3289736 economics

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Shareholders and Objectives of Listed Corporations
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Shareholders and Objectives of Listed Corporations
Corporate executives and stockholders appear paralyzed. Executives complain that
shareholder interference and second-guessing make it challenging to do their jobs effectively and
achieve organizational goals. Shareholders have a legitimate gripe about lavishly compensated
CEOs despite poor results. Throughout the battle, the organizational goals and objectives have
been changed by the shareholders (Lim & Greenwood, 2017). On the contrary, boards are
increasingly expected to be both watchdogs and disciplinarians. The 1970s saw a power shift that
resulted in this impasse. Academic research into corporate managers’ motivations and behaviors
also contributed to the change, political and economic causes. However, corporate reality has
proven to be obstinate. Shareholders do not own corporations – neither do they make the final
decisions in the listed corporations (Lim & Greenwood, 2017). Therefore, they must work
towards meeting the company’s objectives. This paper will examine how shareholder
expectations have shifted corporate goals. This will be assessed by examining their monetary,
informational, and disciplinary roles.
Monetary
Providing money is a shareholder’s primary role. It is not as easy as it seems.
Corporations need money to invest in growth, but this money does not come from shareholders
collectively. The US has issued negative 287 billion dollars in corporate stock over the last
decade. It would be much higher to exclude financial firms and their frenetic fundraising in 2008
and 2009 (Driver & Thompson, 2018). Including dividends, US corporations have paid out
several trillions of dollars to shareholders in the last decade. Long-standing businesses are more
likely to invest with their funds or borrow funds. This is not an option for every business. Many
businesses rely on equity investors for funding.
A board member’s veto over management decisions and appointments are not
uncommon(Driver & Thompson, 2018). This does not apply to the vast majority of stockholders
and businesses. The stock market, rather than shareholders, funds most publicly traded
companies. The market gives liquidity. For a company to raise capital, its stock must be easily
changed and its prices visible. It aids consolidation. Investors who step up when a sudden cash
infusion is needed can profit from their initial investments to facilitate the sale of company stock
and the exercise of employee stock options. It is like lubricating the capitalist machine. All-stock
mergers frequently devalue assets. Many companies overuse stock options to reward employees,
especially senior executives.
Overall, it appears that market liquidity returns are dwindling (Mishra & Modi, 2016). A
market’s liquidity depends on a large number of volatile short-term speculators. A market
dominated solely by long-term investors is pointless. An overly short-term focused market has its
own set of issues. The NYSE now has high-frequency traders handling 70% of the daily trading
volume. This shift in perspective is due to three factors: Regulators in many countries have
reduced transaction costs by deregulating brokerage fees and other initiatives like price
decimalization (Roiter, 2016). In addition, new trading methods have been made possible by
advances in technology, particularly computer and communications hardware. Professionals
have displaced once-dominant individual investors, who now face greater incentives and
pressure to trade. Notably, households controlled more than 90% of shares in the U.S. firms in
the 1950s. Institutions now control over half of all publicly traded U.S. corporations (figure 1).
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The real institutional proportion is probably closer to 65 or 70 percent if you include hedge
funds, which are typically listed as homeowners, and institutional owners from outside
the country – foreign ownership of shares is not split down between people and institutions. The
proportion is significantly greater for the largest firms.
Figure 1: Decline of Individual Investors (Source: Federal Reserve)
The equities market has changed due to increased institutional ownership and other
factors. Brokerage fees have been reduced, but institutional investors have been hit the hardest.
Institutions have access to financial, computing, and communication resources, allowing them to
benefit from recent technological advances (Denis, 2016). People can make long-term plans that
ignore the whims of fashion and the market, but financial institutions cannot. Customers will
leave if returns are too slow. Today’s securities regulations prohibit excessive liquidity, trading,
or volatility (Maak et al., 2016) Transaction costs are seen as a good in and of themselves. That’s
not how taxes work: Short-term trading attracts a higher capital gains tax rate than long-term
investments in most countries. This tax preference is mitigated because many of the largest
investors do not pay income taxes as they are exempt from them.
Informational
Buying stocks gives you access to one of the world’s most robust databases. Finance
experts agree that it is an excellent source of company information. If one hears an executive or
their accountants claim that investors are undervaluing his company because its financial
performance is not recognized, rest assured that the market is correct. Public stock markets are
frequently criticized for being impatient and short-sighted (Stubbs & Higgins, 2015). However,
data shows that stock prices factor in future earnings decades out, especially for growing
companies. Investors are less likely to look ahead.
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As a result, stock markets have never been perfect in predicting a company’s future.
