Understanding the difference between shareholder and stakeholder

Stakeholder trust is a critical component of company success, as acknowledged by 95% of directors and executives, who consider it their primary responsibility to cultivate and protect it. However, the pursuit of stakeholder satisfaction frequently meets with the primary goal of generating shareholder profit and financial interest.

The importance of corporate governance highlights the difficult balance between increasing shareholder profit and safeguarding the well-being of all stakeholders.

The article examines the complex dynamics of shareholder and stakeholder theories in terms of a company’s success. It also explains the difference between shareholders and stakeholders with examples. 

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What is the stakeholder model (stakeholder theory)? 

The stakeholder model prioritizes how corporate activity affects all identifiable stakeholders of a corporation.

Officers and directors involved in a company following this model must primarily contemplate the various interests of every possible stakeholder throughout its governance process, taking into account stakeholder reporting principles.

So, they need to strategize over matters such as reducing stakeholder interest conflicts. The purview of board directors eclipses the more traditional focus of its corporate managers. They should now be far more concerned with other third parties that could depend upon the corporation in any way, instead of merely profits.

Taking into account stakeholders’ focus and their direct relationship, here are four key principles of the stakeholder model:

1. Long-term sustainability. Focus on long-term success, not just short-term profits.
2. Ethical decision-making. Make decisions that are fair, just, and responsible to all stakeholders in terms of corporate social responsibility.
3. Inclusive governance. Give all stakeholders a voice in decision-making.
4. Balanced approach. Find solutions that work for all stakeholders, even if there are conflicts.

As the infographics below show, there are 2 main types of stakeholders: internal and external. Internal stakeholders are the board’s directors and employees involved in corporate governance. Whereas external stakeholders might be creditors, auditors, customers, suppliers, government agencies, and the surrounding community.

What is the shareholder model (shareholder theory)?

The thought process behind the shareholder model is for a board to center its approach around maximizing profits accruing to its shareholders. Compared to the more socially forward stakeholder model, this more traditional corporate methodology values the fact that people buy shares to earn money. 

These companies operate under the principle that shareholders will sell shares or try to remove the board of directors if the organization does something not associated with profit margins. In general, the shareholder model of corporate governance requires guaranteed annual dividend payment, increased share prices, and other factors involved with making money. 

Corporate managers ethically, in this scenario, must do everything in their power to generate significant value for the owner.

So let’s take a closer look at the three main principles of the shareholder model:

1. Profit maximization. The primary goal of a corporation under the shareholder model is to maximize profits for its shareholders.
2. Residual claimant. Shareholders can claim assets and receive the remaining profits after all other stakeholders have been paid.
3. Market discipline. Shareholders influence corporate decisions by buying and selling shares based on the company’s performance.

Given the principles, the shareholder model prioritizes the interests of shareholders in corporate decision-making in several ways:

• Board composition. The board is composed of shareholder-appointed individuals, ensuring shareholder focus.

• Executive compensation. Incentives align with shareholder interests by tying executive pay to company performance.

• Shareholder activism. Shareholders can express concerns, and take action if management underperforms, including voting against proposals, lawsuits, or board replacement.

Stakeholder model vs shareholder model

The shareholder and stakeholder models represent two divergent approaches to corporate governance, each with its own set of advantages and drawbacks. At their core, they differ in their primary focus: the shareholder model prioritizes maximizing shareholder value, while the stakeholder model advocates for considering the interests of a broader range of groups impacted by the company’s decisions.

As you can see, the shareholder model is highly efficient and focuses on financial returns. However, it has received criticism for its limited reach and potential negative effects. The stakeholder model, on the other hand, offers a broader approach but can be difficult and time-consuming to adopt. Finally, the decision between the shareholder and stakeholder models is difficult, with no one “right” solution. 

However, by understanding the difference between stakeholder and shareholder, companies can make more informed decisions about how to balance the interests of their shareholders with the broader needs of society.

Shareholder model vs stakeholder model in governance

Within corporate governance, the debate between shareholder and stakeholder models centers on power allocation and decision-making priorities. The shareholder model concentrates authority in the boardroom, prioritizing metrics like:

• Short-term profitability
• Creating wealth 
• Shareholder value 

Boards in this model serve as investor conduits, influencing executive compensation and strategic decisions with efficiency and responsiveness. However, critics argue this focus can neglect long-term sustainability and broader societal concerns.

In contrast, the stakeholder model proposes a shift, advocating for diverse board representation that includes not just shareholders: 

• Company’s employees
• Local community
• Business analysts 
• Environmental organizations 

Executives in this model must balance profitability with ESG factors. While this approach promotes inclusivity and broader impact, it may lead to slower decision-making, with compromises that fully satisfy no one.

However, сompanies must balance investor concerns with responsibility to a wider range of stakeholders to find the optimal governance structure.

Shareholder approach vs stakeholder approach in corporate governance

Corporations face a critical decision: prioritize their investors’ expectations or widen their vision to include the requirements of the larger ecosystem in which they operate. This decision is based on two essential approaches: the shareholder and stakeholder models, each of which creates a separate route for business strategy, risk management, and long-term sustainability.

