SHAREHOLDERS AND STAKEHOLDERS

EXECUTIVE SUMMARY
Stockholder Theory Advocates of the stockholder theory make their case on the basis of the different functions that organizations can fulfill. Private businesses, according to this understanding, are created in order to generate wealth. They do this by seeking the maximum profits available for themselves and that can then be passed on to their shareholders. Other functions of organizations can be best fulfilled by other kinds of organizations, such as non-profits and government agencies. Stakeholder Theory Advocates of the stakeholder theory make their case on the basis of the fact that businesses owe their existence to a greater community. From this fact, they argue, comes a basic duty to enrich and improve the well being of the greater community. If the community becomes impoverished or dysfunctional, this will interfere with the proper activity of all businesses within that community, and so there is also a justification for stakeholder theory from self-interest. Ethics Business ethics is primarily concerned with the debate between stockholder and stakeholder theory. In different contexts, either theory may seem like the more true one. Business ethicists often focus on bridging the gap and showing how a business might pursue the greatest profit for its shareholders while still behaving in a way that pays ethical dues to the greater community. Honesty in business accounting is often taken to be an example of where duties converge. Regulation Both stockholder theory and stakeholder theory are primarily concerned with the internal deliberation that businesses go through when considering their primary duties. Government regulation is meant to impose duties and behavior on businesses from the outside. Stockholder theory and stakeholder theory influence government regulation, however, in the sense that the duties a business owes others shape what you feel they should be compelled to do. Regulation often imposes both stakeholder and stockholder duties on businesses.

K.C.COLLEGE

Page 1

SHAREHOLDERS AND STAKEHOLDERS

Shareholder A shareholder or stockholder is an individual or institution (including a corporation) that legally owns any part of a share of stock in a public or private corporation. Stockholders are granted special privileges depending on the class of stock. These rights may include:

The right to sell their shares, The right to vote on the directors nominated by the board, The right to nominate directors (although this is very difficult in practice because of minority protections) and propose shareholder resolutions, The right to dividends if they are declared, The right to purchase new shares issued by the company, and The right to what assets remain after a liquidation.

Stockholders or shareholders are considered by some to be a subset of stakeholders, which may include anyone who has a direct or indirect interest in the business entity. For example, labor, suppliers, customers, the community, etc., are typically considered stakeholders because they contribute value and/or are impacted by the corporation. Shareholders in the primary market who buy IPOs provide capital to corporations; however, the vast majority of shareholders are in the secondary market and provide no capital directly to the corporation. Definition of 'Shareholder' Any person, company, or other institution that owns at least one share in a company. A shareholder may also be referred to as a "stockholder." Shareholders are the owners of a company. They have the potential to profit if the company does well, but that comes with the potential to lose if the company does poorly.

K.C.COLLEGE

Page 2

SHAREHOLDERS AND STAKEHOLDERS

THE IMPORTANCE OF SHAREHOLDERS IN BUSINESS

Shareholders are the owners of companies. A small business may have just one shareholder, the founder, while a public company may have thousands of individual and institutional shareholders, such as mutual fund companies, pension funds and hedge funds. Shareholders play an important role in the financing, operations, governance and control aspects of a business.

Financing One of the primary reasons for going public is to raise funds from investors. In return, the company's founders give up part ownership to these new investors. Private companies and startups may also raise funds through private placements, which are share issues to a select group of individuals and institutions. The founders of a startup company, including venture capital backers, may also provide additional capital in exchange for a higher percentage of the ownership. Unlike bond investors, shareholders do not get periodic interest payments or their original investment back from the company. Operations Shareholders play both direct and indirect roles in a company's operations. They elect directors who appoint and supervise senior officers, including the chief executive officer and the chief financial officer. They play an indirect role through the stock market. Investors stay away from companies that cannot meet earnings expectations but invest in stocks that consistently beat expectations. Therefore, company management is under constant pressure to meet and beat sales and profit projections. Companies that generate significant free cash flow often face pressure from shareholders to return some of the surplus cash to shareholders in the form of dividends or share buybacks. Governance Public companies usually have formal corporate governance policies, such as the composition and roles of different board committees, the role of the chairman, codes of conduct and business ethics. Boards of directors answer to shareholders, not to management. Public companies must provide timely and complete disclosures to shareholders. Senior executives often spend a few days each quarter discussing operations
K.C.COLLEGE Page 3

SHAREHOLDERS AND STAKEHOLDERS

and general business conditions with shareholders, market analysts and the business media. The chief executive and the chief financial officer sign off on financial documents, thus making them accountable for errors and omissions. Control Shareholders usually determine who controls a public company. A widely held company, in which there is not a single majority shareholder, is vulnerable to hostile takeover attempts. Shareholders can block such moves if they are satisfied with the current management or if they believe the offering price is insufficient. Institutional shareholders may publicly call on company management to consider strategic options, such as selling off the company or merging with another company. Considerations Public companies incur certain additional costs related to shareholders. These include investor communications expenses, legal and other fees related to regulatory disclosures, and the costs of hosting annual general meetings, quarterly conference calls and other investor relations events.

