Advantages and Disadvantages of Stakeholders: Everything You Need to Know
The advantages and disadvantages of stakeholders must be understood and managed in order for companies to navigate in the business world.4 min read
2. Two Categories of Stakeholders
3. Advantages of Stakeholders
4. Disadvantages of Stakeholders
Updated October 5,2020:
Advantages and Disadvantages of Stakeholders
The advantages and disadvantages of stakeholders must be understood and managed in order for companies to navigate in the business world. In general terms, a stakeholder is any individual who has an interest in the success or failure of a business. Traditionally, individuals with a vested concern about how the company is run are considered stakeholders. This includes owners, shareholders or members (in the case of limited liability companies or LLCs), and investors in the company.
In addition, employees who depend on the business for their livelihood, suppliers who have entered into agreements with the company and partners who rely on the company to fulfill contractual obligations are looked upon as stakeholders.
However, a stakeholder’s interest in a business need not only be defined monetarily or by ownership shares in a corporation. It can include parties that interact with a company and share common concerns and interests. Thus, religious groups and political parties can be considered stakeholders if the position taken by a company can affect their membership favorably or adversely. This is also true of media companies whose subscribers depend on news about the business to make financial or lifestyle decisions.
Two Categories of Stakeholders
Stakeholders are essentially divided into two distinct categories: internal and external stakeholders. The amount of influence and the roles they play in the overall accomplishments of the business can vary and change depending on issues ranging from economic conditions to public perceptions of the business.
- Internal stakeholders are individuals or businesses whose relationship with a business is determined by their existence within the structure of the business.
- External stakeholders are those with an interest in the operations of a business but do not necessarily have a role in the decisions of the business. They do have the ability to influence the success or failure based on their vested influence and can be every bit as powerful as internal stakeholders.
Advantages of Stakeholders
Businesses tend to value stakeholders because of the unique benefits they can bring to the way a company is managed, by the expertise their workforce provides or the ability of individuals to generate capital investments to secure the long-term growth of the business. The two most common advantages include:
- Business experience. Stakeholders are often individuals that a company hopes to attract who have displayed an ability to successfully manage other businesses or have developed important relationships. Typically, these individuals are found on a company’s board of directors, where they do not necessarily play a role in the day-to-day operations of a business but provide a “big picture” view of things, set plans in order for long-term success, and help the company’s management team avoid costly mistakes.
- Business acumen. Companies want to attract individuals who can provide guidance when matters get a little sticky. Whereas board members are looking ahead three or five years down the road, sometimes a company needs someone who knows how to deal with a situation happening in the here and now. Perhaps an opportunity arises that could be extremely beneficial to the company but certain matters have to be handled delicately. A level of expertise is required to do this.
Disadvantages of Stakeholders
Just as important as stakeholders can be to the success of a business, they can often impact operations for a variety of reasons:
- Looking out for number one. Perhaps it’s only human nature for people to often place their own interests above those of the business they claim to support. Whenever the issues of money and power intersect, even the best-intentioned individuals can make or force decisions that protect their own pocketbooks or their standing with their own constituents.
- Standing in the way of progress. People are often wary of change, and in today’s business climate, change is happening at a breathtaking pace. Communication and technological advances are radically affecting relationships between individuals, companies and even countries. For instance, labor and management are often at conflict on key issues, from the impact of globalization on workers’ rights to the effect of automation on jobs traditionally performed by human workers.
- Fearing Failure. Factors that can contribute to a party interfering with a business’ operation out of a fear that things will not work out is an issue. This is caused by a lack of effective communication in which parties are not kept abreast of developments, creating a lack of control over key decisions, or limiting the responsibilities and power of interests used in exerting a large amount of influence.
Managing stakeholders can be every bit as important to the success of a business as wisely managing its assets. Proactively engaging stakeholders can prevent problems before they occur.
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