Reprint: R1207B
Executives complain, with justification, that meddling and second-guessing from shareholders are making it ever harder for them to do their jobs effectively. Shareholders complain, with justification, of executives who pocket staggering paychecks while delivering mediocre results. Boards are stuck in the middle—under increasing pressure to act as watchdogs and disciplinarians despite evidence that they’re more effective as friendly advisers. Over many years shareholders have gained power but been frustrated by the results. Could the problem lie with them? Perhaps they aren’t really suited to being corporate bosses.
Their role, write the authors, has been to provide money, information, and discipline. But established corporations tend to finance investments out of retained earnings or borrowed money. Furthermore, high-frequency traders now account for as much as 70% of daily volume on the NYSE. As for information, shareholders communicate through stock prices—but human nature dictates that we pay more attention to simple recent signals than to complex long-run trends. And shareholders have only two major disciplinary tools at their disposal: selling their shares and casting their votes. But institutional investors, which own the lion’s share of stock and have widely diversified portfolios, find it difficult to focus on the governance and performance of any one company.
Fixing corporate governance, the authors conclude, must be about finding roles for other actors in the corporate equation who can assume some of the burden of providing money, information, and especially discipline.
FAQs
Shareholders essentially own the company, which comes with certain rights and responsibilities. This type of ownership allows them to reap the benefits of a business's success. These rewards come in the form of increased stock valuations or financial profits distributed as dividends.
Are shareholders good for a company? ›
This will often result in a successful business. And, in turn, return great profits of which the shareholders are able to reap a percentage of their investment. A shareholder is arguably the most important role within a business as they essentially have the ability to control it.
What is the purpose of a shareholder? ›
The shareholder is the owner of the company that provides financial security for the company, has control over how the directors manage the company, and also receives a percentage of any profits generated by the company.
How powerful are shareholders? ›
Shareholder's Power Depends on the Percentage of Ownership
The importance of a powers of shareholders is proportional to the number of shares and portion of the vote that they hold, and to the influence they have over other shareholders.
What are the advantages and disadvantages of being a shareholder? ›
The Pros and Cons of Being a Shareholder
- Money-making potential. The better a company does, the more its stock is worth. ...
- Short-term commitment. Owning stock doesn't have to be a long-term commitment. ...
- Dividends. ...
- Access to company information. ...
- Company benefits. ...
- Limited Risk.
Shareholders essentially own the company, which comes with certain rights and responsibilities. This type of ownership allows them to reap the benefits of a business's success. These rewards come in the form of increased stock valuations or financial profits distributed as dividends.
Do companies make money from shareholders? ›
Companies sell shares in their business to raise money. They then use that money for various initiatives: A company might use money raised from a stock offering to fund new products or product lines, to invest in growth, to expand their operations or to pay off debt.
How do shareholders make money? ›
Shareholders make money in two main ways: Capital appreciation and dividend payments. Common shareholders are granted six rights: voting power, ownership, the right to transfer ownership, a claim to dividends, the right to inspect corporate documents, and the right to sue for wrongful acts.
Why do companies pay shareholders? ›
Dividends are corporate earnings that companies pass on to their shareholders. Paying dividends sends a message about a company's future prospects and performance. Its willingness and ability to pay steady dividends over time provides a solid demonstration of financial strength.
What happens when you are a shareholder? ›
A shareholder is an individual, institution, or company that owns a share of a corporation's stock. Since shareholders are also the owners, they get the benefits of the company profits when the stock value increases. If a business performs poorly, shareholders lose money when the stock falls in price.
Generally, shareholders do not have control over the day to day running of the company simply by being shareholders. Shareholders do not have access to the majority of company's records. These sit with the directors.
Do shareholders have more power than CEO? ›
In most cases, the board of directors is indeed above the CEO. The authority of the board of directors comes from the shareholders, who have the ultimate say in how the company is run. The board of directors appoints the CEO and can remove him or her from office. The board also sets the CEO's compensation.
Why do shareholders have so much power? ›
Since Shareholders elect the Directors and Directors elect the officers, it is apparent that Shareholders hold the ultimate position of authority in a company.
What are the risks of being a shareholder? ›
Risks to shareholders
- Directors duties. ...
- Reliance on profitability and dividends. ...
- Control over management. ...
- Selling shares and exiting the company. ...
- Insolvency.
A shareholder is a person or institution that has invested money in a corporation in exchange for a “share” of the ownership. That ownership is represented by common or preferred shares issued by the company and held (i.e., owned) by the shareholder.
What is the difference between a shareholder and a stockholder? ›
To delve into the underlying meaning of the terms, "stockholder" technically means the holder of stock, which can be construed as inventory, rather than shares. Conversely, "shareholder" means the holder of a share, which can only mean an equity share in a business.
How do shareholders affect a company? ›
Shareholders vote on by-laws, the number of members of the board and the sale of company assets and can add restrictions on the types of business engaged in by a corporation.
Why do companies care so much about shareholders? ›
A company's stock price reflects investor perception of its ability to earn and grow its profits in the future. If shareholders are happy and the company is doing well, as reflected by its share price, its executives are likely to keep their jobs and receive increases in compensation.
Can shareholders fire a CEO? ›
Sometimes, the shareholders of a company will have the power to remove a CEO. This is usually done through a vote. If the shareholders feel that the CEO is not doing their job properly, they can vote to have them removed. In other cases, the CEO may be fired by the board of directors but not by the shareholders.
