A stakeholder is a person or a group who has an interest in the actions of a company. They can be a part of the company, or outside it. Their ideas can affect what the company does. They are important for the company to do well.
The international rules from ISO 26000 help to know who a stakeholder is:
- A company has legal duties towards stakeholders.
- They can be affected by the company’s choices.
- They usually share their thoughts and take part in what the company does.
Stakeholders often are customers, workers, people who have put money in the company, suppliers, directors, people in the community, other groups, and government bodies. There is a system called stakeholder capitalism where a company puts the stakeholders’ needs first.
The word “stakeholder” came from horse racing. In a stake race, the prize money comes from the fees that horse owners pay. This fee is called a stake, which means risk.
The person who keeps the fees till the prize money is given out is called the stakeholder. In the past, the stakeholder didn’t have money at risk in the race’s result.
You may also like: Calculating company valuations. Everything there is to know
What is a stakeholder?
A stakeholder is a person or group that has a concern in a business and can either influence or be influenced by the business. The main stakeholders in a usual company are its investors, workers, buyers, and providers.
With more focus on company’s responsibility towards society, now even communities, governments, and trade groups are considered stakeholders.
Stakeholders can be from inside or outside a company. Inside stakeholders are people who have a direct connection with a company like a job, ownership, or investment.
Outside stakeholders are those who do not have a direct connection with a company but are affected in some way by what the company does. Providers, creditors, and public groups fall in this category.
Example of an inside stakeholder
Investors are inside stakeholders who are greatly affected by the company’s performance.
For instance, if a venture capital company decides to invest ₹35 crore in a technology startup for 10% share and big influence, the company becomes an inside stakeholder of the startup.
The venture capital company’s return on investment depends on whether the startup succeeds or fails, showing the company has a big interest.
Also Read: A guide to value investing in India
Example of an external stakeholder
External stakeholders are not part of the company, but they get affected by its operations. If a company in a town crosses the allowed carbon emissions, the town becomes an external stakeholder due to the pollution.
Likewise, the government is an external stakeholder. If it changes carbon emission policies, it impacts the business activities of companies emitting more carbon.
Issues concerning stakeholders
Companies face problems when stakeholder interests clash. For instance, a company might want to keep labor costs low for more profits which shareholders like. But, this can upset the employees, another stakeholder group. Efficient companies balance the needs and expectations of all stakeholders well.
Stakeholders vs. shareholders
Shareholders are a subset of stakeholders invested for financial gains, they can sell their shares anytime. Other stakeholders have a long-term interest tied to the company’s well-being.
For instance, if a company performs badly, it might cut down production, affecting the vendors and possibly leading to job losses for employees. However, shareholders can limit their losses by selling their shares.
|Definition||Individuals or groups with an interest in the company’s well-being either directly or indirectly.||Subset of stakeholders invested for financial gains.|
|Interest||Long-term interest tied to the company’s well-being.||Primarily interested in financial gains.|
|Investment||Interest can be in form of employment, supplies, or community involvement.||Monetary investment through buying shares of the company.|
|Risk Management||Their interests are tied to the company, so they may face job loss or business loss during tough times.||Can limit losses by selling shares during tough times.|
|Example Impact||If a company performs badly, it might affect vendors and lead to job losses for employees.||Shareholders can sell shares to limit financial losses.|
|Relationship with Company||They can be internal or external and have a more holistic relationship with the company.||Primarily financial relationship with the company.|
Types of stakeholders
Stakeholders are linked to an organization or project in different ways. Here are the usual types of stakeholders:
- Customers look for valuable products from organizations.
- Employees, often tied to projects related to their work, are keen to contribute.
- Owners provide the money for the organization and set its goals.
- Investors buy shares in organizations for financial gains. They get regular updates on the company’s money matters and can vote on big decisions.
- Creditors like banks lend money to the organisation, which needs to be returned with some extra money (interest).
- Suppliers provide materials and products, having a stake in the business and its projects.
- Communities benefit from businesses that are safe and add to the local economy. Businesses provide jobs and business activities locally. Environment, sustainability, and governance (ESG) are values that matter more now to customers and investors.
- Governments get taxes from companies and the people working there.
Stakeholders in a business
Stakeholders are individuals or groups directly or indirectly connected to a company’s functioning, its success, or failure. Initially, there are the owners. They actively participate or are passive investors.
If the company has loans, creditors like banks become stakeholders. Employees, forming the next group, along with suppliers, depend on the business for income. Customers purchasing and utilizing the products or services are also stakeholders.
Why do stakeholders matter?
Stakeholders are crucial as the company’s workings depend on their collective efforts towards achieving business objectives. Internal stakeholders have a direct impact, while external stakeholders influence indirectly.
For example, customers may alter buying preferences, suppliers can modify manufacturing processes, and government regulations can change. Managing these relationships is vital for the business’s enduring success.
The bottom line
Stakeholders have a stake in the business outcomes. They could be internal like employees, or external like customers and government bodies.
They vary from customers shareholders to communities, impacting the business in different ways.
With extensive writing experience and years deep in the stock market and fintech sectors, I excel at transforming intricate financial concepts into clear, actionable insights. I’m dedicated to guiding readers on their financial paths with confidence and clarity.