7 Primary Stakeholders: Shareholders and Corporate Governance
Types of Shareholders and Agency Theory
• Shareholders are legal owners of business corporations.
• Two main types of shareholders:
o Individual shareholders
o Large shareholders
• Large shareholders are typically grouped as blockholders and institutional shareholders.
o Blockowners are individuals or corporations that buy firms’ shares directly, not
through an investment entity.
o Institutional investors are entities such as mutual funds, banks, pension funds, and
insurance companies that invest money on other people’s behalf.
• Two problems shareholders face with top management and CEO:
o First, there is moral hazard whereby the top management does not put in the
right effort or misuses the company resources for their own interests.
Corporate Governance
Board of Directors
• The board of directors is often seen as one of the primary mechanisms to monitor and
control the conflict.
• Functions of Board of Directors include:
o Review and provide guidance on all aspects of strategic management.
o Provide guidance on tactical and operational planning.
o Assist in special investigations that question top management’s integrity.
o Have the appropriate financial and accounting expertise to ensure the accuracy and
integrity of the company’s financial and accounting reporting.
o Take steps to ensure that there is a transparent and formal mechanism to elect new
board members.
• Issues relevant to the effectiveness of a board of directors:
o Board independence
o Diversity
o Board size
o Board expertise
• Some of the key considerations to form the best board:
o Have a board with six to seven members.
o Get the right mix by bringing in people with new expertise.
o Have board members with sufficient expertise.
Executive Compensation
• Executive compensation refers to the pay, perks, and benefits given to top executives in
a company.
• Criticisms regarding executive compensation
o High pay has encouraged CEOs to take excessive risks to keep companies growing.
• Justifications for high executive compensation
o Stock values have grown astronomically over the past 25 years.
o CEOs and top executives have rare skills and they devote their entire lives to the
company.
• Stock options are stocks awarded to the CEO who then has the ability to sell the stock at
a future date.
• Companies will need to address a number of issues as they devise such packages and
these include:
o Aligning CEO incentives with long-term health and profitability of companies.
▪ Many companies are abandoning compensation practices that promote
short-term gains.
Ownership Structure
• Ownership structure refers to the primary way ownership of shares of the company is
structured.
• Blockholders are those shareholders that have more than 5% equity stake in a company.
• Three main types of blockholders:
o Corporate blockholders: corporations with significant ownership in a company.
• Private equity refers to the various forms of private funding that are available to
companies that are not necessarily publicly traded.
• Two types of private equity:
o Business angels are those who provide private equity funds when a venture is too
small or risky.
Corporate Governance and Globalization
• Corporate governance will remain a key aspect of how companies need to be governed in
order to run the company efficiently and effectively.
• Uncertainty avoidance reflects the degree to which individuals within a country are
comfortable with ambiguity and uncertainty.
o High uncertainty avoidance is also linked to having more outsiders on the board of
directors.
o This increase in outsiders provides the company with added expertise and
capabilities to reduce risks and ambiguities.
• Masculine societies tend to embrace values that are stereotypically male.
The Future of Corporate Governance
• Multinationals need to consider shareholder rights, which include:
o To purchase shares.
o To timely and accurate information from the company.
o To share in the profits of the corporation.
o To participate in key decisions related to new strategic directions of the company.
o To freely exercise their ownership rights.
• Corporate governance is also seen by both investors and governments as a critical way to
curb corruption.
o Companies with strong governance mechanisms are more likely to have systems in
place to prevent misappropriation and misuse of assets.