INFLUENCE OR INDOLENCE: THE SHAREHOLDERS’ ROLE IN SUCCESSFUL

CORPORATE GOVERNANCE

INTRODUCTION

A shareholder is a person, natural or juridical, that owns at least one share of a

corporation’s stock or a mutual fund. Shareholders are the essential owners of the
corporation. Attached to such ownership are certain rights and responsibilities of the
shareholders, which allow them to suffer or benefit from the corporate business’
success or failure. The rewards and benefits may come in the form of increased stock
or share valuations or financially realizable profits, which are declared and distributed as
dividends by the board of directors of the corporation. Adversely, when the corporation
loses profit, the stock price drops and the shareholders may suffer losses and falloffs in
their portfolios.

As the saying goes, “The shareholders can make or break the company.” This is
where active participation of shareholders comes to the picture. There is active
ownership when the shareholders decides to engage in influencing or affecting the
corporate management strategy and practices. This is grounded on responsible and
informed investing considering that shareholders are interested in pushing the
corporation towards sustainable business conduct and achievement of long-term goals.
However, when shareholders only have their focus on the share valuation, their
influence and responsibilities begin to take the backseat putting the corporation at risk
to possible abuse and fraud of its management. While shareholders’ influence protects
the corporation, their indolence in exercising their right to participate in the corporate
governance may lead to the fall of the corporation itself.

In this research essay, the proponent gave an overview of shareholders’ rights as

well as its limitations. The proponent then reviewed studies on shareholders’ passivity
and activism in terms of exercising their rights to affect and monitor corporate
governance. These reviewed studies include both the international and local corporate
setting from early and modern timelines. The discussions on corporate abuse and fraud
relates the role of shareholders’ influence through active participation or indolence
through their passivity in achieving a successful corporate governance.

OVERVIEW OF SHAREHOLDERS’ RIGHTS

Shareholders claim the residual profits and assets of the corporation. They bear
the risk of the corporation and have control rights over it. Principally, shareholders have
voting rights during the corporation’s general annual meetings concerning matters of
corporate policies, for instance, the appointment of the board of directors, mergers and
consolidations. To enforce these rights is to strengthen legal protection of the
corporation. Nevertheless, the exercise of a shareholder’s right largely depends on the
willingness to check and monitor managerial operations and the extent of involvement in
the corporate affairs. This in turn is founded on the shareholders’ belief on the relevance
of their votes and the extent of its influence in corporate governance and control.

Shareholders rights varies albeit, not all of it are of equal significance considering
that some are more important over the others. In a study conducted by Julian Velasco, 1
the rights of shareholders are summarily categorized into four groups. These are
economic rights, control rights, information rights, and litigation rights. These rights were
assessed and grouped based on the limits of each legally and factually.

Economic Rights

Shareholders’ interest in a corporation is primarily focused on the economic

benefits. The two main ways by which shareholders can benefit from the corporation are
by receiving the distributed dividends and by selling the whole or part of their interest in
the corporation.2 Congruently, the two main economic rights of the shareholders are the
right to receive dividends and the right to sell their shares.

A shareholder’s right to receive dividends is legally and factually limited in nature.

In law, shareholders may receive only such dividends declared by the corporation’s
board of directors. However, the board of directors are in no obligation to declare
dividends. In fact, they may opt to reinvest the corporate profits instead of distributing
the same to the shareholders.3 Shareholders only have a legal right to be paid of the
dividends after, and to the extent of what the board of directors declared.

While it is true that in practice, most corporations declare and pay dividends in a
regular basis, such corporations distribute only minimal portions of their profits to the
shareholders. In general, shareholders cannot expect to receive the bulk of the return
on their investment through the payment of dividends. As a matter of fact, a lot of
corporations pay little or no dividends at all.4

1
J. Velasco, The Fundamental Rights of the Shareholder, Vol. 40:407, pp. 409, (2006).
2
In close corporations, shareholders may generally expect employment and salaries. See F. HODGE O’NEAL &
ROBERT B. THOMSON, O’NEAL AND THOMPSON’S CLOSE CORPORATIONS AND LLCS (3d ed. Rev. 2004).
Nevertheless, such salaries are paid to shareholders only in their roles as employees, hence, in consideration of their
employment.
3
WILLIAM MEADE FLETCHER ET AL., CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS (perm. ed.,
rev. vol. 2003). In theory, directors may be obliged to declare dividends. However, the decision on whether to declare
dividends is protected by the Business Judgment Rule.
4
Eugene F. Fama & Kenneth R. French, Disappearing Dividends: Changing Firm Characteristics or Lower
Propensity to Pay?, 60 J. FIN. ECON. 3, 4 (2001).
 Shareholders also benefit economically by selling their shares at a gain. One
unique characteristics of corporations is the transferability of its shares. Shareholder
may sell their shares at will. Their right of alienation rooted from the fact that shares are
in nature a personal property. Ownership of shares does not directly affect the
corporation because the operation of its business is managed by the board of directors
rather than by the shareholders. While the corporate profits increases, the value of its
shares rises. This creates potential profit in selling shares. Further, as shareholders in
general do not have fiduciary duties to one another or to the corporation, they may keep
to themselves the profits they make from selling their shares.

