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Agenda. Dealing with External Pressures. INTRDUCTION SHAREHOLDER ACTIVISM Labour Relations Issues Full Disclosure Issues Proxy fights Class-Action Lawsuits. EXTERNAL EVENTS AND BOARD MEMBERSHIP FRIENDLY VS HOSTILE TAKEOVERS Poison pills White Knights Greenmail REGULATORY AGENCIES

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Agenda

Dealing with External Pressures

  • INTRDUCTION
  • SHAREHOLDER ACTIVISM
    • Labour Relations Issues
    • Full Disclosure Issues
    • Proxy fights
    • Class-Action Lawsuits.
  • EXTERNAL EVENTS AND BOARD MEMBERSHIP
  • FRIENDLY VS HOSTILE TAKEOVERS
    • Poison pills
    • White Knights
    • Greenmail
  • REGULATORY AGENCIES
  • CONCLUSION

BOD

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INTRODUCTION

Dealing with External Pressures

  • A public company operates in a fishbowl, under vast scrutiny and exposed to a wide variety of external pressures. The board must therefore learn to function effectively in such an environment on a continuous basis.
  • The pressure would come from a wide span, ranging from the shareholders, competitors and the regulating agencies.
  • In addition to the ongoing task of overseeing the complex operations of the company, numerous external and uncountable forces greatly complicate the agendas of boards of public companies.
  • Responses to external events are often more important to the survival of the company than the routine operations. Thus the directors must have a practical capability to deal effectively with these unpredictable perturbations
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SHAREHOLDER ACTIVISM

Dealing with External Pressures

  • Background
  • At the beginning of the last century, many people accepted the status quo with regard to public institutions. In recent years, however, there has been growing tendency for activists to seek change.
  • These activisms have brought extensive changes in several areas including: safe supply of food and drugs in the US population, state federal laws, and in setting up of regulatory bodies.
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SHAREHOLDER ACTIVISM

Dealing with External Pressures

  • Issues around Labor Relations
  • Activists exposed less than sterling practices leading to legal protection for most workers in the following areas:
    • Child Labor
    • Minimum wage practices
    • Minimum safety and health standards in work environment
    • Reasonable length of the work week
  • Trade unions came about from legal prescriptions to protect the workers rights. However, in the US, the perceived need for unions has declined over time as most of the battle issues have been legislated.
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SHAREHOLDER ACTIVISM

Dealing with External Pressures

  • Issues around Full Disclosure
  • Activists representing shareholders and other pressure groups have increasingly come to question the activities of boards and the companies they oversee in areas related to:
    • Shareholder fraud
    • Legally required disclosures of appropriate facts and figures.
    • Conflict of interests on the part of directors
    • The carrying out of other duties of the directors.
  • Examples include:
    • Pressure on disclosure on the use of stock options as a form of incentive to CEOs.
    • Pressure to control engaging in insider trading
    • Pressure to control the use of partnerships to both shield profits from taxes and remove significant debts from the balance sheets
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SHAREHOLDER ACTIVISM

Dealing with External Pressures

  • Proxy Fights
    • Where there are strong differences between a board and a company’s shareholders as to the strategy being followed, the financial results of the firm, the long term outlook, or a proposed merger or acquisition, the stage is set for proxy fights.
    • The fight occurs when the board sends out its proxy statements for which it seeks shareholders approval on a variety of intended actions.
    • Disenchanted shareholders may institute a public fight against the board's proposals. These fights take the form of mailings to shareholders, advertisement in popular media or even initiation of law suits.
    • The board often has an advantage in proxy fights because it can use the company’s funds to promote its preferred course of action.
    • The best example is the case of Hewlett Packard Corporation against a few dissident shareholders in the acquisition of Compaq corporation in 2002.
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SHAREHOLDER ACTIVISM