K.C.COLLEGE

Page 4

SHAREHOLDERS AND STAKEHOLDERS

THE FEATURES AND IMPORTANCE OF SHAREHOLDER AGREEMENTS

A shareholder agreement is an understanding between shareholders and a corporation, under the law, about various aspects ranging from the shareholder duties to rights, in relation to the company. The shareholder agreement is the basis of company inception and paves the way for its future course. It lays down the guidelines about the duties and the powers of the board of directors and the management. Essentials Of A Shareholder Agreement Experts consider the following points and clauses to be prudent when constructing the constitution of a shareholder agreement. These points and clauses also point out the reasons for having shareholder agreements. 1.Introduce the rights related to the issuance, sale, or subsequent distribution of shares, including pre-emptive rights and first refusal. 2.Define the duties and rights of the management and the employees. 3.Write the guidelines and the options for the selling and the buying of shares. 4.Construct the guidelines of conduct in the case of any exigencies, such as the retirement or the death of a shareholder. These guidelines should set out what affects the exigencies have on the corporation and the other shareholders. 5.Decide the duties or composition of the board of directors. 6.Decide on the rights of the current and future shareholders. 7.Chalk out exit clauses or mechanisms

K.C.COLLEGE

Page 5

SHAREHOLDERS AND STAKEHOLDERS

Vital Points For Shareholders Draft the shareholder agreement carefully to minimize future speculation and possibility of any legal entanglement. A carefully written shareholder agreement helps the functioning and the transition of events in a corporation. A foolproof agreement needs to concentrate on the following aspects as well. 1.The structure of the company. 2.The roles of the shareholders. 3.Distinctions in the ownership of the shares. 4.Clearly mentioned vesting provisions. 5.Provision or lack of provision regarding the Stock Pledge. 6.Demarcating of the quorum (the minimum strength of the participants in a meeting to pass a resolution.) 7.Procedures of handling ownership issues in case of buyouts. 8.Methodology of dispute settlement. 9.Voting rights. 10.Issues related to compensation and remuneration. 11.The appointment of professional advisors. These stated points and issues largely cover the ingredients of a good and professional shareholder agreement. Strict adherence to the details about the said issues culminates in a finely carved out agreement. A serious study of the agreement provides valuable insight into the rights and duties with respect to the corporation and other shareholders, the visions of the company, and the workforce to achieve these visions. The company should revise a shareholder agreement regularly for any amendments and upgrade the issues, keeping in mind the current scenario. Frequently seek professional advice from expert professionals, such as tax consultants and legal experts. This advice eliminates some of the
K.C.COLLEGE Page 6

SHAREHOLDERS AND STAKEHOLDERS

botherations that may trouble the company or the shareholder(s) in the future. The contents of the shareholder agreement are not bound by law to be made public. They can be kept confidential or made public according to the consideration of the shareholders. It is in the best interest of the company to have a shareholder agreement to avoid any misunderstanding or inconvenience resulting from the lack of clarity in dispensing the duties or obligations of the company.

K.C.COLLEGE

Page 7

SHAREHOLDERS AND STAKEHOLDERS

RIGHTS OF A SHAREHOLDER Say you just bought stock in Disney (NYSE:DIS). As a part owner of the company does this mean you and the family can hit Disneyland for free this summer? Why is it that Anheuser-Busch (NYSE:BUD) shareholders don't get a case of beer each quarter? (Forget the dividends!) Although these perks are highly unlikely, they do raise a good question: what rights and privileges do shareholders have? While they may not be entitled to free rides and beer, many investors are unaware of their rights as shareowners. We discuss what privileges come with being a shareholder and which do not.

Levels of Ownership Rights Before getting into the nitty-gritty of shareholder rights, let's first look at a company's pecking order. Every company has a hierarchical structure of rights that accompany the three main classes of securities that companies issue: bonds, preferred stock and common stock. The priority of each security is best understood by looking at what happens when a company goes bankrupt. You may think that as an owner you'd be first in line for getting a portion of the company's assets if it went belly up. After all, you did pay for them. In reality, as a common shareholder you are at the very bottom of the corporate food chain when a company liquidates; you are the corporate equivalent of a hyena that eats only after the lions have eaten their share. During insolvency proceedings, it is the creditors who first get dibs on the company's assets to settle their outstanding debts, then the bondholders get first crack at those leftovers, followed by preferred shareholders and finally the common shareholders. This hierarchy forms according to the principle of absolute priority. In addition to the rules of absolute priority, there are other rights that differ with each class of security. For example, usually a company's charter states that only the common stockholders have voting privileges and preferred stockholders must receive dividends before common stockholders. The rights of bondholders are determined differently because a bond agreement, or indenture, represents a contract between the issuer and the bondholder. The payments and privileges the bondholder receives are governed by the indenture (tenets of the
K.C.COLLEGE Page 8

SHAREHOLDERS AND STAKEHOLDERS

contract).

