Protecting Minority Shareholders in Corporate Governance is a huge challenge in the current world. Minority Shareholders own a small percentage of stake in a particular firm. They are usually facing many challenges in ensuring their rights and giving them a voice to be heard. Yet, a greater emphasis has been laid on these stakeholders now. They are considered to be more important now for the enhancement of better corporate governance.

Corporate governance is an arrangement that forms the company. It includes the organizational structures, the processes and the norms that can facilitate the management and regulation of the business enterprise. It is an international issue that has led to efforts for its reforms, recently. As a core of this framework, one can identify the naïve prospect of finding a fair balance of rights within the context of duties performed by participants and minority shareholders who may have some level of vulnerability.

Minority shareholders are the valuable asset for the competitive and fair corporate governance.

Challenges Faced by Minority Shareholders

While there are various readily recognizable rights that minority shareholders possess. There are
also various ill effects that they face. The reality of unequal power distribution across the organizational structure of most corporations is another challenge that minority shareholders are bound to encounter. Regarding the shareholder rights, minority shareholders in general control a limited amount of vote shares in the company they invest. Thus, they encounter difficulties in managing various company matters involving decisions or policies. The above relationship brings about situations where minorities are forced to share with majority shareholders decisions that are most beneficial to the latter.

“The concept of ‘one share, one vote’ is a fundamental tenet of corporate governance, but in reality, it is a principle that is frequently violated,” noted Mariana Vazquez, a leading corporate governance consultant and author of the seminal work, “Minority Shareholder Protections: An Overview From a Global Point of View. “ “This limited the options available to the minority shareholders in their attempt to shape the corporations that they invested in.

Nonetheless, there are two critical topics that have not lost their relevance and are still presented with issues of information dissymmetry. The current state of affairs is unfavorable for shareholders in general and minorities in particular as they can be provided with rather limited, inconsistent, and at times, stale and moreover, misleading information on the company’s performance, plans, or such other matters that may have adverse impact on the value of their shares. This absence of openness hinders both their good observation and their option making
particularly in terms of overseeing the management of the business.

Power Belongs to Majority Shareholders

“To quote the Latin saying, for power belongs to none but the majority shareholders and executives, the divine ones are the majority shareholders and executives of the corporations today,” – Lucia Fernandez, former Director of the Spanish Securities Market Regulator, the current partner at the leading Garrigues law firm. Thus, ‘Wall Street’ consists of a number of minority shareholders who end up side-lined and receiving no share of the profits of the company they invested in, let alone have a say in its operations.

This Combined with the general impossibility of appointing any reps to the board of directors, deepens the plight of minority shareholders. Demutualized minority shareholders may not have any say on how the business is managed. Moreover, such viewers may have a feeling that they were not given the ticket to the party. Plus, they are highly sensitive when it comes to exploitative actions of the majority shareholders.

“Minority shareholders are in vulnerable position in the corporate power,” as said by Professor Greenfield “they are powerless with no ways of readily questioning something or asserting themselves. ” They are still missing in US political and corporate authority and still a structural problem and needs policy and legal remedy.

Enhancing Minority Shareholder Protections

With regards to all these emerging issues, the policymakers and the relevant regulatory bodies have been more attentive on improving the position of the minority shareholders in the corporate governance systems. These efforts have restored the concern for the wide range of measures that are to help strengthen the position of the minority shareholders and to bring the new balance of powers.

Another change encouraging has been involving provisions aiming at facilitating enhancement of the voting rights of minor shareholders. This has taken measures like allowing proportional voting where the shareholders may vote for different candidates depending with the ratio in which they hold the stakes or allowing dual-class share system through which the ownership is separated from the powers of voting where the owners of the small stocks are given the superior powers of voting.

“One, two, three: changed from one man, one vote must be brought in light of the fact that minorities presence require some form of protection to be allowed to protect their rights. ”Ensuing integration of voting mechanisms is therefore a step towards achieving a fair partnership balance within the corporate governance structure at any existing firm. ” Aside from the changes regarding the voting rights, the regulators have also made several changes including the increased disclosure and transparency. Companies are now compelled to provide a report on matters concerning the operations of the business particularly through timely and satisfactory reporting of the company’s performance, relation, compensation of directors and staff as well as other matters. This change is also quite valuable for the company: it makes it possible for minority shareholders to make rational decisions and monitor operations.

Voting Reforms and Disclosures

“Trust is the basis of business as absence of information is the main key to opacity which leads to mistrust, strictly for the minority shareholders,” noted Lucí Fernandez. Disclosure Mechanisms should be efficient because; If there are no disclosure Mechanisms in place then shareholders would not be able to regain their trust in the organizations in which they cannot exercise any control or influence.