Control Rights

Another vital feature of a corporation is the separation of its ownership and

control. Though shareholders technically own the corporation, they do not have the right
to directly manage the corporate business. Such authority to manage the corporate
business is vested in the board of directors. Nonetheless, shareholders still have control
rights.

Shareholders possess the right to vote on crucial matters relating to the

corporate business. This gives them certain control over the corporation. Paramount
among shareholders’ voting rights is the right to elect directors who will manage the
affairs of the corporation. Theoretically, this gives shareholders the ultimate control over
the corporate business. In reality, however, this does not usually happen.

Commonly, individual shareholders are generally not interested in, or at least

incapable of, effectively exercising their control rights. As argued by Professors Adolf A.
Berle, Jr. and Gardiner C. Means, shareholders oftentimes are virtually of less power
against the management.5 Since individual shareholders owns only a very small portion
of the outstanding shares of a corporation, it is not sufficient to consider monitoring
worthwhile and significant. Becoming informed and updated on the corporate affairs is
costly. Moreover, it may also be futile considering that the shareholder’s meager vote is
not likely to affect the outcome. As such, shareholders have a tendency to be rationally
apathetic and to merely support the incumbent board of directors on the stereotypical
idea that the members of the board of directors are experts in business field and have
access to greater information.

It would be a difficult time in the occasion that shareholders wanted to oppose

the incumbent board of directors. Shareholders usually do not attend shareholders’

5
It was argued that it is the executive officers who have the real power in the corporation. See ADOLF A. BERLE, JR
& GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY (1932).
meetings. Instead, they exercise their right to vote by proxy. Proxy voting refers to
casting of ballot by a person or institution on behalf of a shareholder who is not able to
appear in the shareholders’ meeting. The shareholder being represented by a proxy
may also be someone who may not choose to vote on a particular issue. 6 Meanwhile,
the board of directors have control over the proxy mechanisms. In many ways, the
process is amassed against the shareholders. As an example, the incumbent board of
directors are allowed to use corporate funds in soliciting proxies for their own reelection.
To oppose such act, a shareholder would have to incur the expense of a proxy contest.
Else, the proxy rules limit the shareholders’ option to either vote in favor of the
incumbent board of directors or withhold his or her consent. They may neither vote
against the board-sponsored candidates nor propose alternatives.

Nonetheless, the fact stays that only shareholders can elect the board of
directors although they may face obstacles in exercising such right. When a shareholder
is unsatisfied with the performance of the existing management, the said shareholder
may influence the other shareholders into voting against the incumbent directors. Under
such instances, the right to elect the board of directors becomes meaningful.

The voting rights of shareholders are not only as to the election of board of
directors. They likewise have the right to vote on crucial fundamental matters of the
corporation such as mergers and amendments of by-laws. This kind of voting right gives
the shareholders their voice in corporate governance. Yet, this right generally limited on
matters presented to them by the board of directors. The shareholders cannot directly
propose their own ideas nor amend the proposals of the board of directors. Further, the
board of directors can even work their way around to get shareholders approval. For
instance, the board of directors can restructure a merger into a purchase or acquisition
of assets. There are certain corporate affairs that differ in approval requirement but
virtually similar in end results.

Information Rights

Another right to which shareholders are entitled is the right to at least some
information about the affairs of the corporation. For instance, shareholders have the
right to inspect the corporate books and accounts. This right of the shareholders is
grounded on their interests in the corporate governance and ownership of corporate
properties.

6
W. Kenton, What is a Proxy Vote, and How Does it Work? With Example, Investopedia,
https://www.investopedia.com/terms/p/proxy-vote.asp (December 29, 2020)
 In most states, such as Delaware, shareholders have no general right to
information but only certain specific rights.7 In states like Delaware, shareholders must
demonstrate a proper purpose in reviewing corporate records. Further, they are entitled
only to the review of basic documents such as the charter, bylaws, minutes of board
meetings, or the list of recorded shareholders. They must present legitimacy of their
request for additional information.

In the old Corporation Code8 of the Philippines, corporations were required to

maintain a record of all its business transactions and minutes of meetings. In the
Revised Corporation Code, the coverage of these records was expanded. Section 73 of
the Revised Corporation Code9 (RCC) provides that corporate records can be inspected
by any director, trustee, stockholder or member of the corporation, in person or by a
representative, at reasonable hours on business days; and a demand in writing may be
made to request for copies at the expense of the requesting party. Parenthetically, the
shareholders may inspect the records including the articles of incorporation and
corporate bylaws with all its amendments; the ownership structure and voting rights as
well as the lists of shareholders’ group structures, intra-relations, ownership date, and
beneficial ownership; the names and addresses of all the members of the board of
directors, trustees, or executive officers; records of all the business transactions;
resolutions of the board of directors, trustees, or shareholders; copies of the latest
reports submitted to the Securities and Exchange Commission; and the minutes of
meetings of the shareholders, or of the board of directors.

