Business Stakeholders: Meaning, Importance, Examples - Penpoin

Business Stakeholders: Meaning, Importance, Examples

You are here:Business Stakeholders: Meaning, Importance, Examples

What’s it: Stakeholders mean all parties who have a direct or indirect interest in a company. A company’s actions, decisions, or performance can affect them. But, on the other side, their interest in the company also influences its strategy, decisions, and operations.

Examples include employees, management, shareholders, customers, suppliers, governments, creditors, local communities, and special interest groups. They may be affected by the company’s operating activities, such as local communities. They may be interested in the company’s profits, such as employees, management, and shareholders. Or, they have a claim on the assets and income of the company like creditors.

Each stakeholder’s interests are not always aligned and often even contradictory. That then gives rise to a conflict of interest.

What is stakeholder theory?

In stakeholder theory, companies should not only focus on responsibilities to shareholders. They must also respect all stakeholders and their interests in the business.

Many parties have an interest in the business, not just the shareholders. Each makes a specific and strategic contribution to the company’s success. But, on the other side, they expect their interests to be met by the company.

Why are stakeholders important to business?

Stakeholders can affect the success of a company. They also have an interest in delivering the desired results. In other words, they are affected by the company’s actions and affect the company’s success.

Each stakeholder has varying influences. Who they are and how significant influence they have can depend on the company’s industry. Some affect the company directly and others indirectly.

For example, customers have different interests from suppliers even though they affect the company directly. For example, customers are interested in price and product quality. Meanwhile, suppliers are concerned with timely payments and continuous purchases.

Likewise, employees have different interests than shareholders. For example, employees have an interest in job security, pay, and working conditions. Meanwhile, shareholders are interested in profits, good governance, dividend payments, and share price.

The industry where a company operates also has implications for how strong stakeholder influence is. Take, for example, the government’s interest in banks and clothing companies. The government strictly regulates the banking industry because it has a significant impact on the economy. However, it is relatively low for the clothing industry.

The higher the influence of the stakeholders, the greater the company’s dependence on them. For example, shareholders. When they own a majority of the shares, it becomes increasingly difficult to make decisions without being influenced by the shareholders’ wishes.

Stakeholder contribution to the company

As I mentioned earlier, each stakeholder has influence and contribution. For example, a company makes money by selling products to customers. With this money, they can buy raw materials and capital goods from suppliers and pay wages to employees.

In addition, the company uses the money from sales to pay creditors on time. Then, the remaining money can be distributed to shareholders as dividends and held as future capital (retained earnings).

Sometimes, the money from the sale is not enough to sustain future growth. So then, the company collects funds from investors (both stock investors and debt investors) by issuing shares or debt securities. With these funds, it can buy capital goods, build new factories, or acquire other companies. As a result, its business size and operation scale increase.

For details on each stakeholder contribution, I will outline them below.

What are some examples of stakeholders?

Let’s describe how strategic stakeholders are for the company. Then, I will try to describe each interest in the company and how it affects them.

Customer

Customers need products to meet their needs. They can be individual customers, business customers, or other organizations. They buy products for final consumption or for further processing.

Customers are key stakeholders in addition to employees, shareholders, government, and suppliers. They bring money to the company by buying products, which they can then use to pay suppliers, employees, and creditors. So, without them, the company cannot make money.

On the other hand, customers want the money they give up commensurate with their value from consuming the product. So they have an interest in price and product quality. They also like getting good customer service. Another aspect is ethical products as they are increasingly environmentally and socially aware.

Supplier

Suppliers sell the input to the company. It can be raw materials, capital goods, semi-finished goods, and goods and services for daily operations. They can influence a company’s operations through price, quality, and delivery schedules of inputs.

On the other hand, they want the company to pay on time, as agreed. They also like the company to order more frequently and in large volumes. In addition, they are also trying to maintain a good long-term relationship with the company to secure demand.

Furthermore, the suppliers’ bargaining power affects the company’s profits. If they have strong bargaining power, they can negotiate favorable terms to them, which can be detrimental to the company. For example, they can sell less quality inputs at higher prices. On the other side, the company may be forced to buy them due to weak bargaining power and not having alternative suppliers.

Shareholders

Owners or shareholders can refer to the party who founded the company in the first place. In other cases, the shareholders may not be the founders. Instead, they may acquire the company from the founder.

When companies issue their shares on the stock exchange, stock investors are also shareholders, although often, their holdings are relatively small compared to the total outstanding shares. Moreover, they can be individuals or institutions. So, for example, when you buy stock in a company, you are a shareholder of that company.

Shareholders provide risk capital to the company. When buying company shares on the stock exchange, they face the risk of the company’s share price falling. As a result, they make no profit or even find it difficult to break even.

Then, specifically, the founder takes the risk by launching the business, expecting to make a profit in return. They may also have to spend their own money as business start-up capital.

