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Should shareholders have an active role in the company?

Should shareholders have an active role in the company?

The separation of ownership and control under a dispersed ownership has been subject to a passionate debate, starting from the fact that managers are placed in a position where they are spending other people’s money. As a consequence, the company’s owners are left with certain passivity that some accept as a necessary precondition to the wellhead of the company. Others reject such a passive role due to the risk that managers spent the money in their own interests. 

According to the shareholders’ activism theory, checks and balance on the managerial behaviour is a necessary precondition to an optimal efficient and effective corporate system. In accordance with the shareholder primacy in which shareholders’ interests are placed at the heart of the corporation, “shareholder control encourages corporate financing by allowing shareholders to retain control of the corporation, to review activities of directors and to discipline mismanagement”

[1]. Proponents of shareholder control claim that the right to vote includes logically the right to supply contractual gaps but also the right to control the management.

Based on the agent relationship, giving a control right to investors will permit them to check if the managers act in their interests. Therefore, the most frequent argument in such a theory defends the fact that shareholders are the exclusive owners of the corporation. Because they support the financial risk of their investments, it is fair to give them a right of supervision over managers, who are spending their money. After all, “shareholder control is desirable and necessary because it is the non-separable part of every relationship which involves a person who entrusts his money to the care of another person”[2]. Besides, shareholders will probably act with more diligence and more motivation than management.

Others claim that shareholder control will also be beneficial to minority shareholders but also to the other stakeholders. Furthermore, giving a control right to shareholders will attract possible great investors to the company in the sense that their control will be proportional to their investment.

While it has been argued that shareholder control was not only unnecessary but also impossible, Ataollah Ramani defends completely the opposite view. Accordingly, the author claims the fact that it is wrong to think that shareholders will automatically leave the company in the case where things take a bad turn. On the contrary, the most devoted of them will do their best to strike and stay in the company. Moreover, the same author also responds to the above-mentioned argument that mismanagements are controlled by the market. In fact, such an argument does not stand in the case where the market suffers of an absence of competition. In such a situation, the author proves that the market forces will be inoffensive in front of potential mismanagements.

In conclusion, according to the shareholders’ activism theory, shareholder control is a necessary precondition to an optimal efficient and effective corporate system.

 

 

[1] Rahmani A., ‘Shareholder control and its nemesis’ (2012) 23(1) ICCLR 12

[2] Rahmani A., ‘Shareholder control and its nemesis’ (2012) 23(1) ICCLR 21

2017-04-26T01:59:57+00:00September 26th, 2016|In Europe, Non classé, We share|