FinanceWriter

Blog

Archive

Tags

RSS

Keep up to date with our most recent blog posts.

Investors' relationships

In 1919 a court ruled: "A business corporation is organised and carried on primarily for the profit of the stockholders." But today, can a "stockholder" hold all the cards in the face of "stakeholder" ascendency?

The nature and composition of the stockholder community has transformed over time. At the start of the twentieth century rich and powerful individuals controlled the banks, the railroads and other listed corporations.

But proprietorship mutated through the "shareholder democracy" of small, individual ownership of Britain's privatisation era, to an "ownership role" performed by institutional shareholders.

An institutional investors' role is less as an "owners" and more as fiduciary or trustee overseer. They hold shares on behalf of policyholders'. unit holders and other beneficial owners.

Securing the best

However, the primary duty fund managers owe is an extension of corporations' requirement to make profits for shareholders. Institutional investors are obliged to secure what is best for the beneficiaries encompassing all the indirect shareholders of the multiplicity of structures represented in institutional investment.

These indirect, beneficial owners nevertheless have a direct interest in the profitability of the corporations that ultimately pay their pensions and reward their investment.

Staking the ground

Companies vary in the extent to which they have a public face or engage with the general public: an investment bank, while its activities may have a large impact on employment, communities and even countries, may be little known to the general public.

An international mining company may not have a high profile amongst its indirect shareholders, but it engages directly with a range of different stakeholders.

Regardless of the "selfish" interests of shareholders' focus on profitability, a mining company has to deal its customers, it's suppliers, it's employees, the countries and communities that host it's potentially dirty and dangerous activities and corps of activists who may have an interest in everything from the corporation's contribution to climate change to its acquisition of mineral rights under the lands of aboriginal peoples.

In practical, if not legal terms it can no longer be said that corporations are driven solely by their need to generate profits for their shareholders. Customers, suppliers, employees, countries and communities are not stockholders. However, they are increasingly deemed to have a real "stake" in a corporation. That poses the question as to how these non-financial interests can be represented.

D-List celebrity

Anyone with the money can buy a share in a publicly listed corporation. That gives them the democratic right to vote on company resolutions or to raise issues at the companies annual general meeting. The attention of the BP board was focused by shareholder activists who protested at the AGM following the Deepwater Horizon oilfield disaster in 2010.

But should stakeholders' voices only be heard in protest or is it time for stockholders to reclaim ownership as many have done through delisting their companies?

In Continental Europe workers have seats on company boards. How would corporations, institutional shareholders and the beneficial owners of shares take to being obliged to listen to stakeholders on boards who have no "skin in the game"?

If non-shareholder voices become louder perhaps a court will again have to rule on the primary purpose of a corporation.

Back to Blog