The UK Business Secretary has got a range of international academics rather agitated by referring to shareholders as the ‘owners’ of a company. This has re-ignited debate over the interests a company should serve.
Those agitated commentators consider it vital that for companies to be treated and described as separate legal entities, without owners. Effective corporate governance involves the consideration of a variety of stakeholders as well as shareholders and, accordingly, there is an argument that the conflation of share ownership with “ownership of the company” necessarily undermines this.
The first version of the UK Corporate Governance Code produced in 1992 contained the classic definition of corporate governance to be “the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting.”
The governance relationship is complex, being principally between the company, its managers and its shareholders which sit at the apex. However, into this relationship one must also contend with a range of wider stakeholders, including, employees, customers and suppliers, regulators and the community. Companies are, indeed, legal persons distinct from the shareholders: that is the whole purpose of the joint stock company and dates back hundreds of years. Shareholders in private companies limited by shares hold an intangible property interest as defined in the articles of association of the company. Save on a solvent liquidation, the shareholder does not have an underlying ownership right into the assets of the company.
What is meant by ‘owners’?
Most people in the UK would consider shareholders to be the owners of the company (albeit not of the company’s assets). However, by their very nature quoted companies have a diverse shareholder base and it is very common for the largest shareholders in a major public company to hold just a few percentage points of the entire issued capital. Companies are distinct from their shareholders, but not isolated from them.
What constitutes ownership?
Economists will explain ownership to consist of two rights:
- residual financial interest rights; and
- control rights.
Do shareholders have such rights? Generally yes, being rights to assets on a solvent liquidation and rights to vote.
How much control does a shareholder have?
In the UK, shareholder control rights are strong. Ordinary shareholders have the following rights:
- to attend and speak at the annual general meeting
- to appoint directors
- to remove directors
- to approve certain transactions
- to approve changes in the capital structure of the company
- to not be diluted
- to receive dividends if declared
- to receive the annual report and accounts
- to mandate directors to act or desist from acting
Accordingly, the label of shareholders as ‘owners’ may seem apposite, although not in a strict legal sense.
The US tradition is significantly different, with weaker control rights. Accordingly, American legal experts are less accustomed to treating shareholders as owners and, accordingly, the governance model in US companies is very different with a primacy not being on the relationship between the shareholders and the board. US corporations are often highly autonomous from shareholders who may hold restricted voting rights.
Is a debate about the concept of ownership fruitful?
In the context of the executive remuneration issue Dr Cable seeks to influence, even if other stakeholders are to have powerful voices, ultimate control remains with shareholders. There is, and there should remain, a clear distinction between the control rights of shareholders from the influence of other stakeholders. With the rights of ownership come the responsibilities of stewardship and, accordingly, Dr Cable is accurately reflecting current market behaviours by describing shareholders as owners of the company. However, the nature of joint stock investment and the strategies pursued by different types of investors means that shareholders may rarely speak with a united voice.