Shareholders have a residual claim on a company’s assets.
This is the value after all liabilities have been paid off, as all of company’s assets are equal to funding it has from creditors (liabilities) or shareholders (equity). In the event of a liquidation, companies use assets to pay creditors before equity holders, making investing through equity riskier than buying a corporate bond. This is because oftentimes distressed enterprises have nothing left to pay after debt holders are satisfied. Also, shareholders have a claim on firm’s earnings since all residual earnings after obligations have been met are either paid out as stock of cash dividends or reinvested into the company to produce future earnings growth.
With large market capitalization companies such as Apple, owning a single share out of the 16,000,000,000 shares outstanding gives you almost no sway over the company. However, large numbers of shareholders or shareholders that own millions of shares can come together to effect great change in a company.
These votes happen either at annual shareholder meetings, at special purpose meetings, or by mail through proxy. While many investors do not bother to vote, it is inherently in their best interest to do so as their efforts to replace underperforming management, for example, will often be rewarded by better earnings growth and an appreciation in the price of their share(s).
A prime example of this is last year when Engine No. 1, a relatively small hedge fund, was able to garner enough votes to install three new members on Exxon’s Board of Directors with the goal of making the company more environmentally friendly. This only took place because large institutional investors such as Blackrock, Vanguard, and State Street owned a large quantity of shares and sided with Engine No. 1. Also, many retail investors supported Engine No. 1’s cause as well. Engine No. 1 was what one would call an activist investor, and their Cinderella story is a referendum on the important of impact investing in today’s ecosystem. As such, activist investors will continue to become an increasingly substantial part of the financial markets as ESG is continually more integrated into company frameworks.
So, the next time buy stock in a company, consider taking the time to do some research about the firm you are investing in and see the ways in which you can make a difference with your shares.
The Content is for informational purposes only, you should not consider any such information or other material as investment, financial, or other advice. Nothing contained on our Site constitutes a solicitation, recommendation, endorsement, or offer by Alinea Invest or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction. When investing your capital is at risk.