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Last Updated : Jul 29, 2020 03:03 PM IST | Source: Moneycontrol.com

Explained | Difference between stakeholder & shareholder

A shareholder owns the shares of the company. A stakeholder is a member of group that has interest in the company’s business for multiple reasons apart from just stock performance and can affect or be affected by the business.

Moneycontrol Contributor

Sneha Joshi

Some of us think that the words “stakeholder” and “shareholder” are interchangeable. But the involvement and the investment of a stakeholder and shareholder in a company or business differ greatly. So what exactly is the difference? A shareholder is always a stakeholder, but a stakeholder is not always a shareholder.

A shareholder owns the shares of the company. A stakeholder is a member of a group that has an interest in the company’s business for multiple reasons apart from just stock performance and can affect or be affected by the business. Majority times the stakeholders in the company are investors (shareholders), bondholders, employees, customers and suppliers.

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For years, maximising shareholders value was the sole objective of any business but the scope has broadened in the 21st century. After the celebrated article by Nobel Prize Economist Milton Friedman in 1970, the corporations did everything to enhance and maximise shareholder’s wealth. This capitalist’s mindset has contributed to ruthless businesses, greedy corporations and unfair and unequal policies towards employees, suppliers and customers.

The year 2020 has witnessed the adverse effects of maximising shareholder’s value at any cost. This insane obsession towards only focusing on maximising shareholder’s value has created a compromised and toxic business environment. Trust and ethics have taken a back seat!

A company showcasing exponentially high executive pays, stagnant median income of employees, the allure for short-term profits, declining life expectancy of the product offerings, declining return on assets, and unstable balance sheets have typically lost its way in the maze of maximising shareholder’s value. Today, top businesses around the world have recognised that ditching this sole objective is the only way to remain buoyant and grow in future.

The ex-CEO of General Electric Jack Welch, who earlier supported this sole objective of shareholders capitalism, called it the “Dumbest Idea”. The businesses had forgotten that enhancing shareholder’s value is a result of achieving a business goal, rather than considering it as a goal in itself!

Profit with a purpose is the new motto for top businesses across the globe. A theory of incorporating a wider business framework to assess the company’s performance and impact on all stakeholders dates back to 1950s-60s. Thus, the long-forgotten stakeholder capitalism is now taking the front seat! The rise in the climate crisis, increasing inequality, awareness among the people has added additional strength to this movement towards long term sustainability and stakeholder’s capitalism.

The time is both opportune for new entrants and possibly forcefully for the existing businesses to bring about a fundamental change in the way they carry out businesses.

The reshaping is happening on a global level and the changes in the statement of purpose of corporations are more in favour of stakeholders than just shareholder.

The shareholder’s capitalism has been cent percent a contributor toward economic and capital market growth. The question of why is the need to steer away from this continues to play on everyone’s mind.

The answer has been right in front of us. The rosy lens of profits and gains has just overshadowed the impact this has caused on environment and society, which the future generation has to live with. Being shareholders, we are the majority group among the stakeholders. It is our right, our duty and our obligation towards other stakeholders to put forth the best interest of all stakeholders and ensure that the company adheres to it.

With different socio-economic and political ideologies, it is the investors who can be a bigger push to make the businesses change the narrative from just shareholders to the entire stakeholders. It is not an overnight change, we can make a difference by choosing our investments right. After all, the longevity of businesses and the appreciation of shareholders value are only going to last as long as we protect, preserve and nurture our planet!

As investors, the best way to bring about this change is to start small, identify your priorities and look for a good opportunity. Here are some pragmatic actions to begin with:

Understand the concept of sustainable investing

Sustainable investing is also called socially responsible investing (SRI). Sustainable investing is investing in companies that focus on material aspects of the environment, social and governance (ESG) that have a bearing on the business operations along with the financial growth of the business.

Learn to measure the performance of the company based on ESG actions

Companies disclose reports like sustainability reports, business responsibility report and initiatives regarding ESG in the annual report. Understanding the factors having a material impact of the company’s business and measures taken by the company to mitigate those risks can be a good starting point to measure the company’s long term sustainability.

Identify the issues that you as an investor care about

The issues such as climate change, unfair labour practises, lack of corporate social responsibility, gender inequality in employment, discriminatory compensation practises and so on are real and would continue to thrive forever if no one voices their opinion against it.

Alignment of beliefs and ethics and investment choices

It is important to uphold the beliefs and ethics by taking action! Investors should take a decision of investment in line with the issues they care about, the beliefs they have and the ethics they practise. Just like negative screening, the investor can screen the investment options based on their value system.

Start with a small change to limit the risk

Venturing into a new investment avenue is also a bit out of the usual comfort zone. Hence, it is best to identify the fund or investment that appeals to your investment values and start small to minimise the fear of taking too much risk. The year 2020 has made humans face the situations that no one could have ever imagined before. In the present day, the local and global policymakers, the governments and the best scholars in all the fields have failed to predict and anticipate the risks that have materially altered the lives of humans, perhaps, forever.

It is high time to get serious. It is probably our only chance to write a new chapter of stakeholder capitalism and give some hope to the generations to come. Together we can bring about a change that is holistic and sustainable in the long run. Time to choose what matters the most – Planet, People and Profit – in that order!

Risk Factors: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

The author is Associate Fund Manager – Alternative Investments, Quantum AMC

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Jul 29, 2020 03:03 pm
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