Shareholders

Understanding Shareholders: Definition, Types, Rights, and Importance

In business, shareholders play a pivotal role in shaping companies’ direction, success, and governance. Shareholders, often seen as the backbone of a corporation, provide the necessary capital that fuels a company’s growth. In return, they gain specific rights and responsibilities, influencing decisions at the highest levels of a business. This article delves into the intricacies of shareholders, from their fundamental roles and different types to their rights, responsibilities, and impact on corporate governance.

What is a Shareholder?

A shareholder, also known as a stockholder, is any individual or entity that owns shares in a corporation. Shares represent ownership interests in a company, and shareholders are essentially the owners of that company, albeit with varying degrees of control based on their shareholding.

The primary way shareholders benefit from their investment is through dividends, a share of the company’s profits distributed to them. However, shareholders also bear the risks of ownership. If the company performs poorly, they may suffer financial losses, and in the event of bankruptcy, they may lose their investment.

It’s important to differentiate between shareholders and stakeholders. While shareholders are company owners, stakeholders are more interested in the company’s success. Stakeholders include employees, customers, suppliers, creditors, and the community. While shareholders directly benefit from profits and share prices, stakeholders may be impacted by the company’s operations but do not have ownership rights.

Types of Shareholders

Shareholders can be broadly classified into two primary categories based on the type of shares they hold: common shareholders and preferred shareholders. Within these categories, there are further distinctions, each with its unique rights and privileges.

Common Shareholders

Common shareholders are the most typical type of shareholders, holding common stock in a company. These shareholders have voting rights, typically one vote per share, allowing them to participate in the company’s governance. Common shareholders elect the board of directors, who oversee the company’s management and make key decisions on behalf of shareholders.

Common shareholders receive dividends, but the amount and frequency depend on the company’s profitability. In the case of financial distress or liquidation, ordinary shareholders are the last to be paid, after creditors and preferred shareholders. This means that, while they enjoy the highest potential rewards from dividends and capital appreciation, they also assume the highest risks.

Preferred Shareholders

As the name suggests, preferred shareholders are given preference over common shareholders in certain areas, such as receiving dividends and getting paid in case of liquidation. However, preferred shareholders usually do not have voting rights, which means they don’t have a say in the company’s governance. Preferred shares are a hybrid of debt and equity, offering fixed dividends (like interest payments on a bond) while providing ownership (like common stock).

The dividends for preferred shareholders are typically paid before those for common shareholders, and in the event of a company’s liquidation, they have a higher claim on the company’s assets. While they do not participate in the company’s decision-making process, preferred shareholders are generally more protected in receiving their returns, making them a lower-risk investment than common stock.

Non-Voting Shareholders

Non-voting shareholders are individuals or entities that own shares in a company but do not have the right to vote on corporate matters. These shares are typically issued to raise capital without giving too much control over the company to external investors. While non-voting shareholders do not have direct influence on company decisions, they still benefit from dividends and potential capital appreciation.

Majority and Minority Shareholders

Shareholders can also be classified based on the number of shares they hold. Majority shareholders own more than 50% of the company’s shares, giving them significant control over decisions, including appointing the board of directors and influencing corporate strategy. Minority shareholders, on the other hand, own a smaller portion of shares and typically have limited influence on company decisions. However, minority shareholders still retain rights, such as voting in shareholder meetings, and they may band together to form coalitions to exert influence.

Rights of Shareholders

Shareholders have several rights that allow them to participate in the company’s governance, share in its profits, and protect their interests. These rights vary based on the type of shares held and the specific terms outlined in the company’s bylaws, but shareholders typically possess several common rights.

Financial Rights

One of the primary rights of shareholders is the right to a share of the company’s profits, known as dividends. The dividend amount paid is typically determined by the company’s board of directors, based on the company’s earnings and profitability. Common shareholders usually receive dividends per share, while preferred shareholders are guaranteed fixed dividends.