In the Philippines, the Corporation Code is strict in the sense that only the
shareholders or their representatives can inspect the corporate books and accounts. In
other words, a party who is not a shareholder, a competitor or someone representing its
interests cannot inspect or demand the reproduction of the aforementioned corporate
records. This was emphasized in Puno vs. Puno Enterprises Inc.10 where the Supreme
Court ruled that the right to inspect may only be exercised by a shareholder of record.
IN the Puno case, the Supreme Court expounded that the death of a shareholder does
not automatically make his or her heirs shareholders and does not mandatorily entitle
them to the rights and privileges of a shareholder. Comparably, the Supreme Court in
Insigne vs. Abra Valley Colleges Inc.,11 allowed the shareholders to inspect the
corporate records and accounts notwithstanding the fact that no stock certificates were
issued to prove their stock ownership. The shareholders sufficiently proved their

7
There states which require corporations to provide shareholders with annual financial statements. See MODEL
BUS. CORP. ACT; 16.20 (2004).
8
Batas Pambansa 68 (1980).
9
Republic Act 11232 (2019).
10
G.R. No. 177066 (September 11, 2009).
11
G.R. No. 204089 (July 29, 2015).
ownership by presenting proof that they subscribed to the corporation’s shares even
though their subscriptions were not fully settled.

The shareholders’ right to inspect corporate records also has its boundaries. The
inspecting shareholders are bound by the confidentiality rule under the law such as
those on trade secrets under the Intellectual Property Code of the Philippines, the
Securities Regulation Code, the Data Privacy Act of 2012, as well as the Rules of Court.
Moreover, the right to inspect the books and accounts of the corporation must be
grounded in good faith and for a specific and honest purpose. 12 Hence, this cannot be
exercised to merely satisfy curiosity or for whimsical purposes. 13 Meanwhile, it was
clarified in Gokongwei14 case that the corporation has the burden of showing when there
is impropriety of the purpose or motive of the shareholder exercising the right to inspect
the corporate records. Consequently, it was reflected in Associated Smelting and
Refining Corp. vs. Lim15 that the corporation cannot singly deny the shareholders’ right
to examine the corporate accounts based solely on the allegation of impropriety of
purpose in the motive of the inspecting party. As such, the confidentiality rule in
business transactions is not a powerful incantation that can readily overthrow the
shareholders’ right to inspect corporate records. In a broad sense, an action for
injunction or a writ of preliminary injunction filed by the corporation cannot prevent
shareholders from exercising this right. On the other hand, shareholders who are denied
of this right may resort to available remedies such as action for specific performance,
petition for mandamus, damages, or criminal action.

As seemingly trivial as it may sound, the shareholders’ right to inspect the

corporate records to protect their interests in the corporation is highly respected in law
and jurisprudence. Conversely, shareholders must always exercise such right in good
faith and for a legitimate purpose.

Litigation Rights

Shareholders may also seek judicial enforcement of their rights under certain
occasions. One of the most significant remedy is the exercise of their right to seek
enforcement of, and redress of breach of, management’s fiduciary obligations to both
the corporation and its shareholders through a derivative suit. 16 Such right is noteworthy
because technically, derivative actions are brought on the corporations’ behalf. It is the
12
A director, trustee or officer held liable in a suit for denying the shareholder his or her right to inspect may raise the
defense that the person demanding to examine corporate records has improperly used any information secured from
the prior examination of these records was not acting in good faith or the demand is not for a legitimate purpose, or
that the shareholder is a competitor or otherwise represents the interest of a competitor. See SECTION 73, REVISED
CORPORATION CODE OF THE PHILIPPINES.
13
Grey vs. Insular Lumber, G.R. L-45144 (April 3, 1939).
14
John Gokongwei Jr. vs. Securities and Exchange Commission, G.R. No. L-45911 (April 11, 1979).
15
G.R. No. 172948 (October 5, 2016).
board of directors who are usually entitled to determine whether or not a legal action
must be pursued. However, when the board of directors themselves were conflicted, the
shareholders come into picture and take legal action on behalf of the corporation. This
right permits the shareholders to enforce the duties from which they are indirectly
benefitting.

Unfortunately, the conditions underwhich the shareholders are permitted to

initiate derivative actions are relentlessly limited, as are the chances to an affirmative
resolution on the merits. The law imposes a number of remedial obstacles in initiating
and maintaining a derivative lawsuit. For instance, the contention of a person who is not
a shareholder at the time of the action complained of cannot stand in law under the
contemporaneous ownership rule.17 The litigation requirement may insist that the board
of directors be given the chance, in most of the cases, to determine whether a lawsuit is
appropriate. Moreover, even after the suit has been properly initiated, a litigation
committee of the board of directors may still be able to have the suit dismissed. Such
obstacles are not per se unjust. In fact, the shareholders’ right to initiate a derivative
action is more of an exception to the general rule that the members of the board of
directors are the ones who directly manage the corporation. As such, it is only
reasonable to place protection measures against various forms of abuse. 18
Nevertheless, such measures also impose limit on the shareholders’ ability to initiate
derivative actions.

