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Shareholder vs. Stakeholder: What's the Difference?

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

Shareholder vs. Stakeholder: An Overview

When it comes to investing in a corporation, there are shareholders and stakeholders. While they have similar-sounding names, their investment in a company is quite different.

Shareholders are always stakeholders in a corporation, but stakeholders are not always shareholders. A shareholder owns part of a public company through shares of stock, while a stakeholder has an interest in the performance of a company for reasons other than stock performance or appreciation. (They have a "stake" in its success or failure.) As a result, the stakeholder has a greater need for the company to succeed over the longer term.

Key Takeaways

• Shareholders are always stakeholders in a corporation, but stakeholders are not always shareholders.
• Shareholders own part of a public company through shares of stock; a stakeholder wants to see the company prosper for reasons other than stock performance.
• Shareholders don't need to have a long-term perspective on the company and can sell the stock whenever they need to; stakeholders are often in it for the long haul and have a greater need to see the company prosper.

Understanding the Role of the Shareholder

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. A shareholder can also be known as a stockholder.

For example, a shareholder might be an individual investor who is hoping the stock price will increase because it is part of their retirement portfolio. Shareholders have the right to exercise a vote and to affect the management of a company. Shareholders are owners of the company, but they are not liable for the company’s debts. For private companies, sole proprietorships , and partnerships, the owners are liable for the company's debts.

A sole proprietorship is an unincorporated business with a single owner who pays personal income tax on profits earned from the business.

A shareholder is interested in the success of a business because they want the greatest return possible on their investment. Stock prices and dividends go up when a company performs well and increases its value, which increases the value of stocks the shareholder owns.

The more stock a shareholder owns, the more they have invested in the company and the more stake they have in it. The votes of shareholders who own more stock have more weight within the company.

There are generally two different types of shareholders.

• Common shareholders : Anyone who owns common stock in a company. Common stock gives you part ownership of the company and often has higher rates of return over the long term. Common shareholders can vote on board members or other company policies.
• Preferred shareholders : Anyone who owns preferred stock. Preferred stock has lower rates of return in the long term but guarantees a yearly dividend. Preferred shareholders can't vote on policies or board members, but they can claim assets before common shareholders if a company fails and its assets are liquidated.

Understanding the Role of the Stakeholder

Stakeholders are those who either affect or are affected by a project or company. They have a "stake" in its success or failure. Stakeholders might be shareholders or owners. They can also be:

• Employees of the company
• Bondholders who own company-issued debt
• Customers who may rely on the company to provide a particular good or service
• Suppliers and vendors who may rely on the company to provide a consistent revenue stream
• Community members who are impacted by the company's decisions and actions
• Partners in events, promotions, or other activities that the company engages in

In general, stakeholders can be divided into two types:

• Internal stakeholders : Those who are employed by the company or have a direct relationship with it. These are usually employees, shareholders, executives, and partners.
• External stakeholders : Those who are impacted by your company but don't have a direct relationship with it. These are usually customers, suppliers, and community members.

What Is Stakeholder Theory?

Stakeholder Theory is a recent theory of business that argues against the separation of economics and ethics. It states that short-term profits—prioritizing shareholders—should not be the primary objective of a business.

Under this theory, prioritizing the needs and interests of stakeholders over shareholders is more likely to lead to long-term success, both for the business and for the communities that it is a part of. This stakeholder mindset is, in turn, likely to create long-term value for both shareholders and stakeholders.

A shareholder can sell their stock and buy different stock; they do not have a long-term need for the company. Stakeholders, however, are bound to the company for a longer term and for reasons of greater need.

For example, if a company is performing poorly financially, the vendors in that company's supply chain might suffer if the company no longer uses their services. Similarly, employees of the company, who are stakeholders and rely on it for income, might lose their jobs.

Stakeholders and shareholders also may have competing interests depending on their relationship with the organization or company. For example, shareholders may want a company to maximize profits, which could be done by keeping wages low, reducing employees' hours so the company does not have to pay them benefits, or using less expensive manufacturing processes even if they pollute the local ecosystem. But these ways of increasing profits go directly against the interests of stakeholders such as employees and residents of the local community.

Stakeholder vs. Shareholder in CRS Companies

The emergence of corporate social responsibility (CSR), a self-regulating business model that helps a company be socially accountable to itself, its stakeholders, and the public, has encouraged companies to take the interests of all stakeholders into consideration. During their decision-making processes, for example, companies might consider their impact on the environment instead of making choices based solely upon the interests of shareholders. Under CSR governance, the general public is now considered an external stakeholder.

When a company's operations could increase environmental pollution or take away a green space within a community, for example, the public at large is affected. These decisions may increase shareholder profits, but stakeholders could be impacted negatively. Therefore, CSR encourages corporations to make choices that protect social welfare, often using methods that reach far beyond legal and regulatory requirements.

Are Shareholders or Stakeholders More Important?

Shareholders have the power to impact management decisions and strategic policies. However, shareholders are often most concerned with short-term actions that affect stock prices. Stakeholders are often more invested in the long-term impacts and success of a company. Stakeholder Theory states that ethical businesses should prioritize creating value for stakeholders over the short-term pursuit of profit, as this is more likely to lead to long-term health and growth for both the business and everyone connected to it.

Are Employees Shareholders or Stakeholders?

Employees are stakeholders in a business, since they are impacted by its decisions and actions. Some employees may also be shareholders if they own stock in the company that employs them.

Are CEOs Stakeholders?

A CEO is a stakeholder in the company that employs them, since they are affected by and have an interest in the actions of that company. Many CEOs of public companies are also shareholders, especially if stock options are a part of their compensation package. However, if a CEO does not own stock in the company that employs them, they are not a shareholder. A CEO may be an owner of a private company without being a shareholder (as there are no shares to buy).

A stakeholder is anyone who is impacted by a company or organization's decisions, regardless of whether they have ownership in that company. Shareholders are those who have partial ownership of a company because they have bought stock in it. All shareholders are stakeholders, but not all stakeholders are shareholders.

Both shareholders and stakeholders are important, but ethical business ownership and management recognizes that the short-term profit goals of shareholders may not always be in the best long-term interest of either the company or the community that it is a part of. Stakeholder Theory suggests that prioritizing the needs and interests of stakeholders over those of shareholders is more likely to lead to long-term success, health, and growth across a variety of metrics.

U.S. Securities and Exchange Commission. " Shareholder Voting ."

U.S. Small Business Administration. " Sole Proprietorship ."

University of Michigan. " Stakeholder Theory and "The Corporate Objective Revisited" ," Page 1-3.

UVA Darden Ideas to Action. " Principles and Purpose: A Statement on Stakeholders ."

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Stakeholder v Shareholder Concept

Last updated 9 Aug 2019

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The stakeholder concept argues that businesses should take account of its responsibilities to stakeholders rather than just focus on shareholders.

Reminder: The Difference Between Stakeholders and Shareholders

A stakeholder is any individual or organisation who has a vested interest in the activities and decision making of a business.

A shareholder is an owner of a company.

So stakeholders include shareholders, but also a wider range of individuals and organisations.

Stakeholders:

•Have an interest in the business – but do not own it •May work for (employees) or otherwise transact with the business

Shareholders:

•Own the business •May also work in the business •Benefit directly from increases in the value of the business

The Stakeholder Concept

In essence, the stakeholder concept argues that the purpose of a business is to create value for stakeholders not just shareholders.

Business needs to consider customers, suppliers, employees, communities as well as shareholders.

In order to succeed and be sustainable over time, business management must keep the interests of customers, suppliers, employees, communities and shareholders aligned and going in the same direction .

The Shareholder Concept

The shareholder concept approach argues that it is the primary responsibility of businesses to act in the interest of its owners - the shareholders. So, decisions should be taken based on the effect of those decisions on shareholders rather than the wider stakeholder groups.

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Stakeholder vs Shareholder - Definitions, Comparison

Understanding the difference between stakeholders and shareholders is crucial in the business world. Shareholders own a piece of the company through stock, directly influencing its value. Stakeholders, encompassing a broader group, have various interests in a company's performance beyond financial gain. This blog will explore these distinct roles and their impact on corporate decision-making, highlighting how each contributes to a company's success.

What Is the Difference Between a Stakeholder and a Shareholder?

Stakeholders include anyone interested in a company's success, whereas shareholders are individuals or entities that own the company's shares. Let's discover the fundamental differences between them.

Stakeholder

Influence over company decisions (Relationship-based): Stakeholders influence company decisions through their relationships and interactions with the company. This influence is not derived from ownership but from their essential role in the company's ecosystem.

• Engaged Level: The level of engagement among stakeholders varies significantly. Employees engage daily, directly in operations, while customers engage periodically through purchases or feedback. Each stakeholder engages according to their relationship and impact on the company.
• Interest in Company Performance: Stakeholders have a wide range of interests in the company's performance. Financial stability is commonly a concern for all, but other interests can include the company's sustainability practices, its contribution to the local economy, and how it treats its employees.
• Accountability for Company Actions:  Stakeholders can hold a company accountable in various ways depending on their relationship. Consumers can choose not to purchase products in protest, employees can unionize, and local governments can impose fines or restrictions.
• Legal Rights and Responsibilities: Their legal rights and responsibilities depend on their specific interactions with the company. For instance, employees have rights under employment law, consumers under consumer protection laws, and businesses under contract law.
• Ethical Considerations: Stakeholders often drive ethical considerations within a company. Their expectations for the company to operate responsibly can influence corporate policies on sustainability, social responsibility, and ethical business practices.
• Stake in Company's Reputation: They have a deep interest in the company's reputation, which can directly affect them. A good reputation can increase customer loyalty, make it easier to recruit talented employees, and create stronger relationships with suppliers and partners.

Shareholder

• Ownership of company stock: Shareholders own portions of a company by purchasing its stocks. This ownership stake represents a claim on the company's assets and earnings. The extent of this ownership depends on the number and type of shares held, distinguishing between common stock (which typically carries voting rights) and preferred stock (which may have no voting rights but potentially offers fixed dividends).
• Role in strategic decision-making: While the company's executives manage day-to-day decisions, shareholders play a crucial role in strategic decision-making, particularly in matters requiring shareholder approval. This can include major decisions like mergers and acquisitions, changes in corporate charter, or other significant corporate actions.
• Entitlement to dividends (Financial interest-based): As part-owners of the company, shareholders are entitled to a share of the company's profits, distributed as dividends.
• Right to vote in shareholder meetings: Shareholders have the right to vote in shareholder meetings, a fundamental mechanism allowing them to influence the company's governance. Voting rights are often proportional to the number of shares owned, and votes can be cast on various issues.
• Ability to sell shares in the market: Shareholders can sell their shares in the stock market. This liquidity allows investors to adjust their portfolios as needed, responding to changes in the market or their personal financial situations.
• Duty to act in the company's best interest: Shareholders, particularly those holding significant stakes or positions within the company's governance structures, have a fiduciary duty to act in the company's best interest. This duty means making decisions that enhance the company's value and protect the interests of all shareholders rather than prioritizing personal gains at the expense of the company's well-being.

What is a shareholder?

What is a stakeholder.

A stakeholder is anyone interested in a company's operations and outcomes. This group is broader than shareholders and includes employees, customers, suppliers, and the community. The company's actions impact stakeholders but do not necessarily own shares.

What do stakeholders want above all else?

Above all else, stakeholders seek the company's sustainable and ethical success, which aligns with their varied interests. This can range from financial stability for employees and shareholders to quality products for customers to environmental responsibility for the community. The overarching goal is the company's long-term prosperity, which benefits all parties involved.

Stakeholder vs Shareholder Theory

The debate between stakeholder and shareholder theories is central to understanding corporate governance and ethics. At its core, this debate revolves around whom companies should prioritize and how they make decisions affecting various parties.

Shareholder Theory states that a company's primary responsibility is to its shareholders - the individuals or entities that own shares in the company. This theory is grounded in the belief that by maximizing shareholder value, a firm adheres to its economic purpose and efficiently allocates resources within society. The essence of this theory is encapsulated by economist Milton Friedman's assertion that the only social responsibility of a business is to increase its profits, thus benefiting shareholders who can then decide individually how to distribute their wealth.

On the other hand, Stakeholder Theory argues for a broader view of corporate responsibility. According to this theory, businesses have obligations not just to shareholders but to all stakeholders - including anyone affected by the company's actions, such as employees, customers, suppliers, community members, and the environment. Stakeholder theory suggests that companies should make decisions that balance the interests of all stakeholders rather than prioritizing shareholders above all others.

Importance and Benefits of Stakeholders and Shareholders

Both stakeholders and shareholders play crucial roles in the success and sustainability of businesses. Though distinct, their importance and benefits to a company are interlinked in fostering its growth, reputation, and long-term viability.

Shareholders:

• Financial Investment: Shareholders provide the essential capital for a company's operations, expansion, and innovation. Their investment is a vote of confidence in the company's potential for growth and profitability.
• Governance and Accountability: Shareholders have voting rights that can influence major company decisions during annual general meetings (AGMs). This level of accountability ensures that management remains aligned with the owners' interests, striving for efficiency and profitability.
• Market Confidence: A strong shareholder base can enhance a company's reputation in the financial markets, making it easier to raise additional funds if needed. The support of prominent institutional investors can also endorse the company's management and strategy.

Stakeholders:

• Broad Support and Sustainability: Stakeholders such as employees, customers, suppliers, and the community contribute to a supportive ecosystem around the company. Their engagement and satisfaction are critical for sustainable business practices and long-term success.
• Innovation and Improvement: Feedback from various stakeholders can drive innovation and continuous improvement in products, services, and processes. Engaging with stakeholders helps companies understand their needs and preferences better, leading to more targeted and effective offerings.
• Reputation and Trust: Companies that actively consider and balance the interests of all their stakeholders tend to enjoy higher levels of trust and loyalty. This can translate into a stronger brand, customer loyalty, and an ability to attract and retain top talent.
• Risk Management: Stakeholder engagement allows companies to identify and address social, environmental, and ethical issues before they escalate into crises. By considering the broader impact of their actions, companies can mitigate risks associated with public backlash, regulatory penalties, or supply chain disruptions.

