I posted a couple of entries in the glossary love the weekend. One was on shareholders and the other on stakeholders. I offer them here in contrast and then provided an observation.
Shareholders
The owner of a share or shares in a company or corporation.
In many instances, the registered shareholders of companies are nominees which prevents identification of the real-life beneficial owners.
Registers of beneficial ownership are meant to address this issue, but none do so effectively as yet, not least because only the holders of stakes of more than 25% are usually required to be disclosed and this rule is easy to arbitrage or evade.
Shareholders do not own the assets of the company in which they own a share and have no claim over those assets unless the company is liquidation when in most instances companies are insolvent with few if any funds then being available for distribution to shareholders.
Shareholders are entirely dependent upon the decision of the directors of the company in which they invest for the payment of dividends: they cannot enforce a claim to be paid, even by passing a resolution in an annual general meeting. They would have to replace the directors instead, which in most quoted companies almost never happens as a result of a shareholder resolution.
As such the idea that a company is run in the interest of shareholders makes little sense, and nor do the ideas behind the concept of shareholder value have any substance to them.
This fact also makes a mockery of the idea that an auditor should address their audit report to the shareholders of a company when those shareholders have one of the weakest relationships with a company amongst all its stakeholders.
Stakeholders
A stakeholder is a person impacted by or with an interest in or concern about the activities of another person or entity.
The stakeholders of companies, corporations and other reporting entities are likely to be:
- The owners of its capital
- Other suppliers of capital to the reporting entity
- Trading partners of the reporting entity
- Employees of the reporting entity
- Regulators
- Tax authorities
- Civil society in all its forms including local authorities, journalists, academics, civil society groups and individuals.
In the case of most companies, corporations or reporting entities many stakeholders are likely to have more interest in the activities of a company because of its potential impact on their well-being than the owners of its capital.
Despite that, the International Financial Reporting Standards Foundation has ruled through its International Accounting Standards Board that its accounting standards need only meet the needs of shareholders and other owners or suppliers of capital to a company and that the needs of other stakeholders need not be considered in the course of preparing accounts of financial statements.
Commentary
One of the many myths perpetuated by neoliberal economists and commentators is that there is something incredibly important within society that is called a company or corporation and that shareholders reign supreme within those organisations.
It is their implicit suggestion that this status of shareholders somehow means that these massively powerful organisations are benign, even benevolent, and wholly accountable. The promotion of the idea that shareholding is universal (coupled with the legally backed idea that all employees must now be required to invest in pension funds that hold shares) is an essential part of this myth, even though this form of saving is almost wholly inappropriate for most pension funds.
So what is the reality?
The truth is that shareholders have the weakest and most easily severable relationship with a company of any of its stakeholders. If we concentrate on issues relating to large companies, which are of greatest concern, then there are three things to note.
The first is that very few shareholders in large companies have any idea that they own shares in that entity. They will hold their shares via pensions funds, life assurance funds and other savings institutions acting on their behalf, none of whom will give them any real indication of where they have placed funds for them. In other words, the shareholder and the company in which they invest are almost wholly unknown to each other. There can be no relationship between them in that case.
Second, and as a matter of fact, the shareholder in such entities can break their relationship with that company with no notice being given to the company, and without any impact on it. That is because the shares in the company are traded on a stock exchange. The nature of such exchanges is that they permit purchases and sales without notice to the company being given. And as far as that company is concerned the fact that its share might now be owned by another person is a matter of absolute indifference to it. Not only does it gain nothing from the sale, it also has no bearing on its behaviour unless part of a takeover bid, which are now never staged by ordinary shareholders. This necessarily means that the relationship is, once again, totally tenuous.
