Definition of stakeholder
A stakeholder is any person or group that is affected by the activities of a business organisation, e.g. shareholders, suppliers, government, employees, customers and the community. Stakeholders have an interest in the performance of the business. Internal stakeholders are within the organisation, e.g. employees. External stakeholders are outside the business, e.g. the community.
Each stakeholder has its own objectives; by trying to satisfy all the stakeholders, there will be a conflict of objectives because the attainment of the objective of one stakeholder will cause the objective of another group not to be achieved. For example, the community wants an environment that is less polluted while the employees want adequate remuneration and good working conditions. If a firm goes ahead to please either the community or the employees, profits will be reduced.
Shareholder concept versus stakeholder concept
A shareholder has an ownership stake in a company by providing part of its capital. The shareholder concept is a traditional belief that advocates that the primary responsibility of the business is to protect the interests of the shareholders. The management must seek to meet the needs of the shareholders which are more important than the needs of other stakeholders. The business must aim to make enough profit in order to adequately reward the shareholders that finance the organisation. In addition, managers must ensure that shareholders’ investment is protected.
On the other hand, the stakeholder concept advocates that the business organisation must cater to the interests of the other stakeholders apart from the shareholders. The business is a coalition of different stakeholders and it has to sacrifice short-term gains to meet the needs of its various stakeholders. In other words, profit reduces when a business attempts to make all its stakeholders happy. By catering to the interests of the different stakeholders, the long-term survival and profitability of the business are assured. For example, a business that adequately caters for its workers by paying adequate remuneration and providing better working conditions may have its profit reduced in the short term. However, profits, in the long run, would rise as the organisation benefits from the increased productivity of its motivated workforce.
Responsibilities of the business to its stakeholders
| Shareholders | •Achieves good returns on their investment •Pays decent dividend •Renders account of stewardship periodically to shareholders •Creates long-term reserve for expansion •Protects shareholders’ capital by avoiding excessive risk •Avoids corruptive personal enrichment |
| Customers | •Offers value for money by providing quality products •Avoids deceptive advertisements and attends to complaints •Delivers products timely and provides after-sales services |
| Employees | •Pays adequate remuneration that signifies fair pay for a fair day’s work •Provides a safe work environment •Trains and develops employees •Provides opportunity for growth and career advancement •Provides challenging jobs that stimulate interest |
| Suppliers | •Pays promptly for supplies •Supports the research efforts of suppliers •Avoids unhealthy competition |
| Community | •Controls pollution •Supports community development efforts, e.g., sports sponsorship, scholarships, etc. |
| Government | •Pays taxes and levies promptly •Obeys the laws •Creates jobs for the citizens •Supports government development efforts |