Once you get into the world of brokerage, you’ll quickly notice that there’s an extensive glossary of terms you should familiarize yourself with. However, the process of learning delicate definitions is, for most, a tedious and unpleasant one. Because of that, people often skim through the words, picking up the key meaning but not the nuances.
It is on this note that we arrive at our topic for today, shareholders, and stakeholders. Many take the two words as synonyms and use them interchangeably. That’s a mistake, however, as the two terms have unique meanings. In a nutshell, shareholders are always stakeholders, but not the other way around. Let’s dig a bit deeper and see what that actually means.
Stakeholders are a specific section of shareholders. Indeed, while the terms do sound similar, the differences between the two are quite simple to grasp once you define the words clearly.
A shareholder can be an individual or company. To become a shareholder, they must own one share of a firm at the very least, which leads to them having an interest in how that firm does financially. Owning shares in a company allows shareholders to affect how it runs via voting. However, it does not force them to pay the company’s potential debt.
Shareholders use companies as tools; they do have an interest in financial gain, but do not necessarily have any personal involvement beyond that. If a firm would start going under, a shareholder could sell their shares and invest elsewhere.
On the other hand, stakeholders are people who depend on a company to a larger degree. Owners, employees, or even customers who rely on the service, can all be stakeholders. That means you don’t need to own a share in the company to become a stakeholder. The only determining factor to whether someone is a stakeholder is the degree in which they depend on the company.
The picture of what a stakeholder is becomes clear when you look at an employee. They are directly affected by a firm’s financial performance in that, if the company does poorly, their pay might get cut, or they might lose their job. However, even patrons that might not be able to get the products that the company produces are considered stakeholders.
Shareholders vs. Stakeholders
While the explanation above might’ve made you think shareholders and stakeholders exist in harmony, that’s often not the case. The interests of shareholders might not match, or might even actively harm the interests of stakeholders. That gap is created from the difference in interest. While stakeholders have varying interests, shareholders usually only orient themselves towards profit.
For example, we’ve all heard of significant lay-offs in corporations that seem to be doing fine or even flourishing. It’s simple to notice how firings hurt specific stakeholders, primarily the employees which companies fire. However, that’s often good news for shareholders, as the company does better financially.
But the case doesn’t need to be so cut and dry. Shareholders can also influence the discontinuation of a product some customers depend on or the change of supply chains. All those decisions can hurt a certain stakeholder group, one that depended on a company for this or that.
The same decisions can, however, create new stakeholder groups. Launching a new product results in getting new customer stakeholders. Changing supply lines discontinues the old one as a stakeholder, but introduces a new one. There’s a lot of nuance in the relationship between shareholders and stakeholders, and one can’t boil it down to shareholders just hurting stakeholders for money. So what’s the reason for this short explanation about the relationship between the two groups? Well, once you understand the strange symbiotic/adversarial connection shareholders and stakeholders have, it becomes easier to differentiate between them. And once that difference is clear, you’ll undoubtedly stop using shareholders and stakeholders as synonyms.