Saturday, April 29, 2006

Shareholders do not own companies

In the past few months, the press has carried a number of articles discussing shareholder ability to express their disapproval of CEO compensation by voting against the board. In fact, we never see this happen. Recently, over 20% of Pfizer shareholders voted against the election of two members of the board, and the press trumpeted this as an example of shareholder power. There are several reasons why this is not true. Firstly, unlike in political elections, shareholders who do not vote at all have their votes cast with management. Secondly, shareholders who really disagree with maanegement are more likely to simply sell and buy shares in another company.

If we consider the characteristics of ownership, shareholders do not have many of them. They do not have rights of disposal (in the sense of destruction), or even of access (try getting into an R&D lab as a shareholder). The reality is that companies are "owned" by top management, and shareholders simply acquire rights to dividends and appreciation. As such ownership is simply passed on, much like in North Korea. It is only regulation and legislation which keeps companies under control/

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