Sunday, 4 September 2011

Shareholders as owners, two versions

Version 1, traditional. Shareholders have, and should retain, ownership rights because they provide capital and run this risk of losing it. Management should act in the interests of shareholders, because they are the owners, and should be incentivised to do so. The interests of society, or other stakeholders, may overlap or contradict those of the owners. But, providing what the company does is within the law, this is Of no real importance. The responsibility of the management is to act in the interests of the shareholders, not 'society'.

Version 2, progressive. Shareholders have both ownership rights and responsibilities. The rights they have, both relating to control and to income, are balanced by a responsibility to ensure that the management does not undermine the company. The interests of the owners and of society are largely aligned, if over the long-term. Taking risks, or creating externailities, in the short term is no more in the interest of owners than of other stakeholders since the former are in it for the long-term and maybe 'universal owners'. This means that the owners have an interest in ensuring that companies do more than meet the bare minimum set out in law.

Which is closer to the truth? Personally I would say that in terms of the nature of share ownership, and the attitudes expressed In the Market, it still has to be 1. What's more although version 2 has become expressed a lot more in recent years, this has happened during a period in which long-term, long- only investing (which ought to fit better with such a view) has gone out of fashion.

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