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The Importance of Shareholders in Business
by Chirantan Basu; Reviewed by Michelle Seidel, B.Sc., LL.B., MBA; Updated February 04, 2019
The Importance of Shareholders in Business
Shareholders are the owners of companies. A small business may have just one shareholder, the founder, while a public company may have thousands of individual and institutional shareholders, such as mutual fund companies, pension funds and hedge funds. Shareholders play an important role in the financing, operations, governance and control aspects of a business.



Financing of a Company
One of the primary reasons for going public is to raise funds from investors. In return, the company's founders give up part ownership to these new investors. Private companies and startups may also raise funds through private placements, which are share issues to a select group of individuals and institutions.

The founders of a startup company, including venture capital backers, may also provide additional capital in exchange for a higher percentage of the ownership. Unlike bond investors, shareholders do not get periodic interest payments or their original investment back from the company.

Operations of a Company
Shareholders play both direct and indirect roles in a company's operations. They elect directors who appoint and supervise senior officers, including the chief executive officer and the chief financial officer. They play an indirect role through the stock market. Investors stay away from companies that cannot meet earnings expectations but invest in stocks that consistently beat expectations.

Therefore, company management is under constant pressure to meet and beat sales and profit projections. Companies that generate significant free cash flow often face pressure from shareholders to return some of the surplus cash to shareholders in the form of dividends or share buybacks.