Industries play a vital role in the development of a country’s economy. These industries are either manufacture or service oriented, and provide employment opportunities. A number of public and private companies operate in an industry, which may manufacture the same goods or provide the same services, but follow different strategies and guidelines to operate their businesses. Most public and private limited companies sell shares in order to generate funds to start up or run their business, and these shareholders are the legal owners of a company. Generally, the ones who own the majority of shares have more influence on decision making of a company. When the rights of minority shareholders are eliminated or differentiated from the majority shareholders, it creates a management problem, which then results in operational inefficiency of the company. Therefore, a proper balance of rights of majority and minority shareholders is required for the welfare of a company.
Shareholders and their Rights:
A shareholder, also known as stockholder, is someone who is a legal owner of a limited liability company. The ownership is attained by buying shares of stock of a private or public limited company. Although shareholders are known as owners of a company, they can only claim for the stock which they actually own, but not the company itself (Fama 1980) . These shares are issued by companies to raise funds to initiate or run a business.
Shareholders maybe given specific rights based on the types of shares they own which they can exercise when required. A few of the rights are mentioned below:
Right to sell off shares if there is a buyer
Right to vote, and elect directors nominated from the board
Right to offer resolutions or nominate directors
Right to claim dividends when declared
Right to purchase shares newly issued by the company
Right to assets when those are liquidated
Among these rights, the right to offer resolutions and nominate directs is the most critical and controversial one as it is mostly dominated and influenced by the majority shareholders. These shareholder rights depend on the corporate governance policies of a company. Different companies have different policies and the shareholders should go through those policies and be aware of their rights.
Majority and Minority Shareholders:
Majority shareholders are those who own more than fifty one percent of the outstanding shares of a company. They have total control on the operations and management of a company as they have more than half of the ownership rights. Majority shareholders are known as the parents of a company, and could be an individual or group of people or business entities.
Minority shareholders are those who own fifty percent or less numbers of the outstanding shares of a company. They don’t have any control on the operations and management of a company as they have half or less than half of the ownership rights. They may also own a huge number of shares of a company, but may still have less control if they are given no voting rights.
The majority shareholders have the most advantages. They have the power to replace a company’s employees and even the board of directors. To protect such advantages over the minority shareholders, the majority shareholder are even willing to pay for a control premium. Some majority shareholders may practice such advantages for their personal benefit, for which there are some obligations placed by law to protect the minority shareholders from such biasness, based on the type of company and the place of its operation.
Issues Surrounding Majority and Minority Shareholder:
Companies nowadays are offering stock options to their employees for their outstanding performance. Though such stock offerings could be very attractive to the employees and create incentives to give better output, they also create another segment of minority shareholders. It is very difficult to ensure fair treatment to such minority shareholder, especially in companies where the maximum shares are distributed in the hands of a few people who are closely linked together. For example, business associates, family and relatives. When majority shareholders use the company to dominate the minority shareholders, it would most likely be a legal concern.
To guard the minority shareholders against such unfair practices by the majority, certain obligations are placed by laws that give certain rights to the minority shareholders. The rules may vary from country to country, but many common law rights have been developed to protect all shareholders, including the minority as well, from unfair practices. Generally, shareholder agreements or corporate governance policies of a company often include shields for minority shareholders.
The owners of a company are its shareholders and the majority shareholders, who often influence in decision making and control the management, is responsible to exercise their powers with honesty, to the minority shareholders. Legal actions maybe possessed if there is a dominance of misconduct by the majority shareholders, but it is expected that they should have good ethical standards.
Oppression can take many forms, from which one would be the misuse of assets or the mismanagement of funds. Such behavior might cause major loses to the company shareholders like granting loans or allowing the shareholders to use company funds to pay off personal obligations. In other cases, a few misconducts could be harmless but may be considered as oppressive. For example, paying huge amount of salaries to employees might be considered reasonable during inflation, but unfair when the employees are also the majority shareholders of the company. This may result in the elimination of earnings of the minority shareholders.
Also, during major transactions like mergers or acquisitions that take place in a company, it is essential that the majority shareholders should treat the minority shareholders with fairness. It can be done by ensuring that the majority treats the minority fairly while the transaction takes place by giving them a fair value for their shares in case of a sale or merger. Moreover, such transactions must take place only with valid business reasons, and disregarding the personal interests of the majority shareholders. The company must disclose all facts and circumstances regarding the transaction to the minority shareholders.
The charges on oppression are taken very seriously and handled strictly by the courts. The consequences could be very severe, and in extreme cases the violation could result in dissolution of a company, but most countries have a bad track record in enforcing such laws and regulations.
