Donald Stewart, partner, Faegre Baker Daniels
Have shares, will care
4 June 2012
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5 February 2014
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22 January 2014
Forcing shareholders to exercise their rights of stewardship may sound good, but is not without difficulties
Who is the rightful owner of a company may seem like an easy question for lawyers brought up to respect black print and authority. The joint stock company was invented to allow those with money but little commercial acumen to provide the wherewithal to entrepreneurs who could create value through commerce. The deal was simple: in return for cash an investor would get a partial stake in a business with the benefit of no comeback, pretty much no matter how the money was used.
Yet, due to the failings of shareholders to curb excess and moderate the negative impact of some corporations on society, this premise, as applied to modern listed companies, is now under attack.
This has come to a head as a result of what the press have dubbed the ‘shareholder spring’ – the almost unprecedented 2012 AGM season during which top cats at such behemoths as Aviva, AstraZeneca and Trinity Mirror have been toppled. Further pay rebellions have taken place at UBS, Citigroup, Credit Suisse, Barclays and Xstrata.
Trying to describe the situation, commentators have concluded that shareholders cannot be described as owning companies largely because (a) directors’ fiduciary duties are owed to the company and not to shareholders and (b) share ownership gives no right to ownership of a company’s assets. Colourfully, business philosopher Chares Handy has said shareholders no more own companies than a punter on the 2.30 at Epsom owns the nag he is betting on.
But crucially, the punter has no right to decide who is riding the nag. Shareholders, on the other hand, have the legal right to appoint and remove the board. The fact that right is often missing in action must not be mistaken for its demise. In this sense there is a dislocation between the theory of share ownership and its economic impact.
The problem is that the ownership rights are most effective when exercised by a majority of the owners acting collectively. In a major listed company with thousands of shareholders, each can exercise only a fraction of the aggregate ownership rights. As a result, those rights appear diluted and the primary objective of shareholders becomes passive participation in financial return rather than addressing the shortcomings through board selection.
The question for the effectiveness of corporate stewardship is not whether shareholders own the company but whether they need to be encouraged, or even forced, to exercise their rights of ownership. The Financial Reporting Council’s UK Stewardship Code is an attempt to motivate. Giving shareholders a binding vote on executive remuneration indicates that motivational efforts alone are perceived not to have gone far enough. Yet the 2012 AGM season has shown that investors are capable of having an impact.
The law provides a mechanism for shareholders to exercise their rights of ownership but, as with other aspects of democracy, it does not oblige the exercise of such rights, relying on market forces and societal sensitivity to create the necessary impulse. At a time when there are many public grievances about corporate behaviour this could be seen as inefficient. Yet using the law as anything other than a facilitation mechanism is likely to prove a path lined with difficult unintended consequences.