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Ownership, Control and Compensation

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Presentation on theme: "Ownership, Control and Compensation"— Presentation transcript:

1 Ownership, Control and Compensation

2 Who is a shareholder Owner Beneficiary Risk bearer Decision maker
(internal control).

3 Types of Shares Ordinary shares Preference Shares Other types

4 Features of Ordinary Shares
Permanency No nominal cost to the company Residual claim on profits Residual claim on assets Voting rights Cumulative voting rights Right of purchasing new shares

5 Classification of Equity shareholders
Internal (invest to own and run) Corporate shareholders (holding companies) Families, groups of friends External (invest only for a return) Individuals Institutional investors.

6 Internal Shareholders
Controlling shareholders Majority not a necessity Scene in the West Situation in Pakistan

7 External Shareholders
Generally not on the board. Lack of unity Lack of interest Therefore, lack of influence

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

9 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 endeavors.

10 Corporate Shareholders
Holding companies Multinationals Groups

11 Institutional Investors
Mutual Funds Managed Funds Pension Funds Life Insurance companies Banks In UK, it is believed that institutional shareholders hold, on an overall basis, a majority of shares of all listed companies.

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

13 Role of II’s Capability and Capacity to influence.
Dialogue with directors Regular evaluation of financial reports Flag off danger signals Sharing info with other stakeholders Judicious use of Vote Could / should seek representation on board

14 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.

15 Shareholders’ Expectations from a Company
Accountability of board members Transparency in all transactions Company interest over self interest Effective and efficient management leading to good returns and capital growth. Fair share of real profits.

16 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 Shareholders elect and can remove directors.

17 Tools of Control Defined Procedures CONTROLS
Only one way of doing an action Segregation of duties (internal check) CONTROLS Physical (cash in safe, maintenance) Managerial (e.g. budgets, limits, approvals, etc.) Supervision Accounting and auditing checks Selection of right personnel

18 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.

19 Communication Instruments
Statutory reports Chairman’s report (OFR) Compliance reports Newsletters, circulars Meetings with major shareholders Correspondence

20 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?

21 Shareholders’ Activism - 2
If institutional investors join hands with smaller shareholders: Monitoring of board performance Direct intervention Regular evaluation and sharing of analysis But remember, institutional investor organizations are all run by managers so they have affinity for managers.

22 Areas of Dissent Re-election of directors Re-appointment of auditors
Approval of directors’ remuneration Approval of annual accounts Dividend recommendations Changes in share capital Other approvals

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