And, as I note with regard to shareholders, the power that they actually have over the company in whose share capital they have saved is remarkably small. That is because they have not saved in the company. They have instead bought a financial instrument it issued, whereafter their claim is not on the company itself, over whom they have almost no practical legal powers at all, and which it can anyway ignore (as is the normal practice with shareholder resolution at company annual general meetings). That share gives them no claim over the assets of the company in any situation that a shareholder will want to be in and no entitlement to an income if the company decides not to provide one. Again, then, the relationship is so remote as to be virtually meaningless.
So why does neoliberalism still pretend in the power of shareholders and the need to run an economy for them when this ceased to have much meaning at least a century ago? And I am well aware that things are different for small businesses, but there the supposed power of shareholders usually comes through other means, such as holding directorships, or because of family relationships or something else altogether.
Is it just that this myth allows them to create power for a privileged few who get to run the behemoths that quoted companies really are, who then fund the neoliberal myth that they are brave and glorious entrepreneurs who have taken the risk to earn the many millions paid to them for doing nothing more than positioning themselves in the right place at the right time to exploit the company for all they can lay their hands on whilst sponsoring universities to spread a completely different story about how businesses work?
My answer is, of course, that this is a known myth that delivers exploitation.
What to do about it?
The answer, most obviously, is that we need to have accounting for stakeholders. That is an issue I will be discussing with colleagues in the Corporate Accountability Network this afternoon.
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Let’s say I have an interest in a particular Limited Liability entity.
I’m not a worker, customer or shareholder.
However I’m interested in fairness and what this entity is doing and that it is trying to do such as using a structure to obtain income for individuals for practical purposes when it could go to more substantive partnerships.
Does that make me a stakeholder?
The definition says yes.
That does not in any way answer the question or justify your first claim
It just says you are trolling
But just look at TR Llp’s accounts. You will find more there than in probably any other llp’s in the country.
But don’t come back. I don’t like the dishonesty of trolls.
An excellent piece in which you also touch upon one of the least discussed contradictions of our current Financial system. The use of the word “Investor”. A word frequently used interchangeably to describe two almost completely opposite activities.
Firstly, the concept of the investor as an enabler of successful businesses. Somebody who takes a calculated risk to buy shares in a company that needs that money to facilitate growth. To invest in resources for expansion, including increasing productivity and research into new products/services in order to remain competitive. Britain is very poor at this.
Secondly, there is the concept of the investor that is only interested in buying shares as a means of extracting money from already successful businesses. For preference, businesses that operate in monopoly circumstances. This is the kind of Investor that currently dominates British business. The relationship is approximately the same as a host animal to a tapeworm.
As you have pointed out elsewhere Richard, this leads to an Alice in Wonderland world where major companies borrow money so that they can pay out bigger dividends than the profits they make.
I will boot this up the ‘to do’ list as you are the second person to mention these important issues.
Partnership or employee ownership such as John Lewis or Richer Sounds represent attempts to address the problems (and in so doing only confirm that the problems exist).
It seems to me they are really an attempt to try and make shareholders into the stakeholders they were originally supposed to be. As too is, in a small way, Tesco’s annual distribution of shares to employees.
Meanwhile the Co-op is basically customer owned (although my share gets no dividend unless I actually shop with them). Are they the only operation nowadays with shares as they were supposed to work? Capital is at risk. And they are not generally tradable…
You work on resource accounting is absolutely core to sorting this out.
Will ‘resource accounting’ be in your glossary?
Good entry – for me at least.
Yes….
Like many entries, it’s being worked on
Fair points – covered by JK Galbraith in “The New Industrial State” which noted the powerlessness of shareholders and how managers (directors) pretended they were capitalists/risk-takers and rewarded themselves accordingly. A cursory glance at recent directors pay shows that nothing has changed in 50 odd years. Shares – quoted companies – the stock market – a casino by any other name, nothing more, nothing less, with directors, for the most part playing the role of parasites.
