Oligarchy in Company: Meaning, Causes and Implications

After reading this article you will learn about:- 1. Meaning of Oligarchy 2. Causes of Oligarchy 3. Implications.

Meaning of Oligarchy:

By Oligarchy we mean control by few. Company may be owned by large number of persons but only a few of them attain position and power to exploit the large body of shareholders and turn the company into a vested interest of their own.

Directors, their henchmen and the top executives are likely to abuse their powers, manipulate the finances, deceive the shareholders, pressurise the labourers and swindle the consumers. The management may use the company to grind its own axe at the cost of shareholders in particular and of the community of consumers, workers etc., in general.

Corporate structure has given scope for big business houses to tighten their grip on several companies and have access to crores of rupees worth of business resources and assets. Thus the so-called democratic set-up company form of organisation is merely a myth.

It is owned democratically but managed oligarchically. Lately the democratic character of its ownership also has been withering away. It is, therefore described a Plutocracy in ownership and oligarchy in control.

Plutocracy is dominance of the rich-the capitalists, who by virtue of their money-power wield great economic power detrimental or not conducive to the interests of shareholders, workers and consumers. Shareholders become mere pawns in the game of capital control and in many cases the directors too become just the puppets of a big industrial magnet.

Causes of Oligarchy in Company Organisation:

Oligarchy and its attendant evils in company management mainly arise from weakness of shareholders as a group, financial manipulation, administrative abuses, and devices used for minority control.

These causes are briefly analysed as under:

1. Inability of Shareholders to Defend their Interests:

(1) Shareholders are scattered and are hardly organised to assert their rights and convey their views.

(2) Many shareholders do not attend the General Meetings since they think it waste of their time and money.

(3) Most of the shareholders will be interested only in dividend and are not bothered about ensuring good management of their company’s affairs.

(4) Most of the shareholders lack experience in business matters and are thus easily misled. Average shareholder has no ability for judgement of the position of the company and evaluating the worth of his investments. They buy shares mostly under some advice of interested parties and thus become permanent stooges of such parties.

(5) Shareholders have their own professions or business and thus they can seldom devote their energy and attention to the affairs of the company of their holdings.

(6) Many shareholders may be the members of several companies. They cannot evince active interest in the management of all such companies. Hence their concern will be limited to getting the dividend on their holdings.

(7) Well-informed, ambitious or interested shareholders may find their voice lulled by the tricks of the top management of the company.

(8) Existing directors with the helping officers try to create their own inner coterie of shareholders to perpetuate themselves in power. They manage to get large number of proxies to swing the majority in their favour and silence the voice of the rest.

2. Lack of Information and Clear-Cut Reporting:

Shareholders cannot act or form judgement on corporate affairs without possessing the adequate information regarding facts and figures, new policies, new events in the growth of the company, etc.

(1) Annual Reports do not give a very objective assessment of the company’s position and prospects. Very often they paint a rosy picture, harp on over optimistic tone or they frighten the shareholders by grim facts and figures of failures concealing their causes.

Information given by officers and directors “represent opinions that have a propaganda purpose behind them. They are not intended to instruct the stockholders but to induce such action or inaction as may be desired by those who express the opinions.”

(2) Accounts supposed to be approved by the shareholders are a Greek and Latin to many of them. Depreciation charges, capital revenue distinction, provision for reserves etc. may not call for any precise understanding by the members. The information about undercurrents of the published figures is denied to the shareholders.

An applicant for an accountant’s job is said to have replied when asked about his familiarly with double entry book-keeping “Oh I know, where I worked we used triple entry records. One for the directors, one for the income-tax men, and another for shareholders.”

This shows that some vital information may be withheld from the shareholders.

(3) Shareholders are often handicapped by delay in obtaining information. Annual reports are also presented some months after the close of the year. Many events in the company’s life may not come to the notice of shareholders promptly and by the time they come to know them, the significance of such events might have been lost and the shareholder may miss his chance of offering his comments or suggestions thereon.

(4) The accounts and the other statements presented to the shareholders are just a postmortem survey and do not provide scope and are placed quite late before shareholders. Thus the shareholders become just rubber stamps of approval.

‘State Accounts’ presented to the shareholders are a clever device to take the wind out of possible comments by enlightened shareholders. Accounts drawn by the management may fulfil the formal criteria laid down in law. But they may be smoke-screen for many objectionable practices indulged in by rapacious management, “their (of accounts ) academic correctitude will obviously outweigh their effective truth.”

(5) Reports and accounts are legally correct but factually obscure. “Brief reports to stock (share) holders are frequently confusing accounting reports are frequently defective. They lack precision and completeness. Defective records do not always carry evidence to condemn them.

Auditors who are supposed to examine the accounts critically and draw the attention of shareholders to any defects, secret reserves, incorrect valuation, clandestine profits etc., are also under pressure by management to ignore or overlook them.

Opportunities are available to company management to sugarcoat the reports and place window-dressed accounts.

Window-dressing means attempt by managers to make the company’s affairs appear brighter or better than in reality. “There is always a certain amount of window-dressing with big institutions, but there are degrees of rascality no doubt.”

Management can assert its financial oligarchic hold to befool the shareholders at the same time keeping them in apparent good humour in the following ways:

(i) Use of technical terms in accounts not precisely intelligible to shareholders.

