1

Ownership, Ownership, Control and Control and

CompensationCompensation

2

Who is a shareholderWho is a shareholder

OwnerOwner BeneficiaryBeneficiary Risk bearerRisk bearer Decision makerDecision maker (internal control).(internal control).

3

Types of SharesTypes of Shares

Ordinary sharesOrdinary shares Preference SharesPreference Shares Other typesOther types

4

Features of Ordinary Features of Ordinary SharesShares PermanencyPermanency No nominal cost to the companyNo nominal cost to the company Residual claim on profitsResidual claim on profits Residual claim on assetsResidual claim on assets Voting rightsVoting rights

Cumulative voting rightsCumulative voting rights Right of purchasing new sharesRight of purchasing new shares

5

Classification of Classification of Equity shareholdersEquity shareholders Internal (invest to own and run)Internal (invest to own and run)

Corporate shareholders (holding Corporate shareholders (holding companies)companies)

Families, groups of friendsFamilies, groups of friends External (invest only for a return)External (invest only for a return)

IndividualsIndividuals Institutional investors.Institutional investors.

6

Internal ShareholdersInternal Shareholders

Controlling shareholdersControlling shareholders Majority not a necessityMajority not a necessity Scene in the WestScene in the West Situation in PakistanSituation in Pakistan

7

External ShareholdersExternal Shareholders

Generally not on the board.Generally not on the board. Lack of unityLack of unity Lack of interestLack of interest Therefore, lack of influenceTherefore, lack of influence

8

Small Private Small Private ShareholdersShareholders IndividualsIndividuals Only interest in share price changeOnly interest in share price change No long term interestNo long term interest Only a little interest in earningsOnly a little interest in earnings Reactive buyers/sellersReactive buyers/sellers Big losers when things go badBig losers when things go bad No influence over BoardsNo influence over Boards

9

Large Private Large Private ShareholdersShareholders Individuals (but may be acting through Individuals (but may be acting through

trusts, private limited companies, etc.)trusts, private limited companies, etc.) Have long term interest in the companyHave long term interest in the company May have great influence on the companyMay have great influence on the company May provide bulk of executive directorsMay provide bulk of executive directors In Pakistan, these people are the focus of In Pakistan, these people are the focus of

corporate governance endeavors.corporate governance endeavors.

10

Corporate ShareholdersCorporate Shareholders

Holding companiesHolding companies MultinationalsMultinationals GroupsGroups

11

Institutional InvestorsInstitutional Investors

Mutual FundsMutual Funds Managed FundsManaged Funds Pension FundsPension Funds Life Insurance companiesLife Insurance companies BanksBanks In UK, it is believed that institutional In UK, it is believed that institutional

shareholders hold, on an overall basis, shareholders hold, on an overall basis, a majority of shares of all listed a majority of shares of all listed companies.companies.

12

Institutional Investors Institutional Investors PerspectivePerspective Long term interest in share value Long term interest in share value

growth.growth. Current returns are still important.Current returns are still important. Ability to evaluate performance.Ability to evaluate performance. Power and ability to influence Boards.Power and ability to influence Boards. But do they have the time to pay But do they have the time to pay

attention to every single company.attention to every single company. Monitoring systems for danger signals.Monitoring systems for danger signals.

13

Role of II’sRole of II’s

Capability and Capacity to influence.Capability and Capacity to influence. Dialogue with directorsDialogue with directors Regular evaluation of financial reportsRegular evaluation of financial reports

Flag off danger signalsFlag off danger signals Sharing info with other stakeholdersSharing info with other stakeholders

Judicious use of VoteJudicious use of Vote Could / should seek representation on Could / should seek representation on

boardboard

14

Some interesting factsSome interesting facts

10% of EDs in European companies 10% of EDs in European companies do not know who their top 50 do not know who their top 50 shareholders are.shareholders are.

25% of their CEOs had met only half 25% of their CEOs had met only half of their top 50 shareholdersof their top 50 shareholders

In Pakistan, most listed companies In Pakistan, most listed companies have majority held by a family or have majority held by a family or group and they do not seem to group and they do not seem to attach any importance to any other attach any importance to any other shareholder.shareholder.

15

Shareholders’ Shareholders’ Expectations Expectations from a Companyfrom a Company Accountability of board membersAccountability of board members Transparency in all transactionsTransparency in all transactions Company interest over self interestCompany interest over self interest Effective and efficient management Effective and efficient management

leading to good returns and capital leading to good returns and capital growth.growth.

Fair share of real profits.Fair share of real profits.

16

Shareholders’ Hold on Shareholders’ Hold on BoardBoardShareholders must approve:Shareholders must approve: Class 1 transactionsClass 1 transactions

Large size relative to size of the companyLarge size relative to size of the company Related party transactionsRelated party transactions Financial statementsFinancial statements

Audit report is for shareholdersAudit report is for shareholders Directors remunerationDirectors remuneration Shareholders elect and can remove Shareholders elect and can remove

directors.directors.

17

Tools of ControlTools of Control

Defined ProceduresDefined Procedures Only one way of doing an actionOnly one way of doing an action Segregation of duties (internal check)Segregation of duties (internal check)

CONTROLSCONTROLS Physical (cash in safe, maintenance)Physical (cash in safe, maintenance) Managerial (e.g. budgets, limits, approvals, Managerial (e.g. budgets, limits, approvals,

etc.)etc.) SupervisionSupervision Accounting and auditing checksAccounting and auditing checks

Selection of right personnelSelection of right personnel

18

Communication between Communication between Shareholders & BoardShareholders & Board

Direction: One way reporting or Two Direction: One way reporting or Two way communicationway communication

Nature: Formal or Informal Nature: Formal or Informal communicationcommunication

Scope: All or some shareholders Scope: All or some shareholders Frequency: Regular or irregular, Frequency: Regular or irregular,

need based.need based.

19

Communication Communication InstrumentsInstruments Statutory reportsStatutory reports Chairman’s report (OFR)Chairman’s report (OFR) Compliance reportsCompliance reports Newsletters, circularsNewsletters, circulars Meetings with major shareholdersMeetings with major shareholders CorrespondenceCorrespondence

20

Shareholders ActivismShareholders Activism

Refers to stand taken by shareholders Refers to stand taken by shareholders against recommendations of the Board.against recommendations of the Board.

Do they have adequate rights or power?Do they have adequate rights or power? Result less important than show of dissent.Result less important than show of dissent.

Can work only if institutional investors Can work only if institutional investors participate.participate.

Do institutional investors have a duty to Do institutional investors have a duty to communicate with other shareholders?communicate with other shareholders?

21

Shareholders’ Activism - Shareholders’ Activism - 22If institutional investors join hands with If institutional investors join hands with

smaller shareholders:smaller shareholders: Monitoring of board performance Monitoring of board performance Direct interventionDirect intervention Regular evaluation and sharing of Regular evaluation and sharing of

analysisanalysis But remember, institutional investor But remember, institutional investor

organizations are all run by managers organizations are all run by managers so they have affinity for managers.so they have affinity for managers.

22

Areas of DissentAreas of Dissent

Re-election of directorsRe-election of directors Re-appointment of auditorsRe-appointment of auditors Approval of directors’ remunerationApproval of directors’ remuneration Approval of annual accountsApproval of annual accounts Dividend recommendationsDividend recommendations Changes in share capitalChanges in share capital Other approvalsOther approvals