Gen up on the importance of stakeholders so you can understand and handle them better
In business, we all answer to someone… whether that's the Board, customers, or your line manager. In this article, you'll learn what stakeholders are, find out about the different types, and look at some examples to give you a better idea of how they can make a difference.
Definition of a stakeholder
In simple terms, a stakeholder is a person or a group with a particular interest in a business or a project. They can either affect or be affected by that business, its operations, and how it performs.
The word "stakeholder" actually originates from horse racing, and was first coined in 1708. A stake-holder was “one with whom bets are deposited when a wager is made.” By the 1960s, it had transformed into “one who has something to gain or lose” (in business, for example) and “one who has an interest in” (something).
Different types of stakeholders
There are stakeholders in all walks of life, not just business. For example, a parent with a child at school is a stakeholder of that educational establishment.
The two main types of stakeholder are:
Normally internal stakeholders, primary stakeholders engage in some sort of financial transaction with the company, such as shareholders, suppliers, creditors, and members of staff. For a typical corporation, the primary stakeholders would be the investors, suppliers, and employees.
These are normally external stakeholders. They might not have a direct economic exchange or interest with the firm, but they can be affected by, or can affect, its actions. They can be activist groups, communities, the government, business support groups, the media, and the public.
What are stakeholders in business?
Those stakeholders that have an interest in a business include any party that's either directly or indirectly related to the operations of a company, including whether it succeeds or fails. The owners of the business are the key stakeholders here, including those who are actively involved owners as well as those with more of a passive ownership - also known as “sleeping partners.”
The most common types of stakeholders in business are:
Customers expect organisations to deliver the products or services that they want
Employees have a stake in the company they work for, contributing to its success
Business owners are responsible for organisational goals as well as financial return and capital
Investors are shareholders who invest in a company in exchange for financial gain, and will receive regular financial updates and voting rights on major decisions
Creditors, like banks and building societies, lend money which is paid back with interest
Suppliers supply raw materials and products to businesses in return for payment which keeps their own company within the black
Communities are interested in businesses that are safe, environmentally healthy, and benefit the local economy - such as through the creation of jobs
The government collects taxes from companies and their staff
Examples of stakeholders
Investors are primary stakeholders, as they're financially impacted by the concerns and performance of a business. Let's channel the TV show Dragon's Den here, where entrepreneurs pitch their idea to a panel of venture capitalists in the hope of securing financial investment from them.
Example: A venture capital firm is keen to invest £3 million in a technology start-up in return for 15% equity and influential input. This firm will be seen as a primary, or internal, stakeholder, of the start-up. This is because the return on the firm's investment depends on how the start-up fares, whether it's a success or a failure.
Communities are external stakeholders without a direct relationship with the organisation, but can be affected by the ongoing operations of a business.
Example: A company exceeds the allowable limit of carbon emissions. The city and its inhabitants are significantly affected by the increased pollution, but have no direct link to the company itself.
The government can have a direct effect on a business without having a clear connection to it.
Example: The government initiates a policy change on carbon emissions and this decision affects the operations of the company, which will have to adjust and change their own policies in order to comply with the new rules.
What is the role of a stakeholder?
Stakeholders are vital in keeping a business afloat. A business relies upon its primary stakeholders to pull together and achieve the targets and objectives of the company as a whole. But customers can change buying habits and suppliers can alter manufacturing and distribution practices, so it pays to keep those on your side if you're running a business.
Secondary stakeholders can indirectly affect the course of a business, such as the government modifying laws or regulations.
Cultivating productive and mutually beneficial relations with both primary and secondary stakeholders is key to building a successful and long-term business.
Issues that might concern stakeholders
A common problem arising for companies that have multiple stakeholders is that the different interests of each stakeholder might not dovetail with each other, and could actually be in direct conflict. The main goal of a business, from a shareholder's point of view, is to maximise profits and increase shareholder value. As staff costs are unavoidable, a company might try to keep these costs down as much as possible, upsetting another group of stakeholders, the workers.
The most effective businesses are able to manage the expectations and interests of all their stakeholders simultaneously.
What's the difference between stakeholders and shareholders?
A shareholder is a type of stakeholder. While stakeholders align to companies due to a vested interest that's normally long-term, a shareholder is different because they have a financial interest but not necessarily a long-term need. They can sell their shares in the business and step away at any time.
Example: A company is performing poorly at a financial level. Vendors in the company's supply chain are suffering, as the company limits production and no longer requires their services. Other stakeholders - the employees - look set to lose their jobs. But the shareholders see the rot setting in and quickly sell their shares to limit losses, so they have no more dealings with the failing company.
Stakeholders are individuals, groups, or entities with an interest in the varying outcomes of an enterprise. They can be internal or external, and range from shareholders and customers to governments and communities.
Show how well you relate to stakeholders by incorporating key words and phrases into your CV, such as “stakeholder management” and “stakeholder engagement.” Still concerned that your CV doesn't stack up in terms of relevance? Get your CV in front of decision makers by improving it with a free review.