Shareholders

Conceptual Overview

Shareholders come in many forms. The company's residual profits are distributed among equity or ordinary shareholders once all other costs have been accounted for, including creditors, taxation, and retained earnings. Preference shareholders receive their dividend prior to the distribution of any residual to ordinary shareholders but in return forego their voting rights. A nominee shareholder holds the shares registered in his or her name for the benefit of someone else. A majority shareholder holds more than half of the company's shares. Most companies only have minority shareholders, no person owning more than half of the company. While majority ownership entails control of the enterprise, an effective controlling interest is often exercised by one or several of the larger minority shareholders.

Shares are owned by individuals and by organizations. Companies own shares in one another, often to further their corporate strategy. Insurance companies, pension funds, and fund managers seeking a return on large cash inflows from investors are also major institutional shareholders. The volume of shares owned by institutional shareholders increased rapidly in the second half of the 20th century. At the same time, the proportion of the population owning shares individually expanded as improved stock broking services, rising affluence, and privatization provided greater opportunities for individual shareholders. In spite of this spread in the numbers of shareholders, total share ownership remains heavily concentrated among the very wealthiest in society.

While shareholders may also be the managers of a company, in most cases there is a separation of these responsibilities. Managers are appointed to administer the company on behalf of its shareholders. This enables the shareholders to appoint managers with specialist skills that may not be available among the owners. The delegation of managerial authority to nonshareholders is additionally facilitated by the principle of limited liability, wherein the shareholder's financial liability in the case of corporate collapse is limited to the value of their fully paid shareholding. General limited liability developed from the middle of the 19th century. “No liability” shareholders do not have to meet any unpaid calls on their shares.

Limited liability, however, does not protect shareholders from underperforming managers or individual cases of malfeasance. This is because a principalagent relationship under conditions of asymmetric information exists between the shareholders and managers. In other words, managers (agents) know more about the company's day-to-day operations than do its shareholders (principals) and may use that information for their personal benefit rather than the company's. Therefore, effective corporate governance is a key issue for shareholders.

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