Wikipedia defines a Shareholder as “an individual or institution (including a corporation) that legally owns any part of a share of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself.” Despite shareholders not actually owning the company, executives are constantly driven to appease them. According to Lynn A. Stout, making business decisions solely based on stock prices creates a “shareholder dictatorship” and can be detrimental to the company. The New York Times explains:
Ms. Stout, a professor at Cornell Law School, has written a slim and elegant polemic, “The Shareholder Value Myth” (Berrett-Koehler Publishers) to explain the idea’s two problems: It’s worked out horribly and, as a matter of law, it’s not true.
But the idea that shareholders “own” their companies isn’t actually so set in the law, Ms. Stout argues. It’s almost as if the legal world has been keeping a giant secret from the economists, business schools, investors and journalists.
Instead, as Ms. Stout explains, what the law actually says is that shareholders are more like contractors, similar to debtholders, employees and suppliers. Directors are not obligated to give them any and all profits, but may allocate the money in the best way they see fit. They may want to pay employees more or invest in research. Courts allow boards leeway to use their own judgments.
The law gives shareholders special consideration only during takeovers and in bankruptcy. In bankruptcy, shareholders become the “residual claimants” who get what’s left over.