[Namsan Ddalkkakbari] The Owners of a Company Are Naturally 'Shareholders'...

[Asia Economy Reporter Seomideum] Who is the owner of a company? Managers say it is ‘the families of employees.’ This is not incorrect. However, the answer differs slightly from the perspective of financial economics. The essence of financial economics is how funds are raised. Depending on the method, the owner changes. If the company uses the founder’s assets, the owner is the founder; if it raises funds by issuing bonds, the creditor is the owner; if it issues stocks, the shareholders are considered the owners.

Professor Lee Gwan-hwi of Seoul National University, author of Who Owns the Company?, states that from a global trend perspective, the owner is undoubtedly the shareholder. In fact, the parties contracting with the company are diverse, including employees and partner companies. However, many companies regard shareholders as the owners because they are residual claimants. Employees or creditors receive principal and interest, while shareholders take all the residual value after liabilities are deducted from assets. This is called ‘shareholder primacy.’ Here, managers are merely employees hired by the shareholders.

There are drawbacks to shareholder primacy. Short-term performance orientation is a representative example. In April 2010, a major accident occurred 200 km south of New Orleans, USA. The British oil exploration company British Petroleum’s oil drilling rig exploded during operations. Dozens of casualties occurred, and 800 million liters of crude oil were spilled?enough to cover half the size of South Korea’s southern region.

The disaster was foreseeable. The management ignored warnings from engineers in their rush to achieve short-term results. For them, shareholders came before safety inspections. Generally, managers know the company’s situation better than shareholders. Shareholders evaluate managers annually to monitor the abuse of ‘information asymmetry.’ Managers, in pursuit of clear results, focus on inflating short-term performance even at the expense of long-term value. They seem to blindly follow Nobel laureate Milton Friedman’s assertion: “The sole social responsibility of business is to use its resources to maximize profits.”

Not all shareholders focus only on short-term results. Warren Buffett, in his book Warren Buffett’s Shareholder Letters, regarded the increase of a company’s long-term value as the top priority of management. He demanded the following from the management of companies where he was a shareholder: “Manage as if you own 100% of the company, it is your only asset, and you cannot sell or merge the company for over 100 years. There is no need to consider immediate accounting results at all.”

The context of the ‘Occupy Wall Street’ movement from September to November 2011 is similar. Protesters all shouted, “We are the 99%,” determined not to be manipulated by the 1% capitalists. They united to oust management who claimed their compensation as legitimate pay for working for shareholders through dividends, capital gains, and bonuses. The Business Roundtable, a coalition representing the profits of the top 200 US companies, quickly backtracked. In August 2019, it issued a statement saying, “The purpose of a corporation is no longer solely to serve shareholders but to promote the prosperity of all stakeholders including customers, employees, suppliers, and communities.”

The domestic situation seems to be moving in the opposite direction. Shareholders often suffer from the arbitrary actions of major shareholders, conglomerates, and managers. Professor Lee points out in this book, “Promising business divisions are spun off and listed as subsidiaries, harming the parent company’s shareholders. Practices such as preferential treatment in transactions, group control disputes, and illicit transfers are rampant.” He adds, “In Korea, even shareholders are not yet the owners of companies. Most suffer from backward corporate governance. They are helpless against companies arbitrarily splitting and merging themselves and using these as means for private gain.” Reporter Seomideum faith@asiae.co.kr

Who Owns the Company? | Written by Lee Gwan-hwi | 21st Century Books | 264 pages | 16,000 KRW