April 17, 2018 | Dear CFO | No Comments
I’ve heard of stockholders, but now I am trying to understand the term stakeholder. Who’s considered an internal and external stakeholder? What’s the difference and why I should care about them?
A Shareholder in Milwaukee
Dear Shareholder in Milwaukee,
Stakeholders are often brought up in business lingo, but it’s tough to understand if that refers to those who are investing in a company, those who work at the company, or those who stand to benefit when the company profits. Your question is certainly a common one in today’s business world.
In the shortest definition, a stakeholder is anyone who has an interest or stake in the company. Each stakeholder sees the company from a different view. By considering these differing views, the company can better evaluate decisions.
The terms internal and external stakeholders come into play as well. Internal stakeholders are those who are involved in your company direction—they’re part of operations, employees, and management.
On the other hand, external stakeholders are those who are indirectly affected by your business. Most importantly they’re your customers and clients but it doesn’t stop there. External stakeholders could also be vendors, neighbors, community members, regulatory committees, local government and more.
It takes a village! A business often has a ripple effect on those tied to it. Here’s how to understand how they all work together.
The Many Pieces of a Business: Internal and External Stakeholders
Employees are internal stakeholders. They benefit directly from the company—when the company does well, jobs and pay increase. Employees have a direct stake in their company. The company’s success directly affects their jobs: both their security and rate of pay. Good employees care about how the company decisions influence their role and want to participate in those decisions. They work smarter not harder, receiving fair pay for a job well done. Empowered employees are more productive and enjoy their work because they view themselves as stakeholders in the company.
Customers are your most important external stakeholder. The continued success of the company assures a continued supply of the product they need. When buying your product, the customer expects to get what they pay for. They expect a certain level of price, quality, delivery, and performance. Consider carefully any changes that affect the customer, even if the company thinks it’s an improvement. Just because you think it’s an upgrade, doesn’t mean customers are interested. Good customers become advocates for your business—promoting it to their peers, friends, and family.
Another external stakeholder, vendors are a critical part of your business. Your success helps their success. They want to continue to sell a product to you. Vendors expect to be paid according to terms. They expect you’ll accept and use a product within specifications. Good vendors are your partners for improvement whether it’s price, quality, performance or delivery. They understand when your business is thriving, their business will thrive as well.
Shareholders literally hold an internal financial stake in your company. The company’s bottom line directly influences the shareholder. As with all other stakeholders, good short-term decisions balance with smart long-term decisions: shareholders benefit from good decisions for all stakeholders. A win for shareholders is a win for everyone!
Depending on the industry there may be other external stakeholders. These might include regulatory agencies, environmental groups, or unions. Your competition is even an external stakeholder—your success may result in their loss, so they have a huge stake in the health of your business. All stakeholders’ positions must be considered in the decision-making process.
Management makes up a very important internal stakeholder. Success for all the stakeholders results in the long-term success of management. Unfortunately, in many companies today, management considers itself a separate stakeholder that focuses only on the short-term vision of the business. They may weigh the immediate shareholder returns as the key to their success–often at the expense of other stakeholders. Consider management compensation packages carefully to avoid this pitfall. Success in management should be deeply connected to the success and well-being of all stakeholders.
How Management Can Ensure Success of Internal and External Stakeholders
While management-by-consensus isn’t often probable or advised in most businesses, management should consider the input and feedback of all their stakeholders.
This means, before making a major decision, listen to customers. Are they satisfied with their interactions? Are they wowed by customer service? Which messages are resonating with your customer base and which are falling flat?
Employees are vitally important stakeholders in a company—is their input valued? Are they comfortable approaching management and do they work in an environment where their input is encouraged? Does management keep them motivated? Look at the team culture of your company if you want to see how invested employees are as stakeholders. Do they share your vision or simply see work as a route to a paycheck?
What about vendors? Do they have important feedback for you to pay attention to? Your vendors may serve several businesses like yours and they often have a handle and insight into the market. They’ll also take extra care of businesses who support and promote their products.
Even your peers and competition should be considered when weighing in stakeholders. While too much comparison and keeping up with other businesses is a surefire way to burn out and stress out, keep your ear to the ground. Learn from the mistakes and successes in your industry, so you can stand out. What similarities do you share and what differences? When facing a change in industry regulations, for example, you may someday need to compare notes and band together. Know what makes you special but understand what lessons your competitors can give.
Consider the impact of both long & short-term decisions on each stakeholder group. Where ever possible, seek input from both internal and external stakeholders. By listening to those around your business, management makes better decisions and elicits greater support. As a manager, you aren’t the only person with a stake in the success of your company!
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