Tuesday 26 May 2015

EU says shareholders do not "own" companies

There's a good summary of what is going on in the Shareholder Rights Directive here. Arguably the most significant part of it is below -
Shareholders do not own corporationsThe directive will explicitly acknowledge that shareholders do not own corporations - a first in EU law. Contrary to the popular understanding, public companies have legal personhood and are not owned by their investors. The position of shareholders is similar to that of bondholders, creditors and employees, all of whom have contractual relationships with companies, but do not own them.
To which I'm tempted to respond "well that settles that then" and move on.

However, of course, this is a major issue in corporate governance policy, and from it flow decisions about the emphasis put on different interests in the corporation. Much corporate governance 'reform', drawing on Berle and Means, is intended to address the agency problem believed to arise from the separation of ownership and control, which itself is taken to result from widely dispersed share ownership. But if shareholders never owned the corporation in the first place this would seem to be a fundamentally flawed objective. Why give shareholders more powers to hold companies accountable, or put more pressure on shareholders to exercise 'stewardship', if it's not their property in the first place?

For what it's worth I agree it is hard to make the claim that shareholders "own" companies stack up both in theory and in practice. This is partly a legal issue. As the directive now says, companies have a separate legal existence, and if I remember right have also been cases where shareholders have been held not to own the assets of the company. I am not totally convinced by leaning heavily on jurisprudence though (i.e. I don't think citing Honore proves anything), since things like control rights vary significantly between different types of ownership, and we could argue that corporate "ownership" is simply one of the more watery versions of the concept. To play devil's advocate, even allowing for separate legal personality, limited liability etc it seems a bit weird to argue that no-one owns 21st Century Fox, or Sports Direct, or RBS for that matter.  

My personal view is that the killer blows to ownership as a meaningful concept in the corporate world come from the behaviour of shareholders themselves. Even many of the largest investors have heavily diversified portfolios - essentially designed to free them from having to monitor their 'property' too closely - and don't do much "ownership" activity. There is some interesting research into companies' views of shareholders, and they tend to see them as an important stakeholder (and sometimes a resource provider) with which relationships have to be handled carefully. But this doesn't equate to ownership - they generally see shareholders as traders rather than owners.

Of course, if you knock the concept of ownership away then people might start to ask why it is only shareholders that get a formal role in the governance of companies in markets like the UK. You might also ask why shareholders' views on the pay of directors should be given the weight they are. Therefore it might be in the interests of some parties to encourage the continuation of a frankly fictional view of the relationship (as it stands) between companies and shareholders.

So, in light of all that, if the shareholder rights directive continues in its current form it could open up some significant issues.

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