Acca financial Accounting (FA) Study Text ac ca (FA)

The regulatory framework 

30

 

KAPLAN PUBLISHING

 

5 

Company ownership and control 

 

 

 

A company is a corporate body that has registered in accordance with the 

requirements of relevant national company law (e.g. the Companies Act 

2006), thus becoming its own legal entity. Ownership of the company is 

evidenced by the issuing of shares to the owners (i.e. the shareholders). 

For some smaller and medium sized companies the owners may also be 

the directors/managers of the company. It is also possible for directors of 

large, publically listed companies to own shares in the companies they 

work for. However, of the largest 100 UK companies, directors typically 

own less than 1% of the shares of the company they work for. 

Typically large, listed companies are owned by a wide range of individuals 

and organisations, such as pension funds, trusts and investment banks. 

These individuals and entities will not have any involvement in the day-to-

day running of the business. Imagine if you had to organise a meeting of 

all shareholders every time the business needed to make a decision such 

as the hiring of a new member of staff or which leasing company to rent 

cars from; it would take far too long to make these decisions and 

consensus amongst such a large group might be difficult to achieve. 

Instead, directors are appointed to manage the business on behalf of the 

owners. This leads to the separation of ownership and control within the 

company. Unfortunately the objectives of owners and directors often 

conflict; whilst they might both have the objective of increasing their own 

personal wealth, if the directors increase their own salaries and bonuses 

this reduces the profit available to the shareholders. Also, the directors will 

be rewarded for the financial success of the business, which leads 

towards bias in the preparation of the financial statements. This could 

ultimately result in a reduction in reliability/credibility of the financial 

statements.