Shareholders versus stakeholders

Introduction: Who Really Matters to a Business?

Welcome to one of the most important debates in the business world! When a company makes a big decision, like opening a new factory or raising prices, who should they think about first? Is it the owners who want to make a profit, or is it everyone else affected by the business, like the workers and the local community? In this chapter, we will explore the tug-of-war between shareholders and stakeholders and how this influences every decision a business makes.

1. Internal and External Stakeholders

First, let’s get our definitions straight. Don’t worry if you get "stakeholder" and "shareholder" mixed up—they sound similar, but they are very different!

A stakeholder is any individual or group that has an interest in, or is affected by, the activities of a business. We can split them into two groups:

Internal Stakeholders

These are people inside the business. Their daily lives are directly tied to how the business performs.

• Employees: They want job security and good wages.
• Managers: They want bonuses and career progression.
• Owners/Shareholders: They want the business to be successful so they get a return on their investment.

External Stakeholders

These are people or groups outside the business who are still impacted by its actions.

• Customers: They want high-quality products at fair prices.
• Suppliers: They want to be paid on time and have regular orders.
• The Local Community: They want jobs and a clean environment (no noise or pollution).
• The Government: They want the business to pay the correct amount of tax and follow the law.

Quick Review Box:
Shareholders are always stakeholders (because they own part of the business), but stakeholders are not always shareholders (a customer doesn't necessarily own shares!).

Memory Aid: Think of a Stake as a "claim." If you have a stake in something, you have a claim or an interest in it. If you have a Share, you actually own a piece of the "profit pie."

2. Stakeholder Objectives

Every stakeholder wants something different. This is where things get complicated for business leaders!

Common Objectives:

• Shareholders: Focus on dividends (a share of the profit) and share price growth.
• Employees: Focus on wages, working conditions, and job security.
• Customers: Focus on value for money and customer service.
• Suppliers: Focus on liquidity (being paid quickly) and long-term contracts.
• Community: Focus on social responsibility and local jobs.

Did you know?
A business that ignores its suppliers might find itself with no raw materials to make its products. A business that ignores its customers won't have any revenue! This is why managing these objectives is a balancing act.

3. Shareholder vs. Stakeholder Influences

When making strategic decisions (long-term plans), a business usually follows one of two main "philosophies":

The Shareholder Approach (Shareholder Primacy)

This approach argues that the primary duty of a business is to its owners. The main goal is profit maximisation. Example: A company might decide to close a UK factory and move production to a cheaper country to save money and increase dividends for shareholders.

The Stakeholder Approach

This approach suggests that a business should consider the needs of all stakeholders, not just the owners. It focuses on long-term sustainability and Corporate Social Responsibility (CSR). Example: A company might choose to pay its staff the "Real Living Wage," even if it reduces short-term profits, because it leads to happier, more productive workers.

Key Difference Summary:
Shareholder Approach: Focuses on "What's in it for the owners?"
Stakeholder Approach: Focuses on "How does this affect everyone involved?"

4. The Potential for Conflict

It is almost impossible to keep every stakeholder happy at the same time. This leads to stakeholder conflict.

Classic Conflict Examples:

• Profit vs. Wages: If a business pays employees more (making them happy), costs go up and profits go down (making shareholders unhappy).
• Growth vs. Local Community: If a business builds a massive new warehouse (creating jobs and growth), the local residents might complain about increased traffic and noise.
• Quality vs. Price: Customers want the best quality for the lowest price, but high quality usually costs more to produce, which could squeeze profit margins.

Step-by-Step Explanation of a Conflict:
1. A business decides to cut costs to increase its operating profit margin.
2. It decides to switch to a cheaper, less ethical supplier.
3. Shareholders are happy because profits might rise.
4. Customers might be unhappy if quality drops.
5. Pressure Groups might protest against the business for using unethical suppliers, damaging the brand's reputation.

Common Mistake to Avoid:
Don't assume that shareholders only care about money. Some "ethical investors" only buy shares in companies that follow the stakeholder approach!

Key Takeaways for Section 3.4.3

• Internal stakeholders are inside the business (employees, managers); external stakeholders are outside (customers, government).
• The shareholder approach prioritises profit and returns to owners.
• The stakeholder approach balances the needs of all groups affected by the business.
• Conflicts occur because different groups have different (and often opposite) objectives.
• Decisions are often a trade-off between short-term profit and long-term reputation.

Don't worry if this seems tricky at first! Just remember: Business is about people. Every time a business moves, someone gains and someone might lose. Your job is to identify who those people are!