Challenges that Stakeholders and Shareholders are Facing

Stakeholders and shareholders navigate a dynamic landscape, facing unique challenges from conflicting interests and market volatility to limited control and complex decision-making processes.

Stakeholders

• Conflicting Interests Among Stakeholders: Different stakeholders often have varied, sometimes opposing, interests. Balancing these can be challenging, leading to conflicts and dissatisfaction.
• Complexity in Decision-Making: The involvement of multiple stakeholders adds complexity to decision-making processes, making it challenging to reach straightforward, effective decisions.
• Difficulty in Consensus: With diverse viewpoints and interests, achieving a consensus among stakeholders can be time-consuming and challenging, potentially delaying important initiatives.
• Potential for Power Struggles: Stakeholders with differing levels of influence may engage in power struggles, attempting to sway decisions in their favor, which can disrupt harmony and progress.
• Challenges in Balancing Stakeholder Needs: Identifying and prioritizing the varied needs of all stakeholders is a complex task that requires careful consideration and strategic planning .

Shareholders

• Limited Control Over Company Actions: Shareholders typically have a limited say in a company's day-to-day operations, making it hard to influence key decisions.
• Exposure to Market Volatility: Shareholders' investments are subject to the whims of market fluctuations, which can unexpectedly erode their holdings' value.
• Risk of Financial Loss: Investing in any company risks losing part or all of the invested capital if the company underperforms.
• Vulnerability to Economic Downturns: Economic downturns can significantly impact companies' profitability and, consequently, shareholder returns, making investments riskier during uncertain times.
• Lack of Influence on Management Decisions: Individual shareholders, especially those with small holdings, often find it challenging to impact management's strategic decisions, limiting their influence over company direction.

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Companies often have various people interested in their success, including shareholders and stakeholders. While these two groups often overlap, they are not the same.

The first thing to know is that shareholders are always stakeholders because their success depends on the company’s success. While stakeholders may also succeed due to the company, they may not own stock.

What is a stakeholder?

Stakeholders are people who depend on the company, including investors. But a stakeholder’s relationship with a company can be more complex than that of a shareholder. Stakeholders can be company employees, suppliers, vendors, customers and even the local community.

While some stakeholders are mainly concerned with a company’s performance for financial reasons, that isn’t always the case. A company’s customers can be stakeholders, as can government entities, which are supported by the company’s taxes and those of employees.

For exanmple , if a company builds a new plant for manufacturing or refining, it might have environmental impacts on the surrounding area. So people who live there are stakeholders because the plant might affect their physical and emotional well-being.

What is a shareholder?

In contrast, a shareholder is a person or institution that owns one or more shares of stock in a company . For example, individuals often purchase shares of stock as part of their retirement strategy, hoping to enjoy long-term share appreciation.

Institutions might have other motivations for purchasing stock. For instance, common stock comes with voting rights, so institutions may buy this type of stock to gain a controlling interest in a company. Companies may issue another kind of stock called preferred stock , and owners of this could also rightly be termed shareholders.

Key differences between shareholders and stakeholders

Shareholders and stakeholders can often have overlapping priorities, but they aren’t the same. Here are some key differences between them.

Company ownership

All shareholders are stakeholders, but not all stakeholders are shareholders. Owning stock in the company makes you a shareholder as well as a stakeholder. But anyone affected by the company could be considered a stakeholder, whether they own the company’s stock or not.

Shareholders are focused on financial returns, while stakeholders are interested in broader performance success. Common stockholders have voting rights, and can exercise them at shareholder meetings. However, the shareholder’s motivation to vote is often financial. Most shareholders buy stock in a company mainly to generate a profit.

Stakeholders might be financially interested in a company, but not necessarily because they are shareholders. For example, a company’s employees are stakeholders but may or may not own shares of stock. However, their job security depends on the company’s financial success. Stakeholders usually want a company to succeed, but for reasons that can be more complex than its share price.

Short-term outlook vs. long-term outlook

Shareholders are often more short-term focused than stakeholders. The short-term focus of shareholders is evident when the press reports a negative news story about a company. Negative press often leads to an immediate drop in share price as investors offload shares. However, the news story may not affect the company long term.

Stakeholders tend to be more long-term focused. Employees, suppliers, and vendors often look to maintain their relationship with the company for years. Stability is often a plus for stakeholders, who may be less concerned with day-to-day developments. They may be happy as long as they can maintain their existing social or economic agreements with the company.

Shareholder theory vs. stakeholder theory

Shareholder theory suggests that the sole responsibility of corporations is to maximize profits for shareholders. Stakeholder theory, in contrast, is the idea that stakeholders should have priority and that the relationship between stakeholders and the company is more complex and nuanced.

Shareholders often focus on short-term fluctuations in a company’s stock price. If a company fails to turn a profit , shareholders can sell their stock. They can either repurchase the stock later or buy stock in a different company So they’re able to dissolve their relationship with the company quickly and maybe with little cost.

But things may not be so simple for stakeholders. For instance, a supplier might rely on another business to buy its products. If the company struggles, it may stop placing orders with the supplier. This would likely impact the long-term financial performance of the supplier negatively as well as the buyer, whose product lines might suffer, too.

Bottom line

While the key difference between a shareholder and stakeholder is whether they own stock or not, the two groups can differ in many other respects, particularly their attitudes and emotional investment in the company. Stakeholders have broader motivations beyond the financial success of the business that they’re connected with.

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Shareholder vs Stakeholder: What's the Difference?

Published: February 13, 2024

A wide range of people can impact or influence a business‘s operations, corporate governance, goal-setting, and other key elements that dictate its performance — and keeping track of who’s who in all of that can be tricky. One of the big questions on that front is, “What's a shareholder versus a stakeholder?”

It‘s a topic that can trip anyone up, and as you explore each concept more in-depth, you’ll find that there are a lot of layers to each subject. So, to help you get a better sense of what shareholders and stakeholders are and how they differ, I've put together this handy guide.

Read on if you want some clarity on the distinctions between the two entities, the various kinds of shareholders and stakeholders that exist, a breakdown of each side's role in impacting business outcomes, some perspective on which one is most important, and a brief detour about the role professional wrestling has played in shaping my life both personally and financially (I swear to God that last one actually adds value to this post.)

Table of Contents

Shareholder vs. Stakeholder

What is a shareholder, the role of a shareholder, what is a stakeholder, the role of a stakeholder, which is more important: stakeholders or shareholders.

If you don't have time to dig into the nuances of what stakeholders and shareholders are, I totally get it. You (probably a stakeholder and/or shareholder at one or more organizations, yourself) have a busy schedule.

If that's the case, let me give you a quick rundown on the subject — supported by this super cool graphic I made. Here we go.

Stakeholder versus shareholder — what's the difference? Here are the key points.

• A shareholder of a company is a partial owner of that business — someone who likely purchased stock to “hold a share” of that organization.
• A company stakeholder is any individual or group who contributes to or is impacted by the success of that business — someone who “has a stake” in how the business performs, including shareholders.

Now, check out that graphic I just mentioned:

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The term “the role of a shareholder” is tough to pin down — mostly because there‘s more than one type of shareholder. The two most common of which are "common" and "preferred." Here’s a picture of both kinds, their unique characteristics, and what they do.

Types of Shareholders

Common shareholders.

In most cases, the term “shareholders” refers to common shareholders. Common shareholders are (typically ordinary) individuals who buy common stock — usually available on a stock exchange. For their purchase, they're awarded certain benefits, entrusted with key responsibilities, and assume some risks. For instance:

• They receive dividends — regularly paid distributions of company profits — for their investments.
• They often get to vote on decisions related to certain personnel and broader company direction.
• They're last to receive payments from the proceeds if the company declares bankruptcy.

When I was nine years old, I loved professional wrestling. It was my favorite thing in the world — even now, I can still rattle off enough trivia about early-to-mid-2000s WWE storylines to make people both marginally entertained and visibly uncomfortable.

Anyway, for my 10th birthday, my grandfather bought me five shares of WWE stock to offer me some lessons about financial responsibility (while indulging my interest in what is essentially a violent soap opera where everyone wears costumes) — making me a common shareholder of the most electrifying brand in sports entertainment.

For the past 20 years, I‘ve received around 60 cents in annual dividends from the WWE. And in May 2023, I got to participate in the company’s annual meeting — where I got to vote on key action items like confirming the WWE‘s board of directors and approving the company’s executive compensation.

And if you think I'm kidding about all of this, check this out.

That‘s an actual screenshot from my email. I really am a common shareholder of the foremost "performance art that has significant crossover appeal with Monster energy drink" brand on Earth. It’s okay to be impressed.

But as I said, “common” isn‘t the only kind of shareholder. Let’s take a closer look at the other side of the shareholder token — preferred shareholders.

Preferred Shareholders

Preferred shareholders are both prioritized and limited by the companies they have stock in. Preferred stocks tend to be more lucrative than common stock, but they offer preferred shareholders less influence over a business's corporate governance. In short:

• Preferred shareholders have higher claims on distributions and, in turn, receive higher dividends.
• They have a greater claim on a company's assets in the event of a liquidation.
• They have no voting rights.

Now that you have a sense of what shareholders are and the types of stock they own, we're going to dive into the other half of this topic — stakeholders.

The term ‘stakeholder’ is a catchall that encompasses every individual or group with a vested interest in and impact on (otherwise known as a stake) how an organization performs. Shareholders, employees, customers, and suppliers can all be considered stakeholders for a business — among other entities.

As I mentioned exactly one sentence ago, shareholders are technically also stakeholders in the business. They have a bearing on how a company performs and a definitive interest in seeing to it that it thrives.

Let's take a closer look at the roles various stakeholders can play in a business context.

I said it earlier, but I‘ll reiterate: "Stakeholder" is a pretty broad term, so the "role" of a stakeholder varies pretty considerably from entity to entity. For instance, a customer’s role in a company‘s success isn’t going to be the same as an employee's.

Ultimately, everyone who can be considered a stakeholder at a business is united by the fact that they both influence and are impacted by how a business performs — so while their roles may vary, they all have a personal stake in seeing to it that the company they're working with or for does well.

Here are some of the various kinds of stakeholders a company can have.

Types of Stakeholders

Internal stakeholders.

Internal stakeholders are stakeholders that work within a business. They can include:

• Boards of directors
• Shareholders

External Stakeholders

External stakeholders are those who are interested or directly impacted by the success of a business — without immediate influence over or direct internal contributions to that business's projects and initiatives. They can include:

• Communities
• Government agencies

Primary Stakeholders

Primary stakeholders are those who most directly impact business outcomes and, in turn, are often most closely impacted by how that business performs. They can include:

Secondary Stakeholders

Secondary stakeholders are entities that have an interest in how a business performs and can impact or influence its operations more indirectly. They can include:

• Community groups

So who‘s more important: stakeholders or shareholders? Well, that’s honestly a pretty hotly contested topic. There are two main camps, each subscribing to a different “theory” on the issue — stakeholder theory and shareholder theory. Both theories are staples in the field of business ethics, and they primarily revolve around where a company's social and financial responsibilities lie.

Let's take a closer look at each.

What is shareholder theory?

Shareholder theory, also known as the Friedman doctrine, rests on the notion that businesses' first (and only) responsibility is to maximize shareholder profits. Milton Friedman, the economist behind this theory, asserted that a given company has no responsibility to the public or society at large — just its shareholders.

In turn, businesses should do everything in their power to advance the interests of the people who own it, without regard for broader social responsibility. The theory dictates that actions like making charitable donations and pursuing socially conscious endeavors are up to individuals — and in a corporate context, taking those kinds of strides essentially amounts to executives spending their employers' money without their consent.

What is stakeholder theory?

Stakeholder theory, as you might imagine, is a doctrine that emphasizes that organizations should prioritize the interests of all their stakeholders — both internal and external — as opposed to just the profits of shareholders.

It argues that businesses have a responsibility to create value for everyone who relies on them — including their customers, employees, suppliers, impacted communities, and shareholders. The theory postulates that organizations should work for all of those entities and, in doing so, will achieve lasting, sustainable success.

Stakeholder Theory vs. Shareholder Theory

I‘m going to preface this section by saying I’m not an economist and I don‘t have a background in business ethics. I also want to stress that this is very much my perspective on the issue — I’m not speaking on HubSpot‘s behalf. But based on my (admittedly limited) understanding of these two theories and the research I’ve seen, I would say I err on the side of stakeholder theory being the way to go.

Shareholder wealth maximization is the cornerstone of shareholder theory. The theory asserts that generating as much money as possible for shareholders is both beneficial for business and should be any company leadership's primary responsibility.

And in theory, that does kind of make sense. Hypothetically, shareholder theory offers benefits like minimizing ambiguity in goal-setting by aligning the entire company with the financial interests of a single group and improving manager accountability by not letting company leaders pursue personal agendas or self-interest with company resources.

But there‘s almost always a gap between theory and practice in every facet of life and business, and in this case, shareholder theory’s "gap" has had some disastrous repercussions — specifically when it came to the role financial institutions played in the context of the 2007-2008 financial crisis.

A study from ECSP Europe found that while shareholder theory is sound in the abstract, “some executives following this theory could have brought disrepute to it” in the leadup to the Great Recession. It could be argued that shareholder theory doesn't fully account for greed or human fallibility, and both of those came into play in the leadup to the financial crisis — so much so that it may have undermined the theory itself.

That said, I do need to mention that the researchers from that study also said that stakeholder theory is more ambiguously defined than shareholder theory and, in turn, more “difficult to become operational in practical business settings.”

