When you hear the term 'shareholder', you might envision someone sitting in a boardroom, making high-level decisions about a company's future, but this doesn't fully encapsulate their importance and responsibilities.
In this article, we look at what it means to be a shareholder, the different types of shareholders and the rights and responsibilities that come along with this. We also cover the relationships between shareholders and other stakeholders and discuss shareholder funds and value.
What is a shareholder?
A shareholder is an individual or entity that owns shares or equity in a corporation, making them a part-owner of the company. Shareholders have a financial interest in the company's success and typically have certain rights and responsibilities associated with their ownership.
This type of ownership allows the shareholder to reap the benefits of a company’s success. These rewards can come in the form of increased stock valuations or financial profits distributed as dividends. Conversely, when a company loses money, the share price invariably drops, which can cause shareholders to lose money or suffer declines in their portfolios.
Types of shareholders
There are two standard shareholders which should be noted:
- Common shareholders: common shareholders are the most prevalent type of shareholders in a corporation. They have voting rights at shareholder meetings and may receive dividends if the company chooses to distribute profits. However, they are at the bottom of the priority list when it comes to receiving assets or dividends in the event of bankruptcy or liquidation.
- Preferred shareholders: preferred shareholders, as the name suggests, have certain preferences over common shareholders. They often receive fixed dividends at a predetermined rate, and they have a higher claim on the company's assets in case of liquidation. However, they usually don't have voting rights or have limited voting rights compared to common shareholders.
Role of shareholders in corporate governance
As already noted, shareholders have more responsibilities than many may expect. These include:
- Voting rights: common shareholders typically have the right to vote at shareholder meetings. They can elect the board of directors, approve major corporate decisions, and have a say in corporate governance matters.
- Oversight: shareholders play a crucial role in overseeing the company's management and holding them accountable. They can voice concerns, ask questions, and vote on key matters to ensure the company's best interests are served.
- Proxy voting: shareholders who cannot attend meetings in person can use proxy voting, allowing them to appoint someone else to vote on their behalf.
Relationship between shareholders and other stakeholders:
The association between shareholders and other stakeholders can significantly impact the direction, decisions, and ethical responsibilities of a business. Some of the key considerations include:
- Management: shareholders have a significant influence on the company's management through their voting rights. The board of directors, which is typically elected by shareholders, selects the company's top executives. Shareholders can also use their voting power to approve or disapprove of management decisions and executive compensation packages.
Employees: shareholders indirectly impact employees through their influence on corporate policies and executive decisions. For example, if shareholders demand cost-cutting measures to increase profits, this might affect employee compensation or job security. - Employees: shareholders indirectly impact employees through their influence on corporate policies and executive decisions. For example, if shareholders demand cost-cutting measures to increase profits, this might affect employee compensation or job security.
- Other stakeholders: shareholders are just one group of stakeholders in a corporation. Other stakeholders include customers, suppliers, creditors, and the community at large. Balancing the interests of all these stakeholders is a key challenge for corporate governance. Shareholders may push for profit-maximising strategies, but these strategies should also consider the broader impact on all stakeholders to ensure ethical and sustainable business practices.
In summary, shareholders are individuals or entities who own shares in a corporation, and they have varying rights and preferences depending on whether they are common or preferred shareholders. They play a vital role in corporate governance by electing the board of directors, overseeing management, and influencing major corporate decisions. Their relationship with other stakeholders, such as management, employees, and the broader community, is complex and requires a balance between profit-seeking and responsible corporate citizenship.
What are the rights and responsibilities of a shareholder?
Rights:
- Voting rights: Common shareholders typically have the right to vote at shareholder meetings. They can vote on issues such as the election of the board of directors, major corporate decisions, and changes to the company's bylaws.
- Dividend rights: Common shareholders may be entitled to receive a portion of the company's profits in the form of dividends. Preferred shareholders, if applicable, have priority in receiving dividends.
- Information rights: Shareholders have the right to access certain company information, such as financial statements, annual reports, and disclosures, to make informed investment decisions.
- Liquidation rights: In the event of the company's liquidation or sale, shareholders typically have the right to a portion of the company's assets after the satisfaction of debts and obligations, with preferred shareholders having priority.
Responsibilities:
- Compliance: Shareholders must comply with all relevant laws and regulations governing their ownership and trading of company shares.
- Exercise voting rights: Shareholders should actively participate in shareholder meetings and exercise their voting rights responsibly to help shape corporate governance.
- Informed decision-making: Shareholders have a responsibility to make informed decisions about their investments. This includes staying informed about the company's financial health and performance.
- Ethical considerations: Some shareholders may also have ethical responsibilities, such as advocating for sustainable and socially responsible business practices if they align with their values.
What are shareholder funds?
A shareholder Fund is the fund available to stakeholders after all liabilities have been met in the event of a company’s liquidation. It's essentially the value that belongs to the shareholders.
What is shareholder equity?
Shareholder equity is a broader term encompassing the ownership interest of common and preferred shareholders. It includes the value of common and preferred stock, retained earnings (profits reinvested in the company), and other equity accounts.
What is shareholder value?
Shareholder value refers to the creation of value for shareholders through various corporate activities and decisions. It's the ultimate goal of many businesses, as increasing shareholder value often leads to higher stock prices and returns. Shareholder value can be enhanced through strategies that increase profits, boost stock prices, pay dividends, or engage in share buybacks.
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell investments mentioned, or a solicitation to purchase securities in any company or investment product.
The information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, whether express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
Before making an investment decision, you should familiarise yourself with the different types of specific risks associated with the investment portfolio of each of our Funds and Multi-Asset Model Portfolios. For Liontrust Funds, this information can be found in the final Prospectus and Key Investor Information Documents (KIIDs) and/or PRIIP/KID available on our website: www.liontrust.co.uk. Our Multi-Asset Model Portfolios are available exclusively through financial advisers. Financial advisers can find further information on the different types of specific risk associated with the Liontrust Multi-Asset Model Portfolios in the relevant brochure, also available on our website: www.liontrust.co.uk. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
