In some circles, the person holding a stake is likely a vampire hunter. But in the world of investing, the answer to our title question is more mundane. Stakeholders are the people and groups that affect or are affected by a company’s actions.
Who are stakeholders?
Company stakeholders include shareholders, employees, customers, suppliers, distributors, creditors, communities, and government agencies. Many investors and corporate leaders add the environment to that list as well.
Some stakeholders are internal, and others are external to the organisation. Internal stakeholders, such as employees and shareholders, represent the company directly and have a personal interest in the company’s success.
External stakeholders have less direct ties to the company. Suppliers, for example, might make more as the company grows, but they usually also have other sources of revenue and profits. The same is true for distributors and creditors. Communities also benefit as a company adds new jobs, but the local quality of life is affected by many other factors.
Stakeholders and corporate priorities
Stakeholders play a role in every corporate decision. Employees, leaders, and board members make those decisions, of course. But stakeholder influence goes well beyond that. Corporate decision-makers routinely consider how the company’s actions will affect shareholders, customers, local communities, and others.
One challenge is that the various stakeholder groups can have conflicting needs. Some examples of stakeholder conflict include:
- Employees vs. shareholders: An organisation can show higher profits for shareholders by minimising the investment in its workforce. This can take many forms, from salary reductions to a below-market compensation structure. It can get even darker, too. A 2020 report by The Sunday Times found evidence of fashion group Boohoo breaching modern slavery laws where employees were being paid well below the legal minimum wage.
- Customers vs. shareholders: Customers want a high-quality product, but quality can be expensive, and expenses cut into shareholder profits. In the 1970s, Ford Motor chose not to repair a faulty gas tank in its Pinto model after crash tests revealed a safety risk. Why? Because a cost-benefit analysis concluded that settling customer lawsuits would be less expensive than fixing the Pinto. Dozens of people died or were injured by the Pinto’s exploding gas tank.
- Customers vs. employees: On a more granular level, frontline employees face the potential for conflict with customers every day. A petty disagreement can sometimes spiral into violence. When that happens, the company must pick a side, and the wrong choice could easily damage employee satisfaction and productivity.
Stakeholders and corporate decision-making
Understanding how a company prioritises its stakeholders tells you a lot about how the leadership team makes decisions. If shareholders are the priority without exception, then the business may be pursuing profits at all costs. Employees, customers, and local communities could suffer as a result.
Thankfully, corporate decision-making isn’t often that black and white. A company can pursue profits while:
- Taking care of its employees
- Producing safe, value-rich products
- Providing decent margins to its suppliers
- Protecting the environment
- Contributing positively to society at large
Some argue that this balanced approach to stakeholder needs ultimately serves the shareholder better because it’s a more sustainable way of doing business. That should translate to improved shareholder returns over the long term. This is the idea behind stakeholder capitalism, a fundamental concept in ESG investing.
You can agree or disagree with that argument — and deploy your money accordingly. Listen to earnings calls and read annual reports to understand a company’s approach to stakeholder conflicts. Then decide whether their approach aligns with your own values.