Risks and Rewards Sounds pretty bad for common shareholders, doesn't it? Don't be fooled, common shareholders are still the part owners of the business and if the business is able to turn a profit, then common shareholders gain. The liquidation preference we described makes logical sense: shareholders take on a greater risk (they receive next to nothing if the firm goes bankrupt) but they also have a greater reward potential through exposure to share price appreciation when the company succeeds, whereas there are usually fewer preferred stocks held by a select few. As such, preferred stocks generally experience less price fluctuation.

Shareholders Rights A shareholder in a company enjoys certain rights, which are as follows: to receive the share certificates, on allotment or transfer as the case may be, in due time. to receive copies of the abridged Annual Report, the Balance Sheet and the Profit and Loss Account and the Auditors' Report. to participate and vote in General Meetings either personally or through proxies. to receive Dividends in due time once approved in General Meetings. to receive corporate benefits like rights, bonus etc. once approved. to apply to Company Law Board (CLB) to call or direct the Annual General Meeting. to inspect the minute books of the General Meetings and to receive copies thereof. to proceed against the company by way of civil or criminal proceedings. to apply for the winding- up of the company. to receive the residual proceeds.

K.C.COLLEGE

Page 9

SHAREHOLDERS AND STAKEHOLDERS

Common Shareholders' Six Main Rights 1.Voting Power on Major Issues This includes electing directors and proposals for fundamental changes affecting the company such as mergers or liquidation. Voting takes place at the company's annual meeting. If you can't attend, you can do so by proxy and mail in your vote.

2.Ownership in a Portion of the Company Previously we discussed the event of a corporate liquidation where bondholders and preferred shareholders are paid first. However, when business thrives, common shareholders own a piece of something that has value. Said another way, they have a claim on a portion of the assets owned by the company. As these assets generate profits, and as the profits are reinvested in additional assets, shareholders see a return in the form of increased share value as stock prices rise.

3. The Right to Transfer Ownership Right to transfer ownership means shareholders are allowed to trade their stock on an exchange. The right to transfer ownership might seem mundane, but the liquidity provided by stock exchanges is extremely important. Liquidity is one of the key factors that differentiates stocks from an investment like real estate. If you own property, it can take months to convert your investment into cash. Because stocks are so liquid, you can move your money into other places almost instantaneously. 4. An Entitlement to Dividends Along with a claim on assets, you also receive a claim on any profits a company pays out in the form of a dividend. Management of a company essentially has two options with profits: they can be reinvested back into the firm (hopefully increasing the company's overall value) or paid out in the form of a dividend. You don't have a say in what percentage of
K.C.COLLEGE Page 10

SHAREHOLDERS AND STAKEHOLDERS

profits should be paid out - this is decided by the board of directors. However, whenever dividends are declared, common shareholders are entitled to receive their share.

5.Opportunity to Inspect Corporate Books and Records This opportunity is provided through a company's public filings, including its annual report. Nowadays, this isn't such a big deal as public companies are required to make their financials public. It can be more important for private companies.

6.The Right to Sue for Wrongful Acts Suing a company usually takes the form of a shareholder class-action lawsuit. A good example of this type of suit occurred in the wake of the accounting scandal that rocked WorldCom in 2002, after it was discovered that the company had grossly overstated earnings, giving shareholders and investors an erroneous view of its financial health. The telecom giant faced a firestorm of shareholder class-action suits as a result.

Shareholder rights vary from state to state, and country to country, so it is important to check with your local authorities and public watchdog groups. In North America, however, shareholders rights tend to be more developed than other nations and are standard for the purchase of any common stock. These rights are crucial for the protection of shareholders against poor management. Corporate Governance In addition to the six basic rights of common shareholders, it is vital that you thoroughly research the corporate governance policies of a company. These policies are often crucial in determining how a company treats and informs its shareholders.

