Classification of Stakeholders For the Company , Organization or Business In stock Exchange

We can classify stakeholders in a listed company in two different ways.

The first is on the basis of their respective roles in the company. On this basis we can say the stakeholders are owners, lenders, employees, business associates and society at large.

Owners:

Owners include all sorts of shareholders like those who do or do not control the company, individuals as well as institutional investors, long term holders as well short term players, those with voting rights and those without them, etc. Owners obviously have greatest of interests in the company. If the company performs well, they get a better return on their investment. If the company’s financial position is strong, their investment is safe. 

Lenders:

Leaders essentially include only those who extend financial advances to the company, rather than credit for services rendered or trade goods supplied. These may be formal financial institutions or individuals (e.g. those who buy bonds, or grant loans through asset management firms). Again, their interest in the company is obvious. A well performing company can continue to pay their interest and a strong company means an assurance of full timely repayment of the debt.

Employees:

Employees include executive directors, senior managers and all others who are on the pay roll of the company. If the company continues to perform well, the employees enjoy job security and career progression.

Business Associates:

Business Associates are company’s suppliers and clients. Suppliers benefit from the company only if the company continues to buy from them, which in turn depends on the financial performance of the company. Again, a weak company may not be able to pay the suppliers in time, adding to their cash flow problems. Clients on the other hand can be assured of getting their supplies from the company only if it continues to operate profitably. A financially weak company may fail to offer adequate credit or carry sufficient stock. Hence, both suppliers and clients of a company have an interest in the well-being of the company.

The Society includes public at large as well as the government. A society can benefit from a company only if the company has a capacity (meaning profitability) to participate in socially desirable activities. A government can collect more taxes from a profitable company.

As seen above, there are different types of stakeholders, each with his their particular interest in the company. But only a few of the stakeholders are in a position to protect their interest in the company while most of the other stakeholders do not have any say in the running of its affairs. Another potent way of classifying stakeholders is on the basis of how much opportunity they have to protect their respective interests. On this basis, stakeholders either have full opportunity, a limited opportunity or relatively no opportunity to protect their interests. Now if we try to list the stakeholders, using both of the above bases of classification in one table, it would appear as shown in Fig.

Every class of stakeholders has its own particular interests. The interest of the owners lies in sustainable growth in the net worth of the company, lenders require security of their investment and assurance of timely interest payments, employees want continued employment at attractive terms, business associates seek opportunities to further their own profits while the society looks up to the company to be a good citizen. 

Quite understandably, the interests of these stakeholders often clash with each other. For example, the interest of owners is often best served by depriving the other stakeholders of their rightful dues. Inadequate salaries to employees, lower prices to suppliers, higher charges to clients, tax avoidance, disregard of social obligations, all contribute to higher profits for the company; in turn leading to higher dividends and higher share value for the shareholders. And then, there is the overall interest of the company which we refer to as the collective interest of all the stakeholders, namely the continued profitable existence of the company.

Decisions made by a company affect all the stakeholders; yet only a few of them have influence on the company’s decision-making process. Now those stakeholders (like controlling shareholders, larger institutional lenders, executive directors, etc.) who have greater influence on the company’s decisions, can ensure the protection of their interests without having sufficient regard for the interests of all the other stakeholders, or for the collective interest of the company. The decision-makers in developing countries like Pakistan are not always likely to stop at mere protection of their narrow interests. They often cross the line and try to fill their own coffers by actually depriving other stakeholders of their rightful dues.

a. the individual interest of each stakeholder is served and protected,

b. the collective interest of all the stakeholders is served and protected,

c. no stakeholder is allowed to expropriate the interest of other stakeholders, and

d. No single stakeholder enjoys a monopoly over the decision making process of a company.

Corporate Governance is that mechanism.