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(5) Most shareholders hold well-diversified portfolios, often index funds. Few invest solely or even predominantly in the shares of any one corporation.
Sometimes the issues can be explored by looking at how things would work in a specific example, or a more narrow group.  I think most, certainly many, shareholders diversify as you suggest.  However, there is a not insignificant group that become highly invested in a single company, and another group that thinks they are good at "stock picking', and do not diversify.  I'm thinking of senior management of the company, founders of the company, and employees of the company, particularly as the employees rise through the ranks.  It is pretty common for senior managers to end up with a huge percentage of their net worth invested in their company--particularly since many companies break their compensation packages to employees into cash, stock options, restricted stock, kinds of programs.  I've normally had 80%+ of my financial net worth (excluding home) invested in the stock of the company I worked for.  Investors usually like to see management heavily invested in the company.

Also some investors get very excited about a company's opportunities, follow the company closely, and despite recommendations of financiaql advisors will go over 10% of their portfolio in a company.  Obviously they can lose, but some of the world's fortunes are made when people "bet the farm" on something they believe in.  Berkshire Hathaway comes to mind as an example of shareholders keeping their money there.  IBM in the '70's, Google today,,,,these are companies where "the secretaries" can be millionaires.

It seems this approach would take a lot of that away, and maybe lose some of that 60+ hour a week drive on the part of management and employees.

by wchurchill on Sun Dec 24th, 2006 at 02:24:34 AM EST
An additional argument against point (5) is that the number of shareholders doesn't matter, but the size of their holdings. A few shareholders at the top own the company, and then at the bottom there is a mass of small shareholders who, together, only own a small percentage of the shares of the company. So when it comes to making decisions, it's those shareholders with a chance of influencing who has a controlling interest that have the power to influence the company's management. And those few shareholders with large holdings can have idiosyncratic reasons for those holdings.  

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Sun Dec 24th, 2006 at 04:37:43 AM EST
[ Parent ]
it's those shareholders with a chance of influencing who has a controlling interest that have the power to influence the company's management.

This is an argument that the soft reform option would seldom be exercised (e.g., only when positive externalities are huge); and this, in turn, argues against wchurchill's concern that it might substantially disrupt incentives.

Words and ideas I offer here may be used freely and without attribution.

by technopolitical on Sun Dec 24th, 2006 at 03:48:07 PM EST
[ Parent ]


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