Functional standards under which the board of directors’ actions are adjudged in
a derivative suit are also quite tolerant. The business judgment rule, one of the most
basic principles of corporate law, provides the board of directors with a remarkable
reverence and great protection against liability. Consequently, the shareholders-
plaintiffs may still face sizeable difficulty on the merits even after overcoming the
obstacles to initiate a derivative suit.

These challenges in bringing derivative actions are not applicable in cases where
shareholders sue to enforce their own legal rights. Nonetheless, this right to legal action
is not very much more significant in the context of the direct actions. The instances
under which shareholders may file actions in their own name are also limited. As an
example, shareholders may sue on the ground of non-payment of dividends but this is
proper only if they are legally entitled to dividends, in essence, after the board of
directors have declared dividends. In some instances, shareholders are also given the

16
A.A. Sommer, Jr., Whom Should the Corporation Serve? The Berle-Dodd Debate Revisited Sixty Years Later, 16
DEL. J. CORP. L. 33, 48-49 (1991).
17
T. L. Robinson, Jr., A New Interpretation of the Contemporaneous Ownership Requirement in Shareholder
Derivative Suits: In re Bank of New York Derivative Litigation and the Elimination of the Continuing Wrong Doctrine,
Vol. 2005, Issue 1 (2005).
18
Zapata, 430 A.2d at 779; Auerbach vs. Bennett, 393 N.E. 2d 994 (N.Y. 1979).
right to petition the court to dissolve the corporation. Although the laws vary based on
the state of country, the standards classically require egregious behavior or other
extreme conditions. In practice, the courts are generally averse to order a corporation’s
dissolution.19

Shareholders also have appraisal rights when a corporation engages in certain

major transactions such as a merger. The shareholders under such circumstance, can
relinquish the contractual consideration due under the merger agreement and petition
the court for the fair value of their shares.20

In other countries like the United States of America, appraisal rights may apply
only in the milieu of mergers and with certain exceptions. Moreover, the shareholders
seeking to exercise their appraisal rights often pay the costs of providing the remedy. As
such, the exercise of appraisal rights makes it attractive only in the most extreme
situations.

CORPORATE GOVERNANCE AND CONTROL

Corporate governance is defined as the system of stewardship and control to

guide organizations in fulfilling their long-term economic, moral, legal and social
obligations towards their stakeholder.21 Ownership is the key element in corporate
control and governance. External control through the capital market and the corporate
internal control system, two central forces that resolve problems on balancing corporate
decisions and social good, depend on the degree of share holding.22

Management control is defined by the degree of ownership. Ownership

centralization reveals that publicly listed Philippine companies in reality are not truly
publicly owned. Most companies listed in the Philippine stock exchange have issued
just the minimum number of shares required to gain public listing. This technique of
limiting the ownership shares issued to public investors reduces the minority
shareholders to passive roles in corporate governance.

In Asian setting, development policies formulated by the government and

historical circumstances enabled entrepreneur groups to accumulate capital resulting to
the emergence of large shareholders controlling corporate groups. Shareholders treat
the problem of moral hazard in governance by accumulating controlling ownership
shares when the capital markets and legal frameworks are weak. The Saldaña study
19
N.Y. BUS CORP. LAW; 1104-a(a) (Consol. 2006); MODEL BUS CORP. ACT; 14.30(2) (2004).
20
Section 81, Revised Corporation Code of the Philippines, (2019).
21
Code of Corporate Governance for Publicly-Listed Companies.
http://www/sec/gov/ph/wp-content/uploads/2016/12/2016_memo_circular_no.19.pdf
22
M. Jensen. The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems, Journal of Finance,
48, pp. 831-80 (1993).
concluded that dominant ownership shares and assurance of bank financing were one
of the means by which large shareholders achieved corporate control.23

In the Philippine setting, corporate governance is characterized by the

centralization of ownership by a limited number of family shareholders within a bank-
dominated financial market. Relatively weak institutions undergoing restructuring
reforms enforce a comprehensive set of corporate law and capital market regulations. 24

PASSIVITY STORY OF SHAREHOLDERS

A lot of modern corporate scholars particularly those with law and economics
background admit that shareholder passivity is inevitable. The admission relied on
market forces to limit managerial discretion. The sad reality is that shareholders do not
care that much about voting except during extreme circumstances. However,
shareholders’ voting right, while historically treated as only a minor nuisance in
corporate governance, can play a very important role in monitoring corporate managers
if legal rules would permit.

