In previous articles, we discussed the roles and responsibilities of the shareholders. In this article, we look at the distinction between shareholder ownership and control and illuminate how this comparison plays out in the corporate world. To start with, many public limited companies have a large body of shareholders who have invested in the company and contributed to the setting up of the company and running it.
However, shareholder ownership does not imply control since the company law makes it clear that only a majority percentage of the shareholders can exercise control. The point here is that to have effective say over the running of the company, a majority vote of the shareholders is necessary following the democratic norms of participation that govern companies.
Hence, for all purposes, it is clear that whenever and wherever shareholders gather the necessary majority of votes, they would also have control over the company.
Theoretically, shareholders own the company and hence the company ought to be run according to the dictates of the shareholders. However, in practice, there would be significant differences of opinion among shareholders and this leads to a situation where arriving at a consensus is not possible. Hence, the provision that there needs to be a majority percentage of the shareholders to have effective control or say in the decision making of the companies has been established. This is also the case with any decision that is taken by the board of directors and the shareholders as control is in the hands of those who can drum up the required numbers of votes. This is the crucial distinction between shareholder ownership and control that is practiced in the real world.
However, this is not to say that shareholder control always needs a majority of votes. For instance, there can be cases where many shareholders cede their access to other shareholders who can then act on their behalf. Further, institutional shareholders represent voting blocs who can have a greater say in running of the companies than the minority shareholders. It is these differences that are at the heart of the debate over shareholder ownership and control which determine the nature of control that is exercised in the corporate world. The point here is that shareholders are the owners of the company and hence, they have a right to control the company. However, as in any democracy, they need to have the numbers on their side to have a say in the running of the company.
Finally, in recent years, there has been an upsurge of shareholder activism mainly due to the fact that many corporate scandals have emerged leading to unease among the shareholders. So, it is indeed the case that shareholder control is necessary to prevent the management and the board from taking decisions unilaterally that are not in the best interests of the shareholders. In conclusion, it is the case that shareholders be vigilant and are the custodians of their own interests rather than being passive and let the board or management decide on their behalf.
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