1.2 Understanding different business forms The role of shareholders

Learning outcomes Understanding the nature and purpose of business What you need to know: The role of shareholders and why they invest Influences on share price and the significance of share price changes

The role of shareholders and why they invest A shareholder owns a share in the organisation in which they have invested. They may have a say in how the business is run by voting on some key issues, at the annual general meeting (AGM), or by post. This includes issues such as the election or removal of members of the board of directors or putting pressure on executives to ensure pay and bonuses are in line with the company’s performance. The amount of dividends paid is decided by the board of directors. The board of directors are the highest level of management in a listed company and are appointed to get the best return on investment for the shareholders.

The role of shareholders and why they invest Board members are either executive (regularly working in/running the business) or no-executive members (not regularly working but appointed to ensure the company is run in the shareholders’ interest and ethically). Shareholders purchase shares so they may receive dividends and to potentially sell the shares at a profit later on, if the company is successful and the shares increase in value. Some investors will buy shares to gain overall control of a business, to become the majority shareholder, which occurs when 51 per cent of the available shares of a company are owned by one individual or organisation. Example: The Glazer family’s hostile takeover of Manchester United Football Club

Influences on share price and the significance of share price changes A share price is the price of a single share in a company listed on the stock exchange. In the UK it is quoted in pence (for example, a share in Tesco plc. could be bought for 253.95p in August 2014). When a company does well, it may pay out an equal share of a percentage of the company’s total profit (known as dividends) to each shareholder. Most shares offer income in the form of dividends, which are typically paid twice a year. Dividends can be seen as a reward for shareholders. They are paid when a company is profitable and has cash in the bank after it has satisfied all necessary costs and debts. Share prices are affected by two main factors: The performance of the company that has issued the shares The wider business environment (external factors). Listed companies announce their results twice a year and provide performance updates twice a year to give the investment community an insight into how they are performing.

Influences on share price and the significance of share price changes The company must make regulatory announcements about any events which may influence their share price, such as the launch of new products or takeover bids. Share prices will rise and fall depending on a company’s performance, due to the demand for the shares. Investors will want to invest in high performing shares or those that are expected to perform well so, as with any good/service where demand is higher than the supply and there are not enough to go around, this will push the price up. If the company is not performing well the demand for the shares will decline and it will be harder to sell the shares so the price will fall. Share prices reflect expected future company performance. If a company is performing well and investors expect it to continue to do well then the share price will rise. If the outlook is poor then the share price will fall. External sources such as the press, specialist magazines, stockbroker reports and websites can all influence share prices based on what they write about firms.

Influences on share price and the significance of share price changes Share prices are also affected by the wider economic environment. If economic conditions are good and expected to continue that way, investors tend to feel confident. Companies are more likely to perform well and deliver strong profits when the economic climate is favourable, so they are more likely to pay increasing dividends. Under such circumstances, demand for shares tends to rise and therefore prices will rise. If the economic climate is difficult however, investors may feel nervous and confidence in the future may be low. They may worry that a company’s profitability will suffer if economic conditions are difficult. Fears about future profits tend to reduce demand for shares so prices may fall. This means that, in tough times companies may see their share price fall, even if they are performing well. However some companies can benefit from a rising market and their share price may go up, even if the business is not performing that well. Over the long term however, markets tend to reward strong, well-managed companies and their share prices rise.

Divorce and ownership of control Often in limited companies the owners of the company (shareholders) and the people who run it on a day-to-day basis (managers) will not be the same people. Ltd: The shareholders are more likely to be the managers Plc: Shareholders and managers are normally different groups of people – this creates a divorce of ownership and control. It is very likely that owners and managers will have different objectives. For example, the managers may want to invest in long-term projects such as developing a new product, whereas shareholders may prefer to take money in the form of a dividends out of the business more regularly.