Shareholders own the corporation, and the duty of the directors to maximise shareholder value follows from that. I have lost count of the number of times I have been told “that is the law”.
But it is not the law. Certainly not in America, as Lynn Stout, a professor at Cornell University Law School, has pointed out.
And English shareholders are definitely not owners. The Court of Appeal declared in 1948 that “shareholders are not, in the eyes of the law, part owners of the company”. In 2003, the House of Lords reaffirmed that ruling, in unequivocal terms.
Ownership is not a simple concept. The classic account of its meaning was given 50 years ago by another legal scholar, Tony Honoré.
Ownership, like friendship, has many characteristics and if a relationship has enough of them we can describe it as ownership.
If I own an object I can use it, or not use it, sell it, rent it, give it to others, throw it away and appeal to the police if a thief misappropriates it. And I must accept responsibility for its misuse and admit the right of my creditors to take a lien on it.
But shares give their holders no right of possession and no right of use. If shareholders go to the company premises, they will more likely than not be turned away.
They have no more right than other customers to the services of the business they “own”. The company’s actions are not their responsibility, and corporate assets cannot be used to satisfy their debts.
Shareholders do not have the right to manage the company in which they hold an interest, and even their right to appoint the people who do is largely theoretical. They are entitled only to such part of the income as the directors declare as dividends, and have no right to the proceeds of the sale of corporate assets — except in the event of the liquidation of the entire company, in which case they will get what is left; not much, as a rule.
Of 11 tests of ownership Mr Honoré put forward, the relationship between a company and its shareholders satisfies only two, and these rather minor. Three are satisfied in part; six are not met at all.
There is a stronger case for asserting that a company is “owned” by its directors than there is for its shareholders. There is little doubt that if you explained to a Martian what earthlings mean by ownership and asked who owned a corporation, the Martian would point to the C-suite.
So who does own a company? The answer is that no one does, any more than anyone owns the river Thames, the National Gallery, the streets of London, or the air we breathe. There are many different kinds of claims, contracts and obligations in modern economies, and only occasionally are these well described by the term ownership.
It makes little sense even to ask who owns shares in a company. One name is recorded on a share register; someone else makes a decision to buy or sell; someone else decides how the shares are to be voted; and someone else benefits from the returns from the company’s activities.
It is not only possible today, but usual, for all these rights to be exercised by different people. And that is even before taking account of the complications introduced by stock lending.
As Charles Handy has written, when we look at the modern corporation, “the myth of ownership gets in the way”. Clear thinking about business would be easier if we stopped using the word.
This article was first published in the Financial Times on October 11th, 2015.