What is a Stakeholder?
Stakeholders are individuals or groups with an interest or incentive in a venture’s success or failure.
Different stakeholders have different motivations.
For example, a company’s shareholders look to maximize profits, while the company’s employees want to maximize their compensation.
Stakeholders in Business
In order to be successful, a company must balance varying and often opposing sets of interests.
Looking at our example of shareholders and employees, every dollar an employee is paid is one less dollar its shareholders make – this is known as a “zero-sum game.”
To align the interests of employees and shareholders, a company may offer sales commission to employees.
That way, every dollar an employee earns also generates revenue for the company, making their interests aligned.
Identifying stakeholders is considered one of the most important activities for a business.
Internal and External Stakeholders
There are generally two kinds of stakeholders:
Internal stakeholders are stakeholders who are directly impacted by the company’s success and failure. They often have a financial stake in the company.
Examples of internal stakeholders are:
- Shareholders or investors with a stake in the company: They benefit directly when a company declares profits.
- Employees can earn bonuses or higher salaries when a company is successful.
External stakeholders are stakeholders who have an indirect stake in the company’s success.
They are not directly affected by the company’s financial performance.
Examples of external stakeholders are:
- Customers: They benefit when a company reinvests profits to make a superior product or streamlines its operations to make a cheaper product.
- Contractors and suppliers: They benefit when a company expands existing operations and hires more external people for the purpose.
- Local community: They benefit from a company’s presence because it provides them with jobs and a livelihood.
Stakeholder vs Shareholder
Sometimes a stakeholder can have a disproportionately large impact on a company’s operations.
For example, a shareholder may have a large holding of the company and, therefore, will be able to control strategy and direction.
There has been a large increase in “ESG investing,” or the practice of investing in companies that also engage in corporate social responsibility.
Corporate social responsibility emphasizes a business’s responsibility to its external stakeholders, especially its local community, rather than only its internal stakeholders.