(ii) Arbitrary system of valuation of assets in a legally acceptable manner.

(iii) Lumping together of different assets to express their aggregate values.

(iv) Creation of ‘secret reserves’ at the back of shareholders.

(v) Omission of information regarding the real relation between the Profit and Loss Account and current earnings.

(vi) Failure to give information as to events materially affecting the financial position of the company during the period of interval between accounts and the time of their presentation to shareholders.

3. Defective Constitution of the Board of Directors:

Board of directors is considered as the organ of the enterprise. It is the top ranking body assigned with the function of policy-making and controlling the affairs of the company. But very often the Board consists of incompetent, indifferent directors. Many individuals enter the Board as nominal directors with no ability and no locus standi.

There are hereditary directors who are only concerned with the fees for attending the Board Meetings and the return on their shares. There are the exalted directors who are merely named for their prestige. They are also known as guinea pig directors who really do not possess any qualification or ability but are opted for their position or prestige to attract credulous investors to join the company.

Such directors are just a decoration and the active management will be in the hands of just a few other active directors who virtually develop as commercial directors. “Directorates thus tend to constitute the vested interest of a group and are almost difficult to dislodge.”

The directors are supposed to retire but rotation but they are eligible for re-election. Thus they always try to perpetuate themselves in power through groupism or cliquish.

Multiple directorships have been another cause of economic oligarchy in India as elsewhere. There were instances in the recent past when one individual held as many as 65 directorships. Obviously they cannot put their heart and soul in the affairs of each company under their charge. This plurality of director (now confined to 20 companies under the Companies Act, 1956) leads to weakening of responsibility to the detriment of shareholders.

Interlocking of directorships is also a similar device at exploiting the shareholders. The interests of one company are subordinated to the interests of another company where directors may have more stake. Prominent business houses seek to retain their grip on many companies through common directorships.

4. Directors’ Legal Responsibility and Liability:

Legal position of directors is not completely conducive to the interests of shareholders. Of course directors are the trustees of shareholders and are expected to work diligently for the benefit of the company. They are to be vigilant in using the resources of the company; they are to be judicious in planning, policy-making, controlling; they are liable for losses arising from their negligence or dereliction of duties.

But directors are not bound to give continuous attention to the affairs of the company. They are not liable for errors of judgement provided they have acted in good faith with bona fide motives.

They are only to exercise such degree of skill and diligence as would be exercised by ordinary man in the similar circumstances on his own behalf. They are not legally obliged to exhibit greater degree of skill than can be expected reasonably from persons of their knowledge and experience.

Thus the directors may escape scot-free even though they act in a placid manner or sometimes indulge in manipulation for personal gains. It would be difficult to legally establish their negligence in duties. Thus their oligarchic hold over the company continues almost unchallenged. They avoid responsibility but no one bales them into court to prove their illegality.

5. Directors do not Actually Direct or Manage:

Oligarchy is made much more menacing because of bureaucracy. Technically directors are the fountainhead of authority and control. But in the actual practice-managerial powers are mostly delegated to the Chief Executive and the bureaucratic team, i.e., cadre of officers specialising in varied and related matters of business activities.

Many of the directors have no time, knowledge and the ability to take active part in decision-making, policy formulation etc. Normally a manager is appointed and armed with crucial managerial powers or administrative authority.

Board of Directors will just be a confirming body of the plans, policies and programmes or other decisions put forth by the chief executives. Hence this type of delegation, though inevitable, is certainly one of the patent causes of oligarchy. Managing Director alone will be powerful. Other directors being dummies are ready to do his bidding and possessing no independent judgement.

6. Lack of Interest:

Personal interests of directors and officers on the one hand and those of shareholders on the other are not always consistent. Because directors have no particular interest in the dividend but in the power and the managerial remuneration in different companies. Officers are interested in their salary. Hence the poor the operating results on the company, they cannot be counted upon to show necessary diligence and relied upon to act with integrity in managing the business of the company.

Thus company management becomes the seat of dictatorial authority without intrinsic responsibility or business risk. The above discussion indicates that industrial democracy is just a farce and has failed to protect and promote the interests of shareholders, workers and consumers and has more often degenerated into an ingenious way of violating the law without being illegal.

“Industrial Democracy represented by shareholders in Annual General Meetings of companies has failed to satisfy shareholders. Management very often controls such a safe and absolute majority over the voting rights of shareholders that genuine criticisms of some shareholders remain unheeded.”

Shareholders will always be “victimized by the misfeasance or ineptitude of those who are protecting their interests.”

Implications of Oligarchy in Company Management:

(1) Manipulation of voting rights to wrest control and vest it in a few persons.

(2) Creation of cracks among shareholders and attempt to bargain their loyalty for sticking to positions of power.

(3) Misleading the shareholders by eye-wash reports, worked-up accounts etc.

(4) Claiming a big share in the profits in various forms of managerial remuneration.

(5) Misuse of position and company’s resources for private gain by the directors etc.

(6) Concentration of effective economic power within few hands and accumulation of wealth in few pockets.

(7) Scope for extravagance, neglect and speculative tendencies on the part of directors and managers.

Oligarchic nature of company management may lead to creation of monopolies in the industrial structure through various devices like inter-corporate investment, multiple directorship, holding company, mergers etc.