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The Board & Shareholders

The Board & Shareholders. Their relationship and attendant issues. Nature of Relationship. Shareholders are the owners, but directors’ duties are to the company – not to any particular class of stakeholders.

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The Board & Shareholders

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  1. The Board & Shareholders Their relationship and attendant issues

  2. Nature of Relationship • Shareholders are the owners, but directors’ duties are to the company – not to any particular class of stakeholders. • While directors’ duties are to the company, it cannot be ignored that shareholders are the owners of the company.

  3. Types of Shareholders • Institutional shareholders • Small private shareholders • Large private shareholders • Corporate Shareholders

  4. Institutional Shareholders • Mutual funds • Pension Funds • Insurance Companies • Investment institutions • In UK, it is believed that institutional shareholders hold, on an overall basis, a majority of shares of all listed companies.

  5. Institutional Investors Perspective • Long term interest in share value growth • Current returns are still important • They have the power and ability to influence Boards • But do they have the time to pay attention to every single company • Monitoring systems for danger signals

  6. Small Private Shareholders • Individuals • Only interest in share price change • No long term interest • Only a little interest in earnings • Reactive buyers/sellers • Biggest losers when things go bad • No influence over Boards

  7. Large Private Shareholders • Individuals (but may be acting through trusts, private limited companies, etc.) • Have long term interest in the company • May have great influence on the company • May provide bulk of executive directors • In Pakistan, these people are the focus of corporate governance activities.

  8. Corporate Shareholders • Group, or holding companies. • Differ from institutional investors. • Have a long term interest in the company. • Can influence the Board most. • Tax structures often inhibit holding companies. • How SBP/SECP rules are creating groups

  9. Some interesting facts • 10% of EDs in European companies do not know who their top 50 shareholders are. • 25% of their CEOs had met only half of their top 50 shareholders • In Pakistan, most listed companies have majority held by a family or group and they do not seem to attach any importance to any other shareholder.

  10. CONCENTRATED SHAREHOLDING • Rules on disclosure of shareholding pattern. • Important changes in shareholding pattern are required to be notified to SEs (The 3% level for UK). • Register of Directors’ interest in shares or debentures of the company (UK)

  11. What do shareholders expect? • Accountability of the Board • Transparency / communication • Minimizing conflicts of interest between directors and shareholders • Good management leading to: • Good returns • Capital growth • Fair division of spoils

  12. Shareholders Hold on Board Shareholders must approve: • Class 1 transactions • Large size relative to size of the company • Related party transactions • Financial statements • Audit report is for shareholders • Directors remuneration

  13. Communication between Shareholders & Board • Direction: One way reporting or Two way communication • Nature: Formal or Informal communication • Scope: All or some shareholders • Frequency: Regular or irregular, need based.

  14. Planned meetings • Between Board and institutional investors • Large companies: many institutional investors • Small companies: not enough attention from Institutional Investors • Between NEDs and major shareholders • Chairman is often an NED • Role of SID

  15. Non-financial Reporting • Chairman’s Statement • OFR (including analysis) • Compliance Statement (with CCG) • CSR – Sustainability reports

  16. The AGM Combined Code says: • Encourage attendance • Let them ask questions • Separate voting (avoid grouping issues) • Vote counting: • Show of hands / one vote per share • Proxies • Electronic voting

  17. Role of Institutional Investors • Dialogue with companies • Evaluating their disclosures • Judicious use of vote

  18. Shareholders Activism Refers to stand taken by shareholders against recommendations of the Board. • Do they have adequate rights or power? • Result less important than show of dissent. • Can work only if institutional investors participate. • Do institutional investors have a duty to communicate with other shareholders?

  19. Areas of Show of Dissent • Re-election of directors • Re-appointment of auditors • Approval of accounts and reports • Approval of directors’ remuneration • Justification for past payments • Proposed Schemes • Dividend recommendations • Changes in share capital

  20. Areas of Activism by I.I. • Monitoring performance • Intervention • Evaluation of performance • Reporting direct to other stakeholders

  21. Bodies supporting Activism • Association of British Insurers (ABI) • National Association of Pension Funds (NAPF) • Institutional Shareholders Committee (ISC) • International Corporate Governance Network (ICNG)

  22. Rights of Equity Shareholders • Residual rights to property and profits • Right to equitable treatment • Protection against inside trading and market abuse • Disclosure and transparency

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