Who are stakeholders in business and what do they do?

Superscript
Flexible monthly business insurance
21 July 2022
5 minute read

The term ‘stakeholder’ is one of the most widely used in business and can refer to a number of different people and groups. But who exactly are stakeholders, what relationship do they have to a business and how can you manage that relationship over time to the benefit of the business?

Who are stakeholders in business?

In simple terms, a stakeholder is any person, group of people or organisation that holds an interest in the business and either has the ability to impact the operation of the business, or who is impacted by the business in some way. Different people will breakdown the types of stakeholders into many different categories, but here we will outline six key types of people and groups who may be stakeholders in your business.

Customers

Customers are an often overlooked stakeholder in a business, due to the fact that they are not a legal part of the business in the same way as employees or investors. However, it could be argued that customers are the most important stakeholders a business can have as without them, no business can survive.

Depending on the type of company, customers may be individual consumers or other businesses and their stake in the business is related to the product or service provided and the value for money that a business offers.

Employees

By being on the inside of a company, employees are an obvious stakeholder in any business. From entry-level posts at the bottom of the hierarchy right up to the top executives in larger firms, employees have the ability to both impact the business and be impacted by it.

Employees can have a significant impact on the entire business with the quality and consistency of their performance and simultaneously they are impacted by the business when it comes to issues such as income and job security, benefits, job satisfaction and working culture.

Investors

As a major source of funding for many startup businesses, investors have the ability to directly impact the business with the amount of capital they choose to invest, as well as sometimes taking up a seat on the company’s board of directors. Conversely, investors are impacted by the business’ performance as that determines how much of a return they will see on their investment.

Government and regulators

Governments, both local and national, are direct stakeholders in businesses as they collect money from them through taxes such as VAT, corporation tax, and the income tax of employees, as well as other forms of revenue generation such as National Insurance contributions and business rates.

Governments and industry regulators also directly impact businesses through the enforcement of laws, regulations and standards that govern how those businesses must operate. The consequences of not abiding by the law or operating according to prescribed standards can be catastrophic for any business.

Partners, suppliers and distributors

Partners require a business to be successful in order to be successful themselves, meaning they hold a considerable stake in the success of that business. For suppliers and distributors, where a business is up or downstream of your business in the supply chain, there is a symbiotic relationship in which one company’s operational success directly impacts on the other’s.

Community

A local community is a particularly important stakeholder when it comes to larger businesses, though they can be considered a stakeholder of an enterprise of any size. The way a business operates can have a significant impact on the community around it, whether that is through job creation, acts of corporate social responsibility, investment in infrastructure, environmental impact (both positive and negative) and investment in the local economy.

Different types of stakeholders

There are a number of ways in which different stakeholders can be divided into categories, two of the main ones being:

Internal vs external stakeholders

This distinction is fairly self-explanatory, with internal stakeholders being considered the individuals, groups or organisations that sit inside the structure of the business and include:

  • Employees (including directors, managers and general staff)
  • Investors

For internal stakeholders, their relationship with, and the way they impact and are impacted by, the business is direct.

External stakeholders, on the other hand, have an indirect relationship with the business and their impact on the business is indirect (though still important). They also sit outside the structure of the business and these stakeholders include:

  • Customers
  • Governments and regulators
  • Partners, suppliers and distributors
  • The local community

Primary vs secondary stakeholders

Another way of categorising stakeholders is by dividing them into primary and secondary groups. Primary stakeholders are considered to be those with a financial stake in the choices the business makes, including:

  • Employees
  • Investors
  • Suppliers and distributors
  • Customers

Secondary stakeholders, meanwhile, include those outside the business who may not be as directly dependent on the operations of the business or directly impact the day to day running of the enterprise, including:

  • Government and regulators
  • The local community (including activists)
  • The media

What is stakeholder management?

In simple terms, stakeholder management concerns the way in which a business manages its relationships with different stakeholders, prioritising which stakeholders concerns should be addressed most urgently and where responsibility lies.

Identifying and analysing stakeholders

The first step to effectively managing stakeholder relationships in a business is to accurately identify who your stakeholders are, who the point of contact is if the stakeholder is a group or an organisation, and analyse which categories they sit in.

Once you have done this, one of the best ways of effectively managing numerous complex relationships is to develop a stakeholder matrix.

What is a stakeholder matrix?

A stakeholder matrix is a grid of four squares in which to divide your stakeholders based on their respective power and interest. A typical matrix may look a little something like this:

Low interest High interest
Low power Local community Suppliers and partners, employees
High power Government and regulators, customers Investors

Low power, low interest – these stakeholders should be monitored, which requires the minimum amount of time and effort.

Low power, high interest – this group should be kept informed of decisions taken by the business

High power, low interest – should be kept satisfied through expectation management and clear communication

High power, high interest – this cohort of stakeholders should be managed closely, requiring a greater degree of time and effort

Ultimately, different companies will prioritise their stakeholders in different ways. Socially conscious businesses might see their relationship with the local community as paramount, whereas larger publicly-traded businesses might subscribe to the Friedman Doctrine whereby a company’s only responsibility is to deliver profit to their shareholders. How to prioritise your stakeholders is up to you, but by employing an efficient system of stakeholder management, you can maintain and nurture those relationships in the long term.

And finally…

When it comes to the relationship with one of the most important stakeholders, the employees, the risks presented by difficult relationships can be mitigated by holding employers' liability cover which is a legal requirement for any business that employs staff. If an employee were to become injured in the course of their work, or were to make a claim against the company over an issue such as workplace harassment, discrimination or unfair dismissal, then employers' liability cover would help pay the legal and compensation costs involved.

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This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.

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