Defining Shareholders and Stakeholders

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Update: While this blog was written when our old consulting company was up and running, we’ve moved on to bigger things. Check out our new watch company to find out how we’re implementing some of the things we’ve written about. 

BP’s response to the oil spill has raised a significant number of questions surrounding the company’s financial responsibility to the gulf disaster. On the one hand, BP has offered daily financial assistance around $100 million to help clean up the oil, with more money on the way for all the thousands of workers and industries impacted by the spill. On the other hand, BP is also beholden to its shareholders. Within BP’s own country alone, roughly 18 million Brits are invested in the company and many through their pensions. This means that as the company’s image continues to tank, so does its stock value, and unfortunately, so do the retirement funds for all those British workers. This begs the question: if you were BP, about which group would you be more concerned?

To answer this question in part (I don’t want to oversimplify what is a complex situation), we can look to BP’s orientation, namely that it is a shareholder-driven company. As new reports, memos, and damning confessionals continue to emerge, it seems BP attempted to gain higher stock values through profit at the expense of safety concerns.   I recognize the risk in discussing hypothetical situations, but I find myself wondering: what if BP had been a stakeholder-oriented company? How would that have affected the oil spill, or if the spill even would have happened?

I ask these questions because BP’s choices reflect an important aspect of large corporations: a company’s decision to organize itself around either its shareholders or stakeholders will drastically affect its business policies, objectives, and actions. Therefore, we need to understand the differences between the two groups.

Shareholder approach (interchangeable with stockholder):

A shareholder is simply an individual, organization, or company that legally own share(s) of stock in a joint-stock company. By owning shares of stock, a company’s shareholders collectively own the company itself and therefore have the right to vote on decisions that affect how the company is run. This usually means the shareholders as part owners will push for company actions that increase their own financial returns.

Definition: A company that uses the shareholder approach to conducting business typically views the impact of business operations on profit. In addition, the length of concern for changes in business operations is usually short-term; such as focusing on meeting quarterly or annual results.

Attributes:

• Shareholders are primarily concerned with the company’s bottom line.
• In a traditional business models, shareholders have the primary influence on the company’s strategy, usually resulting in business model with the foremost objective to increase the company’s stock value.
• In a shareholder business model, a company only addresses the needs and concerns of four parties: investors, employees, suppliers, and customers; with investors and customers receiving the most attention.

Stakeholder approach:

To make an analogy, stakeholder and shareholders are like sparkling white wine and champagne. All champagne is sparkling white wine, but not all sparkling white wine is champagne. Similarly, all shareholders are stakeholders, but not all stakeholders are shareholders.

A stakeholder is anyone that can be affected by a company’s actions, objectives, and policies. This includes both internal stakeholders, such as employees and managers, and external stakeholders, such as shareholders, suppliers, customers, surrounding communities, creditors, the government, to name a few.

The term’s common use came about only after R. Edward Freeman published his book Strategic Management: A Stakeholder Approach in 1984.

Definition: A company that uses the stakeholder approach to conducting business typically views the impact of business operations on a wide range of issues; including, but not limited to: profit, reputation, employees, supplies, customers, shareholders, the environment, and the communities where the company conducts business. The length of concern for changes in business operations is usually short-term and long-term; such as understanding the need to meet business objectives on a quarterly or annual basis, but also appreciating the need to focus on the impact on the company beyond just an annual timeframe.

Attributes:

• Stakeholder-oriented companies are primarily concerned with a company’s triple bottom line
• Whereas shareholders have a legal right to directly affect a company’s policies and actions, the other groups incorporated stakeholders can influence a company indirectly as many stakeholders have no involvement with the company in any financial or legal way.
  • In other words, not all stakeholders are equal nor entitled to the same considerations.
• In a stakeholder business model, a company can address or be influenced by the needs and concerns all people, groups, and places affected by the company (including the same parties that shareholders affect investors, employees, suppliers, and customers).

As successful companies use sustainability and CSR more in frequently, stakeholder-oriented business models will also become more common.