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Chapter. 15. Stockholder Rights and Corporate Governance. Stockholders Corporate Governance Executive Compensation Shareholder Activism Government Protection of Stockholder Interests. Stockholders. Stockholders (shareholders) The legal owners of business corporations.

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Stockholder rights and corporate governance

Chapter

15

Stockholder Rights and Corporate Governance

Stockholders

Corporate Governance

Executive Compensation

Shareholder Activism

Government Protection of Stockholder Interests


Stockholders
Stockholders

Stockholders (shareholders)

The legal owners of business corporations.

Types of stockholders:

  • Individual stockholders are people who directly own shares of stock issued by companies.

  • Institutions, such as pension funds, insurance companies and banks.


Major legal rights of stockholders

Figure 15.2

Major legal rights of stockholders

  • To receive dividends, if declared

  • To vote on:

    Members of board of directors (to elect/remove board members)

    Major mergers and acquisitions

    Charter and bylaw changes

    Proposals by stockholders

  • To receive annual reports on the company’s financial condition

  • To sell/ transfer their own shares of stock to others


Corporate governance
Corporate governance

Corporate governance

Refers to the process by which a company is controlled, or governed. These systems determine overall strategic direction and balance sometimes divergent interest.

According to Worldbank Organization,

“Corporate governance refers to the structures and processes for the direction and control of companies. It concerns the relationships among the management, Board of Directors, controlling shareholders, minority shareholders and other stakeholders.”


Malaysia has a strong legal and institutional framework for corporate governance

Legal framework based on traditions of common law legal system

Comprehensive array of statutes

Supported by traditional common law remedies

Established institutions like courts and regulatory agencies

Overview of Reform Agenda


Corporate Governance Initiatives in Malaysia – a snapshot corporate governance

True and fair certification by Directors on financial statements

Audit Committee Requirement

Independent Accounting Standard Setting Board

Directors and CEOs to disclose interests in PLC

Quarterly Reporting

Revamped Takeovers & Mergers Code

Code on Corporate Governance

Mandatory disclosure on CG Code compliance

Establishment of MSWG

Mandatory Accreditation Programme for Directors

Internal Audit guidelines for PLCs

1965

1994

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2001

2002


Corporate governance con t
Corporate governance (con’t) corporate governance

Board of directors (BOD)

An elected group of individuals who have a legal duty to establish corporate objectives, develop broad policies, and select top-level personnel to carry out these objectives and policies. The Board of Directors also reviews management’s performance to be sure that the company is well run and shareholders’ interest are protected.

  • BOD play a central role in corporate governance.


Corporate governance con t1
Corporate Governance (con’t) corporate governance

  • The CA, Malaysia Code, and the Listing Requirements provide guidance and set out the obligations of directors to act in the best interest of the company and the shareholders.

  • The Malaysian Code of Corporate Governance (MCCG) and the Listing Requirements require the boards of publicly listed companies to have a balance of executive directors and independent directors. The MCCG recommends that at least one-third of the board should consist of independent directors.

  • The Chairman of the Board and Chief Executive Officer (CEO) are usually different people.


Corporate governance con t2
Corporate Governance (con’t) corporate governance

  • Amongst the principal responsibilities of the BOD is to:

    i). review and approve a strategic plan and to oversee the business operations;

    2). directly monitor and evaluate the management’s performance; and

    3). ensure the integrity of accounting and financial reporting systems.

  • BOD usually work through committees – In Malaysia, the board of every company should appoint a committee which should also comprise of non-executive directors. Usually the main committees include: the Audit Committee, the Nomination Committee and the Remuneration Committee.


Corporate governance con t3
Corporate Governance (con’t) corporate governance

  • Under the MCCG, some of the major duties of the BOD include:

    1. The board is responsible for the overall corporate governance of the company or group of companies, including its strategic direction, establishing goals for management, and monitoring the achievement of those goals.

    2. Monitoring effectiveness of company governance practices.

    3. Selecting / compensating / monitoring / replacing key executives.

    4. Aligning executive and board pay with long term company and shareholder interests.

    5. Transparent board nomination / election process.

    6. Reviewing the adequacy and the integrity of the company’s internal control systems and management information systems, including systems for compliance with applicable laws, regulations, rules, directives and guidelines.


The business roundtable s statement on good corporate governance

Exhibit 15.A corporate governance

The Business Roundtable’s statement on good corporate governance

  • To select and oversee competent and ethical management to run the company on a day-to-day basis.

  • It is the responsibility of management to operate the company in a competent and ethical manner.

  • To produce financial statements that fairly represent the financial condition of the company under the oversight of the board and its audit committee.