However, another study from The Eastern Institute of Technology in New Zealand found that “unethical behavior, agency issues, CEO compensation, creative accounting, and risk shifting are some of the side effects of [shareholder wealth maximization],” and that, “[it] can be argued that the root cause of the [global financial crisis] was excessive greed and the single-minded pursuit of shareholder wealth maximization.”

All of that to say, while stakeholder theory is a more amorphous concept than shareholder theory, there's research to indicate that shareholder theory can have brutal consequences when applied irresponsibly or too unilaterally. And it might be cynical (but also kind of universally agreed upon), but I don't trust absolutely everyone in corporate leadership to be responsible when exercising their power.

Again, I need to clarify that I'm not an economist or a business ethicist — so please take my perspective with a grain of salt, and get mad at me and me alone if you disagree with this take.

Back to the question: Are stakeholders or shareholders more important?

Ultimately, in my (as I keep stressing) non-economist with no background in business ethics opinion, I would say there's research that might suggest that stakeholders are more important — specifically because of how shareholder theory may have been problematic in the lead-up to the Great Recession.

And from a personal ethics perspective, I do believe that a company's responsibility extends beyond shareholder profits to broader social wellbeing — even if that sometimes comes at the expense of definitive organizational alignment or preventing management from using company resources for personal interests.

Also, on a more surface level, shareholders are still stakeholders, so a company‘s leadership generally won’t ignore their interests if they look out for everyone who relies on their performance.

So there you have it: a comprehensive guide on shareholders, stakeholders, and the distinctions between the two. I hope it cleared any confusion you might have had about the subject — and I really hope the professional wrestling stuff I placed in this post actually helped shape your understanding of these concepts. I promised it would in the intro, so if nothing else, I better have delivered on that.

Don't forget to share this post!

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Shareholder vs. stakeholder: What’s the difference?

The terms shareholder and stakeholder are sometimes used interchangeably, but they’re actually quite different. A shareholder is someone who owns stock in your company, while a stakeholder is someone who is impacted by (or has a “stake” in) a project you’re working on. Learn about the key differences between shareholders and stakeholders, plus why it’s important to consider the needs of all stakeholders when you make decisions.

Warren Buffett bought his first stock in the spring of 1942—when he was just 11 years old. While other kids were playing baseball and trading comic books, Buffett purchased six shares of CITGO stock at $38 a piece and became a company shareholder for the first time.

The soon-to-be investment mogul was a small fish back then. He might have owned shares in CITGO, but at 11 years old he probably wasn’t a key stakeholder for any major project teams. In fact, the company probably didn’t even know he existed. 

So how could Buffett be a shareholder but not a stakeholder? These two words sound similar, but they actually represent two very different roles. 

What is a shareholder?

As a shareholder, you want to get the most financial return on your investment. That means you’re probably interested in how the company performs on a high level, because stock prices go up when the company does well. And when stock prices go up, you have an opportunity to sell your shares and make a profit. 

Depending on the type of shares you own, being a shareholder lets you receive dividends, vote on company policies like mergers and acquisitions, and elect members of the company’s board of directors. Anyone who owns common stock in a company can vote, but the number of shares you own dictates how much power your vote carries. That means big investors hold the most sway over a company’s overall strategic plan .

Types of shareholders

Depending on the type of stock you own, you’re either a common shareholder or a preferred shareholder. You can buy both types of shares through a normal brokerage account, but they give you different benefits. 

Common shareholders own common stock. Common stock typically yields higher rates of return in the long-term and gives shareholders part ownership of a company. That means anyone who owns common stock in a company can vote on corporate policies and elect members of your board of directors. However, common shareholders shoulder a bit more risk—if a company is liquidated, they can only claim assets after bondholders, preferred shareholders, and other debtholders have been paid in full. 

Preferred shareholders own preferred stock. Preferred stock typically yields lower long-term gains but gives shareholders a guaranteed annual dividend payment. Preferred shareholders usually can’t vote on policies or elect board members, so they don’t have a say in a company’s future. However, they take on a bit less risk—if a company is liquidated, preferred shareholders can claim assets before common stakeholders. 

What is a stakeholder?

A stakeholder is someone who can impact or be impacted by a project you’re working on. We usually talk about stakeholders in the context of project management , because you need to understand who’s involved in your project in order to effectively collaborate and get work done. But stakeholders can be more than just team members who work on a project together. For example, shareholders can be stakeholders of your project if the outcome will impact stock prices. 

Stakeholders come in many different forms, from independent contributors to company executives. And they don’t have to be within your organization either—for example, an external agency you work with might be a stakeholder on an upcoming event. Similarly, your customers can be stakeholders when their preferences directly influence your product.

Types of stakeholders

There are two main types of stakeholders: 

Internal stakeholders are people who have a direct relationship with your company, like your teammates and cross-functional partners. They’re often employed by your company, but not always. For example, shareholders are internal stakeholders because they’re tied to your company through the stocks they own. As such, they’re directly impacted by projects that influence stock prices. 

External stakeholders are people who don’t have a direct relationship to your company, like customers, end users, and suppliers. Even though external stakeholders are outside your organization, your project still impacts them in some way. For example, ramping up a manufacturing project would require additional resources from suppliers. 

Main differences between shareholders and stakeholders

The terms shareholder and stakeholder are often used interchangeably, but they’re actually very different. Aside from the contrasting definitions we’ve outlined above, shareholders and stakeholders are separated by these key differences: 

Different priorities

Shareholders and stakeholders have very different priorities. Shareholders have a financial interest in your company because they want to get the best return on their investment, usually in the form of dividends or stock appreciation. That means their first priority is usually to bolster overall revenue and stock prices. Shareholders of private companies and sole proprietorships can also be responsible for the company’s debts, which gives them an extra financial incentive. 

On the other hand, stakeholders are focused on much more than just finances. Internal stakeholders want their projects to succeed so the company can do well overall—plus they want to be treated well and advance in their roles. External stakeholders also want to benefit from your project. That can mean different things, like receiving a great product, experiencing solid customer service, or participating in a respectful and mutually beneficial partnership.

Different timelines 

Shareholders and stakeholders also have different timelines for achieving their goals. Shareholders are part owners of the company only as long as they own stock, so they’re usually focused more on short-term goals that influence a company’s share prices. That means your organization’s long-term success isn’t always their top priority, because they can easily sell their stocks and buy shares from another company if they want to. 

Alternatively, stakeholders are more interested in your company’s longer term goals . They’re usually less focused on short-term economic performance and fluctuations in stock prices. Instead, stakeholders want your organization to do well overall. For example: 

Employees want to keep working at a company that treats them well and gives them opportunities for growth. 

Customers want to keep receiving a product they like. 

Suppliers want to maintain their relationship with your company and keep profiting from your business long-term. 

Who’s more important: Shareholders or stakeholders? 

This is a longstanding debate among business analysts—whether companies should focus primarily on making more profits for their shareholders, or focus on benefiting all of their stakeholders (including customers, suppliers, employees, and the community). The debate is divided into two main schools of thought: 

Shareholder theory

Shareholder theory was first introduced in the 1960s by economist Milton Friedman . According to Friedman, a company should focus primarily on creating wealth for its shareholders. He argues that decisions about social responsibility (like how to treat employees and customers) rest on the shoulders of shareholders rather than company executives. Since company executives are essentially employees of the shareholders, they’re not obligated to any social responsibilities unless shareholders decide they should be. 

Stakeholder theory

Stakeholder theory was first introduced in 1984 by a business professor named Dr. R. Edward Freeman . According to Freeman, companies should focus on creating wealth for all their stakeholders, not just shareholders. He argues that there are interconnected relationships between a business and its customers, suppliers, employees, investors, and the local community. For example:

You want customers to be satisfied with your product and your company so they keep buying from you. 

You want employees to be happy and motivated at work so they can bring their full energy and creativity to the table. 

You want to help your financiers, partners, and shareholders make a profit so you can keep your investors and get more opportunities for growth. 

Why you should prioritize stakeholder theory

Shareholders are important for your company, but as a project lead or program manager you should really prioritize stakeholder theory. That’s because shareholders are usually most concerned with short-term goals that impact stock prices, rather than the long-term health of your company. If you prioritize short-term wins and revenue gains over everything else, you might sacrifice your company culture, business relationships, and customer satisfaction in the process. 

On the other hand, stakeholder theory helps you act responsibly towards your employees, customers, and business partners. By prioritizing your immediate project stakeholders (both internal and external), you can create better work environments that promote both employee well-being and customer satisfaction. And when your team feels heard, they’re more motivated to do their best work and help projects succeed. Research shows that only 15% of workers feel completely heard by their organization, but stakeholder theory can help you boost that number and build sustainable and healthy relationships with all of your employees and partners. That means instead of aiming for quick wins, you’re investing in your future. 

Stakeholder management, simplified

Most people work with stakeholders on a day-to-day basis, but they rarely encounter company shareholders. Stakeholders help you get work done and achieve your project goals, so it’s important to have a way to manage relationships, coordinate work, and keep stakeholders in the loop. 

A project management tool can help simplify the stakeholder management process. For example, Asana lets you create and assign tasks with clear due dates, comment directly on tasks, organize work into shareable projects, and send out automated status updates. That way, you can give stakeholders the information they need, when they need it. 

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What’s the Difference Between Stakeholders and Shareholders?

They’re not the same thing—find out how to tell them apart

  Luis Alvarez / Getty Images

The terms stakeholder and shareholder are sometimes incorrectly used interchangeably. It’s important to be aware of the distinction between the two.

A shareholder is any party—whether an individual, a company, or an institution—that has shares in a publicly owned company. Stakeholder is a broader category that refers to all parties with an interest in a company’s success. Thus, shareholders are always stakeholders, but stakeholders are not always shareholders.

Stakeholders in a company include its employees, board members, suppliers, distributors, governments, and sometimes even members of the community where a business is operating. Employees and board members are internal stakeholders because they have a direct relationship with the company. Distributors and community members, however, are examples of external stakeholders. 

Although stakeholders do not have a direct relationship with the company, they may be affected by the company’s actions or performance.

The Differences Between Shareholders and Stakeholders

Varied interests.

Shareholders are primarily interested in a company’s stock-market valuation because if the company’s share price increases, the shareholder’s value increases. Stakeholders are interested in the company’s performance for a wider variety of reasons. 

For example, employees want the company to remain financially stable because they rely on it for their income. Suppliers desire the company to continue doing business with them. Civic leaders want the company to remain an employer of the area’s residents and to contribute to tax revenue.

Stock Price Valuation vs. Broader Success

Shareholders focus on the company’s stock valuation. Because they own shares of the company’s stock, they want the company to take actions that produce growth and profitability , thereby increasing the share price and any dividends it may pay to shareholders. 

Because stakeholders are typically more concerned with a company’s long-term financial stability, they may have different priorities than shareholders, who may be interested only as long as they own stock. For instance, stakeholders who are concerned about a company’s performance at environmental, social, and governance (ESG) criteria may be more willing than shareholders to sacrifice a percentage of profit to gain a higher ESG score over time.

Short-Term Interest vs. Long-Term Interest

Shareholders frequently are interested in a company’s performance only as long as they hold shares of stock. Stakeholders, on the other hand, often have a longer-term interest in a company’s performance, even if they don’t own shares of stock. This may be because they earn their living at the company, they own or operate a business that is a supplier to the company, or they live in a community where the company operates and contributes to the local economy.

Because shares of stock are easily sold, stakeholders’ interests in a company are often more complex, as it’s generally easier for a shareholder to cut ties with a company than a stakeholder. 

Shareholder Theory vs. Stakeholder Theory 

The interests of stakeholders and shareholders don’t always align. In fact, they can be in direct opposition to each other. As such, shareholders may want a company to outsource production overseas or to use a different supplier to increase profits, while stakeholders may want to keep production the same for quality-control purposes, to avoid supply-chain controversies, or for other reasons.

For more than two decades beginning in 1997, the Business Roundtable, an association of chief executive officers of leading U.S. companies, endorsed principles known as shareholder theory, or shareholder primacy—the view that corporations should principally serve their shareholders.

But in 2019, the Business Roundtable issued a statement on the purpose of the corporation that affirms “the essential role corporations can play in improving our society when CEOs are truly committed to meeting the needs of all stakeholders.”

Key Takeaways

• Shareholders of a company are always stakeholders, but stakeholders are not necessarily shareholders.
• Employees, company executives, and board members are internal stakeholders because they have a direct relationship with the company. Suppliers, distributors, or community members are types of external stakeholders.
• Shareholders primarily focus on a company’s profitability and share price. Stakeholders generally care about a company’s overall health. 
• Shareholders’ interest in a company can cease the minute they no longer own shares. Stakeholders, on the other hand, typically have a more long-term interest in a company because their ties are more complex and not broken as easily.

Business Roundtable. " Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans. " Accessed June 24, 2021.

Stakeholder vs. Shareholder: Exploring the Differences

Stakeholders and shareholders contribute to business success. Learn how you can secure their support and manage their expectations for long-term relationships.

Businesses impact people in different ways. And vice versa.

For owners, a successful business means a healthy bottom line. They do almost everything to ensure the company remains profitable. Unfortunately, this sometimes includes cutting corners to reduce expenses.

On the other hand, consumers might have a different take.

For example, suppose you live near a food processing plant with a poor waste management plan. Every morning, sludge flows into your backyard. You're likely not going to be a big fan of their products.

Every action has a reaction. As a business, you should understand who your shareholders and stakeholders are and what effect your products (or projects) have on them (and vice versa).

In his article, we'll compare stakeholders vs. shareholders and help you understand how to meet their expectations.

Stakeholder vs. shareholder: What's the difference?

While stakeholders and shareholders may sound similar, they have several key differences. Let's explore those differences.

