3.4.3 - Shareholders versus Stakeholders
This lesson explains who internal and external stakeholders are, what different stakeholders want from a business, and why businesses often face tension between a shareholder approach and a stakeholder approach. This matters in exams because high-quality answers do more than list groups: they explain how a decision that helps one stakeholder can create costs, conflict, or risk for another.
Who stakeholders are
Every major business decision affects people inside the firm and people outside it. That is why managers need to know not just what the business wants to achieve, but who will be helped or harmed by each objective and policy.
Stakeholders
People or groups who have an interest in the actions of a business.
Some stakeholders are directly involved in the running of the business, while others influence it from outside through spending, finance, regulation, supply relationships, or public pressure.
| Type | Meaning | Typical examples | Why they matter |
|---|---|---|---|
| Internal stakeholders | Inside the business | Employees, managers, directors, owner-managers | They affect productivity, motivation, service quality and the implementation of strategy |
| External stakeholders | Outside the business | Shareholders in a plc, customers, suppliers, creditors, government, local community, pressure groups representing environmental interests | They provide revenue, finance, resources, legal permission and reputational pressure |
A useful nuance is that owners are not always in the same position. In a small owner-managed business, the owner is usually an internal stakeholder because they work inside the firm. In a large public limited company, most shareholders are external stakeholders because they invest capital but are not involved in daily management. If managers ignore an important external stakeholder such as customers or suppliers, sales or supply reliability may fall, so stakeholder analysis affects performance directly.
What different stakeholders want
Once a business has identified its stakeholders, the next issue is that each group has different objectives. Shareholders are the owners of a company who have risked their capital, so they usually focus on returns from that investment. In practice, this means stronger dividends, which are payments from profit to shareholders, and a higher share price.
Other stakeholders judge success differently. Employees want good pay, job security, safe conditions and fair treatment. Customers want quality products at fair prices. Suppliers want regular orders and prompt payment. Government wants businesses to create jobs, pay tax and follow the law. The local community wants employment and low negative impact. Environmental groups want the business to reduce environmental damage.
If management gives one stakeholder group more of what it wants, another group may receive less. For example, if a business raises wages and improves working conditions, employees benefit, but short-term costs rise. However, better morale can improve productivity and service, which may support profit later. That is why stakeholder objectives often involve trade-offs between short-term and long-term performance.
| Stakeholder | Common objectives |
|---|---|
| Shareholders | Higher dividends and rising share price |
| Employees | Pay, security, good conditions, development |
| Customers | Quality, fair prices, reliable service |
| Suppliers and creditors | Prompt payment, regular business, lower risk |
| Government, community and environment | Compliance, jobs, tax revenue, lower negative impact |
Tesco has to balance several stakeholder objectives at the same time. Customers want low prices, employees want pay and secure work, suppliers want fair treatment, and shareholders want strong profits. A decision to cut prices may help customers and sales volume, but it can also reduce margins unless Tesco improves efficiency elsewhere.
Approaches to influence
The key debate is not whether shareholders matter. They do. The issue is whether business decisions should focus purely on shareholder returns, or whether management should balance the interests of a wider group of stakeholders.
Stakeholder approach
When a business should consider all of its stakeholders in its business decisions/objectives.
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