Week 5

Introduction to“Shareholders: Ownership”

Faisal AlSager

MGT 427 - Corporate Governance

Objectives

✤ To have a background about ownership and property in terms of rights and responsibility

✤ To see the difficulties facing applying the rights and responsibilities to modern corporations, and the factors influencing that

Challenge of Governance

✤ Companies have managers that have different agendas from those the owners have

✤ The challenge is to make sure that the resolution of conflict is an open and fair process between entities that are informed, motivated, and empowered

Definitions

✤ We think of ownership (O) of property (P) as including three elements:

✤ O has the right to use P as he/she wishes

✤ O has the right to regulate anyone else’s use of P

✤ O has the right to to transfer rights of P on whatever terms he/she wishes

Fourth Component

✤ There is less general agreement on a fourth component of ownership:

✤ O is responsible for making sure that his/her use of P does not damage others

Rights and Responsibilities

✤ From what we know and studied, ownership is a combination of rights and responsibilities with respect to a specific property

✤ However, in some cases these rights and responsibilities are well defined more than in other cases

Shareholders

✤ Shareholders are different from full owners of properties

✤ Shareholder own “a part” of the property, and they are also called stockholders

✤ Their stocks cannot be linked to specific asset of the corporation

✤ They have limited liability limiting their opportunity and responsibility to direct the affairs of the corporation or to prevent corporation’s wrongs

Elements of Corporate Structure

Different Rights of Shareholders

✤ Rights of ownership mentioned earlier are simple for personal properties

✤ However, in the shareholder case it’s more difficult because the shareholder has an a fractional share of the corporation:

✤ intangible interest in an intangible entity

✤ One right mentioned earlier is exercised by shareholder: the right to transfer right

The Separation of Ownership and Control

✤ Shareholders don’t have the right to use the property; he/she does not use the intangible fraction of the company

✤ Shareholder does not participate in activities of the management

✤ Shareholder has the exclusive control of the stock itself, but gives the control of the company to the management

✤ He/she owns a certificate of the stock, but the corporation is an owner of its own property

Shareholder Rights

1. The right to sell the stock

2. The right to vote the proxy

3. The right to bring suit for damages if the corporation’s directors or managers failed to meet their obligations

4. The right to certain information from the company

5. Certain residual rights following the company's liquidation, once the creditors and other claimants are paid off

Corporations Today

✤ Corporations today are bigger than they were in the past

✤ They are led by individuals having stakes in the company that are dwarfed by the holdings of institutional investors

✤ Shareholders don’t lead the organization because of the advancement of technology and for the efficiency of the corporation

✤ The emergence of institutional investors (like the pension funds, huge mutual funds and others) has influenced corporations and the separation of ownership and control

References

✤ Corporate Governance (4th Edition): Monks, R. and Minow, N. 2004. (Publisher: Wiley-Blackwell)