Ownership vs Management

Ownership vs Management/Control

It’s very common for the press to report on some ne’er-do-well scoring a dubious tender under strange circumstances.  When they report they can only note whether the person is a director of said company, or as the case may be, multiple companies.  They are not able to determine whether that person is a shareholder or not.  The information that they are able to access only shows who the directors of a company are. 

Being a director does not imply that you are a shareholder, nor does being a shareholder mean that you are automatically a director.  It makes sense, non-profit companies have directors but  no shareholders because they can’t be owned.  Also many people are passive shareholders in listed companies who cannot all be directors, but the directors of those companies are answerable to the shareholders. The lines do, however, get blurred in smaller companies.

Let’s start with shareholding:

Shareholding is one of the most natural things existing in any capitalist society.  It means that you have the right to exercise the rights of ownership in something, whether that be a house, car or a chocolate bar you bought earlier.  Being a shareholder of a company comes with certain rights.  These are summarised in Section 57(1) of the Companies Act (No. 71 of 2008)

In this Part, ‘‘shareholder’’ means a person who is entitled to exercise any voting rights in relation to a company, irrespective of the form, title or nature of the securities to which those voting rights are attached.

In other words as an active shareholder you have the right to vote on what do with an asset, which may be shares in a company.  In other words you can tell the management how you want them to look after your shareholding.  Typically this is done at a shareholders’ meeting. 

In the B-BBEE world they have taken this concept of ownership one step further.  Not only are you entitled to voting rights on the shares but you are also entitled to any financial benefit of being a shareholder, whether that be dividends or the cash from the sale of those shares.  The house analogy applies here, if you own a house (we’ll assume it’s yours and not the bank’s) then you are free to paint it any colour you like, you may decorate it anyway you want – you are even allowed to turn it into a Mexican hacienda.   That the voting rights.   When you sell it you are entitled to the profits (I believe haciendas command large amounts in certain circles).

Moving on to Management:

Let’s say that this is second property and you don’t want to manage it.  You’ll find a letting to help you with the management of the property and tenants.  This is rather similar to the role of a director in a firm.  The agent is not the shareholder but they have been employed to manage the house.  If they don’t then they are answerable to you as the shareholder.  Of course you may choose to manage it yourself – you’d be fulfilling the director and shareholder role.

Simply put – directors manage the business on behalf of the shareholders.  In most cases where a director is not a shareholder they are expected to operate in the best interests of the business (vis a vie the shareholders).

Conclusion:

When you embark on an ownership transaction, you are not compelled to take an active role in the part of the running of the business.  This is why BEE scorecards separate the two concepts: 

Ownerships means economic interest and voting rights attached to those shares, normally exercised at a shareholders’ meeting.

Management control considers the voting rights of directors at a board meeting.