Shareholders and the Myth of Company Ownership - Vivek Kaul's Diary
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Shareholders and the Myth of Company Ownership

May 31, 2016

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I wrote last week about ownership of listed companies with reference to the VW emissions fraud. John Kay is excellent on the subject, and I particularly like a column he wrote on the matter 20 years ago. He has given me permission to reproduce it. So here it is.

I own my umbrella. And companies are owned by their shareholders. But what do we mean when we say that? What does, or could, the word "own" mean when applied, not to the relationship between me and my umbrella, but to that between hundreds of thousands of shareholders and the collection of people, assets, brands and customers that constitutes BT?

The classic description of the nature of ownership was provided 40 years ago by the distinguished legal theorist, AM Honore. Concepts of ownership vary across countries and over time. But, Honore argued, "there is indeed a substantial similarity in the position of one who "owns" an umbrella in England, France, Russia, China. In all these countries, the owner of an umbrella may use it, stop others using it, lend it, sell it, or leave it by will. Nowhere may he use it to poke his neighbour in the ribs or knock over his vase".

Honore explained that ownership is neither a single nor a simple concept. Ownership, like friendship, or obligation, has many characteristics. If a relationship has sufficiently many of these, it is one we can describe as ownership: just as if an animal has enough elephant-like features, we say that what we see is an elephant.

Honore went on to list 11 badges of ownership. Ownership typically confers the right to possess, the right to use, and the right to manage. Ownership entitles you to any income that is earned, and to claim the capital value of the asset. Ownership imposes an obligation to refrain from harmful use. What you own can be seized to satisfy your unpaid debts. Owners may claim security against expropriation. And owners can pass on any or all of their rights to someone else. There is no time limit on the rights of ownership. And owners have an ultimate right of residual control. All rights which you have not explicitly conceded to someone else belong to you.

That is what we mean when we say "I own my umbrella". I can put it up, take it down, sell it, rent it, leave it in my will, throw it away. I can appeal to the police or the European Commission on Human Rights if a thief or the government takes my umbrella away. And I must accept responsibility for its misuse and admit the right of my creditors to take a lien on it.

When we run through these tests, we see immediately that shareholders own their shares in BT. All the criteria of ownership are met. But it's not at all obvious that they own BT itself. Their shareholding gives them no right of possession, no right of use. If they go to a telephone exchange, they will be turned away at the door. They have no more right to use BT services than any other customers. They are not responsible for BT's harmful actions, and BT assets cannot be used to satisfy their debts. Shareholders do not have the right to manage, although they do have a - largely theoretical - right to appoint the people who do. They have a right to such part of the income as the directors declare as dividends. They have no right to the proceeds of the sale of BT assets, except in the wholly fanciful event of the liquidation of the entire company, in which case they will get what value is left, but not much.

The application of another of Honore's tests - the right of shareholders to contest the appropriation of the company's assets - was the key issue in a leading case in corporate law, Short Vs Treasury Commissioners, and the shareholders lost. Their Lordships went on to say, in unequivocal terms, "shareholders are not, in the eyes of the law, part owners of the company".

And the House of Lords was right. Of the 11 tests put forward by Honore, the relationship between BT and its shareholders satisfies only two, and these rather minor; three are satisfied in part; and six are not met at all. We could make a stronger case for asserting that BT is "owned" by its directors.

So who does own BT? The answer is that no one does, any more than anyone owns the River Thames, the National Gallery, the streets of London, or the air we breathe. There are many different kinds of claims, contracts and obligations in modern economies, and only occasionally are these well described by the term ownership. The differences between BT and my umbrella are so wide ranging that it is hardly likely that my relationship to them could be described in the same way. We have been made victims of an inappropriate analogy. As Charles Handy puts it, when we look at the modern corporation, 'the myth of ownership gets in the way".

Please Note: This article was first published in Moneyweek on October 02, 2015.

Merryn Somerset Webb is the editor-in-chief of Moneyweek, the best-selling financial magazine in the UK, and is a director of two investment trusts - the Baillie Gifford Shin Nippon Trust and the Montanaro European Smaller Companies Trust. Before joining Moneyweek, she worked at the Japanese public broadcaster NHK, SBC, UBS, BNP Paribas, and The Week. Merryn has a weekly column in the FT and a monthly column in Saga. She is a regular TV/radio commentator and speaker on financial matters.

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