Companies are complex entities with numerous conflicts and disputes that arise often owed to a variety of factors. Decisions and consequences are, for the most part, borne out of financial considerations. The Enron accounting scandal of 2001 may for instance lead one to ask where the shareholders were and why they did not play a more active role in preventing the company’s bankruptcy. Often, shareholders are onboard for a short period and are constantly changing.
Companies need people to act on their behalf. To this end, we either look internally, whereby people manage the company or externally which looks at aspects such as contracts with third parties and the incurrence of rights and obligations for the company. Profit companies generally have at least two organs which include the board of directors and shareholders where it is also possible, depending on its size, for the company to have committees of the board with a chief executive officer as the fourth body.
Shareholders interfering with the board of directors is a possibility. The extent of interference is addressed by considering the Companies Act 71 of 2008 (the “Act”) and the memorandum of incorporation (the “MOI”) of the company. If a specific power is vested in a specific organ in the Act, it cannot be taken away in the MOI. If the board decides on a distribution, that power to distribute cannot be given to shareholders. It is possible to create an additional layer of consent by providing that shareholders’ approval is obtained. The new Companies Act does not give as much power to interfere with management by shareholders as the old Act did. We see shareholders have less power than the board. This is more the case within a big company with many shareholders whereas in small companies’ shareholders are often directors as well.
If you are a shareholder in a big company and there are millions of shareholders, it is not practically viable for all of them to participate in the management of the company as this would not work with everyone voicing their opinion, and this aside from the fact that getting them to agree is another near-impossible task given the various interests and given human nature. For this reason, the board has more powers than shareholders in larger companies.
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