Keeping the shareholders happy

According to Australian Stock Exchange statistics, more than half of adult Australians (55 per cent, or eight million in number) now own shares in a company - either directly or through a managed fund. That means the majority of Australians, including a sizeable percentage of people reading this article, are part-owners in a business.

For those readers who do own shares, let me ask you one question: have you ever thought about having more of a role in the company or companies for which you have a financial interest?

The answer will probably be “No”. This is because, traditionally, directors and managers have assumed the bulk of power in the corporation, and are responsible for almost all the decisions affecting the company. Given that public companies often have a large number of shareholders, it is considered rational for shareholders to remain passive - collecting the dividend cheques and occasionally giving blessings to decisions (via the annual general meeting) already made.

An interesting point relating to the issue of shareholder “empowerment” is that both the proponents and opponents of empowerment adopt a similar approach. Those on both sides of the argument view shareholder rights as being a means to an end, rather than an end in itself. The end which connects both proponents and opponents in their analysis is maximising company performance - making the company as healthy as possible, in governance terms, to achieve more profits. Somewhat counter-intuitively, their harmony in approach could be the main cause of conflicting views.

But as I argue in a new book, Shareholder Participation and the Corporation (2006, Routledge London), shareholder empowerment could generate consensus rather than what seems at present to be inevitable conflict, if we did consider increasing shareholder power to be an end in and of itself. The end game would be shareholder empowerment because the recipients of this power, shareholders, would be inherently happier for the very reason of having the power, not because of any consequential benefits to the corporation.

Empirical studies now tell us with a fair degree of precision what does and does not contribute to happiness. One of the common ingredients to happiness is participation. For example, a study by psychologist Judith Rodin found that by encouraging nursing home patients to contribute more to the policies determining their environment in the home, 93 per cent of patients became more active, alert and happy.

Another important study by psychologists Leaf Van Boven and Thomas Gilovich, “To Do or to Have? That is the Question” (pdf file 73KB), found that: those interviewed experienced more positive feelings after pondering an experiential purchase (purchases that involve some kind of active component which people engage in to generate a life experience) than after pondering a material purchase (those that involve buying tangible objects such as television, cars and jewellery); and the people interviewed indicated they were more likely to anticipate that experiences would make them happier than material purchases after adopting a temporally distant, versus a temporally proximate, perspective.

Applying these studies to shareholder empowerment, it is misguided not to respect increasing shareholder power as an end in itself. Greater empowerment, beyond the formality of the annual general meeting, could be achieved through having a separate board with shareholder representatives (as occurs in Germany), regular meetings between company management and shareholders (as occurs in Japan), or through company shareholder committees designed to improve communication channels between officers and shareholders (as in the US).

If participation is a key factor contributing to individual happiness, and the pursuit of happiness is the natural underlying objective of all human beings, then participation rather than passivity becomes the rational choice. Even if active involvement in the company seems less desirable at the time than kicking back and collecting the dividend cheque, the study of Van Boven and Gilovich highlights that when looking back on the decision we made, we are likely to be happier by following the participation path.

Participation will, of course, not appeal to all shareholders. Many shareholders may simply not have the time or the inclination to get involved. But this should not form the basis for preventing other shareholders who want, or are encouraged, to get involved, doing so.

Furthermore, shareholder empowerment is not intended to undermine the important role that officers play in managing the affairs of the company, particularly in large sophisticated organisations.

The corporation must be an ongoing, successful entity so that shareholders have the opportunity to participate. Shareholder empowerment is about encouraging shareholder democracy, rather than shareholder autocracy.

UCLA law professor Stephen Bainbridge recently wrote that the decision-making model for the large public corporation is one in which the board acts and shareholders, at most, react. But this is not an inspiring approach. Rather, the decision-making model should be about facilitating the achievement of the most important objective for individual shareholders: happiness.