Stakeholder vs. Shareholder (Differences and Rights)

By Indeed Editorial Team

Published June 10, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Every company has two major classifications of entities that control it, stakeholders and shareholders. While stakeholders are public entities with a vested interest in the company, shareholders have a more direct relationship. Understanding the differences between stakeholders and shareholders in a company can help you decide the rights accruing to both categories. In this article, we consider stakeholders vs. shareholders, outline the rights of shareholders, and highlight the rights of stakeholders.

Stakeholder vs. shareholder

When considering stakeholders vs. shareholders, some of the differences between them are:

Definition

A shareholder, or stockholder, is an individual, institution, or corporation that owns shares in a company. Shareholders usually own companies through shares. A share or stock is a piece of ownership in a company. Shareholders purchase shares or equities in a company in exchange for their investment in the company. These shares come with a portion of ownership and rights in the company. The major interest of shareholders in a company is the success and profitability of the venture.

A stakeholder is a broad classification that includes all the individuals and entities with a financial interest or otherwise in a company. They're internal or external parties that directly impact the company's growth or failure, goals, and objectives. Internal stakeholders have a direct relationship with the company through ownership, employment, and investment. They include shareholders, central executives, employees, managers, board members, and project coordinators. External stakeholders are individuals who don't have a direct relationship with the company but feel the impact of its actions. These external stakeholders are the host community, customers, vendors, suppliers, contractors, and industry regulators.

Read more: What Is Equity in a Company? (With Definition and Types)

Types

The different types of shareholders are, namely common and preferred shareholders. Common shareholders reserve the right to vote during meetings but receive payments last when a company is undergoing liquidation. In contrast, preferred shareholders get priority over common shareholders in repayments but don't have voting rights. Contrastingly, an example of a stakeholder is a customer who has an indirect interest in a company and its product. Host communities are also stakeholders as these communities directly affect a company's growth and decisions and have a vested interest.

Categorization

Although shareholders are part of a company's stakeholders, not all stakeholders are shareholders. Shareholders generally have ownership rights in a company and can sue its management if they don't discharge their duties dutifully. They also have voting rights and contribute to major decision-making in the company, including selecting board members and key executives. As a result, you may find shareholders in companies limited by shares.

In contrast, you may find stakeholders in sole proprietorships, non-profit organizations, partnerships, and government and non-government organizations. Although these organizations don't have shareholders, they have stakeholders that contribute to their leadership and operations. For instance, the stakeholders in a public university are faculties and their heads, host communities, students, and taxpayers.

Longevity

You can distinguish stakeholders and shareholders by the length of their relationship with the company. Shareholders usually have varying lengths of relationship with the company based on important factors like performance. Most shareholders remain with a company for as long as it meets its expectations regarding high dividend payouts, increasing profits, and high share price. When the company starts to record losses, shareholders start to sell their ownership in the company to minimize their loss. In addition, it's not mandatory for shareholders to give notice when leaving the company or selling off their shares.

Alternatively, stakeholders can't leave the company at short notice as their interest in the company is usually long-term. These stakeholders may be the host community that enjoys the company's corporate social responsibility efforts. They may also be employees who depend on their remuneration, bonuses, and other work benefits as a source of livelihood. In addition, they may be suppliers or vendors who depend on the standing contract or goodwill they have with the company. Finally, the stakeholders are personally vested in the company's success as it profits them in the long run.

Company expectations

Stakeholders and shareholders in a company have different vested interests in a company that determines how they view it. Stakeholders generally look forward to long-term goals such as improved service, better work conditions, and optimized service delivery. While managers and communities expect the company remains in operation, employees expect improved remuneration and welfare packages, job stability, better compensation, and an optimal work environment. Customers generally seek a stable supply of products and services, supportive customer service, and enhanced product service quality.