In the event of liquidation, shareholders also have the right to a portion of the company’s remaining assets, although this is subject to the company’s debt obligations. Common shareholders are last in line for asset distribution, while preferred shareholders are given priority.

Control Rights

Shareholders have significant control over the company, especially common shareholders. Their control comes from their voting rights, which allow them to participate in important decisions, such as:

• Electing members to the board of directors.
• Approving mergers and acquisitions.
• Deciding on major financial decisions, such as issuing more shares or taking on significant debt.
• Approving changes to the company’s bylaws.

The voting power of shareholders is proportional to the number of shares they hold, meaning those with a more significant ownership stake have more influence over company decisions. This is why major shareholders, such as institutional investors, often have considerable power in corporate governance.

Access Rights

Shareholders are entitled to information about the company’s financial health, strategy, and performance. They have the right to inspect financial statements, attend annual general meetings (AGMs), and ask the board of directors questions. This transparency allows shareholders to make informed decisions about their investment.

Additionally, shareholders have the right to propose new business at AGMs or special meetings, which can influence the company’s direction.

Legal Rights

In addition to the financial and control rights, shareholders also have legal rights that protect them in cases of mismanagement, fraud, or breach of fiduciary duties. For example, if the company’s directors fail to act in the best interests of shareholders, they may be held accountable in court. Shareholders can take legal action to protect their interests, such as filing derivative lawsuits on behalf of the company if they believe the management is causing harm to the company.

Shareholders can also exercise their right to vote on some issues, such as approving or rejecting a proposed merger or acquisition. If dissatisfied with the company’s management or financial performance, shareholders may decide to sell their shares and exit the company.

Responsibilities of Shareholders

While shareholders have numerous rights, they also bear responsibilities that come with owning shares in a company. As part-owners of the company, shareholders are expected to act in a way that supports the long-term success of the company, and this often involves being informed and engaged in the company’s governance.

Supporting Long-Term Growth

Shareholders contribute to a company’s long-term growth by holding their shares, which helps the company raise capital for expansion. Rather than focusing on short-term gains, responsible shareholders take a long-term view of their investments, understanding that the company’s success will eventually translate into higher share prices and dividends.

Voting Responsibly

Shareholders are responsible for voting on matters that affect the company’s future. Voting on board members, mergers, and acquisitions, or changes to company policies should be done to reflect the best interests of the company and all shareholders, not just personal gain. Shareholders should consider the long-term implications of their votes and seek to ensure that the company is being managed effectively.

Participating in AGMs and Meetings

Active participation in AGMs and special meetings is a key responsibility of shareholders. These meetings provide an opportunity to interact with the company’s leadership, ask questions, and raise concerns about the company’s direction. Shareholders should engage with the company’s leadership and other shareholders to ensure their interests are represented.

Shareholders vs Stakeholders

While shareholders are company owners, stakeholders are individuals or groups affected by the company’s activities but do not necessarily own shares. Stakeholders include employees, customers, suppliers, creditors, and the local community. The main difference between shareholders and stakeholders lies in their relationship to the company: shareholders own the company, while stakeholders are interested in its success or failure.

Stakeholders can influence company decisions, particularly in corporate social responsibility (CSR), environmental impact, and employee relations. For example, employees may advocate for better working conditions, while customers may push for more sustainable products. Shareholders, on the other hand, are focused on financial performance and returns.

Balancing the interests of shareholders and stakeholders is a key challenge for many businesses. While shareholders may prioritize profit maximization, stakeholders may have broader interests that require the company to consider social, environmental, and ethical factors in its decision-making.

Acquisition of Shares

Acquiring shares in a company can be done in various ways, depending on the company type—whether privately owned or publicly listed on a stock exchange. Becoming a shareholder can seem complex, but it is ultimately about purchasing or obtaining shares representing an ownership stake in a business.

