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WHO ARE THE REAL OWNERS OF A COMPANY

WHO ARE THE REAL OWNERS OF A COMPANY, This makes them the real risk-bearers in the company whose rights on the company’s profits and assets come after the claims of everyone else have been satisfied in full. At the same time, they are the ones who benefit if the profits or the assets of the company increase. WHO ARE THE REAL OWNERS OF A COMPANY This is so because the claim of everyone else is restricted to a pre-stated amount while the rights of the ordinary shareholders are not restricted in this regard.

Generally, ordinary shareholders are the only class of shareholders who have a right to vote of the company’s meetings. They elect the directors, they choose the external auditor, they have the right to amend the company’s constitution, they approve company’s financial statements, they decide on the quantum of dividends to be paid each year.

This is where the catch lies. Directors can be over-ruled by shareholders provided a sufficient majority votes against the directors. In Pakistan, most companies are created and controlled by families or closed groups. These families (or closed groups) make sure that they hold at least 50% of the ordinary shares of the company. This gives them a power to elect almost the entire board and also the power to ensure that none of their proposals is ever out- voted at any meeting of the shareholders.

Classification of Equity Shareholders:

WHO ARE THE REAL OWNERS OF A COMPANY

Equity shareholders can be classified in to two broad groups: Internal and External shareholders:

Those who invest in a company with an intention of owning (wholly or with a majority of shares), controlling and running a company. From the company’s point of view, this group of shareholders is considered as Internal Shareholders.

• Those who invest in a company with a view to earn a return on their investment but have no intention of participating in the management of the company, or putting their nominees on its board. From the company’s perspective, this group shareholders is considered as External Shareholders.

Internal Shareholders may be further classified into two main groups:

• Companies that invest in other companies with an intention of owning, controlling and running them. Such companies are also known as holding companies, or corporate shareholders. Examples of such companies are multi-national corporations that own one or more subsidiary companies in every country that they operate in.

• Private individuals who have large amount of capital at their disposal and are able to invest heavily in a company with an intention of owning, controlling and running it. These individuals may be single persons or families or closed group of friends. Pakistan most companies are controlled by such individuals or families.

External Shareholders may be further classified into two main groups:

WHO ARE THE REAL OWNERS OF A COMPANY

• Individuals who have some capital on which they wish to earn a return without participating in the management of the company in which they invest it.
• Business organizations that do a business of investing funds in various companies with a view to earn a return on their investment without participating in the management of such companies. Such organizations are often referred to a institutional investors. Examples of institutional investors include mutual fund pension funds, insurance companies, investment banks, commercial banks, etc.

We now discuss briefly each class of shareholders.

Internal Shareholders

WHO ARE THE REAL OWNERS OF A COMPANY, Also known as controlling shareholders, these shareholders have a majority of director on the board of a company and are therefore able to control all the decisions of the board.

They can take any decision and govern the company virtually without an opposition from any quarter. In Pakistan, internal shareholders generally own more than 50% of the issued shares of the company which enables them to ensure that all or most of directors on the board are their nominees.

External Shareholders

WHO ARE THE REAL OWNERS OF A COMPANY, These are the shareholders who have no representation at the board, primarily because they hold a minority of shares in the company.

The situation in Pakistan (and most other developing countries) is that the internal or controlling shareholders hold 50 to 55% of the total shares while the rest are held by a large number of individual or institutional shareholders, with none holding sufficient percentage to get a director elected on the board.

Since external shareholders are seldom able to unite and vote collectively, they generally fail to get any representation on the board.

Corporate Shareholders

WHO ARE THE REAL OWNERS OF A COMPANY, When large corporations wish to expand their operations, they generally create new companies. For example, multi-national companies find it convenient for tax and leg reasons to create a subsidiary company in each new country in which they wish to their products, rather than open a branch there.

MNCS then ensure that they control the affairs of such subsidiary companies by either wholly owning them, or owning least a comfortable majority of their shares. Many of these subsidiaries may even be listed at different stock exchanges, but their control remains with the holding company.

Institutional Shareholders

Also known as institutional investors, these are financial institutions that make a business of investing in shares (or bonds) of other companies. Examples of institutional investors are:

Pension Funds

These organizations have vast sums of money collected from employers and employees which they have to pay back after a long time when an employee retires. They invest these funds in suitable instruments to earn a return for their clients. Pakistan, private pension funds are a relatively new phenomenon and none has as ye gained the national stature.

However, there are several governmental pension fund and similar institutions like EOBI who do make investments at stock exchange.

Life Insurance Companies

They collect premiums from their client whom they promise to repay with profits at the expiry of policy term. Meanwhile they must invest these funds to earn profits in order to attract more policyholders. Many of these insurance companies set aside a part of their investment portfolio to invest in shares of listed companies

Mutual Funds

These organizations raise their capital by selling their units and use the funds so raised to invest in share and bonds of different companies. The most notable to such funds in Pakistan is National Investment Trust. Others include ICP funds, KASB fund, etc.

Managed Funds

These funds are floated by investment banks or similar financial institutions but do not have tradable units like mutual funds. Individuals or organizations with surplus cash invest in these managed funds who in turn invest their collected funds in shares and bonds of different companies. Almost all the major commercial banks have a subsidiary company that floats and manages such funds.

Banks

Banks, both commercial and investment banks, also frequently invest in the shares of listed companies either directly or on behalf of their clients.

Capabilities of Institutional Investors

WHO ARE THE REAL OWNERS OF A COMPANY, Institutional investors hold large sums of money on behalf of their depositors or members on which they must earn a decent return to keep their clients happy. If they are able to invest their funds in good companies and earn good returns, they will get more people to use their services.

The magnitude of funds held by institutional shareholders can be guessed from the fact that more than 50% of the shares of the companies listed at the London Stock Exchange are held by institutional shareholders. WHO ARE THE REAL OWNERS OF A COMPANY

Institutional Shareholders’ Perspective

WHO ARE THE REAL OWNERS OF A COMPANY, Generally institutional shareholders allocate a good percentage of its investment that portfolio to long term shareholding. This gives them a different perspective from ordinary individual shareholders who only aim to get short term gains out of regular purchase and disposal of shares.

Holding shares on a long term basis means Institutional investors have a greater interest in the sustainability of share value than a mere temporary increase in share value. In order to achieve a sustained growth in the value of their investments, they can exert influence on the boards of directors of their investee companies.

However, they do not let go of their short term gains. This means dividend payments still important for them. And they are able to exert pressure on investee companies pay regular dividends.

Role of Institutional Investors in Corporate Governance

WHO ARE THE REAL OWNERS OF A COMPANY, Institutional investors have two main qualities that are lacking in other external shareholders: the first is professional competence to understand what the board of a company is doing (or ought to be doing) and the second is their clout due to their size.

They are therefore in a position to influence the decision making process at the board level of any of their investee companies. Most individual shareholders are incapable of appreciating the true significance of annual financial reports or other information coming from companies.

Conclusion:

WHO ARE THE REAL OWNERS OF A COMPANY, This makes them the real risk-bearers in the company whose rights on the company’s profits and assets come after the claims of everyone else have been satisfied in full. At the same time, they are the ones who benefit if the profits or the assets of the company increase.

This is so because the claim of everyone  believe that if our institutional investors start allocating say 25% of their total portfolio to investment on a long term basis, they can start having influence on their investee companies which they can use for the safe-guarding the interests of ALL stakeholders- thereby meeting the primary objectives of corporate governance.

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