In business, a stakeholder is usually an investor in your company whose actions determine the outcome of your business decisions. Stakeholders don’t have to be equity shareholders. They can also be your employees, who have a stake in your company’s success and incentive for your products to succeed. They can be business partners, who rely on your success to keep the supply chain going. Every business takes a different approach to stakeholders. The roles of stakeholders differ between businesses, dependent on the rules and responsibilities laid out at the founding of your company or as your business evolved over the years. The most common definition of a stakeholder, however, is a large investor that has the clout to hold a viable “stake” in your company.
The most common gathering of stakeholders in a publicly traded company is the board of directors, comprised of high-ranking executives and occasional outsiders who hold large amounts of equity in the company. Any one of these stakeholders has the power to disrupt decisions or introduce new ideas to the company. The board of directors has the power to appoint all levels of senior management – including the CEO – and remove them if necessary. Members of the board dictate the future of the company and are involved in all major business decisions.
While the board of directors is a more “hands off” approach to controlling a company, some stakeholders prefer the “hands on” approach by directly assuming management positions. Stakeholders can take over certain departments – such as human resources or research and development – to micromanage the business and insure success. In privately owned and publicly traded companies, large investors often directly participate in business decisions on the management level.
Stakeholders are regarded as large investors, who will either increase or decrease their stakes in your company according to your financial performance. Ideally, they act as guardian angels for everyday investors, poring over financial reports and pressuring management to change tactics if necessary. Certain stakeholders, known as activist investors, will make wildly unpredictable investments and divestitures in order to move the share price and attract media attention to a certain issue. Carl Icahn is well known for this high pressure tactic, which is used to mold companies more to his liking.
Large stakeholders are generally high profile investors, and would like to steer clear of companies that trample human rights and environmental laws. They monitor your company’s outsourcing activities and globalization initiatives, and may vote against your business decisions if they are deemed harmful to the company’s long-term goals.
Of course, this is only a broad description of stakeholder responsibilities. Ideally, you’ll have stakeholders who care about these four issues, but more often than not, short-term profits take precedence over long-term sustainability. While stakeholders may own your company, it’s easier to control your investors when your company is privately held than publicly traded. Often times, the large influx of cash from a successful IPO turns out to be a deal with the devil when your company is suddenly taken over by a board of directors that ousts you. On the flip side, however, stakeholders can keep your company grounded and focused on its most profitable products and sustain your company’s earnings growth.