Primary Market vs Secondary Market

When a company initially issues shares, they are typically offered to the public through a primary market. This is commonly done via an Initial Public Offering (IPO) for companies that decide to go public. An IPO is when a company offers its shares to the public for the first time, and individuals and institutions can purchase them to become shareholders. In this case, the company receives the capital from the sale, which can be used for various purposes like expansion, reducing debt, or funding projects.

Once the shares are in circulation, they are traded on the secondary market—the stock exchange. In this market, investors can buy and sell shares among themselves, with the company not directly receiving any funds from these transactions. Shareholders in the secondary market can sell their shares to other investors to realise gains or cut losses.

For private companies, acquiring shares is typically done through direct negotiations between investors and the company or through private placements. Unlike public companies, the shares of private companies are not traded on stock exchanges, so the process of buying and selling shares is more restricted.

Private vs Public Companies

Becoming a shareholder in a private company differs significantly from that of a public company. In a private company, shares are sold directly to specific investors, such as venture capitalists, private equity firms, or through employee stock options. There is no public trading of shares, meaning that buying or selling shares can be more complex and subject to restrictions imposed by the company.

On the other hand, shareholders in a public company have easier access to buying and selling shares because the shares are listed on public exchanges, such as the London Stock Exchange (LSE) or the New York Stock Exchange (NYSE). This liquidity provides more flexibility for shareholders to enter or exit their investments.

Impact of Shareholders on Corporate Governance

Shareholders, especially those holding a significant number of shares, have the ability to influence corporate governance. Governance refers to the system by which a company is controlled and directed. This includes the actions taken by the board of directors and senior management to make decisions that align with the interests of shareholders and the company.

Role in Electing the Board of Directors

One of the most significant rights that shareholders have is the ability to vote in the election of board members. The board of directors is responsible for overseeing the company’s management, setting strategic goals, and ensuring that the business operates effectively and in the best interest of shareholders. Shareholders can vote for directors during annual general meetings (AGMs) or special meetings, with votes often proportional to the number of shares they own.

For companies with many shareholders, this process can be critical in ensuring that the company’s management is aligned with the shareholders’ interests. Large institutional investors, such as pension funds or mutual funds, often have significant voting power and can influence the direction of the company’s governance.

Influence Over Major Decisions

Shareholders also have a say in significant company decisions, such as mergers, acquisitions, or substantial company structure changes. In many cases, these decisions require shareholder approval before moving forward. For instance, if a company wants to merge with another or acquire a new business, shareholders must vote on the proposed deal. This allows shareholders to ensure that major decisions align with their best interests.

In addition to mergers and acquisitions, shareholders also have a say in issues such as:

• The issuance of new shares (which could dilute existing shareholders’ ownership).
• Dividend payments.
• Changes to the company’s articles of association or bylaws.

Shareholders can propose new business at AGMs, submit shareholder proposals, and vote on various resolutions put forward by the company’s management.

Transparency and Accountability

Another key role of shareholders in corporate governance is ensuring that the company remains transparent and accountable. Shareholders can access financial information, such as balance sheets, income statements, and cash flow reports, which provide insights into the company’s financial health.

If shareholders feel that management is not acting in their best interests, they can hold the company accountable. They may voice concerns at AGMs, vote against management proposals, or take legal action if necessary. In extreme cases, shareholders can call for a vote of no confidence in the company’s management or even initiate a shareholder revolt if they believe management misled them or acted inappropriately.

Challenges Faced by Shareholders

While being a shareholder offers numerous benefits, it also comes with certain risks and challenges that can impact the overall investment experience. These challenges stem from both external factors, such as market fluctuations, and internal factors, such as company management and governance.

Market Volatility and Risk

One of the most significant challenges faced by shareholders is market volatility. Stock prices can fluctuate based on various factors, including economic conditions, industry trends, political events, and company performance. These fluctuations can lead to significant gains or losses for shareholders, depending on the timing of their investments.

