A stakeholder is an individual, group, or entity with a vested interest in the operations and outcomes of an organisation or project. These stakeholders may be internal members or external entities. Their involvement can significantly influence the organisation's success or failure. To ensure positive outcomes, organisations must proactively engage with stakeholders, understanding their needs and concerns, and fostering mutually beneficial relationships.
Who are stakeholders in business organisations?
In companies, stakeholders are individuals or groups with an active interest or stake in the company’s business performance. Usually, they are directly affected by a company’s:
- Actions
- Objectives, and
- Policies
Stakeholders definition by ISO 26000
The stakeholders definition is also provided by ISO 26000. For those who are unaware, these are a set of international guidelines designed to help organisations operate in a socially responsible manner.
These guidelines also provide three major factors which can be used for identifying stakeholders. Let us study them:
Factor I: A company is legally bound to its stakeholders
- Say the organisation has formal and binding commitments to certain groups or individuals.
- For example,
- Compliance with labour laws
- Contracts with suppliers
- Regulatory requirements
- All these groups or individuals can be termed as the company’s stakeholders.
Factor II: A company’s activities directly impact its stakeholders
- The organisation’s decisions and activities can positively or negatively affect different groups.
- For example,
- A company’s environmental practices can affect local communities
- Its financial decisions can impact investors
- These groups are stakeholders of the company.
Factor III: A company must engage its stakeholders while making business decisions
- Stakeholders are all those parties who are likely to express concerns and be involved in the organisation’s activities.
- Usually, these groups can influence the organisation’s decisions.
Types of stakeholders
Stakeholders represent individuals or entities with a vested interest in a project. They can influence its outcome or be impacted by its results. As projects often involve multiple stakeholders, effective identification and classification are crucial.
1. Internal stakeholders
Internal stakeholders are directly affiliated with the organisation undertaking the project. They are employed by or invested in the organisation and are directly impacted by its activities. Examples include:
- Employees: Individuals working within the organisation.
- Owners: The individuals or entities that own the organisation.
- Board of Directors: The governing body of the organisation.
- Project Managers: Individuals responsible for overseeing the project.
- Investors: Individuals or entities providing financial support to the project.
2. External stakeholders
External stakeholders are not directly employed by or affiliated with the organisation but may be indirectly impacted by the project. They may have a vested interest in the project due to their relationships with the organisation or the industry. Examples include:
- Suppliers: Organisations that provide goods or services to the project.
- Customers: Individuals or organisations that purchase the project's outputs.
- Creditors: Entities that have lent money to the organisation.
- Clients: Individuals or organisations that have contracted with the organisation for the project.
- Intermediaries: Entities that facilitate transactions between the organisation and other parties.
- Competitors: Organisations that offer similar products or services.
- Society: The broader community that may be affected by the project's outcomes.
- Government: Regulatory bodies or government agencies with jurisdiction over the project.
Different between internal vs external stakeholders
Based on several studies, we can divide stakeholders into internal and external categories:
| Parameters | Internal stakeholders | External stakeholders |
| Meaning |
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| Example |
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Stakeholder examples
Stakeholders are individuals or groups who have a vested interest in an organisation or project. They can be categorised based on their relationship and expectations:
- Customers: Expect high-quality products or services that meet their needs and preferences.
- Employees: Seek meaningful work, career growth, and a positive work environment.
- Owners: Are responsible for the organisation's overall direction and financial performance.
- Investors: Seek financial returns and often have a say in major decisions.
- Creditors: Lend money to the organization and expect timely repayment with interest.
- Suppliers: Provide materials and products and are interested in the organisation's long-term success.
- Communities: Value the economic benefits, social impact, and environmental sustainability of the organisation.
- Governments: Collect taxes and regulate the organisation's operations.
What is the concept of stakeholder capitalism?
In the corporate world, “stakeholder capitalism” is an important concept. It states that organisations prioritise the interests and well-being of all their stakeholders, not just shareholders. This approach contrasts with the traditional shareholder-centric model, which focuses primarily on maximising profits for shareholders.
In stakeholder capitalism, the success of an organisation is measured not only by its financial performance but also by its contributions to the well-being of its:
- Employees
- Customers
- Suppliers
- Communities
- Environment
Why is stakeholder capitalism important for investors?
By picking the companies following the concept of stakeholder capitalism, investors can earn better returns and achieve their long-term value creation objectives. Let us see why:
Sustainable business practices
- Companies that follow stakeholder capitalism often integrate sustainable business practices into their operations.
- Some common examples include:
- Fair treatment of employees
- Ethical sourcing
Such practices reduce risks associated with environmental and social issues.
Customer loyalty and brand strength
- Stakeholder-focused companies prioritise meeting the needs of their customers.
- By doing so, they often build:
- Strong brand reputations
and - Usually, such companies gain from:
- Repeat business
- Positive word-of-mouth referrals
- Increased market share
- Customer loyalty
- Strong brand reputations
Employee engagement and innovation
- Valuing employees as stakeholders leads to higher levels of:
- Engagement
- Satisfaction, and
- Retention
- Often, engaged employees contribute innovative ideas and solutions.
- This boosts competitiveness and helps companies achieve long-term growth.
Responsible financial management
- Companies practising stakeholder capitalism prioritise responsible financial management.
- They consider the interests of all stakeholders, including investors.
- Such companies are often involved in:
- Transparent reporting
- Prudent risk management
- Long-term strategic planning
- High levels of fiscal responsibility and accountability
- Often, these companies instil confidence among investors and easily attract business capital.
Also, read about the different types of shares issued by the companies to raise funds.
How are stakeholders different from shareholders?
People often use the terms ‘stakeholders’ and ‘shareholders’ interchangeably. However, both differ in scope and represent distinct groups involved with a company. Let us understand how:
Who are shareholders?
Shareholders are individuals or entities that own shares of a company. This ownership allows them to get a portion of the company's profits and assets. Their primary interest is maximising their financial returns on investment. Furthermore,
- Shareholders have legal rights, such as:
- Voting rights in corporate decisions
- Electing the board of directors
- Approving major business decisions
- They can directly influence a company’s decisions in proportion to the number of shares they hold.
- They have a financial focus and often evaluate the company's success based on metrics such as:
- Stock price
- Dividend per share (DPS)
- Earnings per share (EPS)
Who are stakeholders?
On the other hand, “stakeholders” is a broader term and even includes shareholders under the category of internal stakeholders. It is pertinent to note that stakeholders (other than equity shareholders) do not have:
- Earnings per share (EPS)
or - Voting rights
However, they can still influence the company through:
- Activism
- Consumer behaviour
- Regulatory pressure
- Community support
Their interests often extend beyond financial gains. They even focus on aspects like social responsibility and ethical conduct. Also, read about share warrants and how they work.
Conclusion
Stakeholders in a company are individuals or groups affected by its decisions and financial performance. They are broadly divided into internal and external stakeholders. Some common examples include employees, customers, investors, shareholders, and regulatory authorities.
Stakeholder capitalism is an important concept that states companies consider the interests of all their stakeholders, not just shareholders. Companies following this approach often develop sustainable business practices and help investors achieve their long-term value-creation objectives.
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