Stakeholder

A  stakeholder  is any party with an inherent interest in a business (or project) and is classified as an internal or external stakeholder.

Internal stakeholders  have a direct relationship with the company or project, including employees, the board of directors, project sponsors, and investors. External stakeholders consist of interest groups outside a business. They include labor unions, suppliers, creditors, and the surrounding community.

The stakeholders of a local grocery store may include:

• Institutions and governing bodies
• The community, including adjacent businesses

Shareholder

A shareholder, also known as a stockholder, is an individual or group that owns shares in a company (and expects financial returns for their stake).

For the grocery store, shareholders are any party that owns equity.

There are two types of shareholders: common shareholders and preferred shareholders. As the name suggests, common shareholders own common stocks. They enjoy privileges like voting rights and higher dividends. Preferred shareholders own preferred stock and receive dividends before common shareholders but don't have voting rights.

Most small businesses don't have preferred shareholders because (usually) only one or a few individual investors own the business.

Understanding stakeholder and shareholder theories

To understand the differences between stakeholder and shareholder, let's review their respective theories, which define their management and ethical approaches.

Stakeholder theory

The stakeholder theory emphasizes considering the interests of all stakeholders. It considers that a company's success isn't dependent on its financial performance and that businesses should have a positive impact on their communities.

Examples of ways a company can create value for stakeholders and the community include:

• Fair wages and benefits for employees.
• Producing high-quality products and services for customers.
• Being a responsible member of the community.

Shareholder theory

Milton Friedman is credited as the father of capitalism and shareholder theory. He first introduced the concept in 1970 in an essay published in the New York Times newspaper.

The stockholder theory encourages owners to rank shareholders' interests above stakeholders' concerns. The premise is that a business's primary goal is to generate profits. Based on this theory, dividend payments (profits) are the best performance measure. Businesses should also target share price increases (increase in valuation).

Why you can’t ignore stakeholder theory

The stakeholder theory is critical because consumer behavior has tended in that direction. Consumers care about how businesses treat their employees (and communities).

Suppose you learn that the store owner of the grocery store in our example penalizes workers for throwing away spoiled groceries. Would you continue to patronize that business?

It's true that the primary goal of any for-profit business is maximizing profits, but a business shouldn't do so at the expense of its shareholders.

Customers may jump ship if they perceive a business to be overly profit-hungry. Customers understand that every business is profit-driven. However, there are ‘limits’ on how far a business should go to pursue profits.

Employees also want to work for companies that value them.

For the grocery store, suppose the owner instructs the workers to "sneak in" a few bad vegetables with every order. Initially, employees may follow the instructions for fear of being fired or fined, but eventually, they might sour on it (and tell customers). The ripple effects could be employee turnover, losing customers, and (worst-case scenario) regulatory breaches.

A real-world example

Case study : Starbucks (Five-year performance)

Starbucks is among the leading coffeehouse companies in the US and globally. It has about  35,711 stores spread across 80 countries . Besides 2020, Starbucks has experienced a year-on-year profit growth. This is while maintaining a positive public approval rating.

So, how does Starbucks keep its shareholders and stakeholders happy? The answer is effective stakeholder management. Below is a breakdown of how they cater to different stakeholders' interests.

Workers : It pays employees above the minimum wage.

Customers : It encourages baristas to maintain warm and friendly relations with customers.

Suppliers : It has a supplier diversity program. The company contracts suppliers from around the world.

Community : It participates in community support programs through the Starbucks Foundation.

Shareholders : It maintains profitable global operations. Shareholders receive competitive dividends every year.

Benefits of managing stakeholder relationships

If you care about long-term success, you must manage your stakeholder relationships. To do so, you need their buy-in upfront and then communicate with them throughout the business (or project) lifecycle.

Here are some benefits if you do it right.

‎Easier decision-making

You know how everyone has an opinion? And likes to be heard?

Once you've identified the stakeholders in your business, and maybe even created a stakeholder management plan, it becomes much easier (and faster) to make decisions on the fly.

This streamlined decision process also adds the benefit of building transparency into your operations, earning you trust with your stakeholders (and customers).

A positive company brand

Stakeholder management is central to creating a positive brand (and experience).

When you understand your stakeholders and their expectations, it's easier to tailor specific brand messaging for that person or group.

For example, you'd probably use community programs to endear your brand to the public but use team-building programs and performance bonuses to motivate your employees.

Long-term business success

Would you want to invest in a business only for it to fail within five years? Didn't think so.

Nobody likes surprises, especially once the ship has sailed. Effective stakeholder management means understanding your stakeholders and managing their expectations. Do this right, and you'll have smoother sailing (and success) in the long run.

For example, if you understand and have a good relationship with the regulatory agencies in your industry, it's probably an easier road to getting any needed licenses or permits. This goes a long way in ensuring your business's long-term survival.

4 tips for managing stakeholder relationships

The goal of stakeholder relationship management is to maintain stakeholder support throughout the venture or project. Below are some helpful tips for managing stakeholder relationships.

Transparency

Like in any relationship, transparency is crucial in managing stakeholder relationships. It's like a window into your business, allowing everyone to see inside. When you're transparent about your business operations, challenges, and successes, you build trust.

Trader Joe's does this exceptionally well with their "Fearless Flyer" newsletter. Besides the obvious (e.g., covering featured products), the newsletter drives store traffic and builds community in their respective locations.

Communicate

According to the Project Management Institute (PMI), poor communication is identified as a contributing factor in 56% of failed projects.

Imagine what it could do for your business.

Communication is the easiest way to build trust with stakeholders.

Trader Joe's understands the value of effective communication. A notable example was in 2023 when Trader Joe's Food Safety team flagged some products for undeclared peanuts. The company's press team released a press statement acknowledging the hiccup. It also assured the public that the products had been removed from shelves pending investigations.

Technology continues to revolutionize how we do business (to wit: AI)

Customer Relationship Management (CRM) software can anticipate customer needs, leading to stronger relationships and repeat business. Social media (like X and Facebook) are powerful tools for engaging stakeholders and getting valuable feedback. And  project management software  is transforming how we collaborate and track work progress.

Technology is an enabler that can help you optimize your stakeholder management processes.

Secure your stakeholders' and shareholders' support for improved business success

Some businesses perform well for their shareholders, yet receive poor ratings from stakeholders.

‎Differentiating stakeholders from shareholders, and building lasting stakeholder relationships, is vital for your long-term success.

Make stakeholder management easier by using Motion.

You can use Motion to automate functions like allocating tasks, tracking progress, scheduling meetings, and communicating with the entire team and stakeholders.

For example, Motion will collect all the tasks and schedule data to help you report to your stakeholders, then send the report, all within the app.

Try  Motion's free trial  today!

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What Are Long-Term Goals? (+50 Examples & Tips to Achieve Them)

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Understanding the difference between shareholder and stakeholder

Stakeholder trust is a critical component of company success, as acknowledged by 95% of directors and executives , who consider it their primary responsibility to cultivate and protect it. However, the pursuit of stakeholder satisfaction frequently meets with the primary goal of generating shareholder profit and financial interest.

The importance of corporate governance highlights the difficult balance between increasing shareholder profit and safeguarding the well-being of all stakeholders.

The article examines the complex dynamics of shareholder and stakeholder theories in terms of a company’s success. It also explains the difference between shareholders and stakeholders with examples. 

What is the stakeholder model (stakeholder theory)? 

The stakeholder model prioritizes how corporate activity affects all identifiable stakeholders of a corporation.

Officers and directors involved in a company following this model must primarily contemplate the various interests of every possible stakeholder throughout its governance process, taking into account stakeholder reporting principles.

So, they need to strategize over matters such as reducing stakeholder interest conflicts. The purview of board directors eclipses the more traditional focus of its corporate managers. They should now be far more concerned with other third parties that could depend upon the corporation in any way, instead of merely profits.

Taking into account stakeholders’ focus and their direct relationship, here are four key principles of the stakeholder model:

• Long-term sustainability . Focus on long-term success, not just short-term profits.
• Ethical decision-making . Make decisions that are fair, just, and responsible to all stakeholders in terms of corporate social responsibility.
• Inclusive governance . Give all stakeholders a voice in decision-making.
• Balanced approach . Find solutions that work for all stakeholders, even if there are conflicts.

As the infographics below show, there are 2 main types of stakeholders: internal and external. Internal stakeholders are the board’s directors and employees involved in corporate governance. Whereas external stakeholders might be creditors, auditors, customers, suppliers, government agencies, and the surrounding community.

What is the shareholder model (shareholder theory)?

The thought process behind the shareholder model is for a board to center its approach around maximizing profits accruing to its shareholders. Compared to the more socially forward stakeholder model, this more traditional corporate methodology values the fact that people buy shares to earn money. 

These companies operate under the principle that shareholders will sell shares or try to remove the board of directors if the organization does something not associated with profit margins. In general, the shareholder model of corporate governance requires guaranteed annual dividend payment, increased share prices, and other factors involved with making money. 

Corporate managers ethically, in this scenario, must do everything in their power to generate significant value for the owner.

So let’s take a closer look at the three main principles of the shareholder model:

• Profit maximization . The primary goal of a corporation under the shareholder model is to maximize profits for its shareholders.
• Residual claimant . Shareholders can claim assets and receive the remaining profits after all other stakeholders have been paid.
• Market discipline . Shareholders influence corporate decisions by buying and selling shares based on the company’s performance.

Given the principles, the shareholder model prioritizes the interests of shareholders in corporate decision-making in several ways:

• Board composition . The board is composed of shareholder-appointed individuals, ensuring shareholder focus.
• Executive compensation . Incentives align with shareholder interests by tying executive pay to company performance.
• Shareholder activism . Shareholders can express concerns, and take action if management underperforms, including voting against proposals, lawsuits, or board replacement.

See how we can support your board meetings

Stakeholder model vs shareholder model.

The shareholder and stakeholder models represent two divergent approaches to corporate governance, each with its own set of advantages and drawbacks. At their core, they differ in their primary focus: the shareholder model prioritizes maximizing shareholder value, while the stakeholder model advocates for considering the interests of a broader range of groups impacted by the company’s decisions.

As you can see, the shareholder model is highly efficient and focuses on financial returns. However, it has received criticism for its limited reach and potential negative effects. The stakeholder model, on the other hand, offers a broader approach but can be difficult and time-consuming to adopt. Finally, the decision between the shareholder and stakeholder models is difficult, with no one “right” solution. 

However, by understanding the difference between stakeholder and shareholder, companies can make more informed decisions about how to balance the interests of their shareholders with the broader needs of society.

Shareholder approach vs stakeholder approach in corporate governance

Corporations face a critical decision: prioritize their investors’ expectations or widen their vision to include the requirements of the larger ecosystem in which they operate. This decision is based on two essential approaches: the shareholder and stakeholder models, each of which creates a separate route for business strategy, risk management, and long-term sustainability.

Now, let’s examine how each of the models shapes the three aspects of the company’s operations:

Shareholder dominance: short-term focus, high-ROI strategies

• Corporate strategy . Driven by maximizing shareholder value and financial returns. Strategic decisions prioritize rapid growth, cost-cutting measures on the company’s debts, and entry into high-potential markets with potentially high returns.
• Risk management . Primarily focused on mitigating threats to shareholder wealth, such as market downturns, competitor threats, and regulatory changes. Short-term financial risks often overshadow long-term environmental, social, and reputational risks.
• Long-term sustainability . Viewed as a potential constraint to short-term financial goals. Environmental and social concerns may be addressed only if they directly impact immediate profitability.

Stakeholder inclusivity: broadened perspective, shared value creation

• Corporate strategy . Considers the needs of all stakeholders, including employees, communities, the environment, and suppliers. Strategic decisions aim to create shared value and build trust with all stakeholders.
• Risk management . Expands beyond financial risks to encompass a broader spectrum, including ecological risks (resource scarcity, climate change), social risks (labor unrest, community backlash), and ethical risks (supply chain practices, product safety). Proactive management of these diverse risks builds resilience and mitigates long-term threats.
• Long-term sustainability . Companies invest in renewable energy, responsible sourcing, and employee well-being, recognizing the intrinsic link between sustainability and long-term success.

Real-world examples: shareholder vs stakeholder business

Speaking about real and practical examples, we couldn’t have mentioned the technological giant — Tesla. As we delve into the case, there are both pros and cons, in terms of its operations and corporate approaches.

Tesla’s sustainability path illustrates the delicate relationship between stakeholders and shareholders. Stakeholders, including environmentally concerned customers and regulatory organizations, appreciate Tesla’s zero-emission vehicles and their commitment to carbon reduction . However, concerns about harmful chemical usage and inadequate environmental reporting pose ethical problems, indicating a lack of openness.

On the shareholder side, Tesla’s strong market position and innovative technology attract investors. However, scandals such as labor issues in cobalt mining and poor environmental violations harm Tesla’s brand and could threaten profitability. 

This case study exemplifies the difficulty of combining stakeholder expectations with shareholder objectives in the drive for sustainability. Tesla’s road ahead is to address these issues with true openness and meaningful action, assuring not just a green image, but a truly sustainable future.

Factors to consider: shareholder vs stakeholder model of corporate governance

Choosing the ideal model of corporate governance primarily depends on the people involved as well as what kind of organization is being discussed.

A company selling shoes that only uses recycled, sustainable material would benefit from the stakeholder model. Whereas, a more rigid, corporate company selling accounting software, for instance, would likely prefer the shareholder model.