K.C.COLLEGE

Page 11

SHAREHOLDERS AND STAKEHOLDERS

Shareholder Rights Plan Despite its name, this plan differs from the standard shareholder rights outlined by the government (the six rights we touched on). Shareholder rights plans outline the rights of a shareholder in a specific corporation. A company's shareholder rights plan, it is usually accessible in the investor's relations section of its corporate website or by contacting the company directly. In most cases, these plans are designed to give the company's board of directors the power to protect shareholder interests in the event of an attempt by an outsider to acquire the company. To prevent a hostile takeover, the company will have a shareholder rights plan that can be exercised when another person or firm acquires a certain percentage of outstanding shares. The way a shareholder rights plan may work can be best demonstrated with an example: let's say Cory's Tequila Co. notices that its competitor, Joe's Tequila Co., has purchased more than 20% of its common shares. A shareholder rights plan might then stipulate that existing common shareholders have the opportunity to buy shares at a discount to the current market price (usually a 10-20% discount). This maneuver is sometimes referred to as a "flip-in poison pill". By being able to purchase more shares at a lower price, investors get instant profits and more importantly, they dilute the shares held by the competitor, whose takeover attempt is now more difficult and expensive. There are numerous techniques like this that companies can put into place to defend themselves against a hostile takeover.

Sometimes There are Little Extras Are you still looking for other perks? Although free beer may be a little far-fetched there are companies that offer shareholders little extras. For instance, Anheuser-Busch does offer its shareholders discounted rates to some of the company's entertainment parks, among other things. Other companies have been known to give their shareholders small tokens of their appreciation along with their annual reports. For example, AT&T (NYSE:ATT) has given shareholders a 10-minute phone card with its annual report, McDonald's (NYSE:MCD) included a voucher for free fries and Starbucks (Nasdaq:SBUX) was gracious enough to give shareholders a free cup of coffee.
K.C.COLLEGE Page 12

SHAREHOLDERS AND STAKEHOLDERS

Conclusion Buying a stock means ownership in a company and ownership gives you certain rights. While common shareholders might be at the bottom of the ladder when it comes to liquidation, this is balanced by other opportunities like share price appreciation. As a shareholder, knowing your rights is an essential part of being an informed investor - ignorance is not a defense. Although the Securities and Exchange Commission and other regulatory bodies attempt to enforce a certain degree of shareholder rights, a well-informed investor who fully understands his or her rights is much less susceptible to additional risks.

K.C.COLLEGE

Page 13

SHAREHOLDERS AND STAKEHOLDERS

TYPES OF SHAREHOLDERS
Shareholders are generally classified as individual investors or institutional investors. Individual investors are individuals who invest their own money and institutional investors are organizations that invest the money of others. Institutional investors include insurance companies, banks, pension funds, and investment companies. The number of individual investors has risen over time, with slight decreases during periods of inflation or recession.

Institutional investors also have increased in number and influence. While they once concentrated on short-term investments by planning strategic stock trades, they since have become major players in the long-term investment market. Moreover, institutional investors have been clamoring for a voice in company operations and they are the largest shareholders in the United States. The major institutional investors are pension funds, which invest retirement money. As a result of the trend towards concentration of stock in the hands of institutional investors, companies have become more attentive to their needs.

K.C.COLLEGE

Page 14

SHAREHOLDERS AND STAKEHOLDERS

TYPES OF SHARES
A company may have many different types of shares that come with different conditions and rights. The main types of shares are:

Ordinary shares are standard shares with no special rights or restrictions. They have the potential to give the highest financial gains, but also have the highest risk. Ordinary shareholders are the last to be paid if the company is wound up.

Preference shares typically carry a right that gives the holder preferential treatment when annual dividends are distributed to shareholders. Shares in this category receive a fixed dividend, which means that a shareholder would not benefit from an increase in the business' profits. However, usually they have rights to their dividend ahead of ordinary shareholders if the business is in trouble. Also, where a business is wound up, they are likely to be repaid the par or nominal value of shares ahead of ordinary shareholders.

Cumulative preference shares give holders the right that, if a dividend cannot be paid one year, it will be carried forward to successive years. Dividends on cumulative preference shares must be paid, despite the earning levels of the business, provided the company has distributable profits.

Redeemable shares come with an agreement that the company can buy them back at a future date - this can be at a fixed date or at the choice of the business. A company cannot issue only redeemable shares.

Deferred shares: These shares are those shares which are held by the founders or pioneer or beginners of the company. They are also called as Founder shares or Management shares.
Page 15

K.C.COLLEGE

SHAREHOLDERS AND STAKEHOLDERS

In deferred shares, the right to share profits of the company is deferred, i.e. postponed till all the other shareholders receive their normal dividends. Being the last claimants of the profits, they have a considerable element of speculation or uncertainty and they have to bear the greatest risk of loss. The market price of such shares shows a very wide fluctuation on account of wide dividend fluctuations. Deferred shares have disproportionate voting rights. These shares have a small denomination or face value. Deferred shares are not transferable if issued by a private company. Deferred shareholders do not enjoy the right of priority to have shares offered in case of the issue of shares by the company. If the company goes into liquidation the deferred shareholders can get refund of capital and participate in the surplus capital, if any, after the rights of preference and equity shareholders have been satisfied.