Factors which could change this: accounting for exposure to the climate disaster (which if nothing else will concentrate minds), the involvement on boards of more than just quasi-self appointed directors. In the case of the latter – although Germany has gone down this route to some extent, it has not changed company behaviour. For example, the level of corporate lobbying in Berlin is not pretty and often works against the interests of German citizens (ditto France, ditto Bruxelles and the EU).
Large companies are part of society – but the directors often regard society as something they control – & where they want to call the shots (example: emissions from motor vehicles).
Accounting for stakeholders – could be a step in the right direction – given the current situation.
We are looking at a programme to do that
Good morning Richard. I’ve been an advocating Employee Share Ownership since the 90’s. As Principal Shareholder at Accolade, the ‘dividend’ I received was incredible loyalty from Staff when my quad-bypass heart operation concided with the banker-induced crash of 2007… onwards and ongoing. As we enter ‘banker-bonus-season’ (God ROT ye merry gentlemen), may I post a link to my one-and-only blog post… from 2011.
https://enterpriseinvestmentscheme.blogspot.com/2011/01/graduate-jobs-from-banker-bonus-pay.html . Needless to say it wasn’t a banker that provided the seed capital for what has become a reasonably successful small business throughout the past decade. Later this year, repayment of that investment will result in full ownership by the ’employees’ who, all along, have considered it ‘their’ business. I know from our past exchanges that you are not a fan of EIS. ESO doesn’t depend on EIS but in the above instance it worked out well.
Thanks for that
What do you think of the group called ShareAction which tries to influence boards through the numbers of its supporters? It manages to get shareholders to put resolutions at AGMs about climate change, etc.
https://shareaction.org/shareholder-resolutions/shareholder-resolutions-2022
Worthwhile
But what are they really achieving after many years?
On a sidenote, and it sounds like US-style management speak to me, but it has become fashionable in some circles now to describe football supporters as “stakeholders”. I think there is a case for this in some European countries eg, Germany, where clubs are not PLCs or “owned” by foreign entities but managed like community trusts involving fans and local groups, but not in the UK and in particular the Premier League.
Small sherholders do not count. Shares as a pure financial instrument follows from the fact that the major suppliers of funds; investment portfolios, pension funds, hedge funds etc., are not interested in becoming inveigled into close association with the management of the company (save, typically the capacity to have access to them directly from time to time to ask questions or make judgements; or very rarely vote on their remuneration, if it becmoes a PR issue for the investor). Major shareholders back management, or they don’t. They have no interest in ‘managing’ or the hassle of finding new management. They own a financial instrument and they have little interest in anything more, because if the don’t like it any more – they sell it. They buy. They sell. Period: that is the essence of what I might call Modern Shareholder Theory.
Richard, great blog on Shareholders & Stakeholders with some insightful comments from others too. I think one change that could be effected is to do with “Limited Liability”. I suspect Directors including Non-Execs becoming fully liable personally for losses would concentrate the minds of those who currently extract so much income from managing companies. Do you think this would work?
I agree with the idea
I suppose the problem stems from the fact that we havnt really rethought the ‘Theory’ of the Limited Company since they were first created.
If we did and did it thoroughly who knows what might come out of such a review?
Its worth going back to the ‘original’ Great Western Railway and the concern that its last chair, Viscount Portal had for its ‘Ordinary’ shareholders both in the inter war period and its representations to The Government when it was nationalised. Times have changed.
Adam Leaver at Sheffield and I did a lot on this in our submissions to BEIS on audit failure
John Boxall’s comment on the theory of the Limited company reminded me of this paper by Paddy Ireland (2010) that I read some time ago in which he examines the history of the limited liability company.
“Limited liability, shareholder rights and the problem of corporate irresponsibility”
https://academic.oup.com/cje/article/34/5/837/1700679?login=false
If anyone is interested.
Thanks
On reading this made me remember a science fiction book by EE Doc Smith where the workers representative on the board, was taking the CEO to task as production was showing a dip and he wanted it back up.
The workers in a company could be considered to have a bigger stake in it than management or the shareholders.