What Do Shareholders Do? Accounting, Ownership and the Theory of the Firm: Implications for Corporate Governance and Reporting

In the last three decades, corporate governance and reporting have been confronted to a drift toward shareholders’ primacy and value, and the revival of old-fashioned proprietary views against entity views on the business firm. This paper develops an accounting perspective of the relationship between shareholding and the inner congeries of the enterprise entity. These congeries require an accounting system, instead of a market price system, to deal with. Theoretical insights and improved accounting reporting methods are then presented to better represent and control the relationship between shareholding and the business firm, based upon the distinction between shareholders’ income and equity from income and equity to the enterprise entity. This distinction is especially important in case of goodwill, asset revaluations and share buybacks, as well as share issuance (use) for employee benefits and business combination considerations. Absent this distinction, accounting systems might enable corporate Ponzi schemes (through the corporate shield) by insiders (either executive management or controlling blockholders) to the detriment of other stakeholders, including outsider shareholders, and the continuity of the business enterprise over time.