In light with the recent demands for voting reforms and more disclosures, there has also been the demand for minority shareholders better representation on the board. Some of these legal provisions, which have been passed require or recommend that the company has a minimum degree of board representation as being an appropriate formulation for minority shareholders to have a substantive say in the strategic direction of the company or not.

This expert labelled board representation as being amongst the most vital legal guarantees for minority shareholders. It also ensures that these stakeholders’ voices and concerns are heard and, more importantly, their matters are addressed or solved by the board also.

Shareholder Remedies for Minority Shareholders

In addition, another major reform that has been thought to be central to the general process of improving and strengthening minority shareholders’ rights has to do with bettering the opportunities for shareholders’ remedies. This false claim has been rectified by the present movement reforming the legal systems and judiciaries which ensure the legal protection to the minority shareholders with some remedies like right to sue for oppression or unfair treatment through derivative action where it is direct slavery or the right of appraisal.

‘People always talk about shareholders as if they are a minority which cannot do anything to companies but realistic remedies must be pursued that would encourage shareholders to stand up for their rights,’ Mariana Vazquez said. It was seen to be a precaution against the possibility of the ruling party in the House of Representatives to become dictatorial and exercise unwarranted control over the House.

Promoting Shareholder Activism

Other than the rigorous regulatory and legislative measures adopted to curtail the actions of shareholders, there is also the role of minority activism and how the minority shareholders can blow the whistle. Minimized engagement and participation of minority shareholders has thus been regarded as a strategy for enabling them play an active role in policy making as they possess a significant tool within them; minority shareholders.

Fernandez aptly pointed out that shareholder activism is the blood that flows in the veins of the strong and effective system of corporate governance. “They also express a clear message to a company, that the minority shareholders will not sit idly and watch their investment disappear into the pockets of others or through other means of unlawful deeds.

“Which inherent sense as organizational signals , have urgent actions in terms that they let a corporation know that the minority shareholders will not continue investing in the company quietly. Recent past has witnessed an upsurge or rising influence of shareholder activism, investors with minority stakes are now striving for the collective bargaining power to prevent the management decisions they do not agree with, attain additional information, and exercise changes that they feel are suitable in the long-term interest of the shareholders.

Minority Shareholders are a Great Force

Toshiba is amongst the companies that were used as an example, where minority shareholders collectively led by Effissimo Capital Management hedge fund, sued the company and gathered the majority of corporative governance changes. On its own, the case topped demonstrated how diluting dissatisfaction of minor shareholders can affect the growth of major firms they are part of.

“The following quote based on the Toshiba case demonstrates it quite effectively that minority shareholders are a great force if they are united and provided with some legal powers to reform the companies and make the managers act responsibly,” opined Professor Greenfield. Indeed, going by developments that have unfolded in the recent past, it becomes evident that even minority shareholders lack the much-needed protection that many would expect from corporations around the world.

Although, there appears to be a rising improvement in the frameworks of corporate governance, the concerns as to how minority shareholders’ rights are protected continues to be a significant concern in the present time. The World and Industries this include comprises of policy makers and regulators as well as the companies most of them need to come together and collectively, in order to help address some of the current ills as well as to build on the already existing protective barriers or mechanisms.

Speaking of the future of minority shareholder protections, the following can be said: The future of minority shareholder protections does not lie in the possibility that changes must be made in order to accommodate for the predicament that minority shareholders are not given fair value for their shares or equity, although this might be a valid solution to a problem which surely has its roots in issues of power and knowledge disparities, Mariana Vazquez noted.

Corporate Transparency and Representation of the Minority Shareholders

There is then the need to provide a more complex view of the phenomenon that would require a global strategy based on the voting rights, and on the corporate transparency, the representation of the minority shareholders and the legal recourses of shareholders.

Fellow was similar to this, Lujan Fernandez opined that comprehensive coordination of measures from all the actors in the labor market is required. The common man, unfortunately, is the biggest loser in all scenarios, while the activist shareholders and the minority shareholders are given little regard, so it is high time with companies, policy makers, and minority shareholders come together and build a new wave of corporate governance.

Professor Greenfield, the renowned expert in corporate law, offered a concluding remark on the importance of advancing minority shareholder protections: ‘Protection of minorities is not only legal imperative as well as the mandatory corporate social responsibility but also quest of today for building the future of today’s capitalist systems and the future sustainability of corporate formations. Awakened Minority Capitalism is not a consideration in the scale but the living reality in the legally mandated play script’.

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With the listed challenges of the corporate world in the twenty first century business environment, the issue of minority shareholders and how they can be protected remains an area of study worth striving more towards in order to improve the corporate world, business environment, and the economy in Corporate governance paradigm.