Shareholders expect the company to maximize their return on investment. Their two sources of income: dividends and capital gains. The latter applies to public companies, where stock investors can sell company shares higher than the purchase price.

They are interested in its operating and financial performance because it affects the dividends and capital gains. For this reason, they may intervene in the business using their decision-making power. For example, they can replace underperforming directors with other ones, which is more likely to improve performance.

Creditors

Creditors refer to parties who provide loans to the company. They could be banks or debt securities investors. They are willing to lend money if the company can pay the debt plus interest on time. If the company fails to pay, creditors might file for bankruptcy against the company in court. So, the company must have sufficient cash flow to pay debts.

On the other hand, companies need loans to operate and grow the business. Some loans are used as working capital and to finance day-to-day operations. Others are used as capital to support business expansion.

Creditors pay attention to the company’s financial condition, including the company’s liquidity and solvency. They also use credit ratings to determine a company’s default rate. But, on the other hand, they also like companies applying for new contracts for loans as long as they can afford to pay them back.

Employee

In this discussion, I refer to employees as staff or those who occupy positions within the management level. In general, they pay attention to salary levels, benefits, job security, respect, recognition, and a supportive work environment.

Staff work under the direction of the manager. They are not in a position to make a decision.
Management has the power to make decisions. This position has responsibility for planning, organizing, leading, and controlling company resources. And, it spans multiple layers, including directors, middle-level managers, and lower-level managers.

Employees provide time, effort, and skills. As compensation, they want a commensurate salary and benefits. In addition, they also demand job satisfaction, job security, and good working conditions. Promotion and training, and development programs are their other concern.

For companies, high salaries create high operating costs, reducing company profits. Shareholders also don’t like it because it reduces the money they could potentially receive from dividends. Likewise, high labor costs also reduce the company’s ability to pay debts, so creditors do not like it either.

Furthermore, although their interests in the company are relatively the same as those of staff, managers have significant influence. They set goals, design strategies and tactics, create action plans and allocate company resources. Thus, the company’s performance depends on the quality of their work and their decisions.

Labor union

Through labor unions, companies can access the required qualified workforce more easily. As a result, they help provide companies with productive employees.

On the other hand, labor unions want their members to be compensated according to their contribution to the company. They strengthen the bargaining position of workers in negotiations related to, for example, salaries. They protect workers’ interests, provide job security, protect workers from unfair dismissal, and provide them with legal support and services.

Competitor

Competitors aim to outperform the company to make more money. They serve the same customer needs as the company. They are happy when the company fails. Their strategy affects the company’s success.

Companies and competitors pay attention to the fair and legal competition. As a result, they try to avoid legal consequences as a result of anti-competitive practices. In other cases, they may also cooperate – known as coopetition – as long as it is not against the law.

Public

Companies cannot operate entirely through automation, relying on robots and computers. Instead, they need humans as input. How high they depend on the workforce, it varies between businesses. Labor-intensive businesses rely on more human labor than capital-intensive businesses.

Local communities and the general public supply labor to companies. When people are highly educated and skilled, they supply a quality workforce, affecting many aspects of business, such as productivity, efficiency, and innovation.

Local communities and the general public are interested in employment, environmental protection, privacy protection, safe products, price, quality, and various products. For example, they expect the company to provide employment and not generate negative externalities. They also want companies to set prices fairly and protect their privacy, such as not commercializing personal data.

Government

Governments are interested in business performance, decisions and operations as they affect tax revenues, public welfare, and environmental sustainability. They want businesses to pay taxes, comply with laws and regulations, adopt justifiable employment practices, have honest reporting, legality, generate no negative externalities, and practice fair competition. In addition, they are also concerned with the welfare of society, including those related to employment and income, which are affected by business activities.

The government influences the company through the regulations and policies it makes. Labor regulations, product safety, antitrust laws, and environmental requirements are examples. Minimum wage policies, subsidies, and taxation also affect business activities. In addition, the government bureaucracy also impacts the ease of doing business and regulatory costs.

Non-compliance with government regulations and policies can hurt the company, such as fines and other legal consequences, even operating licenses revoked.

Furthermore, companies also need some services from the government, for example, through infrastructure and education. For example, companies use highways for the smooth delivery of goods and raw materials. Smoother logistics allows for lower transportation costs. Indeed, the company might be able to build a road, but that would be too expensive. Long story short, infrastructure development by the government contributes to the company’s operations.

Furthermore, through a good education system, companies can recruit qualified workers. The government also provides skills centers and produces people who are ready to work. And, ultimately, qualified human resources make an important contribution to the company’s innovation and competitive advantage.

Pressure group

Pressure groups try to influence company policies and practices for a specific purpose. For example, they want companies to be socially and environmentally responsible. Then, they may lobby the government to change policies or practices at a company, for example, by issuing petitions or lobbying members of parliament.

What are the classifications of stakeholders?

