Corporate stakeholders and their interests

Who has a stake in a company?

A stakeholder is any individual or group with a vested interest in a company. These groups depend on the company, and the company depends on them. Their goals often conflict, and an analyst has to include their actions in a view of the company’s performance and risk.

Companyeveryone with a vested interest

• Investors Memorize provide capital
  • Shareholders Memorize residual claim; vote
  • Private debtholders Use it banks, lessors
  • Bondholders Use it public debt
• Inside the company Use it run and staff it
  • Board of directors Use it oversees management
  • Managers Use it set and execute strategy
  • Employees Use it human capital
• Outside the company Use it trade with it or regulate it
  • Customers Use it value, quality, safety
  • Suppliers Use it timely payment
  • Governments Use it taxes and rules
  • Society and the environment Know the idea affected by products and processes

Stakeholder	Main interest	Note
Shareholders	residual value, control	elect the board; vote on major matters
Private lenders (banks, lessors)	repayment; protection	hold to maturity; access to management and non-public information
Bondholders	repayment	rely on public information; little influence except in restructuring
Board of directors	oversee management for shareholders	inside and independent directors; duties of care and loyalty
Managers	pay, career, job security	pay mixes salary, bonus and shares
Employees	pay, benefits, safety, development, job security	may own shares through plans
Customers	value, quality, safety, service	growing focus on products’ social and environmental impact
Suppliers	timely payment; long-term relationship	often short-term creditors
Governments	taxes, compliance, employment, economic well-being	set and enforce rules

Shareholder theory or stakeholder theory?

In a typical company, shareholders elect the board and the board hires the managers to serve the shareholders. The shareholder theory of corporate governance says other groups matter only to the extent they affect shareholder value. The stakeholder theory of corporate governance says governance should consider the interests of all stakeholders, for example by making environmental and social goals an explicit objective of the board and managers.

Stakeholder theory is harder to apply, for four reasons:

• balancing several objectives at once;
• defining and measuring non-shareholder objectives;
• competing with firms that do not face the same constraints;
• the direct costs of meeting higher standards.

The two theories can point the same way over the long run. A company that is a large local employer may find that decent wages and community support attract better staff and cut turnover, which raises profits.

Exam tip Applying stakeholder theory needs both balancing goals and measuring non-shareholder goals. Not one or the other.

What does each group want?

Investors: shareholders, private lenders and bondholders

Shares carry the exclusive right to vote on the board, mergers and the sale of assets. Debt investors agree their rights in the contract when the debt is issued, but the two kinds of lender differ.

Private debtholders are banks and other institutions that provide loans, credit lines and leases. They often hold to maturity and typically have direct access to management and non-public information, so they know more about the borrower. For a small or mid-sized company a single bank can be a critical source of money, so its decision to relax a restriction, extend more credit or refuse can matter a great deal. Private lenders vary in appetite and style: a property lessor cares about rent and upkeep, some lenders also hold equity, and some specialize in lending to companies near or in bankruptcy.

Bondholders are often institutional investors and asset managers. They rely on public information such as financial statements, and have little or no influence over operations beyond the terms negotiated at issue. It is harder to win the consent of many bondholders than of one bank to change those terms, though bondholders can gain real influence if the company must restructure its public debt in distress.

	Private lenders	Bondholders
Information	direct access, including non-public	public information
Influence	high, especially for smaller companies	low, except in restructuring
Changing the terms	easier, one-to-one	harder, many holders

The board of directors

The board of directors is elected by shareholders to advance their interests. It hires and monitors the chief executive and the performance of the company. Directors are expected to show prudence, care and loyalty. Boards mix inside directors (founders and current or former managers) and independent directors (no material tie such as employment or family), who can better represent minority shareholders. Stock exchanges often set independence rules, for example a majority or at least half of directors independent, and expect a diversity of backgrounds and skills.

Two features shape how much power shareholders have over the board.

• Tiers. A single board is common in the US and UK. Parts of continental Europe use a two-tier structure, and some countries require it. A supervisory board , which can include shareholders, employees, unions and, for state-owned firms, government representatives, oversees the management board. It may appoint or dismiss its members and approve certain decisions.
• Election timing. Most boards are elected all at once for a set term. In a staggered board the directors are split into groups, elected in different years, so replacing a majority takes several years. That limits a change of control, but it gives continuity and some protection from short-term thinking.

Shareholder power to change controlthree features of the board

• Who sits on it Use it inside or independent majority
  • Independent majority Use it easier to change
  • Insider majority Use it harder to change
• How it is elected Use it all at once or in groups
  • Annual elections Use it whole board can go at once
  • Staggered Use it years to replace a majority
• How many tiers Use it single or two-tier
  • Single board Know the idea common in the US and UK
  • Two-tier Use it supervisory board above the management board

Managers, employees, customers, suppliers and governments

Managers, led by the chief executive, set and carry out the strategy under the board’s oversight and run day-to-day operations. They are usually paid a base salary, an annual bonus in cash and stock, and a multi-year share-based plan. The mix keeps them in the job and aligns their interests with those of shareholders.

Employees supply the skills and labor, the company’s human capital . They want competitive pay and benefits, development, job security and a safe workplace. Some join unions to bargain together, and some own shares through profit-sharing, share-purchase or option plans, though this is a small part of pay for most.

Customers want products that meet their needs at a fair price, with quality, safety, support and guarantees. Large corporate customers can be influential, and retail loyalty tracks revenue growth. The environmental and social impact of products matters more each year, and boycotts or product scandals can hit sales.

Suppliers include sellers of raw materials, software and outsourced services. They are often short-term creditors whose first interest is being paid on time. They also care about the long term, especially where products are specialized and both sides have invested in the relationship, so a financially stretched customer worries them.

Governments write and enforce rules and collect taxes, and care about employment, output and wider well-being.

Go deeper A government with a blocking stake

Suppose a regional government owns 30% of a shipbuilder and the company’s charter says major decisions need at least 75% of the votes. Without the government, the other holders have only 70%, which is not enough, so the government can block a yard closure alone. If its supervisory board seats also include labor representatives, the stakeholders inside the company have a veto over decisions that shareholders alone might favor. Analysts treat this as a feature of the ownership structure that can limit how fast the company can restructure.

Go deeper Why private lenders can be decisive for smaller companies

A small or mid-sized company often cannot issue bonds, so one bank may provide most of its borrowing. That bank can set covenants, grant waivers when the company stumbles, or decline to refinance. Because it also sees management accounts, it can act early. A large issuer with many bondholders and several banks is not so exposed to the decision of any one lender.