Controlling shareholders play an important role in corporate governance. They monitor the company assessing company performance as well as board and management effectiveness. They decide who gets elected to the board. They can veto all important decisions and are often consulted on all major issues, including strategy and succession. They can often provide additional equity if necessary. For company management they are an important resource with which important issues can be discussed in private. They are owners more than investors and have a long-term commitment to the company. They care about it; it is not just a financial investment. The company is not a portfolio investment but a living entity with a meaningful purpose. Very often they are represented on the company board.
Prominent examples of long-term shareholders include founding families, industrial foundations, financial mutuals, cooperatives and (in some cases) state-owned holding companies. They may be contrasted with medium-term shareholders like private equity funds or institutional investors as well as short-term investors such as hedge funds, financial investors, and at the extreme the high-frequency traders.
Most of the long-term shareholders, who rarely sell their shares and can therefore legally possess inside information about the company. Because they hold their shares for a long time, they get to know a lot about the company and the people who run it on a daily basis. This reduces information asymmetries and agency problems. Opportunism is kept in check. Long-term shareholders are highly competent owners. Because of their long-term horizon, they are willing to undertake investments which short-term stockholders would want to avoid.
Outside the US and the UK, these controlling shareholders are the dominant force in corporate governance. It is crucial how they exercise their responsibility, and, unlike other actors, they do not have superiors in the chain of command. The controlling shareholders are typically not directly accountable to anyone, and therefore need to define their own goals and objectives. In addition, they are subject to rules and regulations and market forces, and they have money at stake, which gives them a strong economic incentive. But within these limitations it is up to them how they want to govern the company.
While many large owners try to behave responsibly, there are also examples of irresponsible ownership, for example second generation owners or state-owned enterprise, who squander the resources at their disposal and destroy value and act immorally towards their minority investors or their other stakeholders.
With great power comes great responsibility.
Stewardship can (in this context) be defined as responsible, long-term ownership. Certainly, in some cases, the responsible solution may be to sell the shares to a better owner, but most of the time it implies a commitment to own (shares in) the company for a long time and, in many cases, to own it indefinitely.
But to whom are they stewards responsible? And how should they exercise their responsibility? The stewardship concept is still in its intellectual and academic infancy, but we can touch on some of the important issues.
In a broad sense the stewards may regard themselves as accountable to society at large, since their decisions influence the welfare of their many stakeholders. They provide customers with useful and enjoyable products or services. They provide jobs, which enable their employees to make a living. They generate business and jobs among their many business partners.
The stewards may also feel bound by a company purpose, usually related to its core main product or services.
Some stewards feel they also have a religious responsibility to God in their business affairs. Certainly, many bible quotes point in this direction, for example:
“From everyone who has been given much, much will be demanded; and from the one who has been entrusted with much, much more will be asked…
…For unto whomsoever much is given, of him shall be much required: and to whom men have committed much, of him they will ask the more.“[1]
Accountability and responsibility are often closely connected to company history, and new owners will usually have new conceptions of accountability.
The exercise of stewardship involves finding a balance between the extremes of passivity and over-activism in which the owner makes all important decisions. For example, the steward owner may want to be represented on the company board with one or two members, rather than electing only owner representatives or avoiding representation all together. In the same way, the stewardship owner may want to be consulted on the choice of a new CEO in the company or the adoption of a new strategy, without taking a lead in making the decision. Many steward owners would also like to be able to supervise the firm by receiving the same monthly or quarterly economic reports that are sent to the company board.