TheStreet

A lot of terms get bandied about by corporations and investors, but few can be more confusing than the term stakeholder.

What Is a Stakeholder? 

A stakeholder is anyone who has a "stake" in the success of a business - a person who can be affected by, or affect, the operations of a business. They can be owners, shareholders, employees, bondholders of company issued debt (creditors), customers dependent on the business' success, or even suppliers or vendors of a product that depend on the business' success for their own revenue or profit.

The primary stakeholders of a publicly-traded company are shareholders. But not all stakeholders are shareholders. The term stakeholder therefore more accurately covers everyone with a stake in the business' success, as opposed to only those concerned with its profit growth and valuation. 

As an example, outside of business, you are a stakeholder in a family - your own, whether as a child, parent, or grandparent. You are a stakeholder if you or your child goes to school, or you do, or you vote, pay taxes, or belong to any sort of community for the benefit of yourself as well as others. If, for instance, you volunteer for any organization, you are a stakeholder of that organization - affected by, and affecting its operations and success - even though you don't own stock, sometimes called equity, in that organization.

There are essentially two different types of stakeholders: internal and external. 

Internal stakeholders are those having a direct influence on the function of the business, and being directly affected by its successes or failures. External stakeholders are those affected by the business but from outside its functioning. 

Internal Stakeholders

  • Owners
  • Shareholders
  • Employees

External Stakeholders

  • Bondholders
  • Customers
  • Suppliers
  • Vendors

One easy way to distinguish between the two main types of shareholders is, for instance, in a Chapter 11 bankruptcy: a company declares voluntary Chapter 11 bankruptcy to reorganize itself in hopes of making changes that improve its future prospects, such as changes in strategy or looking for funds from external stakeholders to be able to continue to pay its debts. Frequently the company's owners, employees and shareholders remain where they are, doing what they've always been doing, in anticipation of a recovery of the business in some form, even under new owners.

The external stakeholders however - creditors (bondholders), customers, suppliers and vendors, sometimes have to wait to get their products, or paid.

One cross-over of external stakeholders to internal stakeholders is, for instance, a venture capital company. If a venture capital firm invests in a business, like a start-up social network or online marketing company, in exchange for equity - like a controlling interest in shares of the start-up - the firm becomes an internal stakeholder of the company. Because return on its investment (unlike creditors, whose return is usually fixed) is dependent on the company's success or failure.

What Is the Difference Between a Shareholder and a Stakeholder? 

A stakeholder doesn't have to be a shareholder. A shareholder is, however, a primary stakeholder, because at least in the stock market, shareholders benefit from a company's success but are also affected by its misses. 

Shareholders decide whether to invest more in a company - buy more stock - or take some of their investment elsewhere by selling their stock. One obvious influence the company's success or misses have on shareholders is easily observable during earnings season. 

But what makes them internal stakeholders is, for instance, all shareholders are entitled to vote to elect directors of a public company, and to have a say in any strategic decisions a company makes. And a 'controlling shareholder' gets to suggest its own candidates for the company's board, and influence decisions and ideas regarding strategy - such as even looking for suitors to buy, or targets to acquire, to grow or change direction. Shareholders are primary stakeholders of a public company because in owning shares, they are participating in ownership of the company. 

In fact, external stakeholders and shareholders often have competing interests: shareholders can pull out of investing in a public company by selling their holdings at any time, while external stakeholders are dependent on the company for their own success.

Because corporations have a relationship with both internal and external stakeholders, investors and corporations have made the concept of corporate social responsibility popular.

What Is Corporate Social Responsibility? 

Corporate social responsibility, or CSR, helps a company boost its brand and its relationship with both external and internal stakeholders by acting socially accountable. Another term for CSR is corporate citizenship. Most corporations see a benefit in public relations to being viewed by the general public as good corporate citizens. One way corporations are perceived as good corporate citizens is by being conscious of their impact on everything from the community in which the company's headquarters is located to even international perceptions and relations.

Ways companies impact society, including social perception, economic influence, and environmental conscientiousness are all part of a company's social responsibility. Corporations attract stakeholders when they operate in ways benefiting society and the environment as opposed to ways seen detrimental to either. Ways corporations incorporate CSR in their strategy include through volunteer efforts, community assistance, and philanthropy. A CSR program can help strengthen the loyalty of employees to their employer, can boost employee morale and help internal stakeholders feel more connected to their lives outside the company. 

To be able to develop a CSR strategy, a company must first be responsible to itself and its shareholders. Because of that, companies adopting CSR strategies have to have grown to the point where they can give back to society as a whole. Also, as CSR is essentially a relationship strategy, the more visibly successful a company is, the greater is its responsibility to set standards of ethical behavior for itself and its peers.

Why Do You Need to Worry About Stakeholders in Business? 

For a business to grow, it needs to keep innovating, doing new things, developing new projects, and attracting stakeholders, including customers. To embark on a project - whether a new product, a new patent, or a new operating method - the first step after having an idea is determining who the project's stakeholders are, understanding the role of different stakeholders, such as internal versus external, in the project, and identifying project-related goals and expectations. 

In addition to shareholders and the company's chief executive and board of directors, primary stakeholders of a particular project are those who will be part of the project until the end of its completion. These stakeholders' needs, inputs and decision making will be focused on seeing the project through to a successful conclusion. So when starting a project, the project manager must have a clear idea what the result of the project will be, for who, and why the results are important.

A classic example is Gillette, owned by Proctor & Gamble (PG - Get Report) since 2005. The Gillette Company was founded in 1901 by King C. Gillette. It started as a safety-razor manufacturer. It patented a razor that could use a disposable blade at a time most men shaved with straight razors. It sold its razors for less than it cost to make them, and sold disposable blades for more than it cost to make them. 

But just patenting a safety razor, or developing an inexpensive, disposable product to manufacture and sell at a profit wasn't going to make his market grow beyond safety razors and blades. King Gillette had to come up with more convenient models, from the original one-position screw-down blade cover to a "butterfly" opening top to an adjustable (position) razor and, eventually, disposable razors. Then came the "Track II," the world's first two-blade razor, and several other innovations up to the five-bladed "Fusion."

Stakeholder strategy is essential for:

  • Innovation
  • Market/Business growth
  • Shareholder value
  • Social responsibility
  • Customer and employee loyalty 

Negative Impacts of Stakeholder Strategy

  • Shareholder concerns over innovation in an untested market.
  • Disagreements internally over the need for a stakeholder strategy versus a desire for market growth with existing products.
  • Customer loss, and shareholder loss, as when Coca-Cola (KO - Get Report)   decided to market "New Coke," resulting in its having to re-market "Classic Coke" until it could name future cola products something else.
  • Not every "new" idea is a good idea, especially if its affect on all stakeholders rather than just profit/loss isn't considered.