Dealing with External Pressures

  • Class-Action Lawsuits
    • The use of lawsuits brought about against companies has increased dramatically in recent years, consistent with growth of litigiousness in the society.
    • Class-action lawsuits have been brought into the courts on behalf of:
      • Environmental activists.
      • Groups of individuals who feel they have been denied fundamental rights by companies
      • Large numbers of people who claim to have been hurt as a result of negligence on the part of the manufacturers who have delivered allegedly unsafe products.
    • The possibility of such lawsuits reminds boards of directors that all their actions are subject to scrutiny by all parties interested in their operations.
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EXTERNAL EVENTS AND BOD MEMBERSHIP

Dealing with External Pressures

  • Board Retrenchment: Poor performance by the board and the company can lead to outside pressures to reform the governance of the company. Such pressures can lead to effective reform (if received well) or board retrenchment if received defensively.
  • Restructuring due to mergers or acquisitions: Acquiring another company of similar size or market values typically leads to downsizing of the combined board members by half since the resultant organization would not need all the members. This is affected by the followings issues:
    • Many of the decisions on which director will be retained follow from the perceptions of their relative experience and expertise.
    • The CEO of the surviving entity will want majority of directors on whom he/she can depend on for support in building the new company and implementing the new strategy.
    • Directors and CEOs views of potential mergers or acquisitions would be tempered by their perceptions of their likely positions in the hierarchy of directors that would result after the merger.
    • The actual structure of the new board for the newly merged company is usually stipulated in the merger or acquisition documents.
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FRIENDLY MERGERS VS HOSTILE MERGERS

Dealing with External Pressures

  • Friendly takeover: Some situations such as lack of economies of scale among many firms can lead the respective boards to simultaneously conclude that consolidation of two or more smaller firms would provide the missing economies of scale. Such companies can agree to merge “friendlily” lessening the trauma to the employees, lenders, suppliers, customers and the shareholders of the respective companies.
  • Hostile takeover: Hostile transitions come about when an aggressor company attempts to take over another company without the consent of its boards. In spite of its negativity it has the following advantages:
    • Replacement of non-performing board and CEO leading to better returns
    • May provide a lucrative exit for disenchanted shareholders.
    • They provide the ultimate safety valve for the shareholders of poorly managed, underperforming companies.
  • The operative rule is for the company to produce and compete effectively or perish.
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FRIENDLY MERGERS VS HOSTILE MERGERS

Dealing with External Pressures

  • Defence Mechanisms
  • Poison Pills: It works through a company capital structure to thwart hostile takeovers. The board and the shareholders adopt a plan that, when unwanted agency acquires a given percentage of the company’s shares, there is an automatic triggering of the release of a very large number of stock options for each of the prior shareholders at a very low price. This is meant to dilute the value of the holdings on the unwanted suitor.
  • White Knights: In defense against raiders, the board may proceed to seek other possible acquires for the company, perhaps a firm that had approached the company much earlier or one it feels to be a better strategic fit. Underlying the strategy is to achieve the best possible price for the shareholders. The firm invited into the contest by the target company has come to be known as a “white knight.”
  • Greenmail: On some occasions the board and the CEO of the target company, in defense of raiders, will negotiate to re-purchase the shares held by the raider for some premium above the acquisition cost. The raider then walks away with a rather fast and often sometimes handsome premium on its investment. These transactions came to be called “greenmail” emanating from the similarity of the process to “blackmail.”
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REGULATORY AGENCIS

Dealing with External Pressures

  • In addition to the pressure brought about by shareholders and hostile acquirers, boards also experience the scrutiny of regulatory agencies like:
    • Federal Securities and Exchange Commission: Concerned with the timely, accurate and complete disclosure of information designed to maintain orderly markets.
    • The Internal Revenue service
    • The Federal Trade commission (FTC)
    • Federal reserve bank
    • The Federal Communications Commission
  • In Kenya these would be:
    • The CBK
    • The CCK
    • The IRA
    • The CMA … etc.
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CONCLUSION

Dealing with External Pressures

  • External pressure is a significantly expected especially in public companies. The directors must be well equipped in terms of knowledge and personality to manage the pressures.
  • Individuals who are uncomfortable when dealing with the unexpected may find themselves unsuited for the board service.
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THE END

Corporate and

Capital Structure