Do (Toyota’s) Shareholders Own the Company?
Just what is the relationship between shareholders and the companies in which they hold shares? People who own shares through pension plans, mutual funds, and so on, don’t even know the names of the companies they’ve invested in. And yet, in some sense, the managers of a company are supposed to work “for” shareholders. What does that mean?
As illustration, see, for example, this story recent story about Toyota and the currently-not-so-cozy relationship it has with its shareholders: Toyota Shareholders Sue Over Fallen Stock Price
Toyota shareholders incensed over a sudden drop in the Japanese automaker’s stock price are heading to court with lawsuits claiming company executives deliberately misled investors and the public about the depth of accelerator problems in millions of its vehicles….
Some people will find this odd. How can shareholders sue the company? Don’t they own the company? Well, it would be odd, if in fact that were true.
A good critique of the notion that shareholders own the company can be found in John Boatright’s Fiduciary Duties and the Shareholder-Management Relation: or, What’s so Special About Shareholders?, in which he argues that, if there is any sense in which shareholders can be thought of as owners, it is in a very special sense that differs markedly from other examples of ownership of property. Boatright writes:
Ownership of a corporation is different, of course, from the ownership of personal assets. Most notably, shareholders do not have a right to possess and use corporate assets as they would their own; instead, they create a fictitious person to conduct business, with the shareholders as the beneficiaries….
And it’s often noted that, as a shareholder, you don’t automatically have the right even to set foot on corporate property. That’s a pretty strange form of ownership.
(The notion that shareholders do not own corporations is also a favourite theme of law professor Steven Bainbridge. See his blog entry, Who Owns the Corporation? Nobody.)
Others hold that, yes, shareholders do own the company — it’s just that it’s an unusual form of ownership, set up to meet particular needs. The question, then, isn’t simply whether shareholders ought to be regarded as owners. It’s rather to what extent shareholders ought to be regarded as owners, for what purposes, and what the legal and ethical implications of this odd form of ownership are. In the case of Toyota, a judge is going to have to decide, in effet, whether the company’s shareholders are owners whose employees (managers) failed in their duty of loyal service, or whether, instead, the shareholders are merely another stakeholder group that was let down.
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Thanks to Wayne Norman for showing me this story, and for pointing out this implication.
The Business Ethics Blog 
I’m always amused when a corp exec comes on the air and says that they are trying to maximize shareholder profits. When there’s a problem such as a proposed regulation, it seems that’s the defense is that they are acting in the interest of their shareholders. Balderdash!!! When I get my proxy to vote my 200 shares of xyz corp, I generally throw them in the waste basket. When there are over a billion shares outstanding it’s hardly worth the effort.
With some of the high salaries and big bonuses it’s hard to believe that they are acting in my interst or even in the interest of the large institutions.
However, the institutions and funds do have a greater impact and in some cases assert that influence. My hope is that they are thinking about me too when they vote.
My My favorite topic right now having suffered badly with some stocks such as AMR. AMR is one of best examples of shareholders being shafted. Although they had billions in reserves AMR stated it was in the best interest of the shareholders perhaps they meant stakeholders which include unions, bond holders, passengers, public entities, debtors, creditors (experts, advisors and executives. The latter group who should be serving the interests of shareholders only or at least mostly clearly has an agenda that does little for shareholders. There is so much common sense that ownership collectively has the ultimate authority. Unions are being blamed of course and they do share much of it. However the board and management are the enemies of shareholders as their plan is to wipe out existing shareholders and issue fresh shares. What it means is that the big guns have disposed of their shares and the entire stake is mostly held by retail small investors either direct or indirect through funds etc. and they believe deserve to be screwed as they did not heed the Wall Street warning and did not see through the AMR lies.
Where a company is for the public good or the union stakeholder and not the shareholder – is that not communism? – Taking possession of someone’s asset for the public good- whittle down its value first is common in Venezuela. The mystery to me is why shareholders have tolerated greedy ceos and a corrupt board of directors who are in the pocket of the executives and high flyer advisors who also make big bucks on our back. I agree with Franklin about voting rights, many times its only advisory but i do think there are key issues that need the direct approval of shareholders 1) compensation, when extraordinary, e.g. over $1 million .2) board of directors and who they are nominated by, who they truly represent shareholders or other stakeholders 3) role and compensation of advisors and other issues that are unfair to shareholders.
Franklin I understand exactly how you feel about voting. I have been voting http://www.proxyvote.com. I have over 100 shares so it can be timely. But i go into web site and I vote NO to directors who have no real qualifications- potential yes men, I mostly vote no to the compensation. On some occasions i actually vote yes, where there is clarity and a sense of fair play with shareholders, very rare. If all shareholders voted no, IF IN DOUBT VOTE NO, then shareholders will once again be relevant. Government can help with shareholder reforms where a shareholder can have a fixed; position on an issue -e.g. no to poison pill. Just be like Nancy Regan and “just say no”, be lazy if you want and if they dangle reasons that benefit you , heck vote YES. But we have to vote otherwise we are screwed. Government can help, – companies should be required to set up a web site for their owners where they can review qualifications of director and ask questions before voting. There should be greater ease in suing individuals rather than the company you own , perhaps lawsuits where they are are serous ethical breaches.
Thanks for the thoughtful post and the Bainbridge link. One option is to follow those who prefer to classify shareholder rights as essentially “rights to residual” rather than rights to ownership. This addresses some of the problems you suggest. Strangely, Boatright and his critics may find this terminology appropriate.
Excellent entry Chris. I have been to shareholder meetings that were merely a mockery of the entire shareholder-ownership concept. It can be a very frustrating experience–especially when there is alleged fraud or malfeasance at issue. While I was reading this and contemplating the issue afterwords my mind kept returning to the notion of corporate rights (Thursday, September 24, 2009) and the reciprocity of the two. Seems that the notion is a breeding ground for paradox.
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