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Their relationship and attendant issues THE BOARD & SHAREHOLDERS 1
Their relationship and attendant issues
THE BOARD & SHAREHOLDERS
1
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.
NATURE OF RELATIONSHIP
2
Institutional shareholdersSmall private shareholdersLarge private shareholders
Corporate Shareholders
TYPES OF SHAREHOLDERS
3
Mutual fundsPension Funds
Insurance CompaniesInvestment institutions
In UK, it is believed that institutional shareholders hold, on an overall basis, a majority of shares of all listed
companies.
INSTITUTIONAL SHAREHOLDERS
4
Long term interest in share value growthCurrent returns are still important
They have the power and ability to influence BoardsBut do they have the time to pay attention to every single
companyMonitoring systems for danger signals
INSTITUTIONAL INVESTORS PERSPECTIVE
5
IndividualsOnly interest in share price change
No long term interestOnly a little interest in earnings
Reactive buyers/sellersBiggest losers when things go bad
No influence over Boards
SMALL PRIVATE SHAREHOLDERS
6
Individuals (but may be acting through trusts, private limited companies, etc.)
Have long term interest in the companyMay have great influence on the companyMay provide bulk of executive directors
In Pakistan, these people are the focus of corporate governance endeavors.
LARGE PRIVATE SHAREHOLDERS
7
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
CORPORATE SHAREHOLDERS
8
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.
SOME INTERESTING FACTS
9
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)
CONCENTRATED
SHAREHOLDING
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Accountability of the BoardTransparency / communication
Minimizing conflicts of interest between directors and shareholders
Good management leading to:Good returns
Capital growthFair division of spoils
WHAT DO SHAREHOLDERS EXPECT?
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Shareholders must approve:Class 1 transactions
Large size relative to size of the companyRelated party transactions
Financial statementsAudit report is for shareholders
Directors remuneration
SHAREHOLDERS HOLD ON BOARD
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Direction: One way reporting or Two way communicationNature: Formal or Informal communication
Scope: All or some shareholders Frequency: Regular or irregular, need based.
COMMUNICATION
BETWEEN SHAREHOLD
ERS & BOARD
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Between Board and institutional investorsLarge companies: many institutional investors
Small companies: not enough attention from Institutional InvestorsBetween NEDs and major shareholders
Chairman is often an NEDRole of SID
PLANNED MEETINGS
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Chairman’s Statement OFR (including analysis)
Compliance Statement (with CCG)CSR – Sustainability reports
NON-FINANCIAL REPORTING
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Combined Code says:Encourage attendanceLet them ask questions
Separate voting (avoid grouping issues)Vote counting:
Show of hands / one vote per share
Proxies
Electronic voting
THE AGM
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Dialogue with companiesEvaluating their disclosures
Judicious use of vote
ROLE OF INSTITUTIONAL INVESTORS
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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?
SHAREHOLDERS ACTIVISM
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Re-election of directorsRe-appointment of auditors
Approval of accounts and reportsApproval of directors’ remuneration
Justification for past payments
Proposed SchemesDividend recommendations
Changes in share capital
AREAS OF SHOW OF DISSENT
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Association of British Insurers (ABI)National Association of Pension Funds (NAPF)
Institutional Shareholders Committee (ISC)International Corporate Governance Network (ICNG)
BODIES SUPPORTING ACTIVISM
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Residual rights to property and profits Right to equitable treatment
Protection against inside trading and market abuse Disclosure and transparency
RIGHTS OF EQUITY SHAREHOLDERS
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