WHAT are the benefits of wider
share ownership for a country? What are its advantages for organisations? How
do individuals benefit from it? What can governments, companies, trade unions
and management bodies do to promote wider share ownership in a country? These
questions are discussed in this article.
The concept of share ownership originated in England over four hundred years ago. In joint stock companies it is over a hundred years old. Despite that, many companies are owned by only a small number of shareholders. In several countries, the percentage of shareholding population in some cases is below one per cent. Thus, many countries and companies are not realising the various advantages of a large shareholding population.
Following are some of the possible benefits of wider share ownership:
For a country
PROMOTES CAPITAL FORMATION
For economic development investment of capital is required. Capital can come from savings or external borrowings. Borrowings create obligations to pay interest and refund the principal amounts. Hence, investment of local savings in normally a preferred method.
The desire to own shares in organisations can help promote the savings habit amongst people. Increase in level of savings can provide capital for investments in economic and social development. Thus, every country should try to promote the concept of wider share ownership and have a large shareholding population. In the 1980s several countries e.g. United Kingdom, India, etc. have made dramatic increases in their shareholding population and are deriving benefits of higher capital formation and economic growth as result of this.
IMPROVES ACCOUNTABILITY
When an organisation is owned by a large number of people, they will, naturally, ask several questions about the organisation's policies, procedures, services, performance, and so on. This will have the effect of improving its accountability. Indeed, wider share ownership can help in developing a "people sector" and have some measure of economic democracy combining some of the advantages of both the private and public sectors.
IMPROVES SOCIAL RESPONSIBILITY
An organisation owned by a large number of people will be questioned and influenced by them about the organisation's social responsibilities. Hence, it is likely to show a higher level of social responsibility in matters such as quality of its products and services, prices charged, energy conservation, protection of environment, earning foreign exchange, assistance in community projects, and so on. Widely dispersed shareholders can provide information as to community needs to enable an organisation to structure its social programmes. Further, the shareholders can give feedback as to the community reactions to the programmes.
GREATER INFORMATION DISCLOSURE
With an increase in the number of shareholders, there will be demand for greater information about the working of the organisation and about its disclosure in an understandable form. This will, therefore, lead to greater and improved disclosure of information. The practice will spread from one organisation to another throughout the society. This increase in transparency can help in improving the quality of management.
DEVELOPS AN ENTREPRENEURIAL
CULTURE
In a society, where money can be raised through public subscription for shares, entrepreneurs will be able to finance new businesses, growth of existing organisations, new product developments, exploring new ideas, etc. through equity. This ability to finance new business ideas through share subscriptions can slowly develop an entrepreneurial culture in a country. In its absence, entrepreneurship may not develop adequately because people with ideas may find it difficult to give them any shape due to lack of finances or the high cost of borrowed funds.
In short, wider share ownership and a large shareholding population can bring about profound economic and social changes in any country.
For organisations
NO FIXED COST
Loan funds create an immediate fixed cost of interest payments. For equity funds the dividend payments need to be made only after making a profit and establishing a good financial position. Hence, there is no immediate fixed cost of equity capital during the initial construction or setting up phase of an organisation.
FLEXIBILITY IN PRICING
For loan funds compulsory interest payments are made. They are added to the cost of the products or services. Therefore, they increase the prices of products or services. This has the effect of limiting their demand and, therefore, the volume of business and profit of an organisation.
Equity finance does not impose any compulsory costs. Dividends are paid only out of profits. Thus, the products costs of an equity financed business are lower. This gives it the flexibility to sell at lower prices, where appropriate, increase its volume of business and increase its profits. This can also help to keep inflation under control.
- This column is part
of an on-going public education programme of the Council of the Jamaica Stock
Exchange.
