What is the Relationship Between Shareholder Interests and Corporate Governance?

In the world of business, shareholders and company management go hand in hand. Shareholder activism continues to rise year after year, acting as a catalyst for change and advocating for transparency, accountability, and alignment of interests. While, good corporate governance serves as the foundation to ensure ethical conduct, business integrity, and long-term success of a business.

When a company aligns shareholder interests with governance practices, it can foster sustainable growth that contributes to the overall success of a company.

What Rights Do Shareholders Have?

Shareholders make the decision to invest their hard-earned assets in companies with the hope that they will receive a return on their investment. Beyond the financial commitment, being a shareholder grants you rights that hold the power to shape the course of a company. These rights form the foundation of effective corporate governance, promoting transparency and accountability in organizational decision-making. 

What are shareholder rights? Individual shareholders are entitled to:

  • Vote on certain business decisions, including electing directors or approving significant business transactions 
  • Own a portion of company assets
  • View certain financial documents and records, such as the minutes of board meetings
  • Receive dividends that the company pays
  • Transfer ownership of stock
  • Sue for wrongful acts 

It is crucial for shareholders to be familiar with their rights and responsibilities so they can actively participate in corporate activities and make informed decisions about a company’s performance and direction. 

Corporate Governance

Corporate governance refers to the set of rules, practices, and processes that guide how an organization is directed and controlled. The basic principles of corporate governance include accountability, transparency, fairness, responsibility, and risk management. It aims to balance the interests of various stakeholders such as shareholders, senior management, directors, customers, suppliers, and the community. 

A company’s corporate governance plays a pivotal role in setting its course, fostering ethical business practices, ensuring financial sustainability, and establishing trust with investors. Strong and proper corporate governance is essential in supporting long-term shareholder value and signals to the market that the organization is skillfully managed.

The board of directors play a major role in influencing good corporate governance practices and is expected to adhere to the company’s governance policies. Fiduciary duties further emphasize the responsibility of boards to act in the best interest of shareholders and consider their feedback and concerns. 

In short, achieving good corporate governance enhances a company’s brand reputation, resilience, share price, and contributes to the overall success and sustainability of the organization. 

What is Shareholder Activism?

Shareholder activism is when an individual, or entity, uses its equity stake in a company to influence and put pressure on decision-making and policy changes. These activists use various strategies to provoke change within a company, such as proposing changes in leadership, advocating for ESG initiatives, or pushing for alterations in the company’s financial structure. According to Corporate Finance Institution, “a business may be a target for shareholder activism if it reports high costs, suffers mismanagement, or if a shareholder believes that a company could become more profitable if it is run as a private company.” 

Typically, the investor types that engage in shareholder activism include hedge funds, private equity firms, and high-net-worth individuals. Well-known shareholder activists, Carl Icahn and Bill Ackman, have both used their influence to lead activist campaigns to increase shareholder value in various companies. These activists can use several strategies to initiate change within an organization, such as:

  • Public campaigns
  • Proxy contests
  • Direct negotiations with management 
  • Shareholder derivative action lawsuits 

Shareholders should recognize the influence of their role and not underestimate their collective power to drive positive change within companies.

The Connection Between Shareholder Activism and Corporate Governance

Shareholder activism often drives good corporate governance, prompting boards to play a role in addressing issues to maintain a balance between stakeholder expectations and company objectives. These concerns might include executive compensation, transparency in financial reporting, internal culture, social or ethical issues, environmental concerns, and the business model of the company. Companies whose boards actively listen to shareholder concerns and regularly communicate their plans to address those issues, can mitigate the necessity for shareholder activist campaigns, therefore averting negative perceptions and preserving value.  

In essence, the connection between shareholder activism and corporate governance emphasizes the importance of collaboration, transparency, and responsiveness in guiding companies towards sustained success. As shareholders and companies navigate this relationship, the ultimate goal remains the alignment of interests, fostering growth, resilience, and positive impact within the corporate landscape. 

If you believe a company has violated your shareholder rights, you may benefit from speaking with an experienced team of attorneys. Contact us for more information on corporate governance to ensure your shareholder rights are protected.  

Having information at your fingertips is easier than ever. Enroll in Robbins LLP’s free investment monitoring service, Stock Watch, for notifications of corporate misconduct impacting the value of your investments, advice on how to hold corporate officers and directors accountable for their misconduct, and to receive information about class action settlements. 

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