Lack of Information and Corporate Governance Issues - Explained
How Acces to Information for Shareholders Creates Problems
Written by Jason Gordon
Updated at April 5th, 2023
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How does shareholder access to information give rise to issues in corporate governance?
Shareholders own the corporation and control the election of directors. While this structure should effectively check the decision making and actions of directors, the lack of shareholder information about the actions and decisions of directors prevents them from making accurate decisions and often causes apathy with regard to exercising their voting rights.
The lack of information is amplified by the fact that nomination committees within the corporation often have unilateral authority to recommend a director for election to the board. Couple this with the fact that shareholders have limited access to proxy material to make shareholder proposals, it makes it unlikely shareholders will be effective in influencing director actions.
In light of this reality, shareholders must either possess a large share of corporate ownership or assemble into voting groups to have any real influence on the actions and decision-making of directors.
A large shareholder or large voting block has the ability to pass resolutions and control the election of directors. It is often difficult, however, for shareholders to effectively aggregate into a strong voting block in the corporation.
One reason is the lack of available information and the high cost of obtaining and monitoring that information. For this reason, increased shareholder access to proxy material, additional shareholder voting rights, and the role of proxy advisory firms has become very important.
Next Article: Decision Making and Corporate Governance Issues Back to: CORPORATE GOVERNANCE
Discussion Question
What do you think are the potential advantages and disadvantage to allowing shareholders greater access to corporation information? What would be the potential effect on the corporation? Other stakeholders? Practice Questions: What are the primary reasons for shareholders having limited access to information, and how does this lead to conflicts between shareholders and investors.
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