Knowledgeable traders would not waste time and energy gathering information that could be
used to stay ahead of the competitor (Zhang et al., 2017).While this may be adequate in the
framework of capitalism, it is much too vast for executives and board members seeking
information and guidance. Economist Paul Samuelson believed financial markets are micro-and
macro-efficient (Shubham et al., 2018). Aside from the stock price, shareholders may interact
with CEOs in various ways. Knowledgeable investors have contributed important information,
analysis, and suggestions from a startup to the Washington Post Company. In today’s market, this
is frowned upon.
The statute does not address shareholder communications to management, although
managers are less eager to attend due to the rule’s influence on shareholder attendance (Madhani,
2017). Management and investors now broadly interact through quarterly earnings conference
calls. On these calls are traders and investors from brokerage firms and research businesses.
Until the rules alter, long-term shareholders and management should talk more casually
(Shubham et al., 2018). These meetings help executives learn about the market and build
relationships with shareholders, leading to more cooperative governance. Regular contact with
board members and shareholders may also be beneficial. Several top executives believe board
members cannot be trusted in these circumstances. It is challenging to see directors efficiently
managing a firm if they cannot meet and listen to shareholders (Rao & Tilt, 2015). We have
witnessed an improvement in trust and greater relationships between shareholders and board
members, which may be used in the future in a crisis.
Disciplinary
In a disciplined firm, the only alternatives are selling shares or voting (Parmar et al.,
2017). Selling may be used to punish management by reducing the stock price, but a single
shareholder, particularly a significant shareholder, has little power. Many index funds cannot be
sold since they hold all the firms in a market index (Simionescu & Dumitrescu, 2018). Notably,
stock prices broadcast information loud and fast. Short-term investors are not as successful as
long-term investors in directing and punishing management (Zhang et al., 2017). As a
consequence, companies enjoying large proportion of high-turnover shareholders
underperformed the market. Big institutions that control most stocks have diversified portfolios,
which may be troublesome (Li et al., 2018). One cannot focus on one company’s governance or
performance if you hold hundreds or thousands of shares.
Most professional fund managers now depend heavily on voting guidance from
intermediaries like Institutional Shareholder Services (Zhang et al., 2017). Ultimately, it is better
than doing nothing. So far, there is little evidence that ISS’s focus on a few publicly available
governance principles leads to greater governance or firm performance. Even if one feels that
activist hedge funds can hold management to a higher standard, unusual takeovers will always
occur (Armitage et al., 2017). Most institutional investors may be lacking in motivation or time
to monitor and enforce management discipline properly. Also, investors are not all seeking the
same thing. Top-level corporate executives are well-paid professionals with high levels of drive
and skill who work full-time (Naciti, 2019). More items to vote on will not address the situation.
A culture of shareholder vs. management antagonism that encourages managers to
become more mercenary and self-serving may aggravate the problem (Li et al., 2018).
Consequently, most recent corporate governance advances have emphasized strengthening
shareholder rights and duties. Non-binding shareholder votes are required every three years
under the Dodd-Frank financial reform law. To dissolve “poison pill” agreements intended to
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deter hostile takeovers, a simple majority of all shareholders is necessary. This was done to
empower companies (Wahid, 2018). But it is crucial to remember that shareholders are not
owners. In an accident, you are liable for damages that exceed the value of your car—a simple
case. Investors, on the other hand, are entirely accountable for their funds. While some
shareholders function as owners, the majority are tenants—often for brief periods (Desai, 2016).
The law protects tenants, but they seldom have a say in managing or selling the property. That
makes sense for both long-term and short-term investors, in my opinion.
A first stage is incorporated in the “say on pay” regulation: Shareholders with at least two
years of service can vote. There will be a more significant transformation (Zhu et al., 2014).
Depending on the ownership term, voting power may be allocated on a sliding scale. Simpler yet
would restrict voting rights to shareholders who have held their shares for a year or longer.
Short-termism might be curbed by rewarding shareholders who are less interested in daily stock
price and quarterly profit variations (Wahid, 2018). Separating long-term owners from other
stakeholders may also create trust and openness. We need to move away from shareholder
democracy and provide more authority to those shareholders who are most inclined to speak out
(Levit et al., 2022). Involvement of shareholders while avoiding confrontation and dispute is
more likely to increase board effectiveness (Zhu et al., 2014). Large shareholders, for example,
may make informal or formal board member recommendations like in Sweden, where a vast
shareholder committee picks board nominees.
Recommendations and Conclusion
Large firms in the 1970s struggled with complacency issues. Managers perceived
themselves as custodians of historic institutions, unable to react to significant market changes.
As a consequence, shareholders were impatient, and academics devised ways to keep selfserving management on track. Following the revolt, managers were pushed to be more receptive
to new ideas and take greater chances. However, in the long term, shareholders have been unable
to rein in more aggressive management. Shareholders seldom prevail in asymmetrical battles
between management and shareholders until the business is in trouble. Long-term shareholders
should be prioritized, and relationships between shareholders, management, and boards should
be strengthened.
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