Theoretically, the shareholders of public corporations have the right to elect the
board of directors who will watch over the corporate officers in managing the
corporation on behalf of the shareholders. However, the Berle and Means debate
revealed that this theory is but a fiction. In reality, the managers pick the directors and
the shareholders only approve and ‘rubberstamp’ the managers’ choices. 25 In some
instances, unsatisfied shareholders would mount a proxy fight but only about one fourth
of the time, they would win.26

In 1932, Berle and Means convinced the world that managers of big corporations
are powerful while their shareholders are powerless. The passivity story was born out of
the said debate. Advocates of the passivity story believe that since shareholder
passivity is inevitable, we must rely mainly on other constraints such as takeovers, in
keeping managerial discretion within a reasonable bounds. In law and economics, the
passivity story continued to develop as a reflection to the rare successful proxy fights
and corporate social responsibility involvement in the 1970s. 27 In the passivity story, few
23
Estanislao, J., Saldaña, C., Fider, A., The Role of the Board of Directors: Philippine Legal & Regulatory
Framework, and Practice, Third Asian Rountable on Corporate Governance, 4-6 April 2001, Singapore:
http://www.oecd.org/corporate/ca/corporategovernanceprinciples/1873206.pdf
24
World Bank, Corporate Governance Country Assessment: Republic of the Philippines,Washington, DC. © World
Bank, https://openknowledge.worldbank.org/handle/10986/14523, (2001).
25
A. BERLE & G. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY (1932).
26
R. SCHRAGER, CORPORATE CONFLICTS: PROXY FIGHTS IN THE 1980s 11 (Investor Responsibility Research
Center 1986) (reporting data from 1981-1985); Seligman, Equal Protection in Shareholder Voting Rights: The One
Common Share, One Vote Controversy, 54 GEO. WASH L. REV. 687, 711 (1986) (reporting data from 1956-1977).
27
The modern corporate social responsibility movement started in “Campaign GM” in 1970-1971. The supporters
include Curzan & Pelesh, Revitalizing Corporate Democray: Control of Investment Managers’ Voting on Social
Responsibility Proxy Issues, 93 HARV. L> REV. 670 (1980); R. NADER, M. GREEN & J. SELIGMAN, TAMING THE
GIANT CORPORATION (1976); Schwartz, The Public-Interest Proxy Contest: Reflections on Campaign GM, 69
proxy fights exist because most corporations continue to run smoothly without them.
Even when management performance lags at times, proxy fights are not economically
feasible. The meager support for social responsibility proposals was interpreted to mean
that shareholders are not indeed interested in such proposals. 28 The adherence to
passivity emanated from the belief that allowing shareholders to include proposals in the
corporation’s proxy statements involves costs on the corporation, shouldered by all the
shareholders, only to benefit the few activists to advance their own political agenda.

Moreover, the exercise of voting right and becoming sufficiently informed to cast
an intelligent vote requires shareholders to invest their time which is a scarce resource
considering its value in the business world. The cost and vainness of becoming
informed most likely influence the shareholders to choose rational apathy. Instead of
taking time to consider certain proposals, they tend to choose a more ‘convenient’
option – vote in favor of the management.

The argument on shareholder impotence or passivity has been largely accepted

by both the academicians and legislators. For instance, the debate on the ‘one share,
one vote’ rule accepts that shareholders were relatively powerless against dual class
capitalizations. This is also the reason why shareholders blindly approve amendments
to corporate charters even against their own interest.29

Meanwhile, some observers who are skeptic of the true value of management
takeovers, view shareholder activism as a better alternative to takeovers. However, in
the early years, achieving shareholder activism was rarely discussed. One example is
Jonathan Charkham’s reliance on Albert Hirschman’s dichotomy between exit and
voice. Hirschman believes that if takeovers were more complex and almost impossible,
investors would be more inclined to use their rights as an instrument in improving
management.30

SHAREHOLDERS’ ACTIVE PARTICIPATION31

To achieve a sound corporate governance system, shareholders must actively

participate in influencing corporate strategic decision-making. If constructed well
enough, such participation can effectively be done during annual general meetings and
MICH L. REV. 419 (1971); C. STONE, WHERE THE LAW ENDS: THE SOCIAL CONTROL OF CORPORATE
BEHAVIOR (1975).
28
F. EMERSON & F. LATCHAM, SHAREHOLDER DEMOCRACY: A BRAODER OUTLOOK FOR CORPORATIONS
103-04, 112 (1954); Ryan, Rule 14a-8, Institutional Shareholder Proposals, and Corporate Democracy, 23 GA. L.
REV. 97, 116-18, 120 (1988).
29
Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments, 102
HARV. L. REV. 1820, 1839 (1989)
30
J. Charkham, CORPORATE GOVERNANCE AND THE MARKET FOR CONTROL OF COMPANIES, 11 (Bank of
England Panel Paper No. 25, 1989)
31
V. Duhamel, Shareholder Rights and the Equitable Treatment of Shareholders, The Fourth Asian Roundtable on
Corporate Governance, 11-12 November 2002, Mumbai India
proxy voting. The provision of entitlements, proxy voting, annual general meetings and
similar corporate events are regulated in the market. However, some markets have no
established and well defined practices for proxy voting as in the scenario in Bolivia,
Qatar, and Croatia.