Now, let’s examine how each of the models shapes the three aspects of the company’s operations:

Shareholder dominance: short-term focus, high-ROI strategies

1. Corporate strategy. Driven by maximizing shareholder value and financial returns. Strategic decisions prioritize rapid growth, cost-cutting measures on the company’s debts, and entry into high-potential markets with potentially high returns.
2. Risk management. Primarily focused on mitigating threats to shareholder wealth, such as market downturns, competitor threats, and regulatory changes. Short-term financial risks often overshadow long-term environmental, social, and reputational risks.
3. Long-term sustainability. Viewed as a potential constraint to short-term financial goals. Environmental and social concerns may be addressed only if they directly impact immediate profitability.

Stakeholder inclusivity: broadened perspective, shared value creation

1. Corporate strategy. Considers the needs of all stakeholders, including employees, communities, the environment, and suppliers. Strategic decisions aim to create shared value and build trust with all stakeholders.
2. Risk management. Expands beyond financial risks to encompass a broader spectrum, including ecological risks (resource scarcity, climate change), social risks (labor unrest, community backlash), and ethical risks (supply chain practices, product safety). Proactive management of these diverse risks builds resilience and mitigates long-term threats.
3. Long-term sustainability. Companies invest in renewable energy, responsible sourcing, and employee well-being, recognizing the intrinsic link between sustainability and long-term success.

Real-world examples: shareholder vs stakeholder business

Speaking about real and practical examples, we couldn’t have mentioned the technological giant — Tesla. As we delve into the case, there are both pros and cons, in terms of its operations and corporate approaches.

Tesla’s sustainability path illustrates the delicate relationship between stakeholders and shareholders. Stakeholders, including environmentally concerned customers and regulatory organizations, appreciate Tesla’s zero-emission vehicles and their commitment to carbon reduction. However, concerns about harmful chemical usage and inadequate environmental reporting pose ethical problems, indicating a lack of openness.

On the shareholder side, Tesla’s strong market position and innovative technology attract investors. However, scandals such as labor issues in cobalt mining and poor environmental violations harm Tesla’s brand and could threaten profitability. 

This case study exemplifies the difficulty of combining stakeholder expectations with shareholder objectives in the drive for sustainability. Tesla’s road ahead is to address these issues with true openness and meaningful action, assuring not just a green image, but a truly sustainable future.

Factors to consider: shareholder vs stakeholder model of corporate governance

Choosing the ideal model of corporate governance primarily depends on the people involved as well as what kind of organization is being discussed.

A company selling shoes that only uses recycled, sustainable material would benefit from the stakeholder model. Whereas, a more rigid, corporate company selling accounting software, for instance, would likely prefer the shareholder model.

Each model leads to a different goal, necessitating careful assessment of your values, objectives, and operational environment. Let’s look deeper into examining five major factors:

1. Value focus. Prioritize immediate financial return and high profits or create shared value for all stakeholders, considering long-term impact.
2. Decision-making. For shareholders, quick wins for investors often dominate, but a collaborative, transparent approach can balance stakeholder needs for success.
3. Risk management. Focusing on financial risks, shareholders may overlook other threats. In turn, stakeholders manage a broader spectrum of risks, building resilience.
4. Industry and environment. The shareholder model is best suited for industries focused on rapid growth and high profitability, like tech startups or finance. In contrast, the stakeholder model thrives in sectors reliant on community trust, and long-term sustainability, like renewable energy or ethical brands.
5. Company values and mission. The shareholder approach aligns with corporations prioritizing immediate financial aims and investment rewards. In turn, the stakeholder approach resonates with businesses devoted to social responsibility and delivering shared value alongside profits.  

Leveraging board portals for enhanced stakeholder and shareholder relations

Effective communication and collaboration are crucial for building strong relationships with stakeholders and shareholders. Recognizing the pivotal role of technology in fostering these connections, 80% of global board directors advocate for a digital transformation led by corporate boards. 

This growing appreciation for technology’s significance in boardrooms has fueled a surge in the adoption of board portals. Read more about the digital transformation governance model in our dedicated article. 

Having a centralized platform for communication, collaboration, and decision-making, stakeholders and shareholders can together contribute to the company’s success. Here are more useful board portal tools that Ideals Board offers for the company’s board:

1. Customized solutions for diverse stakeholder needs. Ideals Board is customizable to meet the needs of different stakeholders, ensuring that communication channels are aligned with their preferences.
2. Real-time communication. Ideals Board enables real-time communication and collaboration among board members and stakeholders. They can discuss, ask questions, and give feedback through the platform.
3. Voting and streamlined workflows. Ideals Board simplifies board meetings and voting by offering electronic access to meeting materials and voting on resolutions.
4. Shareholder engagement. Ideals Board provides shareholders with customized access to company information, investor relations materials, and direct engagement with the board and management
5. Secure and centralized document repository. Ideals Board is a secure and centralized platform for all board materials, ensuring easy access to stakeholders and fostering transparency.

Key takeaways

1. The stakeholder model prioritizes all the individuals involved and the shareholder model seeks to maximize shareholder profits.
2. The stakeholder model can be complex and time-consuming, while the shareholder model may neglect social responsibility and long-term sustainability.
3. Choosing the right model depends on priorities. Companies focused solely on short-term financial gain might favor the shareholder model.