Reading 2: Shareholders and supervisory boards

The excerpt on pages 37-38 deals with the topics of shareholders' rights and the role of the supervisory board. It is part of the required reading in a comparative law course dealing with European and Anglo-American company management structures.

8. Read through the text quickly and answer these questions.

1. What basic rights does a shareholder possess?

2. What options does a dissatisfied shareholder have in the Anglo-Saxon system?

3. What is meant by the concepts of the one-tier board and the two-tier board? (Note: the word tier means 'rank' or 'level'.) Which do you think the best model of organisation?

Shareholders

A. Shareholders are the owners of the company's assets. Normally, ownership of an asset entails a number of rights: the right to determine how the asset is to be managed; the right to receive the residual income from the asset; and the right to transfer ownership of the asset to others. The last two clearly apply to shareholders, but what of the first? Can shareholders exercise control if the directors fail to protect their interests?

B. Two factors keep them from doing so. Both are related to the spreading of ownership needed for risk diversification in large corporations. In return for the privilege of limited liability under law, shareholders’ powers are generally restricted. There is the AGM to approve the directors’ report and accounts, elect and re-elect the board, and vote on such issues as allowed for in company legislation. But, apart from this, shareholders’ rights are limited to the right to sell the shares. They have no right to interfere in the management of the company. Awkward questions can be asked at the annual meeting, but the chairman of the board usually holds enough proxy votes to hold off any challenge.

C. The second factor is in many ways more fundamental. An essential requirement for the exercise of effective control is the possession of an adequate flow of information. As outsiders, shareholders face considerable obstacles in obtaining good information. Then there is the free-rider issue. Any one small shareholder investing in the information needed to monitor management will bear all of the costs, whereas shareholders accrue benefits as a group. Moreover, co-ordination of monitoring efforts is not easy to arrange. Often it is easier for the shareholder to sell the shares, and thus vote with one's feet.

D. In short, someone with ownership rights in a company can express their disappointment with the company's performance by either getting rid of their shares or in some way expressing their concern. Hirschman (1970) called this the dichotomy between 'exit' and 'voice'. Where there are obstacles to the exercise of voice, the right of exit and transferring ownership to another party becomes not so much the accompaniment but the substitute for the other two components of ownership rights.

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