Effective shareholder participation likewise depends on the procedures in voting

as well as notification of the dates and agenda taken up in annual meetings, voting, and
counting methods. In order to meet voting deadlines, sufficient time to notify the
shareholders must be provided. To effectively perform the voting, documentation
requirements and timing must essentially be considered. However, there are legal,
regulatory and remedial impediments that hamper the active participation of
shareholders in several markets. For instance, voting difficulties are faced due to a wide
variation in share voting laws and security holding systems. Language translation,
delivery of information in a timely manner to the beneficiary holders, requirement of
physical presence when voting in certain countries, and the registration of shares under
the names of beneficial owners, are also some of the usual operations challenges
hampering the effective voting process.

Considering that shareholders have a right to participate in decision-making and

be sufficiently informed of fundamental corporate changes, they must be given sufficient
information relative thereto. Voting during general meetings of the corporation is one of
the most valuable and basic mechanism of the shareholders in accepting or rejecting
the proposals from the board of directors. Their right to participate through voting is the
only available means for the shareholders to exercise external check and monitoring of
the board of directions and its management.

Despite the challenges and issues involving concentrated ownership and other
impediments hampering shareholders’ participation, there have been an increase in the
preparation and interest to voice out their views as well as organize the minority vote.
Governments are likewise reevaluating corporation laws to further improve and
encourage shareholder participation. Greater reliance on new technology is also being
viewed in consideration of better corporate governance. Some corporations attempt to
reduce the risk of management manipulation by enabling the shareholders and potential
investors receive essential documents on time. Nonetheless, there is still a need to
balance the acts needed to be performed and the consideration of means to preserve
the corporation, the shareholders, as well as the investors’ privacy.

Innovations in the relationship of the corporation to its shareholders are mostly

apparent when there are efforts to curtail shareholders’ information and rights. Being
owners of the corporation, the shareholders are actually concerned and interested in
sound corporate practices and its effect in realization of corporate goals. Shareholder
activism provides the essential check and monitoring of corporate managements. It has
provoked a numerous response from corporate boards and management. Nonetheless,
shareholder activism seems to be the new trend in corporate governance.32

THE ENRON SCANDAL33

Enron Corporation was founded in 1985 by Kenneth Lay as a product of merging

two natural-gas-transmission companies, Houston Natural Gas Corporation and
InterNorth, Inc.Jeffrey Skilling who was then a consultant turned chief of operation
officer helped Enron transform into a trader of energy derivative contracts, serving as an
intermediary between natural-gas producers and the end-users. These trades mitigated
the risk of energy-price fluctuations by fixing the selling price of their products through a
contract negotiated by Enron for a fee. Enron soon dominated the market for natural-
gas contracts under Skilling’s leadership. Later, Enron generated huge profits on its
trades. Gradaully, Enron’s culture was changed to emphasize aggressive trading.
Skillings hired top candidates from MBA programs to create an intensely competitive
environment within the compay. Their focus was inclining to closing as many cash-
generating trades as possible in the shortest possible time.

In 1990s, the bull market largely contributed to Enron’s ambitions and rapid
growth. Deals were made everywhere and Enron created a market for anything that
anyone was willing to trade. It traded derivative contracts for various commodities such
as coal, paper, electricity, steel, and even weather. Enron launched an online trading
division and invested in telecommunications network to facilitate its high-speed trading.

Later on, Enron is faced with increasing competition in the energy-trading

business resulting to the company’s rapid shrink in profits. Pressured by the
shareholders, the company management began relying on dubious accounting
practices such as “mark-to-market” accounting in an attempt to hide the trouble. This
technique allowed Enron to write unrealized future gains in trading contracts to their
current income statements. This gave an illusion that Enron was still generating higher
current profits. Enron likewise abused its practice by using special purpose entities
(SPEs) to dump their troubled assets. The transfers were kept off Enron’s books giving
an illusion that the losses were less severe than they actually were. All throughout,
Enron’s auditor and consultant was Arthur Andersen.

32
K. M. Stein, U.S. Securities and Exchange Commission, Mutualism: Reimagining the Role of Shareholders in
Modern Corporate Governance, https://corpgov.law.harvard.edu/2018/02/15/mutualism-reimagining-the-role-of-
shareholders-in-modern-corporate-governance/ (February 15, 2018).
33
P. Bondarekno, Enron Scandal, Britannica, https://www.britannica.com/event/Enron-scandal (2001).
 The financial trouble of Enron became apparent in mid-2001 when a number of
analysts started digging into the details of Enron’s financial statements. Sometime in
October of the same year, Enron’s investors were shocked with the announcement that
it was suffering from USD 638 million loss for the third quarter. It also took USD 1.2
billion reduction in the shareholders’ equity. The Securities and Exchange Commission
started the investigation on the transactions of Enron and Fastow’s SPEs. Arthur
Andersen reportedly shredded documents relative to Enron audits.

