The nonsense of shareholder ownership: what we should know

Neoliberals claim that shareholders are the owners of companies. This is nonsense, argues Austin Mitchell MP and Prem Sikka, Professor of Accounting, University of Essex

Neoliberals claim that shareholders are the owners of companies. This is nonsense, argues Austin Mitchell MP and Prem Sikka, Professor of Accounting, University of Essex

In its 2013 report, the Parliamentary Commission on Banking Standards concluded that “shareholders failed to control risk-taking in banks, and indeed were criticising some for excessive conservatism”. The Commission rightly recommended that company law should be changed to remove shareholder primacy in respect of banks, and require directors to ensure the financial safety and soundness of the company ahead of the interests of its shareholders.

No political party has had the good sense to follow up the above recommendations from a Committee, which included a former Conservative Chancellor Lord Lawson. Instead, economic elites continue to preach the futile myths about empowering shareholders to check corporate abuses.

The Department of Business, Innovation and Skills (BIS) claims that the “role of shareholders as owners of companies is crucial. It is they who are best placed to assess the governance of companies and engage with their boards on key governance and other issues”. The illusion of shareholders as owners is rarely questioned in the press. This myth of shareholder supremacy has to go. It’s obstructing the development of a stakeholder economy.

Neoliberals equate “ownership” of shares with ownership of companies. Yet they provide neither theory nor evidence to support this claim. We can all enjoy a legal right to own a pen, a pencil, a car or a house, something which gives us rights, powers, liberties, duties and liabilities. We can use and destroy a pen. If a car that we own injures someone then we can be held liable. If we hold late-night parties at our houses which disturb others, police can be called to remind us of our obligations to neighbours. But ownership of shares in large companies is not like that.

Characteristics of Ownership

The characteristics of ownership have long been explored by scholars and courts. Let`s list them to see whether the possession or ownership of shares passes the tests implicit in the characteristics. The Rights of ownership include:

(1) The right to possess: to have exclusive physical control of athing.

(2) The right of personal use and enjoyment of the thing.

(3) The right to manage: the right to decide how and by whom the thing owned shall be used,

(4) The right to income: receive benefit from foregoing personal use of the thing and allowing others to use it for reward.

(5) The incident of residuarity: It is a characteristic of ownership that an owner has a residuary right in the thing owned.

The idea of ownership confers powers, liberties and immunities. These include:

(1) The right to the capital: the right to capital consists of the power to transfer ownership to others through exchange, selling, gift and mortgage, etc.

(2) The power to transfer ownership to successors.

(3) The liberty to consume, waste or destroy the thing in question.

(4) The right to security: the owner should be able to look forward to retaining ownership indefinitely, if s/he so chooses and remains solvent.

But ownership isn’t just about rights and powers; it also confers duty and liability towards others. This includes:

(1) the prohibition of harmful use: the owner must not use the thing to harm others, and s/he must also prevent others from using the think to harm citizens. Violation of this duty would lead to penalties.

(2) The thing owned can be taken away to satisfy a debt either either by execution of a judgment debt or on insolvency.

What do Shareholders Own?

How does the above apply to ownership of shares in a large public company? Shareholders of a company, such as Royal Mail, cannot use any of the assets held by the corporation for their personal use. Under corporate law, companies are legal persons and in that capacity they own the assets and use them in accordance with the directions given by the directors. If any shareholder were to attempt to posses the assets and use them for personal enjoyment, they’ll be accused of theft and fraud.

Shareholders do not have a right to manage the company or its assets. Instead, they “elect” directors for that purpose. Shareholders can vote on resolutions to constrain management, but that`s not a right to manage the assets of the company. Most votes at annual general meetings of UK corporations are advisory rather than binding. Directors owe a duty of care’ to the company and not to any individual shareholder.

Shareholders invest in the hope of getting a return on their investment, but do not have the right to demand income from the assets owned and used by the company. Shareholders can receive dividends but only after directors agree to declare them.

Shareholders can continue to enjoy the benefits of shareholding, as long as the company remains in existence, but cannot recover the capital represented by share certificates from the company. They can sell their shares to another party and can transfer or bequeath shares to successors, subject to the taxation laws of the country. The share certificates have some value, as long as the company is solvent. But that`s it: a speculative commodity not a control.