For shareholders, their major expectations are to increase the value of their ownership in the company. This goal includes increasing stock value and market price, increasing profitability to attract investments, and business expansion to other markets and territories. In addition, shareholders generally expect the company to achieve organic and inorganic growth to increase their holdings and their returns on investment.

Right of shareholders

Some of the rights that are shareholders have in companies include:

  • Right to information: Shareholders generally have the right to access administrative documents and learn of any information that may affect their investment.

  • Right to nominate board members: Depending on the type of shareholders, shareholders can exercise their right to nominate their preferred board member.

  • Right to sue management for violating fiduciary duty: Shareholders in a company can sue the company management if they violate any fiduciary duty, such as failure to give full disclosure.

  • Right to buy and sell shares: A shareholder can decide to buy or sell company shares through legal and recognized processes and exchanges for private or public companies.

  • Right to dissent: The right to dissent ensures that shareholders can sell off their shares if they don't agree with a company's management or corporate governance.

  • Right to vote to elect board members: In addition to nominating board members, shareholders can vote to elect board members based on their credentials.

  • Right to receive dividends from the company's profits: Although the company may not pay dividends regularly, shareholders have the right to receive dividends, especially when they make profits.

  • Right to vote on takeovers, mergers and acquisitions, and general major changes to its rules and operations: When a company wants to make major changes such as a merger, they require shareholders' approval before proceeding.

  • Right to initiate proposals: Shareholders with one percent or more of a company's outstanding shares can initiate matters for discussion and voting during shareholders' meetings.

  • Right to transfer ownership in the company: A shareholder can decide to transfer their ownership in a company to another entity without approval from the company, unless in exceptional circumstances where notice is compulsory.

  • Right to inspect corporate records and financials: Shareholders reserve the right to request full disclosure of financial statements from the company either through shareholder communications or in the public domain.

  • Right to influence changes in governing documentation: For most companies and jurisdictions, shareholders can vote for major changes in the company's governing documents, such as the bye-laws.

  • Right to hold meetings: It's important for companies to hold annual shareholder meetings to brief shareholders on the company's progress and discuss necessary governance actions.

Read more: What Is a Stakeholder, and How Should You Prioritize Them?

Right of stakeholders

While their rights depend on their status, some rights that stakeholders have include:

Lenders

Lenders are individuals or institutions who lend money to companies without necessarily having ownership. Companies raise capital from lenders such as high net worth individuals, banks, and institutional investors like pension and insurance companies. Organizations may also raise capital by issuing bonds to these individuals with the agreement to pay back the capital and interest at the end of the specified bond duration. The major concern of lenders is to receive their money and interest when due. To ensure a seamless lending process, the company issues a bond indenture that outlines lenders' rights.

Some of the rights of lenders include:

  • Right to preference over shareholders: If a company goes bankrupt, an indenture mandates that the bondholders receive their investment before shareholders.

  • Right to revoke other credit lines: Lenders have the right to revoke other credit lines or request outstanding dues if the company violates the covenant terms.

  • Right to request repayment: Bondholders can request a repayment of loans and interest after the expiration of the bond period or sue when the company defaults.

Read more: Debt vs. Equity Financing (With Types and Example)

Customers

Companies owe certain obligations to their customers as they earn their income. A company has the basic obligation to act with integrity and transparency when offering products or services to customers. They also have an obligation to provide effective and responsive customer service and attend to customer complaints.

Some of the rights of customers are:

  • Right to choice of goods and services: Customers reserve the right to choose freely from the available goods and services based on their preferences.

  • Right to complete consumer disclosure: A customer has the right to full consumer education on a particular product or service offering.

  • Right to protection from user hazards: Companies have a general duty of care to customers to prevent them from any hazards while using a product.

  • Right to seek redress: Customers reserve the right to see redress when the company violates or infringes on any of these rights.

  • Right to input in the decision-making process: Although companies aren't mandated to include customers in the core decision-making process, it's good to consider customers when changing product and service offerings.

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