Tue, 12 Dec 2006

Shareholders? Or Customers?

Who has more control over a corporation's operations? The shareholders or the customers? Some people seem to think it's the shareholders. Silly people! Let's say that the shareholders think the corporation is doing the wrong thing. They have two avenues of control: sell their shares (but as long as the company is making earnings, other people will be willing to buy it). Or they could vote to change the board of directors. Ultimately the company is run by the board of directors representing the shareholders' interests. The board can fire the company's officers &etc. That's the theory. The practice is that shareholders will just sell their stock if they think the company is going the wrong way. Why? Because shareholder control is limited by the amount of shares they own. Only majority or significant minority shareholders are in a position to change the company. The only reason for them to do this (rather than selling) is because they think the company isn't pleasing its customers enough.

On the other hand, what if the customers don't like the corporation's products? The corporation's income drops in proportion to the dislike. We all know what happens to a company whose costs exceed its income, right? It has to sell more, cut costs, spend its savings, dilute its stock, borrow money, or go out of business.

Which of these induces the most drastic actions? Clearly the customers. Active investors are few and far between.

Posted [16:22] [Filed in: economics] [permalink] [Google for the title] [digg this]