Directors of a company can sell the assets held by the company, but shareholders do not have rights to receive the proceeds. Shareholders do have a residual interest in the event of bankruptcy, assuming that the assets have been sold to satisfy the prior claims of secured and unsecured creditors. However, they might still not suffer the ultimate loss of their investment as the state has bailed-out banks and other corporations.

Companies engage in harmful practices, from cartels, tax avoidance, bribery and corruption to adulterated food, and company boardrooms manufacture diseases, such as those relating to smoking and obesity. These harmful practices increase returns to shareholders and also blight the lives of many, but shareholders are not liable for the consequences because their liability is limited to the value of shares that they own but haven’t paid for. At AGMs, shareholders can ask questions about harmful practices but they cannot bind directors to follow a particular business strategy. The ultimate sanction is that shareholders can liquidate the company engaged in harmful practices, but that is extremely rare. The state can liquidate a corporation engaged in harmful practices, but shareholders are not required to make good the damage done to citizens.

Neoliberals claim that shareholders are the owners of companies. Nonsense. Shareholders own a piece of paper that entitles them to receive income from a company. They do not own its assets, cannot personally access them or use them. They have powers to appoint directors but cannot direct them to use any particular business strategy. They cannot force directors to pay a dividend, or demand a higher one. They cannot demand to see a company’s books, or personally audit them. They can sit back and receive dividends, but are not responsible for the harmful use of the resources generating those dividends.

Courts have long distinguished the special characteristics of corporations and do not support the neoliberal propaganda. For example, in the 1935 case of Shaw & Sons (Salford) Ltd v Shaw, the judges said that “A company is an entity distinct alike from its shareholders and its directors. Some of its powers may, according to its Articles be exercised by directors; certain other powers may be reserved for the shareholders in General Meeting. If powers of management are vested in the directors, they and they alone can exercise those powers”. The 1908 case of Gramophone & Typewriter Ltd v Stanley said that “even a resolution of a numerical majority at a general meeting of the company cannot impose its will upon the directors when the articles have confided to them the control of the company affairs. The directors are not servants to obey directions given by the shareholders as individual; they are not agents appointed by and bound to serve the shareholders as their principals”. Successive Companies Acts have codified directors’ duties, but they are not subject to control by any individual shareholder.

So the neoliberal notion that shareholders are the “owners” of companies has little economic and legal substance. At best, share ownership results in a very weak notion of ownership, but not sufficient to direct, control the company, its directors, assets or liabilities. Who owns the company? The answer is that the company owns itself and is the sole andbeneficial owner of all the property vested in it.

Challenges Ahead

Policymakers must move away from narrow concerns about shareholder welfare to building a stakeholder economy. Corporations are created by the state and it has the legal and moral duty to control them to ensure that they serve the entire community. Sadly too many politicians have become subservient to the corporations which fund political parties and provide jobs for former and potential ministers. So corporate interests get portrayed as “the public interest” and their priorities dominate domestic and foreign policymaking. Such is the grip of corporations on political life that swathes of publicly owned assets have been sold to economic elites at knockdown prices. The result is wholesale destruction of savings, banking crisis, daily scandals. The myth of shareholder power has created an unbalanced economy which lacks any sense of direction, democracy or any concern for the welfare of society. Corporate power over society should also be reduced by promoting alternative forms of business structures, such as cooperatives, mutuals, not-for-profit and employees ownership.

Austin Mitchell is the Labour MP for Great Grimsby and Prem Sikka is the Professor of Accounting, University of Essex

19 Responses to “The nonsense of shareholder ownership: what we should know”

  1. JM

    Gambling is what shareholders of stock exchange companies do. Let us call a spade a spade. Such shareholders can only bet whether they receive a dividend and whether the share price will rise in the future. Other than that they have nothing since private individuals have no control over the running of stock exchange quoted corporates.

  2. Leon Wolfeson

    I think it’d simply be easier to change the duty of a company, legally, from solely considering the profit of shareholders to also include a duty to the communities in which they work, and a duty not to be a long-term burden on the state (living wage, etc.)

