An external stakeholder is a person or organization who has an interest in the success or failure of a project, business, or organization but is not directly involved in its operations.
This can include suppliers, customers, regulatory bodies, and even the general public. While companies usually focus on their internal stakeholders, such as employees and shareholders, it is important to consider the needs of external stakeholders as well.
After all, they can have a significant impact on a company’s bottom line. For example, if customers are unhappy with a product, they may choose to take their business elsewhere.
Likewise, if regulators feel that a company is not complying with safety standards, they may impose heavy fines or even shut down operations. As such, it is clear that companies must take the needs of their external stakeholders.
External Stakeholder Examples
Suppliers have a stake in the business because they are reliant on it for income. It is in both the supplier’s and the company’s interests to ensure a steady flow of goods and services.
Suppliers can also impact a company’s reputation; if they are known for providing poor-quality products, this will reflect poorly on the company that uses them.
Because suppliers don’t have a direct and active stake in the operation of the business, they are considered to be external rather than internal stakeholders.
Customers are perhaps the most important external stakeholder group for companies. They are the ones who actually purchase the goods and services that businesses provide.
As such, they have a direct impact on a company’s revenue and profitability. If customers are happy with what they’re buying, they’ll keep coming back for more. If they’re not, they’ll take their business elsewhere.
To maintain their relationship with customers, the business may maintain a customer support phone line and engage in advertising campaigns targeted at gaining new customers.
3. Regulatory Bodies
Regulatory bodies are government organizations that set and enforce standards for businesses to follow. In some industries, such as food and medicine, these standards are incredibly important for protecting public health and safety.
Another example of a regulatory body is the labor board, which sets standards for things like minimum wage and employee safety. Businesses must comply with the regulations set by bodies like this.
Regulators are stakeholders because they observe the business from a distance and intervene if there appears to be lack of compliance. In other words, they take an active interest in the business without actually participating in it.
4. Business Associations
Business associations are external interest groups that advocate for business interests to politicians. In other words, they’re external stakeholders whose goal is to ensure there is a thriving business community.
A business association may also have an interest in supporting an individual business in its growth. For example, it may help connect businesspeople who can help one another through strategic decisions, provide mentorship, or even provide seed funding for future growth.
5. Citizen Action Groups
Citizen Action Groups are groups of citizens who have come together because they have a particular interest that they want to progress. Many of these groups have a stake in elements of businesses, such as how much the business is polluting.
To use the above example, an environmentalist group of citizens have a stake in encouraging a business to decrease waste. They may submit proposals and suggestions to the business or produce public information materials about businesses who are poor social actors (Greenpeace does this regularly).
There are also several powerful citizen action groups who work to educate consumers on the quality of products. For example, Consumer Reports investigates products and provides ratings and comparisons. By getting these external stakeholders on side, a business may be able to differentiate themselves from competitors and grow their market share.
6. Society / The General Public
We, as a society, are also external stakeholders in businesses and organizations that may impact society as a whole. We all have an interest in the well-being of businesses and organizations, even if we’re not directly involved with them.
For example, we rely on businesses to provide jobs so that people can support themselves and their families. We also want businesses to produce goods and services that make our lives better.
Similarly, we are stakeholders in non-profit, public sector, and political organizations because what the do can affect us. If the government’s transit department decides to build a railway in our area, it affects us. If a non-profit decides to lobby for a wind farm in the area, it affects us.
In other words, society is an external stakeholder in a wide range of business, public, and private activities if those activities have an impact on our lives.
The government is a stakeholder in businesses because it has an interest in ensuring that businesses operate legally and ethically. The government also wants businesses to contribute to the economy by providing jobs and producing goods and services.
The government is also a stakeholder because it can pass laws and regulations that affect businesses. For example, the government can raise taxes on businesses, which may impact their bottom line. The government can also pass laws that make it easier or harder for businesses to operate.
The government may also be a stakeholder in other types of organizations, like schools (it has an interest in how society is educated), healthcare (it wants to ensure a healthy citizenry), and agriculture (it wants to prevent the spread of diseases, insecticides, and other potentially dangerous things around farms).
8. Trade Unions
A trade union is an organization that represents the interests of workers. Trade unions situate themselves as external stakeholders who advocate for the rights of the people employed by the company.
They may be interested in job security, wages, working hours, health and safety, and equal opportunity.
Trade unions are outside of the business, so they’re external stakeholders, but they may negotiate with a business to ensure that the workers receive a livable wage.
