The statement, “the hand that rocks the cradle rules the world” captures the incredibly powerful role that a parent plays in their child’s life. Parents invest in their children emotionally and financially, in childhood and well into adulthood. These investments, in turn, help determine how happy and successful their children grow up to be. Shareholders —also called stockholders—play a very similar role in the birth and development of small businesses. Shareholders bankroll a portion of the finances that small businesses need to get started and gain traction. As investors, they have a stake in the business’s present and future, since the only way they can recoup their investment is through company profits. It is therefore in the both the company’s and the shareholders’ interests that the business succeed. The crux of this success, its fulcrum,is the relationship between both parties. Draw up a shareholders’ agreement The first step to any good professional relationship is a good contract. In addition to the articles of association, any company that has more than one shareholder would do well to draw up and sign an agreement with each of its shareholders. Thisagreementis useful in the following ways (among others):
- It contains provisions that safeguard shareholders’ interests. In the absence of an agreement, it might be possible for the Board of Directors to ignore or sideline shareholders’ objections at critical junctures of the business’s growth trajectory.
An agreement would establish and define the terms and conditions of shareholder participation in the decision-making process. It can also enforce necessary checks on the influence that the Board of Directors wields over a company’s fortunes.
- It can institute dispute resolution mechanisms that could help solve any future conflicts between minority and majority shareholders. This is critical for the preservation of investor relations.
Observe the principles of ‘Care, Loyalty, and Disclosure’ As company representative, the CEO has a fiduciary responsibility towards the company shareholders. This includes taking care to monitor and evaluate the business’s day-to-day functioning. It also calls for the CEO to make reasoned, well thought out decisions that are in the stakeholders’ best interests, as an expression of loyalty. Finally, it behoves the CEO to be open and honest about the company’s functioning and fortunes. To fulfil these obligations, here are some best practices that CEOs would do well to follow:
- Don’t keep secrets. It might seem fairly self-evident, but when the going gets tough, some CEOs are reluctant to inform shareholders that the business is struggling. However, if things get worse, the shareholders are going to be that much more upset that they weren’t informed sooner. As a gesture of your loyalty to their shareholders, CEOs should always keep them in the loop.
- Convene shareholders’ meetings. Hold regular meetings with your shareholders and share business updates and plans. Inform them a couple of weeks in advance and send them the agenda for the meeting. This will give them time to come up with some insights and inputs of their own.
- Maintain a good relationship with individual investors. Developing a strong relationship with each of your investors will help build consensus and ensure that you benefit from each shareholder’s individual inputs and suggestions.
Though the CEO is only really answerable to the Board of Directors, neither portfolio would exist without the shareholders’ financial support. It is worth keeping this in mind, if only in the interests of a healthy bottom-line.