What Are External Stakeholders? (Definition and Types)
Updated April 28, 2023
Many businesses have external and internal stakeholders with unique roles in a company. Both types of stakeholder influence a company's operations, but external stakeholders sometimes have a more indirect connection. Understanding what an external stakeholder is can help you develop and strengthen relationships with them, improving the company's success. In this article, we explain what external stakeholders are, discuss the importance of these stakeholders and the different types there are, and answer frequently asked questions you may have about stakeholders.
What are external stakeholders?
External stakeholders are people or factors that operate outside of the internal affairs of a business but still experience risk based on the business's performance. For example, a creditor is an external stakeholder as the repayment of their loan depends on the success of the business.
These stakeholders can encompass many people and factors that affect how a business operates and that experience the effects of a business's daily operations. Stakeholders typically gain something from the company's products or services and often help hold businesses accountable in their industries. For example, if a production company produces lower-quality items, their customers might complain, return, or boycott the products.
Importance of external stakeholders
These professionals play an important role in the operations of any business. By monitoring business activities, buying products or services, and creating basic expectations, these stakeholders, like customers and government regulations, help ensure a safe, fair market. Stakeholders have a lot of influence over the long-term success of a company.
Different stakeholders can have different needs from the company. For example, a customer may need something completely different from vendors, government regulators, or consultants. A customer might expect a high-quality, affordable product that meets their basic needs, whereas a government regulator might need the company to report production numbers to ensure fair taxation.
Types of external stakeholders
Every business has different stakeholders. Here are a few of the common ones:
Every registered business in the country follows the policies and regulations of certain government regulators, such as Corporations Canada and the Canada Revenue Agency (CRA). Corporations Canada is a federal corporate regulator that administers the laws and regulations Canadians follow when creating and maintaining a corporation. They administer the following laws:
Canada Business Corporations Act
Canada Not-for-profit Corporations Act
Boards of Trade Act
Canada Cooperatives Act
Corporation Canada is a federal regulator, but companies typically also follow provincial and territorial regulations. Another common government regulator is the Canada Revenue Agency. The CRA enforces tax laws that companies adhere to by paying corporate taxes, which are separate from an individual's personal taxes. Every industry typically also has unique regulations businesses follow or the government can fine the company. To avoid this, many companies hire compliance managers that ensure the company and all its employees follow relevant regulations.
Customers are one of the primary stakeholders of a business. The business's activities typically affect the customers before anyone else. If a company provides a great product that customers love, they're creating a positive effect on the stakeholders. This helps build trust with customers and increases the likelihood that customers recommend the brand to friends and family, increasing the company's sales and brand awareness.
When businesses partner with each other, they create an external stakeholder with that partnered business. Each business now depends on the other to provide a product or service and experience the effects of that service. Partnering with another company is also a great way to keep a business accountable and to ensure the quality of the products and services the company produces. Business partnerships can help businesses grow within their industry and create more competition.
Creditors and lenders have an external stake in a business because the repayment of their loans or credit depends on the overall success of the business. If the business is generating enough capital to pay back its loans and keep credit lines open, creditors and lenders make money. Creditors and lenders typically hold a larger external stake in a business because many businesses, especially startups, depend on loans and lines of credit to stay open or to enter the market.
The community around a business is also an external stakeholder because the activities of that business can have a major impact on the community itself. For example, if a company donates to homeless shelters and sponsors food drives, they're creating a positive effect on the community by providing for those in need. The community knows the business cares about more than just a profit and wants to build meaningful relationships with its customers and community members. This is a great way to foster trust and loyalty from current customers and attract new leads.
Media organizations often partner with businesses to expand their reach and influence. This can mean that the media organization is an external stakeholder with the business because, if the business is thriving, it can provide funding and other resources for the media outlet. The connection to the business can also help the media organization grow and create new networking opportunities or build its audience.
Trade unions are made up of employees and contractors who exist outside of the business but still affect its internal operations. Trade unions bargain for better wages, benefits, and working conditions for their skilled tradesmen. This has a positive effect on both the company and the union, which can create better working environments, better pay, and increase the level of quality products or services that a business can produce.
If a company produces or sells goods, they often need a supplier or vendor to offer the necessary materials to create these products. For example, a restaurant may purchase ingredients from multiple suppliers to create the dishes they serve customers. A supplier is an external stakeholder in a business as they affect how the business performs and rely on its success.
If a supplier delivers low-quality products or materials, a business' sales may decrease. This can cause the company to stop doing business with the supplier. This means it's typically in the suppliers' best interest to offer high-quality products and materials so they can build a strong relationship with the business and create regular orders.
Celebrities sometimes partner with their favourite brands to offer sponsorship and market the products to their fan base. A celebrity can be an external stakeholder because they share the success of the business through monetary gain and provide a unique service to the brand. If the company performs well, the celebrity can credit some of their contribution to the company's success and receive compensation for their services.
FAQs about stakeholders
To help you understand what stakeholders are, consider the answers to the following frequently asked questions:
What's the difference between external and internal stakeholders?
To better understand what an external stakeholder is, it's important to know what internal stakeholders are and the difference between the two. Internal stakeholders, or primary stakeholders, are groups or individuals that are involved in a business' operation. They serve the company and ensure it's successful as they can be negatively impacted by an unsuccessful business. Decisions regarding profitability or performance tend to affect internal stakeholders the most. Here are some examples of internal stakeholders:
Employees: The group of people who work for the business.
Business owners: The person or people who own the business.
Board of directors: The group of people who make important decisions that impact the company.
Managers or supervisors: People who manage a team, such as an entire department.
investors: The person or people who invest money into the business for a fair return.
External and internal stakeholders are similar, as they both rely on the success of the business, but the main difference is the impact they have. Internal stakeholders have a direct impact as they work for the company and work hard to make it successful, while external ones have an indirect impact. Another major difference is that an internal stakeholder typically works for the company, but an external stakeholder doesn't.
What's the difference between a stakeholder and a shareholder?
Shareholders own part of a company and are often able to vote on decisions that impact the business. For example, a business owner may ask shareholders to vote on whether they want to merge with another business.
Both shareholders and stakeholders rely on the success of a business, but the main difference is their viewpoints and motivations. Shareholders focus on the company's overall financial health and profitability so the price of the stocks they own increases. Stakeholders focus on the longevity of the business by ensuring the service and products they offer are of the highest quality.
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