The details of Enron’s accounting fraud emerged until the company finally faced
its downfall. Enron’s stock price miserably fell from USD 90 per share in 2000 to less
than USD 12 in November of 2001. Later, Enron’s stock dropped to under USD 1 per
share affecting the value of its employees’ pensions which were tied to its company
stock. Finally, on December 2, 2001, Enron Corporation filed for a bankruptcy
protection. The Enron scandal led to a wave in formulating new regulations and
legislation formulated to increase the accuracy of financial reporting. This gave birth to
the Sarbanes-Oxley Act of 2002 which imposed harsh penalties for destroying, altering,
or fabricating financial records. Auditing firms were also prohibited from doing
concurrent consulting business for the same clients.

What happened to Enron Corporation is a good pattern in determining loopholes

in corporate governance. With the realized loss amounting to billions of capital, the last
line of defense of the self-regulatory corporate law scheme, the shareholders
themselves. Looking at Enron Corporation’s shareholders, particularly its institutional
shareholders and market actors analysts who sell them services, a failure in Enron’s
boardroom occurred. Shareholders with significant capital stakes have access to its top
executives that perpetrated the fraud. It should have been the shareholders’ job to ask
questions when Enron Corporation’s disclosures failed to articulate a coherent story.
Obvious questions that should have been asked to Enron’s executives could have
exposed the problem earlier and could have saved Enron from drowning deeper into its
fall. However, the questions were not asked.

It can be expected that shareholders of significant blocks of shares would speak

up. Enron Corporation had such shareholders like Janus Capital Corp. which owned 5%
of Enron’s outstanding shared in early 2001. Janus Corp. managers repeatedly met with
Enron’s board of directors. They had enough opportunity to ask expositive questions but
they never did. Superficially, the failed to insist on hearing coherent answers from
Enron’s top executives.34

34
Bratton W., “Enron and the Dark Side of Shareholder value,” 76 Tulane Law Review, May 2002, pp. 54-79:
https://scholarship.law.georgetown.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1508&context=facpub
 While Enron Corporation’s controversial scandal made it infamous in the history
of corporate world, it left corporations some good lessons to learn. Shareholders must
be keen in monitoring corporate management to prevent fraud and unethical corporate
practices. This can be done through active participation of shareholders in exercising
their rights to influence the affairs of the corporation. Sleeping on their rights, on the
other hand, would leave corporate governance under the risk of unmonitored and
unquestioned discretions of the board of directors that may be tempted to prioritize their
own personal interests in the company.

CONCLUSION

Shareholders play a vital role in achieving successful corporate governance. The

rise or fall of a corporation’s business is reliant on whether the shareholders choose to
influence the corporate governance or to be indolent in exercising their rights. The
passivity of shareholders in exercising their rights is not inevitable even in large public
corporations. Legal complications, conflicts of interest and manager agenda control are
some important factors why shareholders sometimes opt not to act on their rights. Still,
shareholders may join forces with others to present voting proposals, nominate and
elect their own choice of board of directors despite facing an intricate web of legal
obstacles and risks.

While one cannot answer the question as to how much would the shareholders
do in a less obstructive setting and more assisting system the fact remains that
monitoring corporate management is crucial considering that corporate managers need
to be watched out by someone. Shareholders possess rights that when exercised
intelligently will impose protective measures not only on their interests but also on the
corporation as a whole. Shareholders’ voice in corporate governance is a strategy that
needs to be further explored especially in the modern corporate environment.

Meanwhile, indolence in the exercise of shareholders right opens the tendency of

corporate managers to perpetrate fraud or abuse the powers of the corporation like
what happened to Enron Corporation. However, all corporate laws and practices must
be put into place to ensure fair treatment of shareholders and proper disclosure of
corporate information. The majority of shareholders must also achieve to operate in a
culture that considers the concept of fiduciary responsibility. Shareholders must be
sincere in their belief that their economic interests inherently require their active
participation in corporate governance to ensure its protection.
BIBLIOGRAPHY