Each model leads to a different goal, necessitating careful assessment of your values, objectives, and operational environment. Let’s look deeper into examining five major factors:

• Value focus . Prioritize immediate financial return and high profits or create shared value for all stakeholders, considering long-term impact.
• Decision-making . For shareholders, quick wins for investors often dominate, but a collaborative, transparent approach can balance stakeholder needs for success.
• Risk management . Focusing on financial risks, shareholders may overlook other threats. In turn, stakeholders manage a broader spectrum of risks, building resilience.
• Industry and environment . The shareholder model is best suited for industries focused on rapid growth and high profitability, like tech startups or finance. In contrast, the stakeholder model thrives in sectors reliant on community trust, and long-term sustainability, like renewable energy or ethical brands.
• Company values and mission . The shareholder approach aligns with corporations prioritizing immediate financial aims and investment rewards. In turn, the stakeholder approach resonates with businesses devoted to social responsibility and delivering shared value alongside profits.  

Leveraging board portals for enhanced stakeholder and shareholder relations

Effective communication and collaboration are crucial for building strong relationships with stakeholders and shareholders. Recognizing the pivotal role of technology in fostering these connections, 80% of global board directors advocate for a digital transformation led by corporate boards. 

This growing appreciation for technology’s significance in boardrooms has fueled a surge in the adoption of board portals. Read more about the digital transformation governance model in our dedicated article. 

Having a centralized platform for communication, collaboration, and decision-making, stakeholders and shareholders can together contribute to the company’s success. Here are more useful board portal tools that iDeals Board offers for the company’s board:

• Customized solutions for diverse stakeholder needs . iDeals Board is customizable to meet the needs of different stakeholders, ensuring that communication channels are aligned with their preferences.
• Real-time communication . iDeals Board enables real-time communication and collaboration among board members and stakeholders. They can discuss, ask questions, and give feedback through the platform.
• Voting and streamlined workflows . iDeals Board simplifies board meetings and voting by offering electronic access to meeting materials and voting on resolutions.
• Shareholder engagement . iDeals Board provides shareholders with customized access to company information, investor relations materials, and direct engagement with the board and management
• Secure and centralized document repository . iDeals Board is a secure and centralized platform for all board materials, ensuring easy access to stakeholders and fostering transparency.

Key takeaways

• The stakeholder model prioritizes all the individuals involved and the shareholder model seeks to maximize shareholder profits.
• The stakeholder model can be complex and time-consuming, while the shareholder model may neglect social responsibility and long-term sustainability.
• Choosing the right model depends on priorities. Companies focused solely on short-term financial gain might favor the shareholder model.

Table of content

Are ceos stakeholders.

Yes, CEOs are both stakeholders and shareholders. CEOs have a vested interest in the company’s success and well-being. Their compensation and reputation are often based on stock prices and stock performance. Additionally, CEOs typically hold shares in the company, making them financial stakeholders as well.

Are employees shareholders or stakeholders?

Employees are stakeholders, but not usually shareholders. They have a strong stake in the company’s success since it directly affects their employment. They have an interest in the company’s future, reputation, and social responsibility.

Are shareholders or stakeholders more important?

The importance of balancing the interests of shareholders and stakeholders varies depending on the company. However, companies are increasingly recognizing the value of creating value for all stakeholders, including shareholders, employees, customers, suppliers, and the community.

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Shareholder vs. Stakeholder: Two Approaches to Corporate Governance

Most managers in the United States would shed workers to sustain profitability, whereas Japanese firms often consider job security one of their primary concerns. Both approaches, and their economic impact, can be explained through insider and outsider models of corporate governance.

In countries with an Anglo-Saxon legal tradition, such as the United States, United Kingdom, Canada and Australia, corporate governance typically focuses on the firm's outside investors, mainly shareholders. In those countries, top managers tend to be monitored by means of market-based rewards and penalties. For instance, in the United States, where compensation is often tied to the level of profitability, most firms would opt to cut back on labor in order to sustain current profitability.

Under this system, employees often find it difficult to trust top management, as their behavior is subject to constant market scrutiny. In countries such as Germany or Japan, where stakeholder claims are typically taken into account in top management decisions, job security becomes a main corporate objective. Canon, for example, has never laid off employees in its entire history, despite all the ups and downs in profitability.

In Germany, employees are influential stakeholders whose welfare is internalized to a certain extent by top managers through co-determination systems of governance, having small percentages of the firm's total stock in free-float, and making the managers' compensation not so focused on current profitability.

It is assumed that corporate governance is determined by a set of mutually reinforcing institutional elements: disclosure, the board of directors, hostile takeovers, legal systems, transparency, accountability, separation of CEO and chair, stock in capital markets, personnel turnover, unionization, flexibility of labor markets and so on. And it is the existence of complementarities between configurations that determines the economic success of different corporate governance arrangements at an individual country level.

In " A Cross-National Study of Corporate Governance and Employment Contracts ," authors Roberto García-Castro , Miguel A. Ariño , Miguel A. Rodriguez and Silvia Ayuso look again at the way firms around the world configure their corporate governance and find that everything can be summed up in two competing models: the shareholder-centered or outsider view versus the stakeholder-centered or insider approach.

Governance Structures

In the outsider model of corporate governance, the nature of interactions is transactional, where interactions are assumed to be frozen in space and time and isolated from any institutional context. This model relies on the strength of the markets — both capital and labor — to allocate resources correctly within firms. It also relies on high-powered incentives and external control systems to discipline and align managers' interests.

Proponents of the outsider model accept the opportunistic tendencies of management and recognize the divergent goals of shareholders and management. Therefore, they argue for external control systems that can effectively monitor and impose constraints on managerial discretion. Measures used to make managers more accountable include executive compensation schemes, such as performance-based bonuses, stock options or performance-based dismissal decisions.

Governance structures — such as the board of directors, union representation on the board of directors and the legal superstructure — are used as mechanisms to ensure fulfillment of implicit and explicit contracts, all aimed at better serving the interests of shareholders. In general, a firm with an outsider model of corporate governance will have a higher proportion of performance-based executive compensation and will adopt more externally verifiable control mechanisms in the board of directors' roles and structure.

In an insider model of corporate governance, the interactions are defined by formal and informal rules developed over the relationship's history. In the insider model, the debt-equity ratio will be higher. They will have lower levels of turnover and layoffs, stronger worker displacement policies, higher levels of firm-specific training for employees, higher employee-firm fit, higher internal knowledge sharing and joint organizational learning among employees in comparison with the outsider model.

See also " Maximizing Stakeholders' Interests: Empirical Insights "

International Landscape

The classification of countries according to their corporate governance model can be divided into four categories: the Anglo-Saxon, French, German and Scandinavian traditions. Together these four categories account for virtually every capitalist country in the world. In general, countries with an Anglo-Saxon legal tradition have favored a shareholder-centered model of corporate governance. In these countries, firms typically adapt their strategies to the demands of capital markets and, hence, we expect to see lower levels of firm commitment and involvement with their workforce and vice versa.

Countries with a German legal tradition are broadly defined as stakeholder-oriented industrial systems. Most German and Austrian firms, for example, have adopted the policies typical of the insider model of governance based on standards of employment security, high employee involvement practices and a tendency to adopt relatively less corporate governance external control policies than firms in Anglo-Saxon related countries. These firms also show a pattern of marginal adoption of external alignment systems, such as stock options, and a financial structure characterized by a high weight of debt in relation to equity.

The countries following the Scandinavian and French traditions are more difficult to classify purely as stakeholder or shareholder economies. Yet, they generally fall into the non-shareholder oriented economies that embrace most of the elements of the stakeholder model. In this study, Anglo-Saxon tradition countries were defined as outsiders (shareholder-oriented) and the remaining countries were defined as insiders (stakeholder-oriented).

See also "The Need for Investors to Wield More Board Influence"

Shareholder vs. Stakeholder

Through a careful study of shareholder-management (corporate governance) and management-employee (labor management) relationships, the authors assert that employees should have a preeminent position among stakeholders, whenever their firm-specific investments are critical for the wealth-creation process characteristic of economic organizations. Being the employees, they are potential beneficiaries of those firm-specific investments, but also their risk bearers.

Ultimately the question is, if the same problems affect all corporations, why then is it that they are addressed in substantially different ways in different firms and countries? Firms in different countries embrace different types of relationships with their shareholders and employees. By analyzing the variables over which firms and their managers have some discretion, instead of relying exclusively on country-level attributes, the authors conclude that firms differ by adopting one of two polarized systems — that is, either shareholder or stakeholder and that the higher the complementarity between the different attributes of each system, the higher the observed economic performance for that firm.

See also " Managing Stakeholders Well Pays Off — in the Long Run "

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Shareholders vs. Stakeholders

• First Online: 08 December 2021

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• Ricardo Ernst 3 &
• Jerry Haar 4  

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Recently, corporations have begun to answer to both shareholders and stakeholders, unlike in the past, where they would mostly be interested in shareholders. This is in tune with the emergence of corporate social responsibility (CSR), a business-model that encourages companies to take into consideration the interest of a wide range of stakeholders and constituents in the business environment. Therefore, when making their decision-making process more engaging, companies might consider the impact of their choices on a variety of stakeholders rather than making choices based solely on the interest of shareholders. The World Economic Forum has been debating the trade-off between all these concepts, releasing what has been known as the Davos Manifesto. It centers on the debate over what type of capitalism we should have if we want to sustain our economic system for future generations. As such, three models are presented: “shareholder capitalism,” which aligns with our concepts of “shareholder value” (i.e., corporation’s primary goal is to maximize profits), “state capitalism,” where the government sets the direction of the economy (e.g., China), and “stakeholder capitalism,” which aligns with our concepts of “stakeholder value” and the M2W principles.

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Ernst, R., Haar, J. (2022). Shareholders vs. Stakeholders. In: From Me to We. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-87424-7_3

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Stakeholder vs. Shareholder

Shareholders in a corporation are indeed stakeholders, but decision-makers, who are also frequently stakeholders, are not always shareholders.

Matthew started his finance career working as an investment banking analyst for Falcon Capital Partners, a healthcare IT boutique, before moving on to  work for Raymond James  Financial, Inc in their specialty finance coverage group in Atlanta. Matthew then started in a role in corporate development at Babcock & Wilcox before moving to a corporate development associate role with Caesars Entertainment Corporation where he currently is. Matthew provides support to Caesars'  M&A  processes including evaluating inbound teasers/ CIMs  to identify possible acquisition targets, due diligence, constructing  financial models , corporate valuation, and interacting with potential acquisition targets.

Matthew has a Bachelor of Science in Accounting and Business Administration and a Bachelor of Arts in German from University of North Carolina.

• What Is A Stakeholder Vs. Shareholder?
• Who Are The Stakeholders?
• Who Are The Shareholders?
• Shareholders Vs. Stakeholders: Interests In A Company's Decision-Making
• Defining The Shareholder Vs. Stakeholder Theory

Stakeholders Vs. Shareholders

• Stakeholders Vs. Shareholders: Degree Of Investment In The Company

What is a Stakeholder vs. Shareholder?

Although they differ, the terms shareholder and stakeholder are commonly used interchangeably. A stakeholder, as opposed to a shareholder, is impacted by (or has a "stake" in) a project you are working on.

Despite appearing identical, the two have specific responsibilities in a company. Therefore, for a company to effectively manage its values, it must comprehend the contrasts between the two viewpoints.

Both are there in a company when it comes to investment. However, even if their tasks are the same, their investments in a company are very different.

A stakeholder is interested in the company's performance for reasons other than financial outcomes or growth, unlike a shareholder who owns stock in a publicly traded company.

These elements frequently show that the shareholder is more concerned with the company's long-term success.

The two words are frequently used interchangeably in the business sector. However, the terms have diverse meanings in terms of usage.

A stakeholder is not always a shareholder, although a shareholder is a stakeholder in a corporation.

A shareholder owns capital stock in a corporation and thus has a stake in the ownership of the business. On the other hand, a stakeholder is interested in the company's success for reasons other than financial benefit.

Who are the stakeholders?

A party with a financial stake in a company's success or failure is a stakeholder. A person, organization, or group may be able to affect or be influenced by the aspirations and objectives of a corporation. Depending on the firm, they may be internal or external.

Internal stakeholders are individuals who directly benefit from, work for, or own the company. Those involved include managers, line managers, site supervisors, shareholders, and executives.

External stakeholders don't have a direct relationship with the organization, but their actions nevertheless have the potential to affect or be affected by it. For example, public organizations, suppliers, clients, contractors, the host population, lenders, and topic experts.

They frequently want a firm to succeed because they have a long-term stake in it. This is due to how frequently stakeholders and businesses depend on one another. Investments made by them are usually linked to and affected by the performance of the business.

Employees, for instance, would desire their business to succeed by offering better pay and benefits. In addition, the benefits the project will bring to the municipality's citizens that will house a new tech campus will also pique their attention.

A stakeholder is anyone interested in the company's financial or otherwise profits.

Their relationship with the corporation determines their role since different categories influence its operations. Internal and external consumers can be divided into two types.

Primary stakeholders deal with the company directly, such as employees, trustees, and shareholders. Suppliers, the local community, and regulators are examples of secondary stakeholder groups.

They frequently have a long history with the business. So to "draw up stakes" is more difficult for them than for shareholders. But because of how closely they are connected to the company, they rely on one another.

The success of the business or project matters to them, just like shareholders. If a company fails, people can lose their jobs, and suppliers will notice a decline in sales.

Project managers must research stakeholders before the project starts to identify and rank them.

Who are The shareholders?

A shareholder is a natural person or legal entity who owns a business's stock. Their major concern is a project's or company's profitability.

They desire substantial revenues in public corporations from the business to reap the rewards of higher share prices and dividends.

Their interest in endeavors is motivated by a desire for the activity to be successful. Stakeholders do not have the same rights as shareholders, as outlined in the contract or the industry's bylaws.

Anyone with a stake in a company's success—and who owns at least one share—is a shareholder and can be an individual, a business, or an institution. Alternatively, shareholders are big businesses that demand a say in how a business is run.

The shareholder's value decreases if the company underperforms and its stock price drops. Therefore, shareholders want the company and management to take action to raise the stock price and dividends while also strengthening the business's financial position.

