Question

Do corporate shareholders have an obligation to make certain that their business corporations act in an ethical and proper manner in conducting their business.

What happens when a corporation does not act ethically?

Answer 1

It depends on whether the concerned shareholder is a major shareholder or a minor one, i.e, holding few shares. In case of most shareholders, they have very tiny control over the Company equity due to the very few shares that they hold. Hence, they are not in a position to influence the affairs of the Company directly apart from giving one vote at the AGM while appointing the Board of Directors. They can't make sure or give any guarantee that the Company is conducting their business in a fair manner. Thus, the only way out for such minor shareholders (when they find out that the Company is acting evil) is to either tolerate everything and stay put or sell their shares and make an exit.

If the shareholder is holding substantial value of shares, meaning he can influence the affairs of the Company directly. This is because these are the owners that can't be neglected by the management for long. They can voice their opinion and can have much more control while electing the Board by virtue of owning huge number of shares. Thus, such shareholders do have an obligation that they should atleast try to stop the unethical activities of the Company. Upon trying, whether those efforts are successful or not, is a different ball game altogether.

When a Company does not act ethically, the following can happen:

1. they lose their goodwill and image in the market leading to loss of customer trust (reputation loss)

2. might face legal repurcussions

3. Financial repurcussions including fees and penalty

4. It severely impacts the morale of the employees

5. Shareholders might take back their ownership (sell their shares)

6. Affects the overall growth, branding and culture of the Company which might take a lot of time to revive.