The Legality and Ethics of Shareholders Unseating Founders in Public Corporations

Whether it is legal and ethical for shareholders to unseat founders in public corporations is a subject of intense debate. John, a seasoned SEO specializing in business ethics and corporate governance, explains the nuances of this issue, drawing on his experience with public companies and activist hedge funds.

Ownership and Decision-Making

Founders create the company but shareholders ultimately own it. Unless the founders have special conditions written into the shareholder agreement or possess special super-voting shares, they can be voted off the board by a general or emergency meeting (AGM/EGM). This is a common occurrence in public corporations where the main concern is the interests of the shareholders.

The whole concept of a corporation is artificial and man-made, thus, the rules and regulations around it are also culturally specific and can be influenced by internal logic that may not be intuitive. Similarly, what 'ethics' means varies widely depending on one's background, mindset, and objectives. Everyone, even those who consider themselves 'good,' often relies on their own super intellect and beliefs.

Legal and Ethical Justification

Legality and ethics in this context hinge on whether the actions in question are illegal or unethical. Founders have an obligation to prioritize the interests of the corporation and shareholders over their personal interests. However, the incentive structures often prioritize staying in power rather than the company's best interests.

Example: Did you see what their stock price is at I said to my friend and business partner Cathal. Fifty-five dollars a share! That's a 1 increase in two years! I know Brett, Cathal said. We did well on that one, didn't we! Yeah! But the activist hedge fund we worked with did better! I laughed. My goodness the amount of money they made and the amount of good they did. The incentive structure for board members and the executive team isn't to act in the company's best interest; it's to retain power.

Public Company Oversight

Public company oversight is often inadequate, especially for small to medium-sized companies. There should be no need for activist hedge funds to force changes. Boards and management should proactively address issues and improve performance. If they do not, the consequences can be severe.

Take a look at the company I'm discussing. For sixteen years, shareholders saw no return on their investment while the CEO and board remained entrenched and complacent. There was no turnover or new plan, just continued stagnation. Activist hedge funds stepped in and created changes that benefited both the company and shareholders.

Incentives and Board Composition

Typically, board members are compensated for their meetings and receive stock options. These stock options should align with shareholder interests, but in many cases, they are not enough of an incentive. Board members, often independently wealthy, may prioritize membership over performance. CEOs often choose board members who are business acquaintances or loyal to the CEO.

The incentives for boards are often skewed. If the company performs well, it's an added bonus. However, if the board members are compensated mainly for being on the board, their actions may not align with shareholder interests. The activist hedge funds we've worked with identified companies with untapped value and brought in competent management teams to unleash that value, benefiting all stakeholders in the process.

Our efforts with the hedge fund highlighted that two board members, including the chairman, were on the board of another company we had successfully turned around. This is a clear demonstration of the same complacency repeating itself. The new teams implemented strategies, and shareholder value increased. The improved performance led to job creation, creating a win-win situation.

Conclusion

In conclusion, the legality and ethics of shareholders unseating founders depend on the specific circumstances and motivations. While it can be seen as a necessary action for improving company performance, it should not be the norm. Boards and management should prioritize shareholder interests and take proactive measures to address issues, rather than waiting for external pressure.

For more on this topic, read:

The Role of Activist Hedge Funds in Public Corporations Navigating the Challenges of Corporate Governance

Keywords: shareholders, founders, public corporations, ethical business practices, activist hedge funds