Shareholders' stakes in a company are frequently tradable or easily traded at any moment. As a result, they often buy stock in a firm with the hope that it will appreciate, giving them a sizable return on their investment.

They can use the proceeds from selling some or all of their company stock to purchase stock in another company or make a completely unrelated investment.

Although shareholders are technically the company's owners, they are not accountable for the limited partnership or any other financial obligations. They cannot be made liable by the corporation's creditors for any debts they may have.

Conversely, lenders of privately held corporations, partnerships, and sole proprietorships have the authority to demand payment from and sell the assets of these business owners.

The company's charter gives them specific ownership obligations even when not involved in the business's day-to-day operations. One of these advantages is the chance to access the company's financial records for the entire year.

Shareholders are entitled to view the company's financial records if they have concerns about how the senior executives are running it. If they discover anything fishy in the financial records, they have the right to sue the company's executives and administrators.

They also have a right to a reasonable percentage of the proceeds if the company files for bankruptcy or liquidation.

shareholders Vs. stakeholders: interests in a company's decision-making

Shareholders are the people that make up a company.

Companies may sell shares of stock, or a portion of their ownership, to raise the investment capital needed to operate the system. As a result, shareholders frequently influence managerial decisions and strategy more than other stakeholders.

Companies with shareholders have always had one fundamental objective: maximizing profit. Their primary focus is still on making money, even though many organizations work to balance shareholders' interests with those of other stakeholders.

In addition to profits, a sole proprietor or partner in a business venture can have more freedom in setting objectives. In addition to maintaining a stable stock price, income is essential for attracting and retaining shareholders.

Stakeholders and shareholders may have competing interests because of their affiliation with the company or organization. For example, since shareholders generally prefer mergers, they would receive a larger payment; this can produce conflict during merger and acquisition discussions.

On the other hand, since these mergers may lead to job losses and unstable supply chains, employees, vendors, and management may oppose them.

Shareholders have historically influenced corporate policies because they own the company and have voting rights. As a result, most corporations prioritized profit maximization over consideration for other stakeholders.

Contrarily, the growing importance of business ethics has given stakeholders more influence over how organizations are operated. A company's social responsibility requires considering the interests of both categories when making decisions.

Nowadays, many businesses consider the opinions of various stakeholders whose decisions might influence them before making a final choice.

As an illustration, a company whose industries pollute a community's water supply might invest in a treatment facility to guarantee that the impacted communities have access to clean drinking water.

A company's commitment to business ethics may also drive it to start a college scholarship program in memory of a departing executive.

Defining the shareholder vs. stakeholder theory

Economist Milton Friedman first put forth the shareholder theory in the 1960s. Friedman contends that making money for the owners of a firm should be its main objective.

He asserts that judgments about social responsibility are made by shareholders, not by company leaders (such as how to treat employees and customers).

Corporation executives are essentially the shareholders' employees. Therefore until shareholders decide otherwise, any social obligation does not bind them.

Stakeholder theory was initially proposed in 1984 by management expert  Dr. R. Edward Freeman .

Freeman believes businesses should concentrate on creating wealth for all stakeholders, not just shareholders. According to him, a company's relationships with its clients, partners, employees, shareholders, and the community are interconnected.

This is not to argue that shareholder theory is an "anything goes" strategy motivated by financial gain. However, it is essential that this process be legal and honest to carry out. Additionally, charitable endeavors are not prohibited.

On the other hand, the stakeholder paradigm incorporates social responsibility, but the advantages must also increase the company's bottom line. Your main interests will define the best theory for you, your company, or your project.

But you would combine both concepts because they cater to different aspects of the company. Stockholders' interests may only sometimes align with stakeholder interests. In actuality, they could be completely at odds with one another.

As a result, shareholders might want a company to outsource manufacturing to another country or employ a different supplier to increase profits. Still, stakeholders might prefer that production continues for various reasons, including supply-chain management, quality control, or other factors.

The Business Roundtable, a group of chief executive officers of significant U.S. companies, adopted shareholder primacy, or the idea that organizations should represent their shareholders first and foremost, beginning in 1997.

The Business Roundtable, however, issued a statement on corporate purpose in 2019 that acknowledges "the crucial role businesses can play in improving our society when CEOs are sincerely dedicated to addressing the interests of all participants."

A shareholder is a person who has invested money in a business by purchasing stock in it. On the other hand, a stakeholder is a party whose interests are affected by the management of the officer, either directly or indirectly.

Since shareholders are a subset of stakeholders, the latter has a wider scope than the former. Stakeholders describe the entirety of the business's macro environment.

Shareholders are the owners of a company since they are responsible for its part of the risk. However, the people who conduct business with the institution are its stakeholders, not its owners.

The words "stakeholder" and "shareholder" are often used when referring to someone who invests in or participates in an organization. However, their views on what constitutes organizational engagement differ despite their similarities.

Shareholders are indeed stakeholders in a business or organization, but only some are shareholders. A shareholder owns equity in a public business, which is the primary contrast.

Shareholders may own shares but generally have interests outside of stock ownership. Thus they are not as beholden to the company as stakeholders are.

They are fully engaged with the firm, cannot easily escape the organization's influence, and can sell their stock or buy new shares.

A company's financial performance will harm its suppliers, employees, and customers. But on the other hand, shareholders can liquidate their assets and leave before the harm becomes too serious.

The stakeholders are the ones who, in this situation, have few other options.

Nevertheless, even if they leave or are forced to leave (for instance, when employees lose their jobs), they are still affected and are powerless to evade the organization's repercussions.

As a result, companies realize that they need to interact with stakeholders. However, unlike shareholders, they do not have the same power over a corporation.

Depending on how tightly their influence is woven into an organization's structure, internal or external stakeholders may occasionally decide the fate of important ongoing project decisions.

Stakeholders Vs. Shareholders: Degree of investment in the company

These factors establish the primary dividing line between the various stakeholder groups and the company's shareholders.

These differences include the following:

A key distinction between shareholders and stakeholders is how long they have been associated with a company. Participants in the organization have a long-term interest in it.

They could depend on the business, such as workers who depend on it for their living or suppliers and merchants who rely on it for customers.

A host community that gains from the organization's CSR efforts and the multiplier effects on the local economy could be a stakeholder.

They would want the business to succeed so they may maintain the benefits they derive from its activities.

Shareholders and a firm have a lasting relationship as long as the company meets its expectations. As a result, profitability and dividend payments will increase.

They can sell their shares and reduce losses if the business loses money. But on the other hand, a company's stakeholders cannot abruptly leave since they stand to gain more from its long-term success.

A Viewpoint

The interests of shareholders and stakeholders shape their perspectives. The corporation's main goal for shareholders is to increase stock prices, pay out more dividends, expand into new markets, increase profitability, and improve its appeal.

They want the company to grow organically and inorganically to increase their returns on investment.

The importance of long-term objectives, improved working conditions, and improved service delivery is growing among stakeholders. Bigger pay, better benefits, and job security are more important to many workers than higher profit margins.

Customers appreciate better product experiences and competent customer support.

Classification

Stakeholders in an enterprise include people who invest money. They own stock in the company, are entitled to vote, and may bring legal action against the management team for breach of contract.

However, only some of them own shares of stock. Shareholders can only be found in companies having a share capital.

Governmental bodies, solitary independent firms, partnerships, and nonprofit organizations have stakeholders, not shareholders.

For instance, public universities do not have shareholders but have various stakeholders, such as teachers, administrators, graduates, local communities, and taxpayers.

Shareholders are the members of a corporation who own shares of that firm's stock and are the firm's owners, while stakeholders are just interested in it.

Two distinct categories of shareholders have the potential to own shares in an organization: equity and preference.

Various stakeholders include employees, consumers, suppliers, shareholders, creditors, many subsets of creditors, and even the government.

The fact that shareholders are mainly concerned with the rate of return on their investments is the most important contrast between the two. The concern is growing among the firm's stakeholders regarding a matter impacting the company's profits.

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The Shareholders vs. Stakeholders Debate

Should companies seek only to maximize shareholder value or strive to serve the often conflicting interests of all stakeholders? Guidance can be found in exploring exactly what each theory does, and doesn’t, say.

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The stakeholder theorists smell blood. Scandals at Enron, Global Crossing, ImClone, Tyco International and WorldCom, concerns about the independence of accountants who are charged with auditing financial statements, and questions about the incentive schema and investor recommendations at Credit Suisse First Boston and Merrill Lynch have all provided rich fodder for those who question the premise of shareholder supremacy. Many observers have claimed that these scandals serve as evidence of the failure of the shareholder theory — that managers primarily have a duty to maximize shareholder returns — and the victory of stakeholder theory, which says that a manager’s duty is to balance the shareholders’ financial interests against the interests of other stakeholders such as employees, customers and the local community, even if it reduces shareholder returns. Before attempting to declare a victor, however, it is helpful to consider what the two theories actually say and what they do not say.

Both the shareholder 1 and stakeholder theories are normative theories of corporate social responsibility, dictating what a corporation’s role ought to be. By extension, they can also be seen as normative theories of business ethics, since executives and managers of a corporation should make decisions according to the “right” theory. Unfortunately, the two theories are very much at odds regarding what is “right.”

Shareholder theory asserts that shareholders advance capital to a company’s managers, who are supposed to spend corporate funds only in ways that have been authorized by the shareholders. As Milton Friedman wrote, “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it … engages in open and free competition, without deception or fraud.” 2

On the other hand, stakeholder theory 3 asserts that managers have a duty to both the corporation’s shareholders and “individuals and constituencies that contribute, either voluntarily or involuntarily, to [a company’s] wealth-creating capacity and activities, and who are therefore its potential beneficiaries and/or risk bearers.” 4 Although there is some debate regarding which stakeholders deserve consideration, a widely accepted interpretation refers to shareholders, customers, employees, suppliers and the local community. 5 According to the stakeholder theory, managers are agents of all stakeholders and have two responsibilities: to ensure that the ethical rights of no stakeholder are violated 6 and to balance the legitimate interests of the stakeholders when making decisions. The objective is to balance profit maximization with the long-term ability of the corporation to remain a going concern.

The fundamental distinction is that the stakeholder theory demands that interests of all stakeholders be considered even if it reduces company profitability. In other words, under the shareholder theory, nonshareholders can be viewed as “means” to the “ends” of profitability; under the stakeholder theory, the interests of many nonshareholders are also viewed as “ends.” 7

Unfortunately, shareholder theory is often misrepresented in several ways. First, it is sometimes misstated as urging managers to “do anything you can to make a profit,” even though the shareholder theory obligates managers to increase profits only through legal, nondeceptive means. 8 Second, some criticize the shareholder theory as geared toward short-term profit maximization at the expense of the long run. However, more thoughtful shareholder theorists often refer to a need for “enlightened self-interest,” which — if embraced — would lead a corporation’s managers to take a long-term orientation. Third, it is sometimes claimed that the shareholder theory prohibits giving corporate funds to things such as charitable projects or investing in improved employee morale. In fact, however, the shareholder theory supports those efforts — insofar as those initiatives are, in the end, the best investments of capital that are available. 9

Similarly, the stakeholder theory is sometimes misunderstood. It is sometimes claimed that the stakeholder theory does not demand that a company focus on profitability. Even though the stakeholder theory’s ultimate objective is the concern’s continued existence, it must be achieved by balancing the interests of all stakeholders, including the shareholders, whose interests are usually addressed through profits.

Also, because many stakeholder theory descriptions provide no formula for adjudicating among the stakeholders’ disparate interests, some have claimed that the theory cannot be implemented. While it is true that some versions of the theory provide no guidance in this regard, many stakeholder theorists have provided algorithms for trade-offs among stakeholders’ interests. For example, one might assess the level of risk that each stakeholder has embraced and rank their interests accordingly, or one might simply assert that one stakeholder group’s interests should always prevail, as Richard Ellsworth has recently argued. 10

Has There Always Been a Dispute?

As many observers have pointed out, the stakeholder view does have a historical tradition in the U.S. economic system. Historically, argued John Cassidy in the New Yorker, “Many chief executives saw their main task as overseeing the welfare of their employees and customers. As long as the firm made a decent profit every year and raised the dividend it paid its stockholders, this was considered good enough.” 11 But it is also clear that, in the past two decades, expectations have shifted, driven by two forces.

One force was the pointed arguments of free-market economists. In a widely cited 1970 article, Milton Friedman argued that the fundamental obligation of managers is to return profits to shareholders — not to invest corporate funds in endeavors that they find socially beneficial but that reduce shareholders’ returns. 12 In 1976, Michael Jensen and William Meckling explored the notion of “principal-agent” conflicts, arguing that executives often fail to maximize profits unless the shareholders invested their time and money in creating appropriate incentives to do so and monitored the resulting behavior. 13 That suggestion, and others that followed, heightened investor awareness that many managers might not be maximizing profits.

Second, and probably related to the growth of the “principal-agent” arguments, many corporate raiders during the 1980s bought stock of companies they considered undervalued, jettisoned the existing management and often dismantled the companies. There is scant evidence that such takeovers (sometimes subsumed under the rubric of “market discipline”) lead to long-term gains for those who finance them. However, the prospect of such takeovers seemed to have made it, for a time, more dangerous for executives to acknowledge publicly anything other than the shareholder theory 14 or to behave in any fashion that could suggest a nonoptimal return to shareholders. 15

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To be sure, many would prefer that the shareholder-stakeholder dispute simply go away. In particular, many shareholder theory advocates are quick to claim that the theories actually converge, that our society’s norms clearly favor the shareholder theory or that market forces and the law leave one no choice but to embrace that theory. However, none of these assertions can withstand logical scrutiny.

