Appearance vs Reality: Shareholders & Ownership

Robert Monks is the dean of corporate governance experts. In this statement from his blog he comments on the growing chasm between the meaning of being a shareholder and the realities of ownership in 2011.


"Adolph Berle wrote 80 years ago about “...the dissolution of the old atom of ownership into its component parts, control and benefit ownership.” Very crudely this means there are owners who only want a return on their investment and there are owners who want to have a say in how their investment is used.

These two very broad umbrella categories cover a myriad of interests held by owners. Ira Millstein’s telling metaphor describes shareholders as a zoo comprised of animals with very different dispositions and appetites (Charkham Memorial Lecture, 2008). Like any other cross section of society, owners are a diverse group with diverging (and conflicting) interests. And, since modern ownership sometimes amounts to short term holdings managed by computer algorithms, people do not always see themselves as owners (indeed, even if they ever know of this “ownership”).

The Delaware Chancery Court has recently identified two different categories of shareholder – arbitrageurs and the rest – in holding that the board acts correctly in serving the interest of the rest (Air Products v. Airgas). In my opinion, if a court is at liberty to decide which category of shareholder a director is obligated to serve, the disciplining impact of “hostile takeovers” is diluted significantly.

Under the present conditions where shareholders do not share a common interest - indeed, their interests may be diametrically opposed - the traditional pillar of corporate law and governance that accountability to ownership is the duty of management must be crumbling. And without the involvement of active and engaged shareholders, the entire corporate system lacks its basic foundation.

Where there is no identifiable group on whom to focus the fiduciary responsibilities of management, a new basis for corporate legitimacy is needed.

Here are my questions:
1. What do owner and shareholder mean in regards to corporations and governance?
2. Can we lump all stock owners together or do we need multiple classes of stock to accommodate owners with different levels of interest and participation?
3. To whom does management owe fiduciary duty when considering the interest of owners? Does having one class of ownership work in management’s favor because it keeps shareholders from ever truly working together to enact change?
4. How can you have “shareholder responsibility” when there is no possibility of shareholders having a common interest and working together. Because there are today so many different classes and categories of shareholders – arbs, derivatives, borrowed stock, etc – that common purpose is impossible.