BUS101: Introduction to Business

A stakeholder is any group or individual who can affect or who is affected by achievement of a group's objectives.

Learning Objectives

• Understand the responsibilities of stakeholders
• Compare and contrast stakeholders and shareholders

Key Points

• The stockholders are the owners of the company, and the firm has a binding fiduciary duty to put their needs first to increase value for them.
• Stakeholder theory argues that there are other parties involved, including governmental bodies, political groups, trade associations, trade unions, communities, associated corporations, prospective employees, prospective customers, and the public at large.
• In some scenarios, even competitors are included as stakeholders.
• Stakeholders believe that an organization should strive to achieve satisfaction among all parties involved, as opposed to solely pursuing the highest profit.
• In some scenarios, even competitors are included as stakeholders.

Terms

• fiduciary duty

  A legal or ethical relationship of confidence or trust between two or more parties. Typically, a fiduciary prudently takes care of money for another person.

• stockholder

  One who owns stock.

• stakeholder

  A person or organization with a legitimate interest in a given situation, action, or enterprise.

Examples

• In the case of a professional landlord undertaking the refurbishment of some rented housing that is occupied while the work is being carried out, key stakeholders would be the residents, neighbors (for whom the work is a nuisance), and the tenancy management team and housing maintenance team employed by the landlord. Other stakeholders would be funders and the design and construction teams.
• In the case of a professional landlord undertaking the refurbishment of some rented housing that is occupied while the work is being carried out, key stakeholders would be the residents, neighbors (for whom the work is a nuisance), and the tenancy management team and housing maintenance team employed by the landlord. Other stakeholders would be funders and the design and construction team.

What is a Stakeholder?

A stakeholder is an individual or group with an interest in an entity's or organization's ability to deliver intended results while maintaining viability of the product and/or service. The stakeholder concept was first used in a 1963 internal memorandum at the Stanford Research Institute. It defined stakeholders as "those groups without whose support the organization would cease to exist".

Stakeholders
This diagram shows the typical stakeholders of a company.

In the traditional view of the firm, the stockholders are the owners of the company, and the firm has a binding fiduciary duty to put their needs first and to increase value. In older input-output models of the corporation, the firm converts the inputs of investors, employees, and suppliers into salable outputs which customers buy, thereby returning some capital benefit to the firm. By this model, firms only address the needs and wishes of those four parties: Investors, employees, suppliers, and customers. However, stakeholder theory argues that there are other parties involved, including governmental bodies, political groups, trade associations, trade unions, communities, associated corporations, prospective employees, prospective customers, and the public at large. Sometimes even competitors are counted as stakeholders.

Types of Stakeholders

Market stakeholders (sometimes called "primary stakeholders") are those that engage in economic transactions with the business. Examples of primary stakeholders could be customers, suppliers, creditors or employees. Non-market stakeholders (sometimes called "secondary stakeholders") are those who generally do not engage in direct economic exchange with the business, but are affected by or can affect its actions. Examples of non-market stakeholders include the general public, communities, activist groups, business support groups, or the media.

Stakeholders, Profit and Corporate Responsibility

Stakeholders, as opposed to shareholders, tend to focus on corporate responsibility over corporate profitability. Stakeholders believe that an organization should strive to achieve satisfaction among all parties involved, as opposed to solely pursuing the highest profit. An organization is a coalition between all stakeholders and exists to increase the common wealth of all parties.

In the field of corporate governance and corporate responsibility, a major debate is ongoing about whether the firm or company should be managed for stakeholders, stockholders (called "shareholders"), or customers. Proponents in favor of stakeholders may base their arguments on the following four key assertions:

1. Value can best be created by trying to maximize joint outcomes. For instance, by simultaneously addressing customer wishes in addition to employee and stockholder interests, both of the latter two groups also benefit from increased sales.
2. Supporters also take issue with the preeminent role given to stockholders by many business thinkers, especially in the past. The argument is that debt holders, employees, and suppliers also make contributions and take risks in creating a successful firm.
3. These normative arguments would matter little if stockholders had complete control in guiding the firm. However, many believe that due to certain kinds of board of directors' structures, top managers like CEOs are mostly in control of the firm.
4. The greatest value of a company is its image and brand. By attempting to fulfill the needs and wants of many different people ranging from the local population and customers to their own employees and owners, companies can prevent damage to their image and brand, prevent losing large amounts of sales, avoid having disgruntled customers, and prevent costly legal expenses. While the stakeholder view has an increased cost, many firms have decided that the concept improves their image, increases sales, reduces the risks of liability for corporate negligence, and makes them less likely to be targeted by pressure groups, campaigning groups and NGOs (non-governmental organizations).