A stakeholder is a person or group who has an interest — vested or otherwise — in an enterprise and whose support is required in order for an enterprise to be successful.
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The term stakeholder has its roots in horse racing. A stake race is one in which the prize money is derived from the entry fees that horse owners pay to enter the race. The entry fee is called a stake, a synonym for risk. The person or entity that takes care of the entry fees until the prize money is awarded is called the stakeholder. Traditionally, the stakeholder has no financial interest in the outcome of the race.
Stake races are still popular today, and over the years, the terms stake and stakeholder have been applied to many other types of speculation — including the stock market. In their 1983 article, “Stockholders and Stakeholders: A New Perspective on Corporate Governance,” R. Edward Freeman and David L. Reed proposed that in order for a business to succeed, it must create value for the owners (the stockholders), as well as for those people who do not have a direct financial interest in the company’s success, but without their help, the business could not exist (the stakeholders). The job of the entrepreneur is to find out who the stakeholders are and determine where their interests intersect with those of the stockholders.
Types of stakeholders
Stakeholders can be internal or external to the business. Internal stakeholders are those within a company whose interest stems from direct employment, ownership or investment. Internal stakeholders include employees, managers, board members, donors and investors. These entities are also referred to as primary stakeholders, because they have a direct stake in the company’s success.
External stakeholders are those outside of a company who are indirectly affected by said company’s decisions and outcomes. External stakeholders include customers, suppliers, government agencies, creditors, labor unions and community groups. These entities are also referred to as secondary stakeholders, because their stake in the company is often more representational than direct.
More potential stakeholders
Stakeholders exist across industries. As detailed above, corporate stakeholders can affect or be affected by a company’s business decisions. In healthcare, stakeholders are those who have a direct interest in healthcare services and decisions. These include medical professionals, healthcare providers, governing bodies, nonprofit organizations and patients. In terms of legal processes, a stakeholder, under the law, is an individual or group who is in temporary possession of money or property while the owner is being determined in court.
Prioritize and support your stakeholders
Both internal and external stakeholders need to be considered when conducting stakeholder analysis and making business decisions. Stakeholder analysis is the process of weighing the demands and influence of stakeholders, then ranking which ones are most likely to influence or be influenced by the company’s actions. This information is then used to make more balanced and effective business decisions. Stakeholder analysis is a central part of stakeholder management, which is a process that studies the varying motives and concerns of stakeholders in order to cultivate positive relationships.
In his 1984 book, Strategic Management: A Stakeholder Approach, Freeman emphasized the idea that a business is a system that’s built on relationships, and no one part of the system can be viewed as an isolated entity. Freeman’s stakeholder theory, an organizational and relationship-based management model, is often credited with helping to raise social consciousness in business about the value of treating stakeholders ethically.