- Business and Employment»
Stockholders and Control of Corporations
Just because you have some stocks does not mean you have control of a corporation
One of the ways that capital is raised by a corporation is to sell shares and stocks in a company that is held in an arrangement with real assets. The stockholder bears something of the relationship to the company assets as the bank does to real estate, car loans, secured credit and other collateral. Other stocks are created such as high risk loans on unsecured credit and student loans. How this is usually done is that there will be a controlling interest by way of stockholder percentage. Anyone who has the financial clout to acquire a major company such as General Motors or Westinghouse Power, does so with massive loans from the banks via the massive real collateral under their legal control. In order to boost value, the company will be listed on the stock exchange where individuals can buy shares in the company. Now, GM and Westinghouse are relatively secure, so stock options are not likely to swing widely except during an economic collapse. Insurance houses are a different matter as they sell risk stocks where profits can be huge and losses catastrophic. In all cases, the principle stockholder aims to control 51% of the stocks (the majority holder) in order to keep a controlling interest in the decisions of the company as far as economic gain is concerned as a whole.
The average street level investors together make up the other 49% (the minority holder) of the stockholders and they do not have the controlling interest and final say in the matter of financial decisions of buying and selling. As a rule, these individual shareholders who may number in the millions, each one of which only control a very tiny portion of 1% of the company. Almost all of them never attend a stockholder's meeting when it is called and required by law to be called. A few who have a large portion of the shares will show up, but they are usually far less than the 49% of the collective minority ownership. Even in the case of a two party ownership of company stocks, there is still the 51-49 percent controlling-controlled divide. This relationship only exists in very small companies that have very little stock and may not even be listed as a trade option on the stock exchanges. The usual case is that the 49% side of the stock divide is held by millions of small time investors in very large companies that are open listed on multiple stock exchanges.
In a high risk and potentially high profiting company, such as insurance, floating currency exchanges, derivative markets and futures, the gains can be great over the short term and a savvy small investor can gain much in a short time. But, if for some reason, the profits fall due to lack of confidence and a high sell off, the small investor can wind up “taking a bath” and losing the shirt off his back. As they collectively only share 49% and typically cannot agree among themselves, they could lose money set aside for pensions and a rainy day in such ventures. A lot of this has happened due to shop unions and workers agreed to invest collectively in the stock market in a bid to increase their pension holdings. Some 401k's were invested in insurance and derivative schemes and when these collapsed, the value of stocks disappeared and the collective investors lost almost all of their pension fund. The result is that they were forced to work past retirement age. The 51% shareholder often has the inside track on their investment portfolio and can sense when disaster is immanent, but sell that as a low risk to all the other shareholders. Thus, just before the collapse happens, they sell all their shares and the value on the rest drops. This triggers a panic sell off and the value drops to pennies on the dollar. When all the damage is done, the original majority shareholder buys up the now cheap stock and gains even more control, well in excess of the original 51%. They may even end up holding 90% or more.
In these days of bailouts, risky ventures get support from government, large banks like the Federal Reserve and clearing houses for complex debt manipulation of toxic assets. They can so manipulate it that profit is made even as a stock falls through the floor. The result is that the majority interest in holdings gets even more control and the minority is squeezed out.
The minority holders cannot effect decisions except on their own behalf and if they sell out their shares, there is always someone else that will snap them up. Tiny fluctuations in the stock market shares of such trades are the mainstay of the stock exchange where small changes in stock worth are the norm. Many small stock holders attempt to predict the ups and downs, selling when the worth is a bit higher and buying when the worth is a bit lower. They attempt to increment their currency wealth by such day trading. It is risky to say the least for the independent day trader and many fail to make any significant progress. When hundreds of small holders organize, they can buy a larger chunk, of stock, but even this is far short in the minority holder of 49% ownership. They are still under the influence of the decisions of the majority holder who can act without warning and slash the value of the stock in a major sell off.
The controlling of such a stock driven economy in the heady casino atmosphere of the stock market that buys and sells stocks of every conceivable option there is, can only be effected by the major and controlling players. Typically, the small players follow the action of the bigger ones in a panic sell off to prevent a financial wipe out. It may be argued that the small player should just sit it out and wait for the stock value to rise again when the major interest reinvests at pennies on the dollar to buy up most of the stock. That strategy could work to regain most of the lost value, but that minority investor now has even less relative clout than before when panic stricken holders dumped their portions and went elsewhere, even if it was to the street wearing a barrel as depicted in past cartoons. The majority holder may buy back anything available to increase their own holding.
In the business of stocks where votes are measured in stocks held, it is hard for the total 49% minority holders to agree on a single direction. The majority holder understands this being a single entity holding the majority of the votes by way of stocks. Influence cannot thus be made by holding a minority of stocks beyond ones own decision to buy and sell. Even when factory workers decide to gamble their pension fund on the stock market, they are still in the minority position and are always at a disadvantage. If the majority holder at any time decides to change their investment portfolio to scare off most of the minority holders in order to buy up the new cheap stock, they will do so, because in the casino atmosphere of the stock market, the last word is always profit and nothing else matters whatsoever. This is one of the faces of the nature of capitalism. The solution is not to attempt to manipulate the majority holder by dumping the minority stock, as the slight resulting drop in value might be enough of an inducement to get the majority holder to buy up the stock just dumped. This will only result in less control in a situation where there was no control to begin with.
The good majority holder worth his or her capitalist salt will not relinquish their control and if in financial trouble, they will persuade the government, who they control as well to grant a bailout or a temporary hold over loan at low interest until the economy improves and drives up the value of their collateral again. As banks are also tied up very deeply in the stock market with heavy investments for the same reason as anyone else, it becomes mandatory to bail out companies “too big to fail”. The small time investor can do nothing to sway the course, unless that small time investor starts their own company with majority holdings (51%) in their own stock. That small time investor or starter company could in effect be a collective of many people who agree on the goal of being a majority holder in common within the context of this economic device. Then and only then can an individual raise any concerns whatsoever in a stockholder's meeting between the majority holders to vote on a decision. Even here the latitude of change is narrow as the dissenter would have to convince the majority of the majority holders to make a desired change for the individual dissenter.