Shareholder Rights 101
Shareownership means having a piece of the stock of a company. Companies divide themselves into a fixed amount ("stock") that they sell, to specific people or anyone in the public. These people collectively share the ownership of the company. When the company sells its stock, the cash generated helps finance everything it does. The worth of the stock is based on supply and demand, which relates to the stability of the company and the profits it shares.
The Dutch East India Company invented this system in 1611.
Their ability to raise money by issuing stock (and bonds) to the general public allowed them to expand faster than their competition, leading to 200 years of dominance of global trade, and a total value of $8 trillion in today's money. In perspective, that's equivalent to 20 of the largest companies in the world today, combined, or the combined GDP of Japan and Germany.
Of course, the Dutch East India Company had many problems. Now, those problems belonged to public investors as well as company managers.
The first 'shareholder revolt' arrived in 1622, at the height of the Dutch Tulip bubble, where the public investors clamored to audit suspicious accounting practices by greedy management. Thus began corporate governance, and the concept of Corporate Social Responsibility (CSR).
Ever since then, shareholders have had rights to a say in what the company does.
In the modern era, the SEC protects shareholder rights for American public companies.
Companies are required to be transparent with their shareholders, provide avenues for communication, and to give shareowners a vote in many aspects of what the company does. Companies publish annual reports, host annual meetings, and distribute annual ballots.
The most important point is that companies serve shareowners. When an issue is in the shareowner interest, the company should do it. That principle is true regardless of the regulatory details, in America or elsewhere.
Pathways to Impact as Shareholders
How does a good idea get from a shareowner to the company management, and then to becoming implemented in the world?
Effort and coordination. Having a good idea is only the first step. Some ways are more effective than others.
Formal Shareholder Resolutions
Shareholders can write a proposal called a shareholder resolution. These resolutions are voted on at the annual company meeting, once a year.
In the USA, the SEC reviews each resolution rigorously. Writing a resolution that passes muster requires careful study.
Few resolutions make it to the ballot; the average company sees a shareholder resolution only once every 7 years.
When they come to a vote, most resolutions never achieve 50% support.
Even if they did, the resolutions are non-binding. They don't force the company to do anything.
Nevertheless, resolutions often lead to change. Whenever a resolution gains 20-30% support, the company management usually makes the change. After all, company management wants the stock value to increase just as much as the investors.
In fact, the measure of a successful shareholder resolution is whether it was 'withdrawn,' not how many votes it achieved. Withdrawal means the company made the requested change, so the author of the resolution can take back the proposal.
In other words, the success of shareholder resolutions is about communication. Change happens when a substantial number of investors signal that they support a good idea.
Informal Shareholder Meetings
Of course, the formal shareholder resolution process takes a long time to achieve a chance to communicate with company management. Most large investors, like mutual funds or pension funds, skip to the chase. They can just call up company management, and have a meeting in private, anytime.
Contrary to their name, informal meetings are only available to you if you have tens or hundreds of billions of dollars in assets. Yet, informal meetings are the most common form of shareholder engagement globally, because they can happen even without a government-mediated formal resolution process.
Informal shareholder meetings are often more effective at persuading management than public formal resolutions. Here are a few reasons why.
- They can happen in real-time
- De facto, millions of investment dollars are at stake
- Company management respect Fund Managers
First, informal meetings aren't limited to the annual shareholder meetings. This can be important, because neither is the real world. If a crisis occurs, the company will always have private meetings with its investors first. These meetings can lead to action soonest.
Second, the fund managers at these informal meetings will commonly be responsible for north of a billion dollars in assets. Even if they aren't already invested in the company in question, their potential investment will matter to that company's stock price. Although any one fund generally can't singlehandedly affect a stock price, scholars have documented a real phenomenon called 'institutional herding.' Just like in any other aspect of human lives, people look around at what other people are doing before making a decision. When a prestigious fund manager decides to invest in a stock, other investors take note and often follow the crowd.
Third, company management respect the staff at large investment funds. They see them as peers or higher. The shareholder engagement staff of investors are highly educated. Like lawyers in a courtroom, they are experts at presentation and negotiation.
You may have heard of public campaigns, such as twitter boycotts, sit-ins, banner unfurling, or plain old public shaming via news media.
The truth is that public campaigns are most effective with consumer brands. Consumer brands, like Disney, Nintendo, or McDonalds, are particularly sensitive to public opinion. Other brands, such as mining companies, don't really care what the public thinks. In those cases, activists hope that the public awareness will lead to government regulation, or the threat of government regulation, to compel companies to take action.
Buying and Selling
Many people ask, "if you don't like what a company does, why don't you just sell it?" Or, if you already took that step, "I don't own any bad companies so I don't have to engage with them."
Were everyone to sell or buy a company at once, the stock price would change. Selling a company because they are socially harmful likely won't have the same effect, particularly as an individual. Amoral investors would keep buying shares they think are undervalued, and the market price would not change.
As any investor will tell you, no company is perfect. Even the 'good' companies have sore spots. Companies are collections of humans. There is almost always room for improvement.
The Power of Stake
The premise of Stake is that you, as an individual, have the same shareownership rights as a billion dollar fund. Stake extends to you the ease with which large funds can call up companies to persuade them to improve, anytime. We do this by pairing you with likeminded funds!
Asks on Stake are just as legally binding as formal shareholder resolutions. Neither are.
Stake is flexible. You can create an Ask on any issue, at any time, with funds as well as with companies, in plain english.
At the end of the day, Stake exists to help you share your good ideas and get them done. The world needs more good.