Question

Suppose you decide (as did Steve Jobs and Mark Zuckerberg) to start a company. Your product is a software platform that integrates a wide range of media devices, including laptop computers, desktop computers, digital video recorders, and cell phones. Your initial market is the student body at your university. Once you have established your company and set up procedures for operating it, you plan to expand to other colleges in the area and eventually to go nationwide. At some point, hopefully sooner rather than later, you plan to go public with an IPO and then to buy a yacht and take off for the South Pacific to indulge in your passion for underwater photography. With these issues in mind, you need to answer for yourself, and potential investors, the following questions.

1. What is block ownership? How does it affect corporate governance?

2. Briefly explain how regulatory agencies and legal systems affect corporate governance.

Answer 1

Block Ownership: Block ownership is holding large number of shares of the company, they typecally have more than 5% of the shareholdings of the company. So that often they are able to influence the company's decisions. Coming to the institutional block shareholders they have more rights than the individual ones.

As we have seen in the above case how ownerof the company wishes to fulfill his personal affairs using the company's money and for that he has to answer shareholders of the company.

Impact on Corporate Governance:

Holding large chunk of shares can be the benefit who holds it but for the company it may create problem in future. Lets understand this in another way, we all know that basic form of shareholding comes with voting rights on certain events of the comapany, like election of board of directors, corporate actions, substancial operational changes, etc. So if a a large chunk of share will be in one hand he or she can take advantage of that in the election and can elect his favourable person in the boards and will get benefit from that whereas other shareholders will not. That is the reason why SEC asks for decleration of the shareholders of the company as and when there shareholdings incrases from 5%.

Affect on corporate governance by regulatory and legal systems:

Corporate governance is the set of rules and prctices that are followed by the companies in order to make good internal and external governance. So the regulatory bodies or the legal systems review these rules nad practices followed by the companies in order to safeguard shareholders and other stakeholders rights.

As we have discussed above the block holding and its impact on the corporate governance, legal authorities also review these issues and impose rules and regulations for the proper working of the whole mechanism.

Hence, these are the impacts of regulatory bodies and legal systems on the corpoarte governance.