Shareholders do not own companies – King, corporate governance guru


September 27, 2017 | 5:15 pm
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Foremost South African corporate governance expert and former Supreme Court judge, Mervyn King, has challenged the notion that shareholders own companies sending ripples across a room full of company directors and shareholders gathered in Lagos.

While delivering the keynote address at the 10th edition of the annual conference of the Society of Corporate Governance of Nigeria, yesterday, King for whom the corporate governance code of South Africa is named, and whose code has become a standard for around the world, said that since a company is a legal person and slavery has been abolished, it is wrong to think that shareholders own a company.

But in a room of corporate executives  used to the concept of shareholders as the ultimate owners of a company, King’s words were not easily digestible.

“So if you claim the shareholder does not own the company, who does?” asked members of the audience.

“I am going to answer your question by asking you a question, could I own you?” asked King.

 The crowd responded with laughter as he made his point. “The answer is no. A company is a sovereign independent, artificial person, the same as you are a person and no one owns it.”

“It has its own assets, its own liabilities; shareholders play a role by providing equity capital. Most companies operating in Nigeria and elsewhere, operate with more debt borrowing from banks and other institutions, yet people still say the shareholders own the company.

“We went through a century of the primacy of the shareholder and the focus was on maximisation of shareholders wealth and a loss of focus on the company’s health but if the company’s health is good in the long term, it benefits the shareholders, and society and the environment and suppliers and everyone.

“So the providers of capital today are not only shareholders. The banks which is your money and my money deposited in the banks are lent to companies, their working capital and finances are more debt than equity so can you really say the shareholders own them? King asked.

The corporate governance expert said that the company is in reality an artificial person, with no heart, mind and soul and directors when appointed, they become its heart, mind and soul with a duty of care for the company.

Tracing the history of companies to the 17th century, King said that companies were unincorporated entities, with unlimited liabilities to the equity contributed by wealthy landowners. In order to reduce risk, it was decided to create an artificial person with limited liability.

However, this soon sparked negative reactions by the society who said that an individual without a body could not be punished. But bowing to pressure by new wealthy middleclass in the middle 18th century, who wanted limitation on risks and political leaders who wanted more jobs created, the act creating a limited liability entity was passed in 1855 in the UK.

After this was created, wealthy families who provided the capital appointed their family members as directors and the focus shifted to primacy of shareholders who sought short-term profits even at a cost to society and environment. This was reinforced in the case of Henry Ford and the Dodge Brothers when Ford tried to use more profit to pay wages. The courts ruled against Ford thereby institutionalising primacy of shareholders.

King further averred that those days are now over reiterating that companies need to go beyond creating money to creating value. He said companies have to provide positive outcomes such as ethical culture and effective leadership, performance and value creation in a sustainable manner, adequate and effective controls and trust and good reputation to gain legitimacy.

King urged shareholders to eschew self-concern and make decisions in the best interest of the company. Have competency in ensuring that value is added in decision that is made.



September 27, 2017 | 5:15 pm
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