In the world of business, you will find the terms “stockholder” and “stakeholder” used quite often. Some even use these terms interchangeably. There are, however, some key differences between these two that should be noted.
A stockholder is a person who is the owner or holder of stock within a corporation. It would be accurate to call a stockholder a “shareholder.”
A stakeholder is a person who has an interest in a corporation or is affected by the actions taking by the corporation. A stakeholder may be an employee, the family of an employee, the vendors who work with the company, its customers, and even the community where the business operates.
It is possible for a stakeholder to also be a stockholder. Employees who purchase shares with a stock option are one example where both classifications would apply.
What Does It Mean to Be a Stockholder?
Stockholders hold stock in a corporation. They own one or more shares of capital stock in some way. It could be held in a personal portfolio, an IRA, a 401k plan, or some other tax-advantaged savings plan.
Stockholders are considered to be separate from the corporation. That means they have a limited liability as far as the obligations of the company are considered.
There are several ways one can become a stockholder of a corporation. When you own common stock of a company, then you become a “common stockholder.”
Common stockholders are responsible for electing the Board of Directors. They will vote on significant transactions which occur, such as a merger or acquisition. When the company becomes successful, the price of purchasing a single common stock moves upward, which means wealth can be generated.
If you own preferred stock in a corporation, then you become a “preferred stockholder.” In this role, the stockholder will receive a fixed-cash dividend before any common stockholders. In exchange for this advantage, preferred stockholders are forced to forego any financial gains which apply to common stockholders.
Each amount paid by the original stockholder is reported as contributed capital within the equity section for stockholders on the balance sheet of the corporation.
What Does It Mean to Be a Stakeholder?
Stakeholders are any people, groups, or organizations which have a concern or interest in the performance of a corporation. They are affected by the objectives, policies, or actions that the corporation takes over the course of doing business.
Unlike shareholders who have an equity stake in the company based on the percentage of stock they own, stakeholders have unequal shares of interest. Customers are entitled to receive a fair, legal trading practice when they choose to purchase goods and services. They do not receive the same payment considerations that an employee would have.
Creditors who are stakeholders in a company will also be treated with unequal shares of interest. Certain debts that a business may carry hold a priority over other debts. Creditors with allowed administrative expenses under Chapter 11 would have a higher priority for payment of their stake than unsecured claims made by individuals or corporations.
There are also community-wide implications that make everyone around a corporation a potential stakeholder in some way.
Let’s say XYZ Enterprises decides that their line of washing machines is no longer a profitable product to produce. They decide to stop making them altogether to focus on making only dryers instead.
The impact of this decision will cause workers to lose their jobs. Those lost jobs reduce the amount of income a family receives, even if the worker qualifies for unemployment. After all, there is a 1-week waiting period after a layoff occurs before a claim can be made and it is not a full income replacement.
Families have less money to spend, which means other businesses receive lower income levels across the board. Communities begin to lose confidence in their economic viability.
And, if the company is large enough, like the automobile companies during the Great Recession years, the impact could even be felt on a national level.
Why It Is Important to Distinguish the Two Terms
Here is why it is important to separate the terms of “stockholder” and “stakeholder” from one another: a positive outcome for one often becomes a negative outcome for the other.
Let’s use the layoff example here. When workers lose their jobs, it becomes a negative experience for them as a stakeholder. They’re no longer earning a paycheck and forced to find different work.
When the company cuts costs by eliminating workers and unprofitable lines of business, the shareholders may see an increase in value in their stock. Investors have more confidence in the business, which boosts the wealth of each stockholder. It may even boost the dividends they receive.
Now let’s say XYZ Enterprises decides to expand their line of washing machines instead, even though they know that the product isn’t selling well. Not only will the workers keep their job in this scenario, let’s say the company needs to hire 100 more people.
That means more income to families, more discretionary spending, and the local community benefits from the extra money.
It also means that stockholders will likely see the value of their stocks go down. Investors will look at this decision and decide to move away from the company because doing business in an unprofitable area makes no sense at all.
There are times when a positive outcome is achieved for both parties. A recent example of this can be found with Apple stockholders and stakeholders. As the stock has risen in value, more opportunities for stakeholders have been created, helping both groups find more value in their investments.
Both groups are important to the success of any business venture. One holds equity in the company. Both hold a shared interest in its overall success.