Bonus shares: The word bonus means a gift given free of charge. Bonus shares are those shares which are issued by the company free of charge as bonus to the shareholders. They are issued to the existing shareholders in proportion to their existing share holdings. It is a kind of gift to the shareholders from the company. It is bonus in the form of shares instead of cash. It is given out of accumulated profits and reserves. These shares have all types of preferences which are available to the existing shares. For example. two bonus shares for five equity shares. The issue of bonus shares is also termed as capitalization of undistributed profits. Bonus shares is a type of windfall gain to the equity shareholders. They are advantageous to the equity shareholders as they get additional shares free of cost and also they earn dividend on them in future.

K.C.COLLEGE

Page 16

SHAREHOLDERS AND STAKEHOLDERS

STAKEHOLDER
Definition A person, group, or organization that has direct or indirect stake in an organization because it can affect or be affected by the organization's actions, objectives, and policies. Key stakeholders in a business organization include creditors, customers, directors, employees, government (and its agencies), owners (shareholders), suppliers, unions, and the community from which the business draws its resources. Although stakeholding is usually self-legitimizing (those who judge themselves to be stakeholders are stakeholder ), all stakeholders are not equal and different stakeholders are entitled to different considerations. For example, a companys customers are entitled to fair trading practices but they are not entitled to the same consideration as the company's employees. See also corporate governance.

K.C.COLLEGE

Page 17

SHAREHOLDERS AND STAKEHOLDERS

INTRODUCTION TO STAKEHOLDERS Lets start with a definition of stakeholders, which are: Groups / individuals that are affected by and/or have an interest in the operations and objectives of the business

Most businesses have a variety of stakeholder groups which can be broadly categorised as follows:

K.C.COLLEGE

Page 18

SHAREHOLDERS AND STAKEHOLDERS

Stakeholder groups vary both in terms of their interest in the business activities and also their power to influence business decisions. Here is a useful summary: Stakeholder Main Interests Power and influence

Shareholders Profit growth, Share price Election of directors growth, dividends Banks other Lenders & Interest and principal to be Can enforce loan covenants repaid, maintain credit rating Can withdraw banking facilities have

Directors and Salary ,share options, job Make decisions, managers satisfaction, status detailed information Employees

Salaries & wages, job Staff turnover, industrial security, job satisfaction & action, service quality motivation Long term contracts, prompt Pricing, quality, payment, growth of availability purchasing product

Suppliers

Customers

Reliable quality, value for Revenue / repeat business money, product availability, Word of mouth customer service recommendation Environment, local impact local jobs, Indirect via local planning and opinion leaders

Community Government

Operate legally, tax receipts, Regulation, subsidies, jobs taxation, planning

K.C.COLLEGE

Page 19

SHAREHOLDERS AND STAKEHOLDERS

DIFFERENT TYPES OF STAKEHOLDERS

Shareholders are stakeholders, but not all stakeholders are shareholders. These two terms often are erroneously confused with one another. There are a number of types of stakeholders, yet a commonality exists among them. They aren't all individuals, but different groups of stakeholders may have individual interests. A stakeholder is any person, entity, group or organization that has an interest in another entity. Legal Stakeholder The legal definition of a stakeholder is an entity or individual with possession of something valuable such as money, documents, property until the rightful owner can be found. For example, many states have unclaimed property departments where people can search for money owed to them or someone they know. Other examples of stakeholders might be lost-and-found departments or the section of a police department for stolen property that has yet to be claimed by the victim of a robbery or burglary. Individuals Individual consumers, investors and shareholders and residents may be stakeholders because they have a monetary or nonmonetary interest in an organization or entity. From an investment standpoint, shareholders are monetary stakeholders in companies for which they purchase shares of stock. Residents are stakeholders in the neighborhood association to which they belong. Both have a bilateral relationship because the stakeholder has an interest in the continued existence of the entity and the entity provides the stakeholder with something of value. Community Interest An example of a community or project stakeholder is a group of residents who are awaiting the arrival of a citys new transit system. Both individuals and groups of residents in this case are looking forward to the benefits they reap from quicker, more efficient transportation, and the project team anticipates the welcome reception of its finished project. Project stakeholders have an interest in a matter that comes to fruition through project management, planning, development and implementation.

K.C.COLLEGE

Page 20

SHAREHOLDERS AND STAKEHOLDERS

Corporate Investment Within the context of corporate governance and activity, different groups of stakeholders exist. Employees have a vested interest in the corporations success as they have devoted their time, talent and energy to working for the organization. In return, employees expect payment for their expertise and qualifications. The corporations board of directors is another group of stakeholders board members expect the company to follow their direction and leadership through the guidance they provide to a corporations CEO. Customers or clients are yet another group of stakeholders because they, too, have an interest in the outcome of the corporation's activities in that they expect quality services and products.

