How Shareholders Affect a Business
Shareholders are the owners of a business and are the ultimate decision-makers on the direction of a company. While the management of a company has the day-to-day decision-making power, shareholders guide the strategy, financing and selection of management of the firm. In many cases, shareholders are the management of the firm. Shareholders also receive the benefits of dividends and the appreciation of the company's value. However, they also are responsible for the liabilities of the firm and the risk of the value of the company dropping to zero.
Shareholders primarily affect a business through their voting rights in company decisions. Shareholders generally have power equal to the percentage of shares they own. So an investor with 20 percent of the shares of a restaurant has 20 percent voting power for making major decisions. The management often will put up major business changes to a vote by the shareholders. The board of directors makeup also is voted on by shareholders in proportion to the company ownership.
Shareholders occasionally have conflicts of interest with other shareholders or the company at large. For example, a retail store needs to purchase insurance for its goods. One of the shareholders is an insurance salesman with a price that is higher than average. This particular shareholder likely will lobby for the store to use his services, while other shareholders likely will vote a different way. The tiebreaker will be the group with the largest percentage ownership of the store.
The board of directors also creates committees to monitor the firm and provide information for the shareholders. The financing committee is in charge of approving the budget, taking loans and issuing new shares. The audit committee verifies the information management provides to shareholders by checking bank accounts and speaking with customers. The personnel committee chooses the president and other senior management. Each of these committees represents important tasks that the shareholders affect through the nomination of the board members.
The board of directors is the legal representative of the shareholders. The board has several duties, including providing continuity for the firm, selecting the managers, assuring the firm is sufficiently financed, providing guidance on policy and strategy and reporting to the shareholders. The board does this by meeting regularly and receiving reports from the managers. The board also approves and confirms the data that is provided to shareholders about the operations of the company.