In some circles, the person holding a stake is likely a vampire hunter. But in the world of investing, the answer to our title question is more mundane. Stakeholders are the people and groups that affect or are affected by a company's actions.
Who are the stakeholders?
Company stakeholders include shareholders, employees, customers, suppliers, distributors, creditors, communities, and government agencies. Many investors and corporate leaders add the environment to that list as well.
Some stakeholders are internal, and others are external to the organisation. Internal stakeholders, such as employees and shareholders, represent the company directly and have a personal interest in the company's success.
External stakeholders have less direct ties to the company. Suppliers, for example, might make more as the company grows, but they usually also have other sources of revenue and profits. The same is true for distributors and creditors.
Communities also benefit as a company adds new jobs, but the local quality of life is affected by many other factors.
Stakeholders and corporate priorities
Stakeholders play a role in every corporate decision. Employees, leaders, and board members make those decisions, of course. But stakeholder influence goes well beyond that.
Corporate decision-makers routinely consider how the company's actions will affect shareholders, customers, local communities, and others.
One challenge is that the various stakeholder groups can have conflicting needs. Some examples of stakeholder conflict include:
Employees vs. shareholders
An organisation can show higher profits for shareholders by minimising the investment in its workforce. This can take many forms, from salary reductions to a below-market compensation structure.
It can get even darker, too. A 2021 report by The New York Times alleged Amazon.com routinely paid employees less than they'd earned.
Customers vs. shareholders
Customers want a high-quality product, but quality can be expensive, and expenses cut into shareholder profits.
In the 1970s, Ford Motor chose not to repair a faulty gas tank in its Pinto model after crash tests revealed a safety risk.
Why? Because a cost-benefit analysis concluded that settling customer lawsuits would be less expensive than fixing the Pinto. Dozens of people died or were injured by the Pinto's exploding gas tank.
Customers vs. employees
On a more granular level, frontline employees face the potential for conflict with customers every day. A petty disagreement can sometimes spiral into violence. When that happens, the company must pick a side, and the wrong choice could easily damage employee satisfaction and productivity.
In 2019, a brawl between an employee and a customer broke out in a McDonald's restaurant in Florida. The customer was escorted out and arrested on battery charges.
McDonald's subsequently said in a statement that it was cooperating with the police investigation, adding, "Our highest priority is always the safety and well-being of our employees and customers at our restaurants." The statement referenced both stakeholder groups, but employees were noted first.
Stakeholders and corporate decision-making
Understanding how a company prioritises its stakeholders tells you a lot about how the leadership team makes decisions. If shareholders are the priority without exception, then the business may be pursuing profits at all costs. Employees, customers, and local communities could suffer as a result.
Thankfully, corporate decision-making isn't often that black and white. A company can pursue profits while:
- Taking care of its employees
- Producing safe, value-rich products
- Providing decent margins to its suppliers
- Protecting the environment
- Contributing positively to society at large.
Some argue that this balanced approach to stakeholder needs ultimately serves the shareholder better because it's a more sustainable way of doing business. That should translate to improved shareholder returns over the long term. This is the idea behind stakeholder capitalism, a fundamental concept in ESG investing.
You can agree or disagree with that argument — and deploy your money accordingly. Listen to earnings calls and read annual reports to understand a company's approach to stakeholder conflicts. Then decide whether their approach aligns with your own values.
A broader view of stakeholders
Software company Salesforce is a great example of a United States-based company that holds itself accountable to many stakeholders, including "shareholders, customers, employees, partners, the planet and the communities in which we work and live".
The company publishes its annual Stakeholder Impact Report1, outlining its key initiatives in emissions, renewable energy adoption, workforce diversity and development, philanthropy, and data privacy.
The company's perspective on stakeholders heavily influences its programs and initiatives, which go beyond the core task of making money. However, Salesforce does that, too, achieving record revenue, cash flow, and operating margin during the most recent fiscal year.
Frequently Asked Questions
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A stakeholder is an individual or party that has an effect on or is affected by, a company's actions. Stakeholders can be internal to the company, like employees or shareholders, or external, like customers, suppliers, and the local communities in which the company operates.
Stakeholders play a significant role in all corporate decisions -- but their needs can often be conflicting. For example, boosting productivity is excellent for a company's profits (and keeps its shareholders happy), but working your staff to the bone can result in high turnover and reputational damage (just ask Amazon).
Stakeholder capitalism is the idea that companies should address the needs of all stakeholders whenever they make business decisions -- and not simply pursue profit at all costs. Many companies now publish regular Environmental, Social and Corporate Governance (ESG) reports to update the market on how they are helping their local communities and other stakeholder groups.
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There are many different types of stakeholder groups. Which group takes priority or is impacted most significantly depends on the type of corporate decision. However, almost every business decision will likely need to balance the needs of three primary groups: shareholders, employees and customers. Clearly, shareholders are important because they are part owners in the company. Their capital helps finance the business, and they expect to earn a return on their investment, or they'll take their money elsewhere.
Employees are important because they are the lifeblood of the company. A safe and happy workplace increases productivity and attracts high-performing staff. And obviously, customers are important because the company needs to make sales to survive. If the company develops a poor-quality product, people simply won't buy it, and the company will be kaput. A fourth important stakeholder group is the company's suppliers. They provide the raw materials to make the company's products, so keeping them onside is also crucial for success.
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Managing stakeholder relationships is vital for a company's success. These are the groups the company relies on to finance its operations, create and market its products and services, and generate revenues. However, the modern concept of stakeholders extends far beyond just these relationships.
It also includes local community groups who sometimes have unique social, environmental, and ethical concerns. Nowadays, investors and customers often expect large organisations to consider environmental, social and corporate governance impacts when they make their business decisions. This means companies need to put a lot of thought into balancing competing stakeholder interests to attract new investors and improve their brand's reputation.
