Stocks And Corporations

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Corporations have a large amount of power in today's society, but even large corporations occasionally listen to their smaller stockholders -- particularly if a number of them band together and start singing the same tune.

A corporation is a sort of "person" created by law, with an existence separate from its owners, who are "natural persons." To start a corporation in the United States, the owners must obtain a charter from a state government, or possibly from the Federal Government, and must submit to government regulation. An American business enterprise that uses a good deal of capital is pretty sure to be a corporation. An outfit that wants to distribute portions of its ownership among more than a handful of people is practically obliged to incorporate. All of the business concerns whose stocks or bonds are sold to the public through the stock markets are corporations or the practical equivalent.

A corporation is managed by officers who, technically at least, are selected by a board of directors, and the board in turn are selected by a vote of the shareholders. Each share is entitled to one vote, so that a stockholder has as many votes as the number of shares he holds. In practice, the voting right of an ordinary stockholder is of little consequence. When the management needs stockholder approval, each owner receives by mail a proxy, which he is requested to sign and return. His choice is limited to voting "yes" or "no" on the management's proposals. Even if a small stockholder bothers to attend an annual meeting, voting against the "inside crowd" is useless except on the rare occasions when the opposition is well organized and powerful.

This sounds like a decidedly undemocratic way to run things. But a small stockholder is not powerless. Provided the stock is readily marketable, he is free to express his disapproval of the management by selling out. Ready marketability is a point for a cautious investor to check before he buys. For a corporate shareholder, it is far more important than voting rights.

In the long run, the easiest and safest way for a corporation officer to increase both his personal income and his prestige is to be in charge of a company that is making money for its stockholders and is growing. He cannot do this unless his company's management is as skillful as its competitors' are. The continued success of the company means a great deal more to an officer than it does to the average stockholder.

Corporations are often in need of additional capital for expansion. Traditionally they have raised the capital by selling stock or bonds to wealthy families. But as the years pass, they find it necessary to induce an ever-increasing number of people to become stockholders. This causes corporation officers to be more respectful of the "little guy." Much still needs to be done in this direction, but there is a trend toward making it more practical and attractive for a small investor to become a shareholder.

Roughly, and over a long period of time, the interests of corporation heads and of small stockholders are likely to agree. But this does not mean that an investor can trustingly assume that all American corporations are well run, or that it matters not whose stock he owns.

Remember that an investment in a corporation is an indication of your values as well as a place to keep your money. It is wise to learn about potential investments before you make them and are unpleasantly surprised by a seedy business practice that you find morally reprehensible. Corporations, just like people, like to put their best foot forward, but sometimes this entails less than full disclosure until after you've bought stock.

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