2 Who is a shareholder Owner Beneficiary Risk bearer Decision maker (internal control).
3 Types of SharesOrdinary sharesPreference SharesOther types
4 Features of Ordinary Shares PermanencyNo nominal cost to the companyResidual claim on profitsResidual claim on assetsVoting rightsCumulative voting rightsRight of purchasing new shares
5 Classification of Equity shareholders Internal (invest to own and run)Corporate shareholders (holding companies)Families, groups of friendsExternal (invest only for a return)IndividualsInstitutional investors.
6 Internal Shareholders Controlling shareholdersMajority not a necessityScene in the WestSituation in Pakistan
7 External Shareholders Generally not on the board.Lack of unityLack of interestTherefore, lack of influence
8 Small Private Shareholders IndividualsOnly interest in share price changeNo long term interestOnly a little interest in earningsReactive buyers/sellersBig losers when things go badNo influence over Boards
9 Large Private Shareholders 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 directorsIn Pakistan, these people are the focus of corporate governance endeavors.
11 Institutional Investors Mutual FundsManaged FundsPension FundsLife Insurance companiesBanksIn 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 directorsRegular evaluation of financial reportsFlag off danger signalsSharing info with other stakeholdersJudicious use of VoteCould / 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 shareholdersIn 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 membersTransparency in all transactionsCompany interest over self interestEffective 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 transactionsLarge size relative to size of the companyRelated party transactionsFinancial statementsAudit report is for shareholdersDirectors remunerationShareholders elect and can remove directors.
17 Tools of Control Defined Procedures CONTROLS Only one way of doing an actionSegregation of duties (internal check)CONTROLSPhysical (cash in safe, maintenance)Managerial (e.g. budgets, limits, approvals, etc.)SupervisionAccounting and auditing checksSelection of right personnel
18 Communication between Shareholders & Board Direction: One way reporting or Two way communicationNature: Formal or Informal communicationScope: All or some shareholdersFrequency: Regular or irregular, need based.
19 Communication Instruments Statutory reportsChairman’s report (OFR)Compliance reportsNewsletters, circularsMeetings with major shareholdersCorrespondence
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 performanceDirect interventionRegular evaluation and sharing of analysisBut 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’ remunerationApproval of annual accountsDividend recommendationsChanges in share capitalOther approvals