are individuals or groups with an interest, or stake, in a firm.
- Internal stakeholders include stockholders and employees at all levels.
- External stakeholders are all other groups, and typically include customers, suppliers, creditors, governments at all levels, unions, local communities, and the general public.
Stakeholders are in a reciprocal relationship with the firm, providing the organization with resources and expecting some benefit in return. Each stakeholder group has a unique relationship with the firm.
- Stockholders provide funds and expect returns.
- Creditors provide funds and expect repayment and interest.
- Employees provide labor, skills, and ideas, and expect income, job satisfaction and security, and good working conditions.
- Customers provide sales revenues and expect products that provide value for money.
- Suppliers provide inputs and expect revenues and dependable buyers.
- Governments provide regulation and expect companies to adhere to the rules.
- Unions provide productive employees and expect income and other benefits for their members.
- Local communities provide local infrastructure and expect companies to behave as responsible citizens.
- The general public provides national infrastructure and expects the company to improve their quality of life.
Companies that neglect to satisfy the needs of one or more important stakeholder groups will find that the stakeholders withdraw their support, damaging the firm. However, a company cannot fully satisfy all of its stakeholders at the same time. To understand stakeholder needs and to develop effective strategies for satisfying those needs, companies use stakeholder impact analysis
- Identify stakeholders.
- Identify stakeholders' interests and concerns.
- As a result, identify what claims stakeholders are likely to make on the organization.
- Identify the stakeholders who are most important to the organization's perspective.
- Identify the resulting strategic challenges.
Most firms identify the three most important stakeholder groups as customers, employees, and stockholders.
The Unique Role of Stockholders
Among stakeholders, stockholders' position is unique because the stockholders are the legal owners of the firm as well as the providers of funds. Their unique position leads to an emphasis on satisfying the needs of this key stakeholder group.
- The money provided by stockholders is called risk capital, because the stockholders are making a risky investment in the firm with no guarantee of returns or even the preservation of their original investment.
- Because of their willingness to assume risk, managers are obliged to reward stockholders by pursuing strategies that maximize returns to them.
- When employees become stockholders too, for example through employee stock ownership plans (ESOPs), the importance of maximizing stockholder return grows.
Profitability, Profit Growth, and Stakeholder Claims
Companies can satisfy stakeholder claims by increasing profitability.
- Managers can best serve the interests of stockholders by increasing profitability. Stockholders receive returns as dividends and as appreciation in share value. Increasing profitability (that can be measured by ROIC) tends to both increase the funds available for dividends and to drive up the value of the stock.
- Managers need to find the right balance between current profitability and profit growth (future profitability).
- Profitability satisfies the claims of several other stakeholder groups, in addition to stockholders. Higher profits generate more funds for paying high salaries and offering more benefits to employees, for satisfying debt obligations to creditors, and for philanthropic activities, which benefit local communities and the general public.
- The cause-and-effect relationship between profitability and satisfying stakeholder claims shows that profitability must be the cause, leading to the ability to satisfy. Once a company is profitable, then it can satisfy stakeholders. In return, satisfied stakeholders provide more generously for the firm, which leads to further increases in profitability. Thus the process is a self-reinforcing cycle.
Not all stakeholder groups are satisfied by high profitability.
- Suppliers want to sell to a profitable company, because it will pay for what it receives. Customers want to buy from a profitable company that will exist long enough to provide customer service and additional sales. However, neither group wants the firm to profit at their expense.
- Governments expect every company to make profits only within the limits set by law. The general public expects companies to profit in a manner consistent with societal expectations.
- Every stakeholder group disapproves of the unfettered pursuit of profit, if it leads to unethical or illegal behavior.