What Is a Stakeholder?
A stakeholder is a person, business, or organization that has an interest in or is affected by the activities of a business and the results those actions produce. Stakeholders may be impacted by the business’s activities, have the ability to influence the business, or both.
Let’s take a closer look at what a stakeholder is, how a stakeholder is different from a shareholder, and why a business may want to pay attention to its stakeholders.
What Is a Stakeholder?
A stakeholder is a group or individual that is connected in any way to a business and that will be affected by, or be able to affect, the business and its operations.
The connection can be a strong and close relationship like that of an owner, supplier, or customer. It can also be a looser relationship, such as with community members who may be affected by the local tax revenue the business generates or the pollution it produces.
Customers, suppliers, employees, communities, and the people who finance the business are all examples of stakeholders.
What Do Stakeholders Do?
Depending on the type of stakeholder, they may not necessarily “do” anything other than engage with the business in the way that best suits their needs. However, some stakeholders are more actively involved with the business, either directly or indirectly.
For example, a customer may simply buy products or services from the business. They are affected by the business in that it provides them with something they want or need, and they affect the business because their purchase provides part of its revenue.
However, customers could also take an active interest in the way they engage with a business through consumer activism, such as boycotting. After voting, consumer activism is the most common political activity in the United States.
Employees are another kind of stakeholder. Some may decide to simply perform their jobs in exchange for their pay and benefits. Others may choose to go on strike or quit if their employer does something they feel is morally or ethically wrong.
Types of Stakeholders
There are two basic types of stakeholders:
- Primary stakeholders: People who are directly affected by a business and its activities or decisions. Shareholders fall into this category, as their profits depend on how the business chooses to operate.
- Secondary stakeholders: People who are indirectly affected by a business and its activities or decisions. They do not directly engage with the business, but they may engage with or be connected to primary stakeholders. Members of the local community in which a business operates who do not actually shop at the business fall into this category.
Stakeholders vs. Shareholders
Shareholders are a very specific group of stakeholders who own shares in a company. Shareholders can vote on important decisions, elect members to the board of directors, and sell their ownership in the company. Not all stakeholders can do these things, because other types of stakeholders own no shares in the company. For example, customers can’t elect members of the board unless they also happen to be shareholders.
|Does not own part of the business||Owns part of the business via shares|
|Directly or indirectly connected to the business||Directly connected to the business by virtue of ownership|
|Not all stakeholders are shareholders||All shareholders are stakeholders|
|May not be able to affect the business||Can affect the business|
What is Stakeholder Theory?
The traditional idea of a business's purpose is that it should operate with the goal of maximizing shareholder wealth. However, stakeholder theory goes beyond shareholder wealth maximization as the sole goal of a business.
Stakeholder theory was developed by Dr. R. Edward Freeman and published in his book “Strategic Management: A Stakeholder Approach” in 1984. His goal was to create a broader view of strategic management that went beyond traditional economic theory.
While stakeholder theory doesn’t preclude creating value for the shareholder, it promotes the idea that a business must create value for all stakeholders, not just the shareholders.
Stakeholder theory suggests that the role of a manager is to think about how the goals of all stakeholders can be achieved, not just the goals of a single group, like shareholders. However, that can be easier said than done, as different groups of stakeholders often have competing interests.
- A stakeholder is any group or individual affected by a business, either directly or indirectly.
- A stakeholder’s interaction with the business may be simple and beneficial, such as an employee earning a paycheck or a customer buying a product. Stakeholders can also be more actively involved with a business, such as in the case of consumer activism like boycotting.
- Shareholders are one type of stakeholder, but stakeholders are a broad group that includes more than just shareholders.
- Stakeholder theory goes beyond traditional shareholder wealth maximization and is the idea that a business should be mindful of all stakeholders.