Shareholders

Definition

Shareholders are individuals or entities that own shares or stock in a corporation, giving them a claim on part of the company's assets and earnings. They play a crucial role in corporate governance, influencing decisions through voting rights and having the potential to receive dividends based on the company's profitability.

5 Must Know Facts For Your Next Test

1. Shareholders have the right to vote on important company matters such as electing board members and approving mergers or acquisitions.
2. There are two main types of shareholders: common shareholders, who typically have voting rights, and preferred shareholders, who usually do not have voting rights but have a higher claim on assets in case of liquidation.
3. Shareholder activism has grown in recent years, with investors increasingly engaging in corporate governance to influence management decisions and promote sustainability practices.
4. In the event of a company's liquidation, shareholders are last in line to receive any remaining assets after debts and obligations are paid off.
5. Institutional investors, such as pension funds and mutual funds, hold a significant percentage of shares in publicly traded companies, greatly impacting shareholder dynamics.

Review Questions

• How do shareholders influence corporate governance through their voting rights?
  • Shareholders influence corporate governance primarily through their voting rights at annual meetings where they can vote on key issues like electing the board of directors or approving significant corporate transactions. The collective decisions made by shareholders can shape company policies and strategies, ensuring that management is held accountable for their performance. This engagement is vital as it reflects shareholders' interests and concerns regarding the direction of the company.
• Discuss the impact of shareholder activism on corporate decision-making and company policies.
  • Shareholder activism has significantly impacted corporate decision-making by enabling investors to voice their concerns and push for changes in company policies. Activist shareholders often advocate for enhanced transparency, better environmental practices, or improved financial performance. Their influence can lead to strategic shifts within companies, prompting management to prioritize long-term value creation over short-term profits, ultimately affecting how businesses operate in today’s market.
• Evaluate how the roles of common and preferred shareholders differ in terms of rights and claims during a company's financial distress.
  • In times of financial distress, common and preferred shareholders have distinct roles and claims. Common shareholders typically possess voting rights but are last in line when it comes to asset distribution during liquidation, making their investment riskier. Preferred shareholders, on the other hand, do not usually have voting rights but have a higher claim on assets compared to common shareholders. This means that preferred shareholders are more likely to receive compensation before any distributions are made to common shareholders if the company faces bankruptcy or liquidation.

Related terms

Dividends: Payments made by a corporation to its shareholders, usually in the form of cash or additional shares, as a portion of the company’s earnings.

Proxy Voting: The process by which shareholders delegate their voting rights to another party, allowing them to vote on their behalf at corporate meetings.

Corporate Governance:

The system by which companies are directed and controlled, involving the relationships among the management, board of directors, and shareholders.