Ownership and Gambling on the success of a company are two distinct things.
It is widely acknowledged that the short horizon of nearly all managers of major investment funds forces chief executives of publicly~traded companies to concentrate on the near term, often thereby neglecting what would benefit the longer~term performance of their companies. This is a problem for which no workable solution seems readily apparent. It is a structural problem of how publicly traded companies are funded.
Clearly, some fundamental change is necessary in order to prevent investment fund managers from demanding that chief executives focus on very near~term performance. ..That pressure must be blocked. How ownership is viewed stands in the way of making any such change that would be effective. ..The theorising about equity shares needs revision.
Revision Needed:
Prior to limited liability incorporations becoming common, partnerships were the means of obtaining capital, and each partner could be held responsible for the debts of the company. Obviously, therefore, each partner was a co~owner and had to have a say in what the company was up to.
But as more capital was being raised and more partners taken on, this style of funding a company became unwieldy. ..Also, as their numbers swelled, most partners were concerned only with results and dividends, having little interest in operations: ..they typically were silent in regards to that, unless a crisis developed.
In short, of any large partnership only a few took much interest in the affairs of the company, while most were investing capital with an eye on expected returns. ..They were along for the ride and hoped it would be a good one. Still, in theory they were ‘owners’, though their expectation was that of speculative gain. ..But partners are co~owners and do not have limits on liability, so really they were gambling on a good result while fearful of some crisis developing which would require them to contribute more capital in order to clear company debt.
Incorporation, where the buyers of shares were limited in their liability to what they paid in, was an attractive and obvious solution. However, the notion of ‘one share one vote’ still attached to it, as if such capital raised was all about ownership — as it had been in a partnership — when in fact most of the capital contributed was speculative, having no ownership aspect to it. ..Why would it, when liability was limited to what was paid for the shares?
The mistake made, and a remedy:
The mistake made seems obvious, and the solution would also seem obvious as well: _divorce ownership from limited liability shares. These contributors of capital are speculators and ought to have no votes at all. Long ago, they would have been expecting high dividends from the company. Nowadays, mainly what is expected of the shares they acquire is a rising price on the after~market, in order to sell them for a capital gain. Their focus is on the stock market price of their shares.
In many legal jurisdictions it is permissible for a company to issue non~voting stock, or to issue different classes of stock, some with one vote per share and others with multiple votes. The difficulty may be in finding buyers for the shares having inferior or no voting rights. These are strongly resisted by many in the current ‘investment community’, who are not used to them.
One approach would be to have the voting right that comes with each common share be non~transferable, extinguished once the share changes in beneficial ownership.*
It is, after all, a fiction that subsequent buyers are “owners.” ..Gamblers on a rise in the value of such shares in the after~market simply cannot be described so, except as a satire: ..for ownership includes a regard for the long~run health of the company, and a speculating buyer has no such thoughts in mind.
An IPO…
An IPO is an ‘initial public offering’ of the shares in a newly formed company. Typically, these shares are somewhat undervalued to what it is expected they will soon be trading at. ..As a result, an IPO usually attracts many buyers of large blocks of stock – and indeed is often over subscribed – so that eager buyers get only some large proportion of the shares they desired to purchase.
Usually, within a few days many of these shares get resold for a quick profit. Clearly, these buyers had no intention to be “owners” in any meaningful sense of that term. …Hence, if the vote attached to the shares was non~transferable, the number of shares retaining voting rights would be that much smaller, and the founders of the new company that much bigger a proportion of that smaller voting pool.
{note: _ If the company sets up a ‘dividend’ account and places in it sufficient funds to cover paying out two years’ of quarterly dividends, the shares would be more attractive to buyers, even without a vote.}
This bodes well for them when the need to raise additional capital prompts them to issue additional common stock, as usually happens. ..Only now, a large proportion of the original shares will have changed hands and lost any voting right, so even with more common shares getting issued, the founders should still have a majority of the votes.
(* By beneficial is meant the true first buyer. ..For instance, the share could not be registered in the name of a mutual fund company itself, but only by it_ in trust for a specifically named fund. If it is switched between funds, the voting right is lost. Similarly, if the shares are held by a separate company, if that company is sold the voting right would be extinguished because beneficial ownership has changed, in this case indirectly.)