People who will be affected by an endeavour and can influence it but who are not directly involved with doing the work. In the private sector, people who are (or might be) affected by any action taken by an organization or group. Examples are parents, children, customers, owners, employees, associates, partners, contractors, and suppliers, people that are related or located nearby. Any group or individual who can affect or who is affected by achievement of a group's objectives. An individual or group with an interest in a group's or an organization's success in delivering intended results and in maintaining the viability of the group or the organization's product and/or service. Stakeholders influence programs, products, and services. Any organization, governmental entity, or individual that has a stake in or may be impacted by a given approach to environmental regulation, pollution prevention, energy conservation, etc. A participant in a community mobilization effort, representing a particular segment of society. School board members, environmental organizations, elected officials, chamber of commerce representatives, neighborhood advisory council members, and religious leaders are all examples of local stakeholders.

K.C.COLLEGE

Page 21

SHAREHOLDERS AND STAKEHOLDERS

Market (or Primary) Stakeholders - usually internal stakeholders, are those that engage in economic transactions with the business. (For example stockholders, customers, suppliers, creditors, and employees) Non-Market (or Secondary) Stakeholders - usually external stakeholders, are those who - although they do not engage in direct economic exchange with the business - are affected by or can affect its actions. (For example the general public, communities, activist groups, business support groups, and the media)

K.C.COLLEGE

Page 22

SHAREHOLDERS AND STAKEHOLDERS

DIFFERENCE BETWEEN STAKEHOLDERS

SHAREHOLDERS

AND

Shareholders vs stakeholders In every company there are shareholders and stakeholders. These investors both have interests in the company. Whatever happens to the company, they will be affected by it. That is why it is important for them to help maintain or, even better, develop the company so that their investments will be worth every single penny. A shareholder is someone who has financial share in the company. A shareholder is someone who owns stock in a company. This means shareholders are somehow part owners of the company. They will be able to earn profits if the company will grow, develop, and earn more through the companys production. A stakeholder on the other hand, is someone who has an interest in the company; this maybe a financial interest or any other kind of interest. Example of stakeholders are employees and staff. Shareholders can also be stakeholders because they have interest in the company in the financial aspect. To have a deeper understanding on the differences between a shareholder and a stakeholder, it is best to define them first. Shareholders are common people who have actually given money to the company to be a part owner of the company. The shareholders can buy stocks or a portion of the company through the share market. Companies need shareholders to be able to raise capital for the company. The shareholders will profit from the company depending upon the production and how much will the company earn. In addition, because they have a share in the company, they are the biggest stakeholders in the company. This is because whatever happens in the company shareholders will be affected by it directly. If a company profits the shareholders will profit through dividends and bonuses. If the company suffers a loss, the shareholders will too.

The stakeholder, on the other hand, has interest in the company. This interest may be direct or indirect. If a person is affect by whatever happens to a company, whether good or bad, he or she is a stakeholder. Employees, their families, customers, and suppliers are some examples
K.C.COLLEGE Page 23

SHAREHOLDERS AND STAKEHOLDERS

of stakeholders. Shareholders are stakeholders too because they are directly affected by whatever happens to the company. Other organisations also only have stakeholders and no shareholders. An example for this is a university, Universities has no shares, but id has many stakeholders. Its stakeholders include students, teachers, administrators and even janitors.

SUMMARY 1.Shareholders have financial shares in the company while stakeholders have interests in the company financial or not. 2.Shareholders can be stakeholders, but shareholders. stakeholders are nto the

3.Shareholders are directly affected by whatever happens to the company while stakeholders are directly or indirectly affected by whatever happens to the company. 4.The stakeholders have a big influence on what will happen to a company while shareholders will only be affected. 5.Shareholders own part of the company, but not all stakeholders do.

K.C.COLLEGE

Page 24

SHAREHOLDERS AND STAKEHOLDERS

CASE STUDY Balancing stakeholder needs A Shell case study

Introduction A stakeholder is anyone who has an interest in what a business does or an influence upon the business. Large organisations have many different stakeholder groups. Some are internal to the business, like employees. Others are external as they are outside of the business, like government. It is important to identify and balance the needs and expectations of these groups and to act responsibly to all of them in order to keep the 'licence to operate, which is necessary for good business. Balancing the needs of all stakeholders is particularly important for large energy companies like Shell, one of the worlds largest and most profitable multinational companies. Shell is a global group of energy and petrochemical companies. Its aim is to meet the energy needs of society in ways that are economically, socially and environmentally viable, now and in the future. Shell's headquarters are in The Hague, the Netherlands, and the parent company of the Shell group is Royal Dutch Shell plc, which is incorporated in England and Wales. Shell provides 2% of the worlds oil and 3% of its natural gas. Shell's fuel retail network has around 44,000 service stations and it sells transport fuel to some 10 million customers a day. Global challenges Oil and gas are non-renewable resources but remain essential for powering the worlds needs. Energy use is increasing due to a growing world population and higher standards of living. This means more demand not only for oil and gas but also for other energy sources. Shell is therefore faced with an enormous challenge to help meet the needs of the present and future generations, while creating as little negative impact as possible to the environment.
K.C.COLLEGE Page 25