For example, during a market downturn, shareholders may see the value of their investments decrease, and if they cannot sell their shares quickly, they may face substantial losses. On the other hand, during periods of strong market growth, shareholders can experience significant returns on their investments. This inherent volatility is one of the key risks of investing in the stock market.

Lack of Control for Minority Shareholders

While majority shareholders have significant influence over a company’s operations, minority shareholders often have limited control. Minority shareholders may own only a tiny percentage of the company’s shares, which restricts their ability to influence corporate decisions. This lack of control can frustrate minority shareholders, especially if they disagree with the company’s direction or management decisions.

In some cases, minority shareholders may feel that their interests are not adequately represented, leading them to question the effectiveness of the company’s governance. This can result in dissatisfaction and sometimes efforts to sell their shares or push for changes through legal channels.

Mismanagement and Fraud

Another significant challenge for shareholders is the risk of mismanagement or fraud. Shareholders rely on the company’s management to make sound decisions that lead to long-term growth and profitability. However, shareholders may suffer financial losses if management acts negligently, engages in fraudulent activities, or prioritizes personal interests over the company’s well-being.

In some cases, companies have faced scandals involving financial misreporting, insider trading, or corporate fraud. These activities can significantly harm shareholders, both in terms of economic loss and damage to the company’s reputation. Shareholders may need to take legal action to hold the company accountable or, in the worst case, exit their investments if the company’s future prospects are severely impacted.

Importance of Shareholders for Companies

Despite the challenges, shareholders remain a crucial part of the corporate landscape. Their role goes beyond providing financial capital to businesses; shareholders shape corporate governance, influence decision-making, and hold companies accountable.

Providing Capital for Growth

Shareholders are essential in providing the capital that businesses need to grow and expand. When companies issue shares, they raise funds that can be used to invest in research and development, acquire new assets, or pay down debt. This capital is vital for companies that want to innovate, enter new markets, or improve their operations.

By purchasing shares, shareholders are essentially betting on the future success of the company. In return, they expect to see returns on their investment, either through capital appreciation (increasing share prices) or through dividends. Without shareholders, companies would struggle to raise the necessary funds to finance growth and achieve their strategic goals.

Ensuring Accountability and Governance

Shareholders also play a key role in ensuring that companies are well-managed and operate transparently. Through their voting rights, shareholders can influence key decisions, hold management accountable, and ensure that the company remains focused on long-term value creation. By attending AGMs, reviewing financial reports, and engaging with the company’s leadership, shareholders help maintain the organisation’s integrity.

The rights and responsibilities of shareholders are fundamental to the functioning of capital markets and the global economy. Through their investments, shareholders contribute to the success and growth of businesses, while also sharing in the risks that come with ownership. In doing so, shareholders help create a dynamic and competitive environment that drives innovation and economic progress.

FAQs

Who are called shareholders?

Shareholders are individuals or entities that own shares in a company, making them partial owners. By purchasing shares, they gain ownership rights and can influence corporate decisions, often through voting in meetings.

Is a shareholder the owner?

Yes, shareholders are considered partial owners of a company. Their ownership is proportional to the number of shares they hold, entitling them to profits (dividends) and a say in company decisions through voting rights.

Can CEO be a shareholder?

Yes, the CEO can be a shareholder if they own shares in the company. Many CEOs hold shares as part of their compensation package or investment strategy, aligning their financial interests with those of other shareholders.

What is the difference between investors and shareholders?

Investors are individuals or entities that put money into a business expecting a return, while shareholders are specific investors who own shares in a company. All shareholders are investors, but not all investors are shareholders.

How do shareholders get paid?

Shareholders can be paid through dividends, which are a portion of the company’s profits. Additionally, they can profit from an increase in share value, selling their shares for more than the purchase price.

What can a 51% shareholder do?

A 51% shareholder holds a controlling stake in the company, allowing them to influence or make key decisions such as electing board members, approving major transactions, and directing the company’s overall strategy.