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Divorce of Ownership from Control | How Many Shareholders Affect a Business
How do economic agents make decisions?
When you spend your money, you tend to make the decision on your own. For example, buying a car.
However, when companies decide to spend money, it is not as straightforward as this.
Corporate decision making is made by shareholders. Companies often have more than one shareholder, and the more shareholders there are, the more complex decision making becomes.
The problem is amplified further when a private company becomes a public company: a company whose shares are available to buy in the stock market.
One example of a family-run company is Mars. It is a privately owned company, which means shares are owned by the people within the family and they are not made public. It is an example of a thriving family business; in fact, the Mars group is one of the biggest producers of chocolate around the globe (if not, the biggest).
However, successful worldwide companies such as Mars are becoming less common. Most global companies tend to turn to public ownership as a way of gathering more investment funds for expansion. When a company wants to become publicly owned, it can do by launching an IPO (initial public offering). This is a type of public offering in which shares of a company are sold to institutional investors and usually also retail investors. These IPOs are usually underwritten by investment banks, and from this point regular day-to-day people can buy shares in global companies.
The problem with this sort of structure is that there is a ‘divorce of ownership from control’. That means the managers/employees are not direct owners of the company. This means that they never really have the company’s best interests at heart. Employees can always leave the company in pursuit of better things. Some employees even leave a company and join competitor companies. Take Luis Figo’s infamous move from Barcelona to Real Madrid in 2000. Would an owner of a company make a move like this?
So, what this means is that employees often put other things ahead of the company’s needs. Employees have a tendency to want to work less hours and get paid more, get more job perks and earn a great pension via an employer-backed scheme. This is not irrational behaviour (people are meant to act in their own self-interests), however, it is the opposite of what the shareholders (owners) want. Owners want their companies to have a bright and profitable future, and employees who work less and claim more in the form of perks and pensions are more costly for a business. Many workers also join trade unions, which aim to increase wages of employees. This is by a process called collective bargaining.
Some managers can also look to prioritise the size and operation of a company, rather than focus on company profits. Being the head of a takeover or a merger can look good on your CV, but what if this action made your company less profitable in the long term? Managers can often get carried away with prestige over profits, which many shareholders also hate.
Profit = Revenue – Cost, so shareholders essentially want the greatest difference between revenue and cost possible. This gives them the best return on their invested money.
Governments can also own a share of privately run companies. For example, Germany’s second-largest bank, Commerzbank, is owned by the German government. They have a 25% stake in the business, which gives them the right to have a direct say in corporate decision making.
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