The 21st century has seen a rapid increase in shareholder activism, such as the general awareness, involvement and influence of corporate shareholders on corporate governance. Markets in North America and Europe have seen more turnover with boards of directors (BoD0, the members of which are subject to shareholder votes, solicitation of votes and legal action.

Key Takeaways

  • Public companies are owned in part by shareholders who do not actually manage or deal with the company's day-to-day operations.
  • Shareholders receive voting rights that can be used during shareholder meetings to vote for or against various corporate actions.
  • Some of these actions entail voting to add or remove members of a firm's board of directors.

Shareholding

Individual shareholders who do not possess large share price influence, or less than 1% of outstanding shares for example, must mobilize others to have real strategic influence. However, the collective of shareholders can exert significant influence to bring about desired changes in the direction of the firm in both the short- and long-term.

In a recent Harvard Law School Corporate Governance Symposium, the HLS reported that markets "continued to see shareholders making their voices heard" and that there is a "growing perception that we are, and have been for several years, experiencing a potentially fundamental shift in the balance of authority between boards of directors and shareholders."

Interestingly, there is some confusion about what exactly shareholders 'own' and are entitled to. For instance, if you own 10% of the shares of a company, can you walk into their boardroom and take home 1/10 of the chairs? The lamps? No, those are owned by the corporation. What about the employees - can you make 10% of them work for you directly? No, they are employed by the corporation. Indeed the corporation is a legal entity that owns these things and enters into contracts. What the shareholder actually owns are shares. That's it. Just shares, but these offer some rights.

The Rights of Shareholders

Company stock represents a partial ownership, and all common stock comes with voting rights and access to shareholders meetings. In the United States, any group comprising more than 3% of a company's stock is allowed to put its nominees for board seats on the annual proxy ballots sent to all shareholders.

Shareholders vote on by-laws, the number of members of the board and the sale of company assets and can add restrictions on the types of business engaged in by a corporation.

Large shareholder blocs can therefore vote to fire a member of the board and replace him or her with somebody else for perceived mismanagement, ineffectual governance, or malfeasance.

The Responsibilities and Responsiveness of Directors

Courts have traditionally ruled that a corporate board of directors has responsibility to the corporation, not individual shareholders. However, this distinction is not always significant.

Directors are made most responsive through two mechanisms: proxy votes at shareholder meetings and movements in the price of company stock. If a single director misbehaves or underperforms, he may be voted out of his job. If shareholders are truly dissatisfied, they can sell their stock and drive down the price.