First, consider the assertion that the theories converge — that if managers take care of the stakeholders, they will wind up maximizing profits and shareholder returns in the long run. In that vein, one thoughtful treatise recently argued that stakeholder relationships are not a “zero-sum game” (that is, anything gained by employees comes out of the pockets of investors or customers) but a mutually reinforcing, interactive network. 16 However, that is clearly not the case in all situations.

Consider a business with many long-term employees that has manufactured its products for more than 30 years in a small Mid-western town. Those products have been sold in many foreign markets — but for the past 10 years, not in the United States. Its executives have recently concluded that they can no longer afford to manufacture the products domestically, and the most cost-effective solution is to outsource the manufacturing to another country. The shareholder theory would support closing the plant and would direct the executives to provide only what the law requires to the community and the employees, since there is little possibility of a backlash against the company due to a plant closing (because the products are solely for export). To expend any corporate funds on retraining affected employees or on contributions to the community would be a waste of shareholders’ money, since the investments would never be returned. However, the stakeholder theory would infer a normative obligation to both the community and the employees; while it might not demand that the company continue to operate the plant, it would expect some attempt to retrain the employees, help the community attract new industry and so on. Obviously, these efforts would reduce the concern’s profitability, but the stakeholder theory would not support a “cut and run” approach to the situation.

That example and many others like it show that reasonable applications of the theories will sometimes yield different normative obligations on managers’ parts. To claim that the theories converge requires that one assume that actions in favor of stakeholders ultimately resonate positively to the bottom line and/or actions against stakeholders are eventually punished on the bottom line. In many cases, though, the linkage between such actions and the profit and loss statement is either nonexistent or so indirect as to strain credulity. The stakeholder theory demands that stakeholder interests be considered as an end in themselves. If stakeholder interests are being considered only as a means to the end of profitability, then managers are using stakeholders to effect the results dictated by the shareholder theory. These are two very different concepts.

Second, consider the assertion that U.S. society’s norms clearly align with the shareholder theory. To be sure, most U.S. economists and those closely associated with the financial markets accept the shareholder theory’s premises unquestionably, and the nation’s business schools have seemingly embraced the shareholder mantra. However, it is startling to note that there is evidence that public perceptions may not comport with those of economists and the financial community.

Perhaps the most telling data regarding perceived societal norms are found in a long-term research study, in which researchers surveyed 15,000 managers from various countries selected “from the ‘upper-middle’ ranks of management” to attend international management seminars over an eight-year period. The researchers asked the managers whether they thought the majority of their fellow citizens felt that a company’s only goal was profit, or if they thought that companies were also responsible for the well-being of various stakeholders. (Note that the study did not ask the managers about their own views on the question.)

Interestingly, 40% of U.S. managers chose the former response — the highest percentage of any country in the study. 17 It seems likely that these managerial perceptions represent solid evidence of a disconnection between the views of free-market economists and those of the rest of the general population.

Finally, consider the assertion that companies have no choice but to follow the shareholder theory, on the basis of law and market forces. Although some people claim that U.S. law respects the supremacy of shareholder interests (and, therefore, that a concern’s directors are liable for any decisions that go against such interests), analysis of legal statutes does not, in the main, support that assertion. Jay Lorsch states that two principles form the nexus of directors’ legal responsibilities: a duty of care and a duty of loyalty. The duty of care simply means that directors should gather necessary information before making decisions; the duty of loyalty means that directors should be careful to act appropriately when there are conflicts of interest. 18 As noted by Richard Ellsworth, “As long as directors fulfill their dual duties of care and loyalty, courts do not challenge their decisions,” 19 even if they are made according to the stakeholder theory. More specifically, in at least 38 states, there are now “‘stakeholder’ laws, which permit (or even require) directors to consider the impact of their actions on constituencies other than shareholders.” 20 In addition, courts in Delaware — where the majority of large U.S. corporations are incorporated and where laws are largely consistent with the shareholder theory — have begun “to liberalize their interpretation of the state’s laws.” 21 Indeed, professors Margaret Blair of George-town University Law Center and Lynn Stout of the University of California at Los Angeles have recently concluded that, legally speaking, a board of directors in the United States is “not a policeman employed by shareholders but a neutral umpire for all involved.” 22 According to Blair, “We have a director primacy model in this country, not a shareholder primacy model.” 23

But even if the law cannot be counted on to enforce the shareholder theory, economic forces, it is claimed, will drive managers to embrace it. One obvious way in which this can be done is for the board of directors to dismiss senior executives who do not maximize profitability. However, research indicates that the forced departure of executives who do not maximize profits is by no means assured, showing it to be more likely when there is an outsider-dominated rather than an insider-dominated board. 24 The probability of such dismissal differs over time for an executive: For a similarly weak performance, a CEO is two to three times more likely to be dismissed during the first four years on the job or after having been on the job 10 years or more than in the period in between. 25 In short, one can hardly count on the thesis that states that the “board of directors will remove non-profit-maximizing managers” to hold uniformly.

However, based on economic theory, there is still a way in which managers who do not maximize profits, and whose boards do not remove them, will wind up unemployed: The company’s underperformance will be noted in the marketplace, the company will be subjected to a hostile takeover, and the board and the managers will be replaced. Some have argued that the large number of mergers and acquisitions in the late 1990s provides evidence that this assumption is accurate. However, the bulk of these M&As were not grounded in removal of existing managers due to suboptimal profitability, as would normally be the case in hostile takeovers. The fact that there are many M&As (or, for that matter, hostile takeovers) does not, in and of itself, tell us whether the “disciplinary” market control is working.

In fact, a seminal study by Julian Franks and Colin Mayer concluded that we cannot rely on hostile takeovers to perform such a disciplinary function. They noted that high bid premiums are associated with hostile bids, but found no evidence that these bids are driven by management’s delivery of suboptimal profits relative to others in the same industry. 26 Of course, one can never know exactly how far below the maximal profit threshold a company is performing (after all, it is possible that all the businesses in an industry could be suboptimizing). But since Franks and Mayer found that hostile bidders do not even distinguish significantly between the companies within an industry, we should view predictions that the market will punish managers who do not follow the shareholder theory more as a statement of religious conviction than as an empirical observation that has withstood rigorous scrutiny.

In sum, despite the attempt by some observers to “make the dispute go away,” the facts remain that the theories demand very different things; that perceptions of U.S. norms across the broad society are likely more suggestive of a stakeholder than of a shareholder orientation; and that neither legal nor marketplace mechanisms can be relied on to enforce the shareholder theory in a uniform fashion. Therefore, the dispute seems to be with us for the time being and the suggestions that recent financial scandals prove the failure of the shareholder theory deserve careful scrutiny before they can be accepted.

Whither the Shareholder Theory?

The year 2002 saw a good deal of corporate executive behavior that was at best disruptive to the free flow of commerce and, at worst, illegal. Few would dispute that such behavior should be discouraged rather than rewarded. The real question, of course, is whether the shareholder theory prescribes, and therefore rewards, behaviors that are actually detrimental to society.

Many of the more strident critics of shareholder theory seem to claim that as executives are charged with maximizing shareholder value and are given large incentives to do so through stock options or other schema, they will respond by embracing whatever manipulations are necessary to achieve that goal. It is further suggested that if those manipulations include setting up illegal partnerships and then shredding incriminating evidence, shareholder theory will encourage the behavior, as long as the executives do not get caught. Since society deems these behaviors reprehensible and since it is suggested that the shareholder theory drove executives to behave that way, these commentators conclude that the theory is bankrupt and must be jettisoned.

The argument relies, however, on an incomplete and somewhat misrepresentative interpretation of the shareholder theory. First, while the mantra of maximizing shareholder value was indeed chanted by many in the economic and financial communities in the late 1990s until the scandals hit in 2002, it is not at all clear that such a goal is completely consistent with the intent of the shareholder theory. It must be remembered that shareholders get a return from their invested capital in two different ways: through dividends paid out by the corporation and through increased share prices. If we return to the most often cited and most accessible statement of the shareholder theory, Milton Friedman’s 1970 essay “The Social Responsibility of Business Is To Increase Its Profits,” it becomes apparent that the shareholder theory spoke more to increasing dividends through profitability than to increasing share price in a (possibly irrational) stock market. Yet those who criticize the mantra of maximized shareholder value seem to be most disturbed by the recent fixation on market returns, which the theory never viewed as the primary end state to begin with.

Second, the argument seems to suggest that the shareholder theory prescribes any action in pursuit of shareholder returns. But the theory clearly dictates that the pursuit of profits should be done legally and without deception, and there is little wiggle room for the kinds of overtly illegal behavior alleged in many recent financial scandals. Thus, the executives who broke the law were not operating according to the shareholder theory.

Third, it must be remembered that many of the executives undertook actions that, from all outward appearances, were more for their own benefit than for that of the shareholders. For example, Enron Corp. CFO Andrew Fastow, who created a partnership that was bankrolled with Enron stock and populated with very risky ventures, “stood to make millions quickly, in fees and profits, even if Enron lost money on the deal,” according to the Washington Post. Actually, Enron lost more than $500 million from these initiatives and entered bankruptcy. 27 Similarly, several other executives, including Kenneth Lay of Enron, Garry Winnick of Global Crossing Holdings Ltd. and Scott Sullivan of WorldCom Inc., also benefited from bonuses and stock options at the same time that their companies’ shareholders were suffering. In fact, the shareholder theory finds such behavior inexcusable, since the basic premise of the theory is that executives should act only in the shareholders’ interests and not in their own.

Thus, the strident line of argument does not appear terribly compelling, since it seems to misinterpret the shareholder theory even as it indicts the theory. However, others who also argue that recent financial scandals augur a move to the stakeholder theory take a less hostile, more compelling tack. While they accept that much of the recent bad behavior was grounded in human weakness and not inherent in the shareholder theory, they contend that if society embraced the stakeholder theory, executives would develop an innate self-correcting mechanism that would temper tendencies to act in a manner that ignores certain stakeholders’ interests. If U.S. society entered an era in which the only “politically correct” perspective was that of the stakeholder theory, it is likely that executives would shift their language to include references to stakeholders’ interests. Over a period of time, if psychological theories are to be believed, managers’ behaviors, and then their true attitudes, would also begin to shift toward the stakeholder theory. That argument is more compelling.

In this context, we can see that the dispute between the shareholder and stakeholder theories in the United States, in which it appeared for several years that the shareholder theory was emerging as a victor, is now best viewed as a standoff. The stakeholder theory may have a slight edge, because the shareholder theory’s less-strident critics do have a logically defensible argument and because the strident argument that the shareholder theory encourages bad behavior, while not logically defensible, has emotional resonance with many people. Rightly or wrongly, the theory is being tarnished by association. Still, even if one generously concedes that many recent linkages of executive misbehavior to the theory are misplaced, it is hard to claim that the shareholder theory has done anything to help the situation.

What Are Executives and Boards To Do?

Against this backdrop, U.S. executives and board members might reasonably ask what they should do differently. First, executives should consider changing their language, getting rid of the phrase “maximizing shareholder value.” Indeed, many of the most ardent supporters of the shareholder theory have quietly shifted to “maximizing our company’s value” and other similar phrases. An even more temperate phrasing of the corporate objective would be “maximizing our company’s contribution to our economic system.”

Second, executives should feel freer to change their attitudes and behaviors openly. If a CEO or board member’s only reason for not verbalizing a belief in the stakeholder theory was a fear of takeover, it is likely that such pressures will abate given the increasing evidence that the “market discipline” of takeovers during the last few years has proven less than efficient in maximizing returns. Assuming that a CEO’s board approves, the CEO should be able to operate freely under either theory for the foreseeable future.

Third, whichever theory is embraced, executives need to be clear about the choice in organizational communications. If midlevel managers are confused about the corporation’s objectives, they will likely make inconsistent decisions, probably by relying on their own normative beliefs about the appropriate theory. Richard Ellsworth has suggested a six-step series of “challenge-sessions” in which executives work through their collective attitudes toward the company’s stakeholder obligations and priorities and then take overt steps to communicate their conclusions throughout the organization. 28 An approach like his should at least provide a firm grounding upon which operational decisions can then be made.

About the Author

H. Jeff Smith is a professor of management at the Babcock Graduate School of Management at Wake Forest University in Winston-Salem, North Carolina. Contact him at [email protected].

1. The theory is sometimes called the “stockholder” theory, but the term “shareholder” is used here for consistency with recent usage in the media.

2. M. Friedman, “Capitalism and Freedom” (Chicago: University of Chicago Press, 1962), 133.

3. Note that I am considering only the normative version of the theory, which states how managers ought to behave. There are also descriptive versions of the stakeholder theory, which describe actual behavior of managers, and instrumental versions, which predict outcomes (for example, higher profits) if managers behave a certain way. These distinctions are drawn crisply in T.M. Jones and A.C. Wicks, “Convergent Stakeholder Theory,” Academy of Management Review 24, no. 2 (April 1999): 206–221.

4. J.E. Post, L.E. Preston and S. Sachs, “Managing the Extended Enterprise: The New Stakeholder View,” California Management Review 45, no. 1 (fall 2002): 5–28.

5. W.M. Evan and R.E. Freeman, “A Stakeholder Theory of the Modern Corporation: Kantian Capitalism,” in “Ethical Theory and Business,” 3rd ed., eds. T.L. Beauchamp and N.E. Bowie (Englewood Cliffs, New Jersey: Prentice-Hall, 1988), 97–106. It is to this version of the normative stakeholder theory that the following description refers. Note, however, that Post, Preston and Sachs, who take a more instrumental than normative view of stakeholder theory, embrace a wider enumeration of stakeholders, including regulatory authorities, governments and unions.

6. Note that these are ethical rights. They may or may not correspond to legal rights or to rights established by professional/industry codes and so on.