SHAREHOLDERS AND STAKEHOLDERS

Shell aims to provide energy safely and responsibly and serve all its stakeholders, customers and investors effectively. Two key aims of the Shell Group are:

to engage efficiently, responsibly and profitably in oil, gas, chemicals and other businesses to participate in the search for and development of other sources of energy to meet evolving customer needs and the worlds growing demand for energy.

The case study examines how stakeholders influence the achievement of these aims and how Shell seeks to meet the needs of all of its stakeholders and balance the social, economic and environmental impacts of its work.

K.C.COLLEGE

Page 26

SHAREHOLDERS AND STAKEHOLDERS

Internal stakeholders Internal stakeholders are seen by the wider community as reflecting Shell and how it works. Shareholders Shell's main internal stakeholders are its shareholders, employees and suppliers. Large businesses like Shell, Sainsbury's, Virgin, and M&S are owned by shareholders. Shareholders play a crucial part in the life of the business. They provide a sizeable part of the capital required to set up and run the business. They take a reward from a share of the profits in the form of a dividend. This varies according to how many shares they own.

The shareholders choose a Board of Directors to represent them and provide a direction to the company. This is set out in a long-term plan which is called a strategy. The directors are responsible for the implementation of the strategy. Each year the directors must produce a report for shareholders. This report is presented each year at an Annual General Meeting of shareholders. Employees Another important internal stakeholder group is employees. Shell employs over 100,000 people worldwide. These include senior international managers specialising in finance, marketing, sales, oil and gas exploration and other aspects of the business. Other employees include geologists, market researchers, site engineers, oil platform workers, office administrators, business analysts and many more. As stakeholders, employees are influenced by Shell but also affect how Shell operates. The employees' standard of work and commitment to health and safety and excellence is vital in order to keep Shell as a leader in the energy field. Mistakes can be costly in terms of reputation and the livelihood of other employees. A priority at Shell is to respect people. It seeks to provide its staff with good and safe working conditions and competitive terms of employment.
K.C.COLLEGE Page 27

SHAREHOLDERS AND STAKEHOLDERS

This has a positive influence on employees as it keeps them safe and motivated. Suppliers Suppliers are also internal stakeholders and are Shell's partners in the chain of production - for example, in bringing petrol from the oil well to the petrol pump. Shell has a number of core values that are central to everything it does. Shell's reputation depends on making sure that its business actions reflect these core values. Shell works with contractors and other partners in the supply chain who also must demonstrate these values. If they do not, Shell will not use them.

K.C.COLLEGE

Page 28

SHAREHOLDERS AND STAKEHOLDERS

External stakeholders - customers and communities

External stakeholders are not part of the business but have a keen interest in what it does and may influence Shell's decision-making. Shell is committed to satisfying the needs of its external stakeholders. Customers Without customers a business would not exist. One of Shell's major objectives therefore is: 'To win and maintain customers by developing and providing products and services which offer value in terms of price, quality, safety and environmental impact, which are supported by technological, environmental and commercial expertise.'

Achieving this objective is challenging. Customers want value for money which involves providing the highest quality fuels at competitive prices. Research drives this process. Safety and environmental impact are key ingredients of the research and development process. Increasingly customers, concerned about pollution and environmental damage, require cleaner, more efficient fuels such as biofuel. There is global interest in liquid biofuels for transport as people travel more. Biofuels also offer the potential to slow the rate of growth in the world's CO2 emissions. Shell responds to changes in customer views and seeks to anticipate future customer expectations. It aims to help customers use less energy and emit less CO2. Shell products include fuels and lubricants for all forms of transport such as cars, ships, aeroplanes and trains. Shell has a set of global environmental standards/expectations for all of its companies. These include: managing greenhouse gases, energy efficiency, control of waste and the impact on water.
K.C.COLLEGE Page 29

SHAREHOLDERS AND STAKEHOLDERS

Local communities Shell's oil and gas operations aim to create economic and social development while minimising negative impacts. It seeks to invest in lasting benefits for the community. Local communities living close to oil refineries have raised concerns over their safety. Shell seeks to overcome these fears and earn the trust of people by taking all the necessary safety measures. This includes operating the plant safely and making people aware of plans and emergency procedures. Shell, in its commitment to improve the wellbeing of local communities, has created local partnerships. It has provided health facilities and supported the development of local schools and universities. One of Shell's initiatives is Shell LiveWire - an online community for young entrepreneurs wanting to start a business. It provides information and resources (such as free guides) to help young people turn ideas into business reality.

