What Is a Stakeholder in Finance?

by Chirantan Basu

    Stakeholders are individuals and businesses with direct and indirect interests in businesses and other organizations. The stakeholders for privately-held and publicly-traded businesses include shareholders, employees, customers, suppliers, competitors, community leaders and the media. Although their interests and concerns may not always be the same, all stakeholders want to see businesses in their communities remain financially viable over the long term.

    Stakeholders play different roles in business operations. Board directors and senior management are responsible for strategy and operations, while rank-and-file employees depend on viable businesses for their livelihoods. Customers and suppliers depend on one another, while competitors have to be aware of the product strategies and financial results of their peers. Stock market analysts publish reports for their clients, while the business media report on the implications of corporate announcements for their viewers and readers. Community leaders have an ongoing interest because companies bring jobs and tax revenues to their regions. Environmental groups play a role for energy and mining companies, especially in the regulatory approval process for major resource development projects.

    Stakeholders can influence corporations in different ways. For example, activist shareholders can bring pressure on the boards of underperforming companies to make senior management changes, sell under-utilized assets or consider merger offers with other companies. Working in cooperation with institutional investors, stakeholders can change the board composition at annual general meetings and bring external media pressure to force changes. Investors can pressure companies to return some of their surplus cash through dividends or stock buybacks. Pressure from consumers and activists have persuaded many companies to make socially responsible decisions, such as reducing their carbon footprints and contributing to various community activities.

    Effective stakeholder communications involves timely disclosure and expectation management. Large publicly-traded companies usually have separate investor relations departments, which manage shareholder communications and regulatory filings. Managing expectations involves setting realistic objectives and meeting or exceeding them. Stakeholder communications should be proactive, not reactive. This means getting the bad news out early and explaining clearly how and when management intends to resolve problems.

    The terms "stakeholder" and "shareholder" are sometimes used interchangeably. Shareholders are owners of businesses, while stakeholders include a broader universe of people and organizations with varying interests. There is some debate as to whether management should strive to add shareholder value or stakeholder value. Some say that management should focus only on profit margins, while others suggest a more holistic approach that considers the interests of all stakeholders.

    About the Author

    Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.

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