× Digital News Videos Kenya @ 50 Health & Science Lifestyle Opinion Education Columnists Ureport Arts & Culture Moi Cabinets Fact Check The Standard Insider Podcasts E-Paper Lifestyle & Entertainment Nairobian Entertainment Eve Woman Travelog TV Stations KTN Home KTN News BTV KTN Farmers TV Radio Stations Radio Maisha Spice FM Vybez Radio Enterprise VAS E-Learning Digger Classified Games Crosswords Sudoku The Standard Group Corporate Contact Us Rate Card Vacancies DCX O.M Portal Corporate Email RMS
Login ×

Why shareholders are not the sole owners of firms

By Otieno Odhiambo | February 13th 2018 at 09:00:17 GMT +0300

Most shareholders think they solely own those listed companies, but in many circumstances, they are not.

Shareholders might not be aware that they are no longer the owners. Even when you are a shareholder, your rights can be quite limited.

The question that isn’t normally asked is who realistically owns listed companies at the Nairobi Securities Exchange (NSE)?

Unknown too many of us, the answer largely lies in understanding the purpose or goal of business. Actions by many managers suggest lack of understanding on the goal of management and by extension, who owns listed public companies. 

In college, we were taught in finance class that businesses exist to create wealth for shareholders - a view referred by Adolf Berle as shareholder supremacy. His argument in 1932 was that: “All powers granted to a corporation were that the management or to any group within a corporation are at all times exercisable only for the rateable benefit of all the shareholders as their interest appears.” Thinkers of note have, however, disagreed with Berle’s perception. For example, E Merrick Dodd sees a business goal as not restricted to creating wealth for shareholders, but that business has a social service as well as profit making.

Dodd’s stand is that a business must offer secure jobs for employees, offer quality goods and services to its customers, pay suppliers on time and be a perfect fit to the environment.

Read More

Managers must be aware who they are in their corporations. The media takes the position that listed firms belong to shareholders. The argument by Milton Friedman is that the only social responsibility of a business is to increase profits.

Most shareholders think they solely own those listed companies, but in many circumstances, they are not.

How can you own a company when you do not have control over its assets? In law, the directors have control over assets and not shareholders.

Selfish interest

Even dividends to shareholders are approved by the directors. Of course, we can argue that shareholders appoint directors. Where shareholders are widespread, their influence is like a drop into the ocean. This means they do not matter and do not stop managers from pursuing selfish interest.

Ownership does not describe the relationship between a company and its shareholders.

Finance heavyweights, Black and Scholes proved that “it’s not only misleading to say that dispersed shareholders own a public corporation, but that it is even questionable from an economic perspective, to say that a single controlling shareholder owns a closely-held firm after it has issued debt.”

This debate about what should be the role of shareholder and whether a company has owners is critical to identifying a goal of a firm in business. Successful businesses are those with a goal.

The issue of debt capital by a company changes ownership and it becomes extremely difficult to determine the value of assets that belong to shareholders and those that belong to debt holders.

In any case, shareholders and debt holders in a firm share the residual risk in the sense that if the assets of their company become worthless, then both shareholders and debt holders lose; they become residual risk bearers.

A company financed by debt cannot be described as solely owned by shareholders. However, we could argue that shareholders are owners because they bear the residual risk i.e they are only paid after the claims from third parties are fully settled.

This issue of bearing risk is less clear if we look at what is going on in the media. Media companies are owned by shareholders if these firms are partly financed by debt, then the business risk and the assets are shared between debt holders and shareholders.

Furthermore, the owners and managers are different and one can argue that managers are equally risk bearers, particularly when the police arrest and confine the journalists.

Media houses hire professional managers, who then hire other employees, including journalist.

In the case of journalists, they bear greater risk in the line of duty yet they are not the owners.  One can, therefore, argue that they are co-owners. In law, shareholders only receive payments when the firm is profitable in the form of dividends.

-The writer teaches at the University of Nairobi

Shareholders NSE Nairobi Securities Exchange
Share this story


More stories

Take a Break