A.A. Sommer, Jr., Whom Should the Corporation Serve? The Berle-Dodd Debate
Revisited Sixty Years Later, 16 DEL. J. CORP. L. 33, 48-49 (1991).
A. BERLE & G. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY
(1932).
ADOLF A. BERLE, JR & GARDINER C. MEANS, THE MODERN CORPORATION AND
PRIVATE PROPERTY (1932).
Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on
Charter Amendments,102 HARV. L. REV. 1820, 1839 (1989).
C. STONE, WHERE THE LAW ENDS: THE SOCIAL CONTROL OF CORPORATE
BEHAVIOR (1975).
Curzan & Pelesh, Revitalizing Corporate Democray: Control of Investment Managers’
Voting on Social Responsibility Proxy Issues, 93 HARV. L. REV. 670 (1980).
Estanislao, J., Saldaña, C., Fider, A., The Role of the Board of Directors: Philippine
Legal & Regulatory Framework, and Practice, Third Asian Rountable on
Corporate Governance, 4-6 April 2001, Singapore:
http://www.oecd.org/corporate/ca/corporategovernanceprinciples/1873206.pdf
Eugene F. Fama & Kenneth R. French, Disappearing Dividends: Changing Firm
Characteristics or Lower Propensity to Pay?, 60 J. FIN. ECON. 3, 4 (2001).
F. EMERSON & F. LATCHAM, SHAREHOLDER DEMOCRACY: A BRAODER
OUTLOOK FOR CORPORATIONS 103-04, 112 (1954).
F. HODGE O’NEAL & ROBERT B. THOMSON, O’NEAL AND THOMPSON’S CLOSE
CORPORATIONS AND LLCS (3d ed. Rev. 2004).
Insigne et al, vs. Abra Valley Colleges and Francis Borgona, G.R. No. 204089 (July 29,
2015), https://lawphil.net/judjuris/juri2015/jul2015/gr_204089_2015.html
J. Charkham, CORPORATE GOVERNANCE AND THE MARKET FOR CONTROL OF
COMPANIES, 11 (Bank of England Panel Paper No. 25, 1989).
J. Velasco, The Fundamental Rights of the Shareholder, Vol. 40:407, pp. 409, (2006).

K. M. Stein, U.S. Securities and Exchange Commission, Mutualism: Reimagining the

Role of Shareholders in Modern Corporate Governance,
https://corpgov.law.harvard.edu/2018/02/15/mutualism-reimagining-the-role-of-
shareholders-in-modern-corporate-governance/ (February 15, 2018).
M. Jensen. The Modern Industrial Revolution, Exit, and the Failure of Internal Control
Systems, Journal of Finance, 48, pp. 831-80 (1993).
P. Bondarekno, Enron Scandal, Britannica, https://www.britannica.com/event/Enron-
scandal (2001). Bratton W., “Enron and the Dark Side of Shareholder value,” 76
Tulane Law Review, May 2002, pp. 54-79:
https://scholarship.law.georgetown.edu/cgi/viewcontent.cgi?
referer=&httpsredir=1&article=1508&context=facpub
Puno vs. Puno Enterprises, G.R. No. 177066 (September 11, 2009),
https://lawphil.net/judjuris/juri2009/sep2009/gr_177066_2009.html
Revised Corporation Code, Republic Act 11232, (2019) https://www.sec.gov.ph/wp-
content/uploads/2019/11/2019Legislation_RA-11232-REVISED-
CORPORATION-CODE-2019.pdf
R. NADER, M. GREEN & J. SELIGMAN, TAMING THE GIANT CORPORATION (1976).
R. SCHRAGER, CORPORATE CONFLICTS: PROXY FIGHTS IN THE 1980s 11
(Investor Responsibility Research Center 1986) (reporting data from 1981-1985).
Ryan, Rule 14a-8, Institutional Shareholder Proposals, and Corporate Democracy, 23
GA. L. REV. 97, 116-18, 120 (1988).
Schwartz, The Public-Interest Proxy Contest: Reflections on Campaign GM, 69 MICH L.
REV. 419 (1971).
Seligman, Equal Protection in Shareholder Voting Rights: The One Common Share,
One Vote Controversy, 54 GEO. WASH L. REV. 687, 711 (1986) (reporting data
from 1956-1977).
The Corporation Code of the Philippines, Batas Pambansa Bilang 68, Official Gazette
(1980), https://www.officialgazette.gov.ph/1980/05/01/batas-pambansa-bilang-
68/
T. L. Robinson, Jr., A New Interpretation of the Contemporaneous Ownership
Requirement in Shareholder Derivative Suits: In re Bank of New York Derivative
Litigation and the Elimination of the Continuing Wrong Doctrine, Vol. 2005, Issue
1 (2005).
V. Duhamel, Shareholder Rights and the Equitable Treatment of Shareholders, The
Fourth Asian Roundtable on Corporate Governance, 11-12 November 2002,
Mumbai India.
WILLIAM MEADE FLETCHER ET AL., CYCLOPEDIA OF THE LAW OF PRIVATE
CORPORATIONS (perm. ed., rev. vol. 2003).
W. Kenton, What is a Proxy Vote, and How Does it Work? With Example, Investopedia,
https://www.investopedia.com/terms/p/proxy-vote.asp (December 29, 2020).
World Bank, Corporate Governance Country Assessment: Republic of the
Philippines,Washington, DC. © World Bank,
https://openknowledge.worldbank.org/handle/10986/14523, (2001).
Zapata, 430 A.2d at 779; Auerbach vs. Bennett, 393 N.E. 2d 994 (N.Y. 1979).