  3. georgie

    🙂 This is something I was on about a number of years back. You can never truly own a share of a trading entity, I suppose the best you can hope for is to in someway lease it as only when you hand it back do you get your capital returned. However the problem for employees and suppliers is and this should not be skirted around a very grave weakness in Legal interpretations in cases around insolvencies and the like. Fees and costs of the legal accountancy companies involved are rarely ever seriously challenged or restricted. There is much myth around this and there are plenty of screens with much smoke and many mirrors in place methinks which hide the true effect of what is going on. Regulation more often protects the assets for these two disciplines so they can have huge and disproportionate fees rather then ensuring a fair and equitable division of what’s left. 🙂

  4. Melis

    Dear authors and commenters, adding to your findings, I would like to draw your attention to my dissertation (May, 2014) called ‘The Institutional Investor Stewardship Myth: a theoretical, legal and empirical analysis of prescribed institutional investor stewardship in a Dutch context’ (summary available on SSRN and via http://blogs.law.harvard.edu/corpgov/2014/06/30/the-institutional-investor-stewardship-myth-in-a-dutch-context/). Look forward to any comments.

  5. Andrew Johnston

    Readers of this post may be interested in this statement of corporate law which debunks a number of myths and is endorsed by a large number of corporate law academics
    http://themoderncorporation.wordpress.com/company-law-memo/

  6. Prem Sikka

    Excellent piece of work. Have you published your dissertation?

  7. Prem Sikka

    Very helpful. I hope to return to the issues at some future date.

  8. Prem Sikka

    Governments have had many opportunities, but have chosen not too, as they attach too much importance to the interests of corporate elites.

  9. Prem Sikka

    Stock market is the biggest casino and our politicians have encouraged financial elites to gamble our savings and pensions there. In a future article I will explain why shareholders in large entities can only be passive.

  10. Prem Sikka

    The interesting thing is how governments promote this myth. Most of the money exchanged in stock markets does not go to companies for investment. It goes from the pocket one trader and speculator to another. I say “trader and speculator” because shareholdings are generally short-term. The typical shareholder holds shares in a bank for around 3 months and thus does not have long-term commitment.

  11. swat

    No. Only Co-operators are true owners of their Companies ar Co-operatives.

  12. Roger

    Regardless of the legal position, the fact is that the majority of shareholders are not interested in the company, merely in the financial possibilities arising from ownership of the shares. I find this not only adds weight to the legal argument set out here, but is actually a more powerful argument for explicitly recognising the situation in law.

  13. Leon Wolfeson

    And what makes you think I that I consider the recent governments to have done a good job?

  14. Prem Sikka

    Did I say anything about that?

  15. Leon Wolfeson

    Well, I think it was rather intimated in your post. Something does not become a bad idea simply because Governments have not done it, after all.

    Changing the duty of companies away from pure profit, making them liable if they engage in behaviours which would be considered predatory in a Human…

  16. Jack

    Do you want to stop individuals buying shares?

  17. Ken Davidson

    Lynn Stout has just published an excellent book on this subject: The Shareholder Value Myth. It is based on American rather than British law but the conclusions are much the same. Her style is clear coherent and more comprehensive. She demonstrates that shareholders do not have the rights of owners. They cannot take or use the property of the corporation in which they hold shares. They have no rights to earnings. These and many other ownership incidents are lacking. Even in bankruptcy, the shareholder may not be entitled to the residual assets. Her most significant point is to show that it is not possible to put the shareholders’ interests cannot be put first regardless of legal reform because shareholders have different interests and beliefs. Speculators and other traders are generally interested in short term profits, but institutions and individual may be more interested in investments in r and d that will yield long term stability, growth, and development. Actions that will promote long or short term shareholder value may be very different. Moreover opinions as to which actions should be taken to achieve any objective are rarely obvious. Professor Stout has produced a book that all interested in this topic should read.

  18. Prem Sikka

    I am an admirer of Lynn’s work.

  19. Prem Sikka

    No. People gambling or investing is a separate issue from governing corporations and their impact on society.

Leave a Reply