What are Equity Securities with Significant Influence?

//What are Equity Securities with Significant Influence?
What are Equity Securities with Significant Influence? 2017-10-04T07:38:27+00:00

Definition: Equity securities with significant influence refers to long-term investments in stock or other equity securities where the stockholder owns between 20 and 50 percent of the outstanding stock. Shareholders with significant influence cannot control the company like a shareholder with controlling influence, but they are highly influential people in the organization.

What Does Equity Securities with Significant Influence Mean?

What’s with the random 20-50% rule, you might ask? Since a shareholder with significant influence can’t have controlling influence, they must have less than 51% of the outstanding stock. The FASB decided that 20% is a large enough ownership percentage to significantly influence the company operations and decision making process. Even though a 20% owner does not have controlling interest, he is usually looked at as a leader and his opinion is valued in the organization. This means that he could persuade other owners to agree with his decisions.

Example

The 20% rule is the standard percentage that FASB created, but owners with less than 20% can also have a significant influence in the company. Look at Bill Gates and Microsoft for instance. In the late 1990s and early 2000s, Bill owned approximately 7% of Microsoft, but his vision for the company and his decisions were extremely important to other investors and the board because he is one of the founder. Even though Bill only owned 7% of the company, he still had a strong influence in the operations and decision making process.

This is often the case with most company founders. No matter their ideas are valued no matter their ownership share percentage.