Business & Economy

What Good Are Shareholders?

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Justin Fox and Jay W. Lorsch

This article responds to the growing demand for improved corporate governance by looking at how existing practices, especially short-term trading, have undermined the purpose of shareholders. It argues that giving increased power to shareholders will not solve the current failures in corporate behaviour. In order to demonstrate this point, the authors evaluate shareholder contributions under three categories—money, information, and discipline—before offering suggestions for improvements in each of these areas.

Most of the challenges in these categories are attributed to a greater focus on short-term trading within the market. Some of the effects of this shift include greater market volatility, executives’ difficulty in interpreting shareholder price information, and failure of corporate discipline by the owners (shareholders). The authors’ recommendations focus on the appeal for greater relationships between various stakeholders as opposed to more disciplinary reforms. This is expressed through ideas such as favouring long-term shareholders; encouraging more relational contact amongst managers, board members, and shareholders; and finding roles for other stakeholder groups tied to the corporate entity.

For those interested in considering other examples of relationally focused solutions to these problems, reading Michael Schluter’s article on Risk, Reward and Responsibility: Limited Liability and Company Reform would be a good place to start.

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Source: Harvard Business Review

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