A stakeholder is a party that has an interest in a company and can either affect or be affected by the business. The primary stakeholders in a typical corporation are its investors, employees, customers and suppliers. However, the modern theory of the idea goes beyond this original notion to include additional stakeholders such as a community, government or trade association.
Stakeholders can be internal or external. Internal stakeholders are people whose interest in a company comes through a direct relationship, such as employment, ownership or investment. External stakeholders are those people who do not directly work with a company but are affected in some way by the actions and outcomes of said business. Suppliers, creditors and public groups are all considered external stakeholders.
Investors are a common type of internal stakeholder and are greatly impacted by the outcome of a business. If, for example, a venture capital firm decides to invest $5 million into a technology startup in return for 10% equity and significant influence, the firm becomes an internal stakeholder of the startup. The return of the company’s investment hinges on the success, or failure, of the startup, meaning it has a vested interest.
External stakeholders are a little harder to identify, seeing as they do not have a direct relationship with the company. Instead, an external stakeholder is normally a person or organization affected by the operations of the business. When a company goes over the allowable limit of carbon emissions, for example, the town in which the company is located is considered an external stakeholder because it is affected by the increased pollution.
Conversely, external stakeholders may also sometimes have a direct effect on a company but are not directly tied to it. The government, for example, is an external stakeholder. When it makes policy changes on carbon emissions, continuing from above, the decision affects the operations of any business with increased levels of carbon.
Problems with Stakeholders
A common problem that arises with having numerous stakeholders in an enterprise is their various self interests may not all be aligned. In fact, they may be in direct conflict. The primary goal of a corporation, for example, from the viewpoint of its shareholders, is to maximize profits and enhance shareholder value. Since labor costs are a critical input cost for most companies, a company may seek to keep these costs under tight control. This might have the effect of making another important group of stakeholders, its employees, unhappy. The most efficient companies successfully manage the self-interests and expectations of their stakeholders.
Stakeholders vs. Shareholders
Stakeholders are bound to a company with some type of vested interest, usually for a longer term and for reasons of greater need. A shareholder, meanwhile, has a financial interest, but a shareholder can sell a stock and buy different stock or keep the proceeds in cash; they do not have a long-term need for the company and can get out at any time.
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. However, shareholders of the company can sell their stock and limit their losses.