Stakeholder vs. shareholder: What’s the difference?

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Though the words “shareholder” and “stakeholder” are sometimes used interchangeably in conversations about investing, there are important distinctions between the two.

Both shareholders and stakeholders may have a vital interest in how a company is run. However, the perspective, priorities and rights of someone who owns shares of stock in a business can be very different from those of a person who has a different kind of stake in the company’s operations — as an employee, community member or through some other connection.

Analysts and academics have long debated which group a company has a greater responsibility to when doing business, especially when their priorities may conflict and there seems to be no end in sight to the controversy.

The shareholder vs. stakeholder debate continues to evolve as the push for good corporate citizenship and social responsibility gains momentum both nationally and globally. Here’s a look at what’s involved and the differences between a shareholder and a stakeholder.

Related: Investment education for beginners

What Is a Shareholder?

A shareholder is a person or organization that is invested in a public company. They own one or more shares of stock in the business and have an interest in how its success or failure might affect the value of their investment.

Individual shareholders might buy stock with a plan to hold on to the investment for the long term as part of an overall portfolio strategy. Conversely, they might plan to sell within a few weeks or months, hoping to make a quick profit on their purchase.

Shareholders also may buy different types of stock depending on their goals. Those who buy common stock (the more popular choice) are more likely to be interested in the potential for higher profits, albeit with more risk. Those who purchase preferred shares are typically looking for reliable dividend income with less risk.

The rights and privileges of shareholders also may vary, depending on the company and the type of investment they make. Owners of common stock, for example, have voting rights, which can give them a say in electing board members and in some corporate policy decisions.

Preferred shareholders don’t have voting rights, but they do have priority when it comes to receiving dividend payments, and they’re more likely to get some money back if a company goes belly up.

Either way, that investment is liquid: Stockholders can sell some or all of their shares in a company and get out at any time. Either way, shareholders’ main goal is usually to get the most for the money they’ve invested in the company.

What Is a Stakeholder?

Here’s where things might get a little confusing. Shareholders are stakeholders — they have a stake in the company’s profitability. In that context, they care about its financial performance and its reputation. However, not all stakeholders are shareholders.

There are other stakeholders — people and organizations that don’t necessarily own a single share of stock in a company — that still may be affected by how the business operates. They might be vendors who supply the business with goods or services. They might be employees who depend on the steady wages and benefits they receive.

They might be bondholders who’ve purchased company debt with the expectation that they’ll receive interest payments as promised. They might be community members who rely on the revenue the business brings to their community or who are concerned about the environmental impact (good or bad) they’ll see over time.

One of the key differences between these stakeholders and company shareholders is that stakeholders may not have the option of severing their ties and moving on quickly if they’re unhappy with how the business is doing. And they don’t have voting rights, so they don’t have the same opportunity to influence corporate policy that shareholders do.

However, stakeholders do have an interest in how the company operates and if it succeeds long term. Their livelihood and lifestyle may depend on it.

Stakeholders and Shareholders: Differing Points of View

Though both shareholders and stakeholders have an interest in how a company operates, they can sometimes have conflicting perspectives about what success looks like.

Shareholders generally want to see a company they’ve invested in do what it takes to increase share price, provide robust dividends and improve profitability. Stakeholders usually want the company to stay financially healthy as well.

But their concerns might also be focused on employee wages, safety and working conditions, ethical practices, community outreach, charitable giving, and other factors. Stakeholders may be more likely to value long-term stability over short-term profits.

These differing perspectives are often referred to as “shareholder theory” and “stakeholder theory.”

What Is Shareholder Theory?

Introduced by economist Milton Friedman in a 1970 New York Times article, shareholder theory (also known as the Friedman Doctrine) argues that the primary responsibility of a corporation’s executives is to satisfy the desires of the company’s shareholders.

According to Friedman, a public company’s executives are employees or “agents” and, as such, should be prioritizing and delivering what the company’s owners — its stockholders — want.

In most cases, Friedman said that means maximizing profits. And executives shouldn’t feel obligated or motivated to spend company resources on social responsibilities unless the shareholders tell them to or if it benefits the bottom line.

Under the shareholder theory, managers are still expected to operate legally and ethically as they strive to increase returns. But the shareholders’ wants and needs supersede those of other stakeholders connected to the business.

That doesn’t mean corporate executives can’t contribute their own time or money in socially responsible ways. “As a person, (an executive) may have many other responsibilities that he recognizes or assumes voluntarily — to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country,” Friedman wrote in the Times.

But those actions should be taken as an individual, Friedman wrote, not as an agent of a public company using stockholder money.

Stakeholder Theory

Stakeholder theory, usually credited to Dr. R. Edward Freeman, a professor of business administration at the University of Virginia, takes an alternative view to the Friedman Doctrine. In his 1984 book, “Strategic Management: A Stakeholder Approach,” Freeman said that to be successful, a business must create value for all stakeholders — not just those who own stock, but all those who might be affected by company decisions.

That might mean considering whether to move forward with a merger or acquisition that could result in layoffs. It may also mean rethinking a decision to relocate and take jobs to another state or country. This could also help a company decide whether to use an overseas supplier that can provide goods or services at a lower cost to customers, but also with a lower quality. Increasingly, it may mean keeping in mind how a decision might affect the environment by taking away green space, for example, or creating more traffic or pollution.

Considering the needs of all stakeholders doesn’t require executives to ignore profitability, proponents of the stakeholder theory argue. It’s just that profitability shouldn’t be the only factor of significance.

But critics of the stakeholder theory counter that a company that tries to please everyone ultimately pleases no one, and the business could be damaged in the effort.

A Move Toward Socially Responsible Decision-Making

As the idea of good corporate citizenship continues to gain ground globally, a growing number of companies have begun assessing decisions based on their responsibilities to society and not just their shareholders.

In 2010, the International Organization for Standardization created voluntary standards  (guidelines, not rules) designed to help companies that wish to put corporate social responsibility policies in place.

And in 2019, the Business Roundtable, a nonprofit association of American CEOs, grabbed headlines when it announced a new commitment to delivering value to all stakeholders, not just shareholders.

For decades, the Business Roundtable has endorsed the principle of shareholder primacy. But the group’s new Statement on the Purpose of a Corporation widens that approach, and it outlines specific commitments to customers, employees, suppliers, communities and shareholders. It was signed by 181 CEOs.

Individual investors also appear to be moving toward making portfolio decisions that take broader stakeholder needs into account.

Those who might wish to invest in companies whose socially conscious policies align with their own values can do so with specific stocks, or through a growing number of exchange-traded funds and mutual funds that follow environmental, social, and governance criteria.

A shareholder’s primary goal may still be to get the best return possible from an investment. But with an ever-widening range of choices available, investors who prefer socially responsible companies don’t necessarily have to accept lower returns in exchange for following their hearts.

And if their stock gives them an opportunity to vote for board members or on policy, those shareholders also may enjoy the satisfaction of having a small say in how a company is run.

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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

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