7. Some authors — for example, see J. Hasnas, “The Normative Theories of Business Ethics: A Guide for the Perplexed,” Business Ethics Quarterly 8, no. 1 (1998): 19–42 — view the “social contract” theory as providing a third, and differing, normative viewpoint that is at an equivalent level to the shareholder and stakeholder theories. However, the most recent writings by the leading proponents of the social contract theory — including T. Donaldson and T.W. Dunfee, “Ties That Bind: A Social Contracts Approach to Business Ethics” (Boston: Harvard Business School Press, 1999), see especially chapter 9 — instead seem to view the “social contracts” perspective as a meta-theory that provides guidance in sorting through the stakeholder obligations.

8. Friedman, “Capitalism and Freedom,” 56, 61.

9. N.E. Bowie and R.E. Freeman, “Ethics and Agency Theory: An Introduction” (Oxford, England: Oxford University Press, 1992), 3–21.

10. R.R. Ellsworth, “Leading With Purpose: The New Corporate Realities” (Stanford, California: Stanford University Press, 2002). Here, Ellsworth argues for the primacy of customers’ interests over those of other stakeholders.

11. J. Cassidy, “The Greed Cycle,” The New Yorker, Sept. 23, 2002, 64–77. Also see Cassidy for a thorough and accessible treatment of the factors driving the shift to a “shareholder value” perspective.

12. M. Friedman, “The Social Responsibility of Business Is To Increase Its Profits,” New York Times Magazine, Sunday, Sept. 13, 1970, sec. 6, p. 32.

13. M.C. Jensen and W.H. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics 3 (October 1976): 305–360.

14. Cassidy, “The Greed Cycle.”

15. J. Magretta, “What Management Is: How It Works and Why It’s Everyone’s Business” (New York: Free Press, 2002), 30–33.

16. Post, “Managing the Extended Enterprise,” 18.

17. See C. Hampden-Turner and A. Trompenaars, “The Seven Cultures of Capitalism: Value Systems for Creating Wealth in the United States, Japan, Germany, France, Britain, Sweden and the Netherlands” (New York: Doubleday, 1993). The percentage of managers choosing the first option varied from lows of 8% (Japan) and 11% (Singapore) to highs of 34% (Canada), 35% (Australia) and 40% (the United States).

18. J.W. Lorsch, “Pawns or Potentates: The Reality of America’s Corporate Boards” (Boston: Harvard Business School Press, 1989), 7–8.

19. Ellsworth, “Leading with Purpose,” 348.

20. R.A.G. Monks and N. Minow, “Corporate Governance” (Cambridge, Massachusetts: Blackwell, 1995), 38.

21. Ellsworth, “Leading with Purpose,” 349.

22. S. London, “An Uprising Against Stock Arguments,” Financial Times, Tuesday, Aug. 20, 2002, p.10.

24. M.S. Weisbach, “Outside Directors and CEO Turnover,” Journal of Financial Economics 20 (March 1988): 431–460.

25. S. Allgood and K.A. Farrell, “The Effect of CEO Tenure on the Relation Between Firm Performance and Turnover,” Journal of Financial Research 23, no. 3 (fall 2000): 373–390.

26. J.R. Franks and C. Mayer, “Hostile Takeovers and the Correction of Managerial Failure,” Journal of Financial Economics 40, no. 1 (January 1996): 163–181.

27. P. Behr and A. Witt, “Visionary’s Dream Led to Risky Business,” Washington Post, Sunday, July 28, 2002, sec. A, p. 1.

28. Ellsworth, “Leading with Purpose,” 327–357.

Acknowledgments

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• Key Differences

Know the Differences & Comparisons

Difference Between Shareholders and Stakeholders

While shareholder own the company’s share by paying the price for it, hence they are the owners of the company. In contrast, stakeholders, are not the owners of the company, but are they are the parties that deal with the company. In the given article excerpt, we’ve broken down all the important differences between shareholders and stakeholders.

Content: Shareholders Vs Stakeholders

Comparison chart, definition of shareholders.

Every company raises capital from the market by issuing shares to the general public. The shareholder is the person who has bought the shares of the company either from the primary market or secondary market , after which he has got the legal part ownership in the capital of the company. He is the one who owns shares in the private or a public company. Share Certificate is given to every individual shareholder for the number of shares held by him.

Mere subscribing to shares does not amount to ownership of shares, until and unless shares are actually allotted to him. They are the people who directly affected by the activities of the company. In a company, there can be two types of shareholders.

• Equity Shareholders : The holders of the ordinary shares of the company. They have the right to vote in the Annual General Meeting (AGM). Moreover, at the time of the liquidation of the company they are repaid at the end.
• Preference Shareholders : Preference Shareholders are the one who gets priority over Equity Shareholders in the payment of dividend at a fixed rate and repayment of capital it the event of winding up of the company.

Definition of Stakeholders

A Stakeholder is a party that can influence and can be influenced by the activities of the organization. They are the interested parties who help the organization to exist. In the absence of stakeholders, the organization will not be able to survive for a long time.

As per the traditional governance model, the company’s management is accountable only to the shareholders. But nowadays, this scenario has been completely changed because many corporations are having the opinion that apart from the shareholders, many other constituents exist in the business environment and the management is answerable to them also. As the business operates in an environment and there are many factors which affect it. Similarly, the steps taken by the entity will also have a positive or a negative impact on its constituents. These constituents, are classified in the following categories:

• Trade Unions
• Government and its agencies
• Competitors

Key Differences Between Shareholders and Stakeholders

The following are the differences between shareholders and stakeholders:

• The person holding the shares of the company is known as Shareholders. The party having a stake in the company or organization is known as Stakeholder.
• Shareholders are the owners of the company as they had bought the financial shares, issued by the company. Conversely, Stakeholders are the interested parties who affect or gets affected by the company’s policies and objectives.
• Shareholders are a part of the Stakeholders. It can also be said that shareholders are stakeholders, but the stakeholders are not necessarily the shareholders of the company.
• Shareholders lay emphasis on the return on their investment made in the company. On the other hand, Stakeholders focuses on the performance, profitability, and liquidity of the company.
• The scope of stakeholders is comparatively wider than the shareholders because there are other constituents also apart from shareholders.
• Only the company limited by shares have shareholders. However, every company or organization have stakeholders, whether it is a government agency, nonprofit organization, company, partnership firm or a sole proprietorship firm.

Therefore, it can be clear from the above discussion that shareholder and stakeholder are two different terms. Hence, should not be confused while using them. Shareholders are just the legal owners of the company, who have got the ownership by purchasing the shares of the company. Stakeholders is a little bigger term than Shareholders, which includes all those factors which have an affect on the business. Not only business doing entity have stakeholders, but every organization irrespective of its size, nature, and structure are accountable to Stakeholders.

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• Diff. Between In Commerce
• Difference Between Stakeholder And Shareholder

Top 6 Difference Between Stakeholder and Shareholder

What is a stakeholder.

Stakeholders can be referred to as a person, organization or a group having an active interest in the functioning of an organization. Stakeholders can affect or are affected by the changes in the business.

Stakeholders are of two types, internal and external. Internal stakeholders are referred to as those persons who have an interest in the company due to presence of a direct relationship with the company, such as through ownership, employment or an investor (through investment).

External stakeholders are those persons who although, not being directly involved with a company but are impacted in some way through the actions and business outcomes. Creditors, suppliers, and public groups are all considered examples of external stakeholders.

What is a Shareholder?

A shareholder is any person or an institution that owns one or more shares in a company. Due to the holder of a share in a company, they can be regarded as partial owners. They receive monetary benefits in the form of dividends as and when the company earns profit from the market.

Shareholders do not engage in the management of a firm’s operations. A board of directors set up by the shareholder looks after the operations.

Also Check:  How to Become a Shareholder?

There are two kinds of shareholders, those who own less than 50% of a company’s stock are known as ‘minority shareholders’, whereas the shareholders who control 50% or more of a company’s stock are called ‘majority shareholders’.

Let us look into the major differences between stakeholders and shareholders in the following table.

For a student of Commerce and Management, this article is of considerable significance as it deals with the critical concept of the fundamental differences between stakeholders and shareholders. More such exciting concepts are coming up. Stay tuned to BYJU’S.

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Stakeholder Capitalism vs Shareholder Capitalism: Are we at a pivotal moment?

Stakeholder versus shareholder capitalism is by no means a new debate. It’s one that’s been discussed for decades, but recent years have brought special attention to it. Here’s how these two perspectives differ, the people supporting each side, and the rationale behind these two concepts. 

What Is Shareholder Capitalism?  

Those who support shareholder capitalism believe that corporations have one purpose they need to fulfill: Generate revenue and ensure things are profitable for shareholders (i.e., those who own stock in the company). They also go as far as saying that losing sight of shareholders, who should be the primary party to please, will backfire on the company’s success. 

What Is Stakeholder Capitalism?  

Supporters of stakeholder capitalism say that a company should consider more than just the owners (i.e., shareholders), but everyone who has a stake in the company’s success. That includes employees, customers, and suppliers. In other words, anyone doing business with the company deserves its considerations as to how its actions will impact all of these parties.  

Who Supports Shareholder Capitalism?  

Milton Friedman, professor at the University of Chicago, is often dubbed the “godfather” of shareholder capitalism. His view asserts that the only responsibility of a corporation’s executives is to ensure the owners see a profit. Friedman, who is a  Nobel Prize winner , has argued this point all the way back to the 1970s when he published an essay in the  New York Times  on the same topic.  

His opinion focuses around the ability to measure and define stockholder returns, whereas expecting corporate executives to account for other social responsibilities would require “spending someone else’s money for a general social interest.” He likens it to an unelected official taxing shareholders and then spending that money however they please, with very little accountability. With competing interest between shareholders and stakeholders, corporations would struggle to please everyone.  

Who Supports Stakeholder Capitalism?  

One of the biggest advocates of stakeholder capitalism is the Business Roundtable, which is an association of some of America’s largest corporate executives. Also on the board is  Klaus Schwab , who founded the World Economic Forum (WEF). Schwab asserts that corporate executives must consider interests that go beyond profit-focused shareholders in order to perform ethically and in a balanced, sustainable manner. 

Founder and CEO of  BlackRock , Larry Fink, publicly acknowledged that the wealthy have prospered since the 2008 financial crash while “regular people” have lost stability. As the Chief Executive of the world’s biggest asset manager, his words prove impactful. In 2018, he wrote: “Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.” This year, they advocated for increased investor focus on sustainable values. 

Joseph Stiglitz , professor at Columbia University and a Nobel Prize winner, has conducted substantial research in response to fellow professor Friedman’s ideas back in the 1970s. In his research with Sandy Grossman, Stiglitz showed that “shareholder wealth maximization  doesn’t maximize societal welfare .” Instead, he continues to support a focus on all stakeholders.  

Defining a Company’s “Stakeholders”  

In an attempt to offer clarity and direction for those pursuing stakeholder capitalism, the Business Roundtable has defined stakeholders as follows and advocated for the following commitments to each party: 

• Customers : Companies should focus on delivering value. 
• Employees:  Companies should invest in employees through fair compensation, training, education, fostering diversity, being inclusive, and treating everyone with dignity and respect. 
• Suppliers:  Companies should handle business in a fair and ethical manner with all suppliers. 
• Community : Companies should respect those in the community and beyond, taking initiatives to protect the environment through eco-friendly, clean, and sustainable processes. 
• Shareholders:  Companies should still strive to create long-term value for those who are shareholders, while offering transparency as to how the company is being managed.  

On paper, these commitments look promising. However, those against stakeholder capitalism say it’s simply far too complex. With competing interests amongst these parties, some would even call it impossible. 

Is Shareholder Capitalism Short-Sighted?  

While those against stakeholder capitalism are quick to call out its challenges, those against shareholder capitalism have a long history of failed business ventures to back their perspective. Many consider shareholder capitalism to be a short-sighted endeavor. In other words, with a focus on pleasing shareholders by making a profit, many companies put their focus into the wrong areas. 

Under shareholder capitalism, business leaders are encouraged to make decisions that lead to quick profit, but they often have long-term consequences. The damage can range from harm to consumers (i.e., selling unhealthy or addictive products); poor employee treatment (i.e., too little pay, unsafe working conditions); damage to communities (i.e., dumping industrial waste into water or soil); and so on.  

Of course, not all would agree with this short-term outlook. For instance,  Michael Faulkender  (Professor at the University of Maryland), says that shareholder capitalism already rewards long-term outlook because equity prices are based on future earnings, not current earnings.  

Is Stakeholder Capitalism Viable?  

Let’s face it: No plan is perfect, and Stiglitz is quick to admit it. He suggested that some signers of the Business Roundtable were disingenuous because they continued to pay less than their fair share of taxes.  

Meanwhile, although certifications exist that help verify a company’s commitment to being a stakeholder-focused corporation (like the list of “B Corporations”), some have been found in direct violation of their pledges.  

Ultimately, given the size of the average corporation and the complexities of verifying social and environmental accountability, mistakes happen. However, proponents of stakeholder capitalism say it most certainly can work. Moreover, more employees and consumers are becoming conscious of the companies they’re buying from, taking support away from brands who fail to consider the long-term, widespread consequences of their actions. 

Get  a  Better Grip on Your Company’s Back Office  

So, where does your company stand in the stakeholder vs shareholder capitalism debate? Ultimately, no matter which side you’re on, profitability remains a key factor in a company’s success.

Multiview ERP is much more than traditional accounting software. It offers robust reporting with intercompany financial statements, dashboards, key performance indicators (KPIs) and data-warehouse interface reporting through our data and reporting engine. It acts as a single source of truth across all information sources in the company. It also has a unique implementation process and support structure to help streamline the transition, and it is fully scalable, designed for expanding small businesses and industry giants alike. 

More than that, Multiview takes pride in putting people first . Our caring, helpful teams are happy to work with you to explain features, answer questions, and help make sure you get the best match for your business and its goals. 

Contact us today to  schedule a demo . 

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