Introduction: The shareholder Role in Corporate Governance
Shareholders are important underliners of the success, direction and control of a corporation. They have some legal rights as owners of shares which says that their interests will be safeguarded, the corporation will be answerable to the decisions it takes and its performance. As a big time investor or even a small retail share owner, you need to know your rights in order to exert your power and secure your investment.
What Is a Shareholder?
Any person, organization or institution that owns a minimum of one share of an organization is termed as a shareholder or a stockholder. The shareholders are part owners of the company and given different kinds of shares and their various magnitudes, they can attain varying controls and privileges.
Shareholders are usually of two types:
- Ordinary shareholders, who are given voting rights and to whom dividend could be paid.
- Preferred shareholders those shareholders having no vote but prefer to be paid first in case of dividend payment and on liquidation.
The Right to Approve the Big Business Decisions
Votes by the shareholders on key aspects of the corporation are also among the most significant rights that the shareholders have. This involves election of board of members, ratification of mergers or acquisitions, alteration to the structure and adoption or amendments to bylaws.
Shareholders tend to vote at the annual general meeting (AGM) of the corporation, although they may also vote through the proxy.
Why It Matters
The fact that the company is accountable to its owners is by virtue of the voting rights. They enable shareholders to participate in designing the destiny of the corporation and management.
Right to Shares Dividends
When a company makes profits, the board of directors can announce dividends-money paid to the stockholders as a recompense to their financial investment. Though not certain, dividends are normally given out in many companies to attract and keep investors.
Common also vs Preferred Shares
Preferred shareholders receive payment usually on dividends in the first and often fixed rate. Owners of common stock get a dividend only after preferred stock owners and they can earn varying degrees of dividends or none.
Right to Inspect Corporate Records
The shareholders have the good right to review vital corporate secrets like financial statements, meeting minutes of the Boards, and shareholder registers. This right is particularly addressed to shareholders who need transparency, accountability or understanding about how the company is functioning.
Access May Be Limited
In spite of this right possessed by shareholders, a company can impose reasonable requirements or needs the acceptance of the request to be proposed only in good faith and on proper purpose.
Right to Sue for Wrongdoing
In the event that directors or officers act in a manner that causes harm to the corporation and breaches fiduciary obligation, shareholders may sue them in order to make them responsible. This may be in the following form:
- Derive litigation, a case in which the stockholder brings an action representing the entity.
- Direct ones, when the shareholder brings the case instead of himself on damages (e.g., dilution of the stock or denial to vote).
Why This Right Is Important
It provides a tool within which shareholders can question mismanagement, fraud or self-dealing that may harm their investment or the company itself.
Right to Meetings Every Year
Shareholders get to hear reports of the company leadership, question them and vote on the issues pertaining to business annually during annual meetings. The highlights given through such meetings also give an impression about the financial performance, future plans and probable risks.
Virtual Meetings on the Rise
Many corporations now offer online attendance options, especially for shareholders in different regions or countries, making participation more accessible.
Right to Dispose Off Ownership
The right of the shareholders to sell or to transfer the shares is free, except when stipulated by shareholder contracts or company bylaws (which tend to be the case with the private companies).
Why It Matters
This right provides liquidity investors can exit their investment when needed or capitalize on favorable market conditions.
Right to Proportional Ownership
Preemptive rights grant shareholders the ability to hold their percentages of ownership. Existing shareholders have an opportunity to purchase more shares in case a company decides to issue new shares, and sell them before making the offer to the general population.
Objective of Preemptive Right
So as to avoid dilution of ownership that may end up reducing their voting potential and value of present shares.
Right of Residuary Gifts
After distribution of labors and taxes and other liabilities, shareholders are entitled to a share of these assets should the company be liquidated.
Preference in Liquidation
Preferred shareholders are paid first after which the common shareholders. But, this can allot the shareholders nothing or even a small amount in most instances particularly when the firm has declared bankruptcy.
Restrictions of Shareholder Rights
Shareholders are also entitled to a lot of protection but such rights are defined in accordance with:
- The state that the company is currently incorporated in.
- The nature of the shares possessed ( whether common shares or preferred).
- Whether it is a publicly traded business or a privately held corporation.
As an example, government bodies such as the Securities and Exchange Commission (SEC) regulate securities and ensure the protection of shareholders of a public company; it is possible that a private company has fewer demands.
Shareholder Activism: Rights as a Method of Impacting Change
Shareholder activism has become active over the previous years. Shareowners are exerting their voting powers, share proposals, and shareholder actions to demand change in corporate policy in governance, environmental responsibility, executive compensation and social responsibility.
Examples of Activism
- The suggested climate risk disclosures
- Insistence on diversity in the board of directors
- Fighting the high executive compensation
Activism proves that powerful shareholders can conduct corporate action through mass action.
Legal Minority Shareholders Protection
In most jurisdictions minority shareholders who do not possess the controlling interest are provided protection of the law against oppression or unfair treatment. The protections may entail:
- Fair buy out rights
- Right to object in mergers
- Entitlement to dispute important decisions that played negatively on the minority interests
The protections make it so that controlling shareholders act only in their own interest instead of acting to the detriment of smaller investors.
Corporate Governance and Fiduciary Cares
The executive officers and the board of directors also have the fiduciary duty to act in the best interests of the corporation and the shareholder. These include:
- Care of duty (behave with care and diligence)
- Duty of loyalty (conflict of interests)
- Good faith responsibility
After the violation of such duties; the shareholders can approach the law to ensure that the management is answerable.
Global Perspective: Shareholder Rights Around the World
Rights of shareholders are not universal in different countries. For example:
- In the U.S, shareholder rights are strictly governed under the state law (e.g. Delaware) as well as federal securities law.
- The United Kingdom Companies Act controls the rights of shareholders; it has robust protection of the minority rights.
- In Germany and Japan, corporate governance is more stakeholder centred and the shareholders might not have a large say in what the management does.
Such differences are essential to international investors and companies engaging in operations in more than one country.
Conclusion: Educating the Shareholders into Power
Shareholders are not only investors but important stakeholders with legal rights that define the corporate governance. Being aware of such rights analyses the situation of shareholders and enables them to make independent judgments as well as defend the interest of stockholders and assist in directing the ethical and strategic nature of companies with which they invest. Buying your first share or running a portfolio, it is important to understand your rights as an intelligent investor and an active owner.