Organisations and shareholders
An Association of Investment Trust Companies (AITC) case study

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Page 3: Shareholders and their role in an organisation

A shareholder is a part owner of the business to which the shares relate. S/he may be an individual or a large financial institution. Many pension fund managers use clients' money to buy shares as a long-term investment, hoping for a higher return from this investment than might be achieved from other types of assets.

Stockbrokers will buy and sell shares according to the wishes of their clients, to maintain their clients' investments and watch them grow. Investment trust shares can also be purchased directly through the product provider, through saving schemes or Individual Savings Accounts (ISAs), which are a low cost way of investing in the stockmarket.

Directors of plcs, including investment trusts, continually try to improve their companies' performance. It is in their interest that shareholders invest in their business. A popular and good performing business in the market place might help its share price rise as demand for its shares increases.

Investment trusts can provide a sound investment option for shareholders as they invest across a variety of sectors and risk profiles, spreading risk over a number of investments.

An investment trust company will use its shareholders' money to buy shares across several different sectors of the market place. The investment trust will consider carefully its aims and objectives and which companies have the best potential to meet them. They will invest accordingly.

A shareholder owns a share of the organisation in which s/he has invested. This means the shareholder can have a say in the running of that company, e.g. they may vote on key issues. The shareholder with more than half the value of the business is known as the majority shareholder. S/he or it - many shareholders are companies or institutions like pension funds - will be very influential in the decisions the organisation takes. If the majority shareholder believes a proposal to be detrimental to the businesses, it may not be carried through.

Investment trusts are themselves shareholders but on a much larger scale than individual investors. This ultimately gives them more power in the company. Where the investment trust has a large shareholding in a company, it has the power to influence the decisions about the company's future.

One respected fund manager, who manages investment trusts and other investment vehicles, was reported to have led a successful shareholder revolt to prevent the appointment of the nominated Chairman of the proposed merged entity of the TV giants Carlton and Granada.

The UK government encourages large institutions that invest substantially in companies to use their power as shareholders to influence decisions in the best interests of the company and their investment. Shareholders are able to vote at the Annual General Meeting for the removal or election of different members of the Board of Directors.

The issue of chief executives' pay often hits the headlines. In many companies, shareholders are urging key personnel be paid in line with their performance and not be given big payouts.

Association of Investment Trust Companies (AITC) | Organisations and shareholders