Introduction
Stockholder and stakeholder are two different terms that can be mistakenly used interchangeably, these two terms invest in a company and reap the rewards from the profits of the company. Even though they both sound similar, their investment and function within the company are different. Stockholders and stakeholders both benefit from the success of the companies they invest in, but the type of benefits they get differ. This article aims to help understand stockholders' and stakeholders' differences and importance.
Stockholder vs Stakeholder
The main difference between a stockholder and a stakeholder is that a stockholder owns a part of the company by owning at least a share of the company, while a stakeholder has an interest in the company mainly for their performance and wants to see the company prosper for reasons other than stock performance. It can be said that stockholders are always stakeholders in a company, but stakeholders are not always stockholders.
Difference Between Stockholder and Stakeholder in Tabular Form
| Basis of Comparison | Stockholder | Stakeholder |
| Meaning | Stockholders are individuals or companies that own a share in the business. | Stakeholders are individuals, groups, or companies that are interested in a business for reasons other than stock performance. |
| Focus | The main focus is on the company’s return on investment. | Focuses on the company’s performance and goodwill. |
| Who Are They? | Stockholders include anyone who has a share in the business. | Includes investors, employees, suppliers, trade associates, etc. |
| Motive | The motive is to partly own the business through shares and stock. | They are interested in the business but don’t necessarily own it. |
| Company’s Impact | Directly impacted by the activities of the business. | Directly or indirectly impacted by the activities of the business. |
| Existence | They are only seen in companies that issue shares. | All types of companies have stakeholders. |
What is a Stockholder?
A stockholder (also known as a shareholder) is a person, a group of individuals, an institution, or a company that has a share in the company’s stock, a stockholder can hold as little as even one share of the company. The individuals or institution owning a share of the company makes them a stockholder of that company, and they reap the profits and benefits of the company’s success. On the flip side, being a stockholder also comes with risks like being negatively impacted when the company’s stock loses value. Also, the only financial risk that stockholders face is the loss of money they invested in the company because they are not personally accountable for the debts and the responsibilities of the company.
Being a stockholder comes with certain rights and responsibilities, a stockholder is permitted to vote on decisions regarding who will serve on the board of directors or issues that are affecting the company or the funds in which they hold shares. A stockholder who controls more than 50% of the company’s stock is called a majority stockholder while those who hold less than 50% of the stocks are called minority stockholders.
Stockholders are only interested in companies that show a solid ability to meet earnings expectations consistently and are swayed away by companies that fail to meet the earnings expectations. Due to this, the management teams of every company are motivated to lead the company to shine in terms of sales, profits, and overall revenue generation, which they return to the investors in the form of dividends. This way, stockholders also indirectly affect the company through the stock market.
Types of Stockholder
Common Stockholder
A common stockholder, as the name suggests, is someone who has purchased a common stock of a company. The benefits that are enjoyed by a common stockholder include having the right to vote for members that will be eligible to sit on the board of directors as well as other decisions and actions of the company like buy-back of shares, issuance of new capital shares, etc. Common stockholders receive payments in dividends, the amount of which is based on the profit earned by the company during that period.
Preferred Stockholder
Preferred stockholders receive their payments in dividends before common stockholders, meaning that after the payments have been made to the preferred stockholders, the money that is left is used to pay the common stockholders. However, preferred stockholders do not enjoy the benefit of the company voting rights as compared to a common stockholder. In case of liquidation of the company, preferred stockholders are the first to be paid out, and then only the remaining assets are claimed by the common stockholders. Investors feel more safe and inclined to purchase preferred stock because of the risk of being the last to be paid dividend even if it comes at the cost of having less influence in the company's voting rights.
Majority Interest
Majority interest means a stockholder holding more than 50% of outstanding shares of the company and has a controlling interest in the company. The majority stockholder can be anyone ranging from a person, a company, or an entity such as the government, and the majority stockholder has more voting interest than the combined interest of all the other company’s other stockholders. In most cases, the majority interest stays with the founder of the company or the family of the founder.
Rights of a Stockholder
The stockholder enjoys the following rights:-
- The right to inspect the company’s books and records.
- The power to sue the company for the transgressions committed by its directors and officers.
- The right to vote on important company decisions and matters like the naming of the board of directors and deciding on whether or not to give the green light for potential mergers.
- The entitlement to receive dividends.
- The right to attend meetings, either in person or through conference calls.
- The right to vote on crucial matters through proxy, either through mail-in ballots or online voting platforms if they are unable to be present physically for the voting meetings.
- The right to claim a proportionate allocation of proceeds if a company liquidates its assets. [1]
What is a Stakeholder?
Stakeholders are individuals, groups of individuals, or an entity who are interested in the company for reasons other than the company's stock performances. They do not work directly with the company but can affect or be affected by the operations and performances of the company. Stakeholders include employees of the company, bondholders who own company-issued debts, customers who depend on the company to provide them with goods or services, suppliers who are dependent on the company and see them as a constant source of revenue, members of the community who are impacted by the decisions and actions of the company, and people who partnered with the company for engaging in events promotions, etc. com.