But in some countries, it’s mandated that businesses and unions work together on issues like health and safety, and the union begins to take a day-to-day role in the workplace. In these instances where unions and businesses work hand-in-hand, the union may become an internal stakeholder example as well (see more: pros and cons of unions).
Consultants are individuals or groups that provide expert advice to businesses and organizations. They may be hired on a short-term basis to solve specific problems or on a long-term basis to provide ongoing support.
We can consider consultants to be external stakeholders because they are not insiders in the organization. They usually come, give some outsider advice, then leave. However, they may be brought inside the organization to provide their expertise on an ongoing basis, and in these cases, they may become internal stakeholders. For example, a marketing consultant may be brought in to help develop a new marketing campaign.
Your competitors are external stakeholders because they are not part of the organization, but they are very interested in what you’re up to.
They may be interested so they can see what you’re doing better than them or to try to differentiate themselves from you.
Business competitors, for example, may try to poach the organization’s customers or employees, or they may undercut the organization’s prices. They may also innovate and offer new products or services that are better than the organization’s offerings.
Competitors can be a source of stress for the organization, but they can also be a source of motivation to do better. You can spur one another on and both you and your competitor may both succeed.
11. The Local Community
The local community is a stakeholder in a business, school, or oragnization because the organization will impact the community.
For example, the community may be interested in whether a business is polluting the environment or whether the business is providing good jobs. If the business outsources work to an offshore company, the local community may be upset, for example.
The community may also be interested in whether the business is providing goods and services that the community needs.
For schools, the local community may be seen as external stakeholders because they want to ensure the school is teaching the values that are commensurate with community values. They may also want to ensure the school is preparing children for jobs in the community. However, community members aren’t teaching the kids or turning up to school every day, so they’re passive, external, stakeholders.
Investors are external stakeholders who have a financial interest in the business. They want the business to make money so that they can make money.
Investors may be individuals, groups, or institutions. For example, a family may invest money in a business, or an ‘angel investor’ who provides seed money in the hopes that the business grows may purchase a stake in the business.
Investors are often interested in the business’s bottom line, but they may also be interested in other aspects of the business, like its environmental record or its treatment of employees.
If the investor becomes an active investor by, for example, taking a seat on the board of directors, they will become an internal stakeholder.
Unlike investors, creditors don’t buy a stake in a business. Investors make their money back through dividends (a proportion of the profits). But investors give the business or organization money and expect a repayment, with interest, on a regular basis until it is paid off.
Banks are the quintessential example of creditors.
A bank will give your business a loan and expect you to pay it back at, say, 10% per annum.
From there on, the bank is an external stakeholder. If you can’t pay back the debts, then it affects them. This might lead them to, for example, call in the loan (demand immediate repayment) or even seek a court ruling to let them take control of the business.
14. Contract Workers
In-house employees are internal stakeholders. They’re in the office every day managing the operations, attending meetings, and being paid a salary.
But contract workers are outsiders who are paid on a per-job or short-term contract basis. These contract workers can be seen as external stakeholders because they are not central to the business operations.
For example, you might realize as a contract worker that you’re not an internal stakeholder because:
- You don’t attend internal staff meetings
- You’re not given employee benefits
- You are not told what to do, you’re consulted on your contracted tasks.
Universities are stakeholders in a wide range of businesses and organizations in society. They sit at the nexus between high school and the workplaces that need upskilled employees.
A university may be a stakeholder in a school because they’re concerned about what is being taught in the school. They will need to pick up on where the high schools left off.
But the university is also a stakeholder in businesses because the university wants to develop the workforce readiness skills that the business wants in graduates. This is, of course, a two-way street: the business is an external stakeholder in the university, with a stake in how their future employees are being educated.
It is sometimes hard to tell the difference between external and internal stakeholders. This is, in many cases, because the line is blurred. In some situations, a person may be an internal stakeholder, and in another situation, they may be an external stakeholder. In general, the best way to assess whether someone is an internal or external stakeholder is to look at how active they are in the business. External stakeholders are passive and hands-off people who are not involved into day-to-day operations. They watch from a distance but still have an interest in the organization, business, or project, in some way.
Dr. Chris Drew is the founder of the Helpful Professor. He holds a PhD in education and has published over 20 articles in scholarly journals. He is the former editor of the Journal of Learning Development in Higher Education. [Image Descriptor: Photo of Chris]