicly-traded corporation, firms also have a financial responsibility to their shareholders.

The interests of investors might not always align with those of customers and/or employees. In many cases, investors may have voting rights in a company as a result of their stock ownership.

Community

The local community in which a company does business is also one of its stakeholders. Companies can have a significant environmental and social impact on their communities.

Socially responsible companies often become active participants in making their communities better places. Many communities also expect this of their local small businesses and corporations.

Communities can also depend financially on businesses. A large employer in a small town makes up a substantial part of that town’s economy.

Government

The government is a stakeholder in businesses within its jurisdiction, for multiple reasons. First, the government is a stakeholder because of the money it collects from companies in the form of tax dollars. Governments rely on those tax dollars to carry out their core functions.

One role of government as a stakeholder is to create and enforce regulations that affect different types of companies. In many cases, the government requires specific licenses or certifications for businesses.

The government also enacts laws to protect other stakeholders. The federal government and state governments regulate how companies are allowed to treat their employees. Some examples of this would be minimum wage laws and workplace safety regulations.

Governments also regulate the impact that firms may have on their communities. For example, they regulate companies’ environmental impacts, such as what they can put into the air and water.

What is the difference between internal and external stakeholders?

Companies have both internal stakeholders and external stakeholders. Internal stakeholders include company owners and employees. They have a direct relationship with the company. External stakeholders are outside of the company, but still have an interest in the firm’s activities.

One example of an internal stakeholder is an investor. Because of the stock they own in the company, they are part owners. Decisions that a company’s management makes directly impact the investors in the form of financial gains or losses.

An example of an external stakeholder would be a customer. Sure, customers can still see a financial effect from the decisions a company makes. But they don’t have the same direct relationship with a company that its employees and investors do.

What is the difference between primary and secondary stakeholders?

Stakeholders can be either primary or secondary stakeholders. Which of these groups a stakeholder falls into depends on how directly a company’s decisions affect that stakeholder.

If a firm’s decisions have a direct impact — usually a financial impact — on a stakeholder, they are considered a primary stakeholder. Primary stakeholders include employees and investors. Both of those groups depend on the company financially, and company decisions can have a considerable impact on their wallets.

Secondary stakeholders don’t feel the impact of a particular company’s decisions quite as strongly. An example of a secondary stakeholder might be a governmental body that regulates the business.

That governmental body doesn’t usually depend on that particular company for its financial wellbeing. Still, it will undoubtedly take notice of business decisions that are of interest to them — and possibly take action.

What is the difference between a stakeholder and a shareholder?

People might use the terms stakeholder and shareholder interchangeably, but the two have entirely different meanings.

Stakeholders are individuals and entities who have an interest of any kind in a company. Usually, stakeholders are those with a long-term interest in the company, such as employees and customers.

Shareholders, on the other hand, are those that have a financial interest in the company. The term shareholder refers to anyone who has a financial interest in a company through their ownership of company stock.

Shareholders are also stakeholders, in that a firm’s business decisions affect them along with other stakeholders — though, they often have a more temporary relationship with a company than other stakeholders.

Suppose that a company is struggling, and many expect it will be going out of business soon. An employee might start applying for other jobs. But if they don’t have one lined up before the company goes under, they’ll find themselves unemployed. The shareholder, on the other hand, can sell their stock in a company as soon as things start to head south. They’ve managed to limit their losses, and can simply turn around and buy stock in a different company.

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