2.Give the summary of the text Stockholders1

The initial stockholders² generally receive shares of the new corporation accord­ing to the relative value of their capital contribution. However, factors other than capital contribution may provide an acceptable basis (as long as that is accept­able to all the incorporators) for issuing original or additional shares. For instance, an individual incorporator might grant rights to a key invention or might fulfill certain construction or management tasks in lieu³ of making a spe­cific capital contribution. Such contributions may be a basis for receiving shares. The corporation may also decide "to go public," selling additional shares beyond the ring of original incorporators.

The stock instruments issued by the corporation may be of two types: preferred stock and common stock. Preferred stock does not extend voting rights in the company to owners, but owners have first claim on the corpo­ration's assets after all debts are paid. Common stock affords owners voting rights, but last legal claim on assets. Each share of common stock represents a single vote; accordingly, the more common stock owned, the greater the power in determining members of the board of directors and the greater power in directing corporate policy.

Corporations hold annual stockholder meetings at which management reports on the past year's progress and long-term business projections. Slates for the board of directors, selection of outside auditors, and proposals for issuing additional stock are also made at this time. For most large companies, stock­holders' meetings are usually poorly attended—a good thing, too, because it would take 30 Rose Bowls to seat all of AT&T's shareholders. Shareholders who do not attend meetings may assign their vote (a proxy⁴) to someone else who attends. Usually, proxies not formally given to the existing board of directors are automatically granted to the board after a lapse of time.

Proxy fights, however, may develop. A group of minority stockholders or an individual with sizable holdings may challenge the present management and control of the company by trying to corral⁵ the outstanding proxies of thousands of shareholders unhappy with the corporation's dividend record or other corpo­rate policies. Remember, stockholder voting is a democratic process; each share entitles its owner to one vote. By obtaining the proxies of other sharehold­ers, an individual or small group can accumulate millions of votes. By obtaining more opposition votes than management can muster⁶, such a group could defeat⁷ management proposals.

Proxy fights within firms were once fairly common, but the wide dispersion of stock ownership among many owners, most of whom do not pay close atten­tion to management performance so long as dividend checks arrive regularly, is very expensive to undertake and has produced few internal turnovers of man­agement recently. On the other hand, "outside takeover⁸" efforts have increased significantly. The recent trend toward more corporate mergers⁹ has led some corporations to seek control of firms whose upper management and the board of directors are opposed to the merger. In these cases, in seeking to take control of reluctant¹⁰ Firm B, Firm A will appeal directly to the stockholders of Firm B, usually offering an attractive purchase or stock transfer offer. The Board of Directors of Firm B must then undertake a public relations and legal battle to retain¹¹ control of their firm. Outside takeover efforts can be defeated, but they are usually expensive and quite taxing¹³ for the sought-after¹² firm's upper manage­ment.

In recent years, the stockholder meetings of a number of giant corporations have been disrupted by the appearance of minority stockholders (all of whom have a right to speak out) who use ownership of a share or two to attack the corporation in a public forum. Although the news media may focus on such attacks by individual radicals, feminists, environmentalists, or consumer advo­cates, corporate officials usually listen politely and then disregard the assaults¹⁴ since they are no threat whatsoever. However, large institutional shareholders such as union pension funds and university or church trust funds have used their greater voting leverage¹⁵ to confront corporations on a wide range of social responsibility and ethical questions. For example, in the late 1970s, many church and university spokesmen received more than polite attention from the management of certain corporations that operated in South Africa. However, it remains to be seen whether or not these groups successfully used their share­holders' powers as the base for an ethical assault on South African racial poli­cies. Nevertheless, despite corporate grumblings¹⁶, these shareholders had every legal right to raise the issue.

The board of directors represents the first transition from ownership to man­agement functions. It authorizes all of the important decisions that affect the business: deciding to expand production facilities or increase product lines, determining long-run investment strategies, deciding production relocation, and ' so on. However, while the board authorizes such decisions, it rarely is the ini­tiator of these recommendations. Policies originate at the upper management level. Accordingly, the most important decision of the board of directors is the hiring of the firm's president and chief executive officers. This action alone can determine financial success or ruin for the enterprise.