Perspectives of Majority and Minority Shareholders:
The minority shareholder issues can be addressed in two ways. One is where you are the minority shareholder, wondering what you can do to either get treated better or get bought out. The other is where you are the majority shareholder wondering what to do about a minority shareholder.
In any analysis of “what to do,” Mary Hanson has advised to look at both sides of this issue. She says, “It is not as one-sided an issue as it may seem. The minority shareholder who feels trapped needs to understand the perspective of the majority shareholder.”
The World Bank’s corporate governance assessments have revealed that there is a growing concern around the world regarding corporate governance’s importance. The majority of the countries who have been assessed are upgrading their legal and regulatory structures under the Organization for Economic Co-operation and Development’s (OECD) principles of corporate governance.
If we look at the country Romania that undertook mass privatization, as their vouchers were free, new shareholders did not consider themselves as owners of the company and neither were they treated as investors by the private companies. It resulted as minority shareholders’ widespread expropriation. The situation changed when the shareholders raised their voice. Romania lately undertook regulations that significantly reinforce rights of the shareholders.
Even today, changing laws and regulations is a very slow process and it takes a lot of cooperation and negotiation. It was a major issue for Brazil on how to treat minority shareholders during the change of control. Initially, the corporate law granted voting power to all shareholders. In 1997, the rights from minority shareholders were withdrawn in order to maximize revenues of the state resulting from privatization.
Defining Corporate Governance, its Importance, and Benefits:
Companies are legal business entities and are separate from its owners. Once a company is properly established, the owners who are shareholders of the company can not be held responsible for the activities of the corporation. This means that no legal action can be taken against the owners of the company even if it is at fault, as both are separate entities. The process and design of how a company should be managed is known as corporate governance.
Many small business owners give less importance to or even ignore corporate formalities like annual shareholders’ meetings and director and officer nominations. But large corporations give it the most importance due to the magnitude and complexity of their business. The point is, it is not only necessary for the large firms, but small firms should also practice corporate governance in order be to attain and then retain success in the long run.
As we know that companies and owners are separate entities, it may look like there is a great advantage for the owners as they are not liable when the company is sued, but there also lies a major issue in the separation of company’s management and its ownership. Managers as well as majority shareholder may seek to work for their own benefit, using funds of the minority shareholders. Such separation may lead to a lack of information on how the funds are being used. Therefore, one of the most important factors in corporate governance is assigning the rights of shareholders, which will also allow them to have a better look at where there money is going.
Companies heavily depend on external funds to finance their activities, investment and most importantly, growth. Thus, it is a very important concern to assure those financers that their money is being used efficiently, and that the management is utilizing it for the best interests of the company. Such assurance can be granted by a corporate governance system. A firm system of corporate governance should be able to provide protection for the shareholders, so that they are assured fair return on their investments. This will not only help the shareholders, but also have a positive impact of the company’s growth. Corporate governance can therefore be defined as: Therefore, according to Cadbury Committee of United Kingdom, we can define corporate governance as “a set of rules that define the relationship between shareholders, managers, creditors, the government, employees and other internal and external stakeholders in respect to their rights and responsibilities, or the system by which companies are directed and controlled .” The main objective of corporate governance is to provide additional value to the stakeholders of the company.
A number of international corporate governance principles have emerged lately. A few of those principles are:
Shareholder rights as they should be informed about the company’s operations; should be able to participate in offering resolutions and decision making; and should be able to claim dividends when declared;
Fair conduct to the shareholders, mainly to the minority and foreign shareholders, by disclosing detailed information about the company’s operations and activities;
The role of stakeholders should be recognized as established by law and active co-operation between corporations and stakeholders in creating wealth, jobs and financially sound enterprises;
Timeliness and accuracy while disclosing information and clarity on every material of company ownership, performance and the stakeholders;
The responsibilities of the managerial board, the management supervision and accountability to the company and its shareholders.
The government generally plays a vital role in issuing and enforcing corporate law, but in most cases such laws are barely practiced within the company. The company is however responsible for implementing a sound system of corporate governance within the company. The company should realize that a system of good corporate governance will result in success of its shareholders and the company itself. The companies should also understand the consequence of breaching the corporate laws enforced by the state, which may also lead to failure.
As we are now aware of what corporate governance is and its importance, there are also benefits which should be brought into limelight. Some benefits that can be obtained with the application of corporate governance are as follows:
It would be easier to raise capital;
The cost of capital would be lower;
Improvement in business and economic performance;
Good impact on share price.
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