  • To engage an independent accounting firm to audit the financial statements prepared by management.

  • It is the responsibility of the independent accounting firm to ensure that it is in fact independent, without conflicts of interest.

  • The company has a responsibility to deal with its employees in a fair and equitable manner.


Key features of effective boards
Key features of effective boards corporate governance

  • Select independent directors to fill most positions.

  • Hold open elections for members of the board.

  • Appoint an independent lead director and hold regular meetings without the CEO present.

  • Evaluate the board’s own performance on a regular basis.


Executive compensation
Executive compensation corporate governance

  • Levels of remuneration are to be sufficient to attract and retain the directors needed to run the company successfully.

  • The component parts of remuneration should be structured so as to link rewards to corporate and individual performance, in the case of executive directors.

  • In the case of non-executive directors, the level of remuneration should reflect the experience and level of responsibilities undertaken by the particular non-executive concerned.

  • Under the Malaysian Company’s Act, directors’ remuneration is subject to shareholders approval.


Executive compensation con t
Executive compensation (con’t) corporate governance

  • Stock options

    Represent the right to buy a company’s stock at a set price for a certain period.

  • In 2006, the chief executives of the largest corporations in the United States earned, on average, $10.9 million, including salaries, bonuses, and stock options.

  • The top 5 highest paid CEOs (U.S) in 2006 received the bulk of their compensation through exercising stock options.

  • Executive pay is set by compensation committees of boards of directors.


Shareholder activism
Shareholder Activism corporate governance

  • Shareholder activism is a way that shareholders can claim their power as company owners to influence a corporation's behavior.

  • It refers to the efforts of a growing number of investors to use their status as part-owners of companies to influence corporate behavior.

  • Shareholder action is a powerful tool for encouraging corporations to improve their social and environmental records.


Shareholder activism con t
Shareholder Activism (con’t) corporate governance

  • Institutional Investors

  • Institutional shareholders includes pension funds, insurance companies, investment trusts, mutual funds, public listed companies and commercial banks.

  • Frequently, agents such as investment managers are appointed by institutional shareholders to invest on their behalf.

  • Institutional investors have less flexibility than individual shareholders in selling their shares.

  • Therefore, institutional investors have a strong incentive to hold their shares and organize to change management policy.


Shareholder activism con t1
Shareholder Activism (con’t) corporate governance

2. Social investment

Refers to the use of stock ownership as a strategy for promoting social objectives.

Social investment can be done in two ways:

  • Social screening of stock

    • Some shareholders wish to choose stocks based on social or environmental criteria.

  • Social responsibility shareholder resolutions

    • A resolution on an issue of corporate social responsibility placed before stockholders for a vote at the company’s annual meeting.


Government protection of stockholder interests
Government Protection of Stockholder Interests corporate governance

Securities Commission Malaysia

  • Established in 1 March, 1993.

  • It reports to the Minister of Finance and its accounts are tabled in Parliament annually.

  • The SC's ultimate responsibility is to protect the investor.

  • Generates revenue to pay for its own operations.


Government protection of stockholder interests con t
Government Protection of Stockholder Interests (con’t) corporate governance

Information Transparency and Disclosure

  • The shareholder should be as fully informed as possible in order to make sound investments.

  • By law, the annual audited accounts, annual reports and the annual audited accounts are required to be distributed directly to the shareholders prior to the annual general shareholder meeting and are also submitted to the Bursa Malaysia.

  • Information such as company objectives, remuneration policy for board and key executives, information about directors, risk management of the firm and the governance structure of the organization must also be disclosed to the shareholders.

  • Because the information disclosed must be accurate, the documents furnished to the shareholders must comply with International Financial Reporting Standards and the International Standards of Auditing.


Government protection of stockholder interests con t1
Government Protection of Stockholder Interests (con’t) corporate governance

Insider trading

Occurs when a person gains access to confidential information about a company’s financial condition and then uses that information, before it becomes public knowledge, to buy or sell the company’s stock.

  • The SC administers the insider trading provisions under the Securities Industry Act 1983.

  • Section 132A of the Companies Act prohibits officers, agents and employees of a corporation and officers of the KLSE from dealing in securities where they make improper use of specific confidential information acquired due to their position in the organization.


Insider trading con t
Insider trading (con’t) corporate governance

  • The Companies Act provides for a fine of RM 30,000 or imprisonment of five years for perpetrators of insider trading offences.

  • The Securities Industry Act is more stringent; the fine is no less than RM one million (US$ 263,192) or three times the insider’s gain, and the imprisonment can go up to ten years.

  • The new civil penalties also allow investors to seek full compensation for loss from the offenders.


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