Here, I will discuss how the above stakeholders are categorized. In general, we can classify stakeholders into several types:

Internal stakeholders vs. external – whether they are inside or outside the company organization.
Primary stakeholders vs. secondary – how they affect the company, whether directly or indirectly.
Product market stakeholders vs. capital market vs. organization – in which aspects of the business they affect the company.

Internal stakeholders vs. external

Internal stakeholders are inside a company. Their interest in the company comes through direct relationships, such as ownership and employment. Their income or employment depends on the company’s performance. So, the success of the company brings them more prosperity and job security. On the other hand, they affect the company’s performance because they work and influence its decisions. They include:

Staff
Supervisor
Lower-level manager
Mid-level manager
Company executive
Shareholders

Meanwhile, external stakeholders are outside the organization. Those who do not directly work in or own shares in the company. However, they influence and are affected by the actions and performance of the company.

Examples of external stakeholders are:

Supplier
Customer
Government
Bank
Bondholders
Labor union
Local community
General public
Pressure group
Non-government regulator
Self-Regulatory Organizations such as stock exchange
Competitor
Media
Insurance company
Research center
Business association

External stakeholder relationships with companies are slightly more difficult to identify and more complex. That’s because it involves many parties with different interests. Take the government, for example. It refers to the national government and local governments, central banks, and many institutions under the government.

Primary vs. secondary stakeholders

Primary stakeholders influence and are affected by the company directly and engage in economic transactions with the company. Therefore, in dealing with and building long-term relationships, the company places them at the highest priority.

Typical primary stakeholders are:

Customer
Supplier
Employee
Shareholders
Creditor
Other business partners such as insurance

Secondary stakeholders do not have an economic exchange relationship with the company but have influence and are influenced by the company. As a result, companies might place them at a lower priority for consideration than primary stakeholders.

Examples of secondary stakeholders are:

Competitor
Media
Pressure group
General public
Government
Regulator
Political group

Furthermore, classifying stakeholders as primary and secondary can differ greatly between industries. Take banking, for example. Regulators and governments may fall into the primary category because this industry is highly regulated. As a result, their non-compliance with the rules can have serious consequences.

Product market vs. organizational vs. capital market stakeholders

Product market stakeholders influence or are affected by the company’s offerings. They include:

Supplier
Customer
Local community
Government

Organizational stakeholders have an interest in the company’s performance and are directly influenced by company practices. Examples are:

Staff
Director
Manager

Capital market stakeholders provide funds or access to the capital market. They include:

Stock investors
Bond investors
Stock exchange

How do stakeholder conflicts arise, and how are they resolved?

Stakeholder conflicts occur due to a misunderstanding of interests between stakeholders. Each has different interests and motives, which are often contradictory. As a result, it often creates problems in decision-making.

The following are examples of conflicts of interest among stakeholders:

Wages. Employees and management like it when they get a high salary. On the other hand, shareholders do not like it because it reduces the share of profits (dividends) distributed by the company to them.
Production location. The business decision to move production overseas favored shareholders as it made operations more efficient. However, because it reduces job creation, the government does not like it. Likewise, staff doesn’t like it because they might have to lose their jobs.
Product. Management and shareholders are interested in reducing quality and increasing prices because it increases company profits. On the other hand, customers want cheaper and higher-quality products.

Such conflicts require companies to make priorities. They must manage conflicts and deal fairly with stakeholder interests and expectations. Before setting priorities, they must also analyze who the company’s stakeholders are and how strategically their influence is.

Stakeholder analysis

Stakeholder analysis is useful for identifying and evaluating company stakeholders. It helps to map out how strategic each stakeholder is for the company. It is important to assist management in prioritizing policies and strategies for dealing with them.

A stakeholder priority matrix or sometimes referred to as a stakeholder map, is a tool for evaluating. It categorizes stakeholders based on how strategic they are to the company. It is measured by their interest in the company and their power to influence the company. Companies should prioritize those who are strategic to the company’s success and significantly affect the company.

Stakeholder maps

Managing stakeholders

Through stakeholder management, the company strives to deal fairly with stakeholders and optimally accommodate their interests to maintain good long-term relationships. That requires the above stakeholder analysis. Companies identify their stakeholders, identify their interests, determine their significance, set priorities, and manage relationships with them.

Several solutions are useful for dealing with multiple stakeholder conflicts, including:

Arbitration. It is a solution to resolve industrial disputes between employees (through trade unions) and management by presenting an independent third party. The arbitrator has no interest in the parties to the conflict and is impartial in making binding decisions in resolving the dispute.

Employee participation. Improved communication, decision-making, and motivation are other ways to reduce the potential for conflict between employees and management.

Profit-sharing scheme. The company shares profits not only with shareholders but also with employees and management. Thus, it reduces jealousy among employees and management because they get less pay for their entire effort to maximize profits.

Share-ownership schemes. The company offers to employees and management to become shareholders of the company. It motivates them to work harder, which leads to an increase in existing shareholder value.