"Shareholders are the legal owners of the firm and the management has a fiduciary obligation to act in their best interest". Sounds great!! doesn't it? But experience has taught me that most of the rights the shareholders have are only on paper and that the management first acts in Self Interest and then probably in shareholder interest.
If shareholders were really the "owners" of the firm and could exercise the rights they think they have, then we would not have had instances like those of Enron, Tyco, Worldcom would not have occurred in US. Neither would have companies in India such as DCM Financial Services and Morepen Laboratories Limited faced investigations.
I was a shareholder of United Breweries Holdings, the holding company for UB Group which belongs to Vijay Mallya. One evening I got a letter in the mail for a voting consent for the company's future JV. It is usually a practice to take the consent of the majority of the shareholders for key decisions about big changes in the company which would impact the shareholder's wealth. It gives the company an idea about the shareholder's perspective and also whether they agree with the decision or not. After all -- they are supposed to be the "real owners".
I was eager to fill it up and mail it when a friend of mine who happens to be the owner of a big brokerage company in Kolkata told me that mailing or not mailing the letter will make no difference. He told me that even if a majority of the shareholders were against the decision, the company would put dummy votes to ensure that its decision goes through.
That made me realize for the first time, how "real" an owner I really was. Speak to brokers and experienced investors and they will tell you that such instances are not unheard of. It is very common and practical at times for companies to keep the investors in the dark. Most of them are not even aware of their rights when they hold the shares of a particular company. Information asymmetry is what gives these companies the "Power". Rest is just limited to your Financial Management books.
2 comments:
Nice one!it's true that the shareholders are kept in the dark alot of times...but then the decision to invest is also ours..We all want to gain and want easy money...it is not rare to see your competitors buy your shares (especially when they are trading at an all time low)...these are bought in huge lots...in a scenario like this the co should go ahead wth the decision of the mgt who are bound to act in the best interest of the company …
Agency cost is something that makes sense at times. I find the concept of true owners running around with 100 shares per head quite silly. For most companies wealth maximization is defined as self prioratization.
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