Stakeholders are important as they can have a positive and negative influence on the company, and their support is pivotal for the project of the company to exist. Stakeholders are also permitted to make decisions regarding a company’s expansion, development, and structural changes because they have a personal interest in the company’s growth, and companies rely on them to supply the necessary resources for the company’s operations and goals. As mentioned before, stakeholders can make the company’s decision because their creativity and understanding are paramount in ensuring the success of ongoing and new projects. Stakeholders also provide constant criticism to fix any flaw in the company and create room for creativity by allowing the people to give their opinions regarding the operations.
The International Organization for Standardization's ISO 26000 is a set of international standards for corporate social responsibility, it has offered the following criteria for identifying a stakeholder:
- An organization is legally obligated to stakeholders.
- The stakeholders might be positively or negatively impacted by an organization’s decisions.
- The stakeholders are likely to express concerns and be involved in the activities of an organization.
Types of Stakeholders
Internal Stakeholders
Internal stakeholders are the people within a company whose interest comes from ownership or investment. Employees, boards of directors, donors, and investors are all included as the internal stakeholders of a company. Internal stakeholders are also more often than not mentioned as primary stakeholders or key stakeholders because they have a direct “stake” in the company and play an important role in the company’s or project’s success.
External Stakeholders
Unlike internal stakeholders, external stakeholders are those outside of the company or those who do not belong to the company and are indirectly affected by the outcomes and decisions of the company. External stakeholders include customers, government agencies, suppliers, creditors, and labor unions. They are also referred to as secondary stakeholders because their “stake” in the company is often indirect or does not have a direct relationship with the company.
Stockholder’s Theory vs. Stakeholder’s Theory
According to economist Milton Friedman, this theory states that a company should focus on creating wealth for its stockholders. He claims that decisions regarding social responsibility, like how to treat employees, rest on the shoulders of stockholders rather than the company executives. He claims that since company executives are essentially employees of the stockholders, they are not obligated to any social responsibilities unless the stockholders decide otherwise. [3] The stakeholder theory was introduced by a business professor named Dr. R. Edward Freeman. According to Mr. Freeman, companies should not solely prioritize the stockholders but also focus on creating wealth for their stakeholders. He backs it up by arguing that the relationships between the stakeholder and the company are interconnected.
Main Differences Between Stockholder and Stakeholder in Points
- Stockholders are people who own at least a stock of the company, while a stakeholder is someone who has an interest in a company for reasons other than the company’s stock.
- Stockholders may not have any need for a company in the long term because they are part of the company for as long as they own stock of the company, meaning that they are focused on short-term goals that influence a company’s share prices. Meanwhile, a stakeholder is usually interested in the success of the company, even in the long-term, as they want the company to have success in all areas and to do well overall.
- Stockholders own a part of the company, and the percentage they own is dependent on the amount of stocks they have in the company. Stakeholders, on the other hand, may or may not have an ownership stake in the company.
- Stakeholder is a broader term.
- Stakeholders are more often than not impacted by the company’s daily decisions, while stockholders may or may not be personally impacted by the company’s day-to-day decisions.
- The priority of a stockholder is to usually increase the overall revenue and stock prices of the companies, they want the best return on investment, which is paid in the form of dividends. On the other hand, stakeholder’s focus is not only on the finances of the company but on the success of the company’s projects so that the company can do well overall and also to be treated well.
- Stockholders are partial owners of the company. Stakeholders, apart from business owners, will rarely have any claims of ownership of the company.
- Stockholders may purchase stocks only from public organizations as they seem to benefit the most from those organizations, while stakeholders may benefit from the success of both public and private organizations.
Conclusion
Both stockholders and stakeholders are important and play different roles in the workings of the business, both are present in companies and both have different interests and visions. Stockholders are focused on the short-term profit goals of the organization, while stakeholders make the company’s overall success their first priority and think long-term. With conflicting interests between both stockholders and stakeholders, it is up to the business owners and management to recognize what is the best solutions for the company, be it prioritizing the stockholders who want to impact the company’s stock prices and drastically increase the revenue gains of the company or, to focus on treating the stakeholders, who’s interest is to promote the well-being of the employees and provide customer satisfaction all that while thinking in the best interest of the company for it to succeed in the long run.
References
- A. Hayes, "Shareholder (Stockholder): Definition, Rights, and Types," 30 August 2023. [Online]. Available: https://www.investopedia.com/terms/s/shareholder.asp.
- N. Barney, "Definition Stakeholder," January 2023. [Online]. Available: https://www.techtarget.com/searchcio/definition/stakeholder.
- C. Macneil, "Shareholder vs. stakeholder: What’s the difference?," 27 March 2023. [Online]. Available: https://asana.com/resources/stakeholder-vs-shareholder.
