What is Ownership Composition? Determinants,

What is Ownership Composition?

Ownership composition refers to the distribution of ownership among different types of shareholders in a company. This includes individuals, institutional investors, and other types of entities that may hold ownership stakes in the company, such as mutual funds, pension funds, and hedge funds.

An important component of the ownership structure is ownership composition, which consists of all the shareholders having major and minor stakes in an organisation. As stated earlier, a shareholder can be a group, a family, an individual, a non-financial organisation or an investment organisation.

If families, groups, or individuals are the shareholders of an organisation, they would be interested in profits as well as non-monetary benefits such as goodwill of the organisation in the market.

However, if institutional investors are shareholders, they will be interested only in profits and will not care about non-monetary benefits. There are various factors or determinants that decide or influence the ownership composition of an organisation.

Determinants of Ownership Composition

Shareholder Control and Protection

Shareholder control and protection refer to a manner in which shareholders monitor managers and the control mechanism. This ensures that managers always act in the interest of the shareholders. There are a number of mechanisms to monitor and control the activities of managers.

Such mechanisms are a part of corporate laws and various legislations. Examples of some important mechanisms are participation of shareholders during voting, compensation of executives (performance based), transparency and disclosure requirements and legal protection of shareholders’ rights.

Board of Directors and Their Fiduciary Responsibilities

BoDs refers to a body of appointed members to take care of activities performed in an organisation. The board formulates corporate policies, authorises major transactions and sales, and declares dividends.

It also recruits people, provides compensation, plans successions and nominates prospective members. The efficiency of BoDs depends on how it manages the organisation on behalf of shareholders.

It protects the rights of minority shareholders and tries to increase the profitability of the organisation. Directors are required to be loyal, cautious and responsible individuals. They need to ensure that any action that is taken is in the best interests of the organisation and its shareholders.

Executive Compensation

Executive compensation refers to the remuneration of executives who play a very important role in corporate governance in an organisation. Executive compensation is designed by BoDs of the company that consists of independent directors.

Executives have a great impact on the strategy of the organisation, and on decision making. Their package includes a mix of salary, bonuses, call options, etc.

An inappropriate compensation of executives costs shareholders a large amount of money. Proper compensation is required as otherwise executives may lack incentives to increase the profits of the organisation.

Minority Shareholder Rights

Minority shareholders are entities that do not have the right to participate and influence the decisions of an organisation. The Companies Act, 2013 protects the rights of minority shareholders.

The following rights are reserved for minority shareholders in the Act:

• Right to appoint a director – Small shareholders, upon notice of not less than 1/10th of the total number of such shareholders or 1000 shareholders, have a small shareholder director elected.
  
  
• Right in decision making and such director appointed shall be considered as independent director.
  
  
• Oppression and mismanagement: Right to apply to tribunal by the minority shareholders, when management or control of the company is being conducted in a manner prejudicial to the interests of the class or company.
  
  
• Rights with respect to reconstruction and amalgamation:
  
  
  • Purchase of shares of dissenting shareholders at a determined value by the registered valuer.
    
    
  • The minority have been given a right to make an offer to the majority shareholders to buy the shares of minority shareholders.
    
    
  • The transferor company shall be the agent for making payments to minority shareholders.
    
    
• Class action suit: Class action suit may be filed by the minority shareholders as per the provisions of Companies Act, 2013

Transparency and Information Disclosure

Transparency and information disclosure is all about maintaining an easy access of information to ensure an effective control and protection of shareholders. Shared information includes financial outcomes, major predicted risks, remuneration of BoD and the policies and objectives of the organisation.

Transparency and information disclosure are important in an organisation for the following reasons:

• Help in monitoring companies by legal authorities
  
  
• Increase shareholder ability to exercise ownership rights
  
  
• Help to attract capital
  
  
• Ensure investor confidence in markets
  
  
• Check whether the organisation is performing according to legal requirements
  
  
• Allow organisations to differentiate themselves among other organisations that are not practicing good governance