K.C.COLLEGE

Page 30

SHAREHOLDERS AND STAKEHOLDERS

External stakeholders - interest groups Shell needs to work with a range of interest groups. These are decision makers and opinion formers. People and organisations in positions of influence make decisions and form opinions that can affect Shell. These include academics, government, media, non-governmental organisations (NGOs), business leaders and the financial community. They interact with Shell in different ways:

Governments - Shell has operations in many countries across all regions of the globe. To gain approval to operate in these countries it has shown the host governments that it is operating in the right way. This includes creating jobs, paying taxes and providing important energy supplies. Shell is also working with governments to promote the need for more effective regulation on CO2 emissions. The business community - Shell supplies to and buys from hundreds of other businesses. Other oil companies - Shell works in partnership on projects with other international oil companies and partners, such as government-owned oil companies in the countries in which it operates. Partnership activities have included building new oil or gas supply lines and new refineries. The media - it is essential for competitive companies like Shell to continue to operate in ways that receive positive press coverage from newspapers, television and magazines. This reinforces its position in the market and can help to attract new customers through a positive reputation. NGOs are a diverse group of organisations, organised on a local, national or international level and often around specific issues, such as environment, human rights or health. They vary in their methods, ranginf from providing services and expertise to lobbying and campaigning organisations. NGOs often seek to influence other actors, including major brands and big multinationals such as Shell. Shell engages and works with a wide variety of NGOs on a regular basis. For example, it works with and learns from more than 100 scientific and conservation organisations in 40 countries. Partnerships with global organisations help Shell to improve its approach to the environment. The 10-year relationship with the International Union for the Conservation of Nature has led

K.C.COLLEGE

Page 31

SHAREHOLDERS AND STAKEHOLDERS

to changes in its operations that have reduced the environmental impact. Shell is committed to respecting human rights and helping communities. The search for oil and gas can take energy companies to places with poor human rights records. Shell uses a variety of tools, often developed with NGO and think-tank input, to manage risks. If Shell chooses not to operate in these areas, this opens the door for less principled competitors to exploit workers in these countries. If it stays then it can become part of the solution. Shell will only operate in countries where it is able to follow its business principles.

K.C.COLLEGE

Page 32

SHAREHOLDERS AND STAKEHOLDERS

Shareholders and resolving conflicts The start of the case study focused on the importance of shareholders. Shell's main shareholders consist of large institutional stockholders, employees and the general public. Shell believes that it has a key responsibility to protect shareholders' investment and provide a long-term return competitive with those of other leading companies in the industry. Shell's profits have then been used to reward shareholders in the form of dividends and to plough back into research and investment in new products, new forms of energy for the future and better ways of managing fuel reserves. Shell believes that through stakeholder dialogue and balancing the needs of different stakeholders it can continue to grow and help meet the world's energy needs.

Shell employs three criteria in making such decisions. It assesses whether: 1. the economic impact of the activity is likely to yield a good return for shareholders 2. the social impact will be suitable for employees and communities 3. the long-term effect of its activity will harm the environment. To avoid conflict, Shell sets minimum levels that must be met for all three areas before making a major decision or investment in any one. For example, when planning new activity on land that was previously used for other purposes such as timber or agriculture, Shell looks to strike a balance between the social opportunities or impact and financial return or risk.

K.C.COLLEGE

Page 33

SHAREHOLDERS AND STAKEHOLDERS

Conclusion It is not easy to balance the needs of stakeholders. In order to best achieve this balance Shell recognises five areas of responsibility: to shareholders, customers, employees, suppliers and society. Ongoing communication and dialogue with all of these groups is essential. In this way it is possible to take account of everyones needs and expectations in making decisions for today and the future. Shell resolves and minimises conflicts between its activities and its stakeholders through its clear strategies and commitment to corporate values. Through balancing social, economic and environmental considerations, Shell seeks to make decisions that maximise value.

K.C.COLLEGE

Page 34

SHAREHOLDERS AND STAKEHOLDERS

BIBLIOGRAPHY Websites
http://www.investopedia.com/terms/s/shareholder.asp#axzz274UhIh9l http://hbr.org/2012/07/what-good-are-shareholders/ar/1 http://smallbusiness.chron.com/importance-shareholders-business20844.html http://mikevolker.com/the-importance-of-a-shareholders-agreement/ http://www.ciri.com/content/shareholders/responsibilities.aspx http://tutor2u.net/business/accounts/stakeholder_theory.htm http://toostep.com/insight/stakeholders---characteristics-and-types

K.C.COLLEGE

Page 35