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1 Ownership, Control and Compensation. 2 Who is a shareholder Owner Owner Beneficiary Beneficiary Risk bearer Risk bearer Decision maker Decision maker.

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Presentation on theme: "1 Ownership, Control and Compensation. 2 Who is a shareholder Owner Owner Beneficiary Beneficiary Risk bearer Risk bearer Decision maker Decision maker."— Presentation transcript:

1 1 Ownership, Control and Compensation

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

3 3 Types of Shares Ordinary shares Ordinary shares Preference Shares Preference Shares Other types Other types

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

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

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

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

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

9 9 Large Private Shareholders Individuals (but may be acting through trusts, private limited companies, etc.) Individuals (but may be acting through trusts, private limited companies, etc.) Have long term interest in the company Have long term interest in the company May have great influence on the company May have great influence on the company May provide bulk of executive directors May provide bulk of executive directors In Pakistan, these people are the focus of corporate governance endeavors. In Pakistan, these people are the focus of corporate governance endeavors.

10 10 Corporate Shareholders Holding companies Holding companies Multinationals Multinationals Groups Groups

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

12 12 Institutional Investors Perspective Long term interest in share value growth. Long term interest in share value 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 attention to every single company. But do they have the time to pay attention to every single company. Monitoring systems for danger signals. Monitoring systems for danger signals.

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

14 14 Some interesting facts 10% of EDs in European companies do not know who their top 50 shareholders are. 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 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. 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 15 Shareholders’ Expectations from a Company Accountability of board members Accountability of board members Transparency in all transactions Transparency in all transactions Company interest over self interest Company interest over self interest Effective and efficient management leading to good returns and capital growth. Effective and efficient management leading to good returns and capital growth. Fair share of real profits. Fair share of real profits.

16 16 Shareholders’ Hold on Board Shareholders must approve: Class 1 transactions Class 1 transactions Large size relative to size of the company Large size relative to size of the company Related party transactions Related party transactions Financial statements Financial statements Audit report is for shareholders Audit report is for shareholders Directors remuneration Directors remuneration Shareholders elect and can remove directors. Shareholders elect and can remove directors.

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

18 18 Communication between Shareholders & Board Direction: One way reporting or Two way communication Direction: One way reporting or Two way communication Nature: Formal or Informal communication Nature: Formal or Informal communication Scope: All or some shareholders Scope: All or some shareholders Frequency: Regular or irregular, need based. Frequency: Regular or irregular, need based.

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

20 20 Shareholders Activism Refers to stand taken by shareholders 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 participate. Can work only if institutional investors participate. Do institutional investors have a duty to communicate with other shareholders? Do institutional investors have a duty to communicate with other shareholders?

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

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


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