Shareholder's Assessment - Assignment Example

Task One b) Stakeholders theory has been established on the premise of corporate social responsibility and social responsivess, thereby acknowledgingthe corporation’s broader responsibilities towards all those who are involved with it. This is marginally different and encompasses greater responsibility than the traditional ‘profit maximizing’ rationale contained in the shareholders theory. The main elements of the shareholders and stakeholders theories have been juxtaposed under the following heads: Director’s fiduciary duties: The Shareholder theory propagates interests of the shareholders based on the argument that they are the owners of the company thus their property rights ought to be protected.Therefore, the directors must run the company in the interest of the shareholders. Donaldson and Preston are the proponents of the idea that the directors should recognize their multi fiduciary duties towards all the stakeholders and not the shareholders alone. Basis of determining business relationships: As per the shareholder’s theory, corporate relationships are determined by legal or implied contracts. Thus, it recognizes accountability towards those parties with whom an explicit legal agreement has been entered into. This vastly limits the scope of accountibility.On the other hand the stakeholders’ school of thought Advocates social/moral obligations, which become binding on the corporation via legal as well as implied contracts. Escalation in value of shareholding: the shareholders theory endorses the objective of generating higher returns to the investment of the shareholders. Whereas the stakeholders’ take is that, the corporation should strive to yield higher social returns to all the parties involved with it. Objective of wealth creation: escalation in the value of shareholding will result in greater wealth creation; therefore, it is consistent with the traditional corporate objective of profit maximization. The proponents of the shareholders theory maintain this. However, the other view is that, when the interest of the stakeholders is taken into consideration then there shall be fairer distribution in addition to wealth creation, which will promote the general welfare of society. The Tinged Shareholders theory contains a reconciliation of the main ideas of the two schools of thought. It makes allowance for moral and social obligations and at the same time retains the director’s fiduciary duties and holds them responsible to the shareholders. The conflicting grounds of the normative and instrumental approaches are blurred in this theory. The traditional profit-maximizing objective of the shareholders theory is maintained, while incorporating the corporate social responsibilities as well, therefore it is consistent with moral duty. c) I find the stakeholders theory rather convincing. The recognition of commercial pursuits and social obligations appeal to me. The stakeholder’s theory can justifiably claim to be superior because it upholds the interests of the owners without neglecting social welfare. If a company is profitable but its employees are a harassed lot, or its suppliers are bleeding dry because of the constant pressure of cutting costs, it defeats the purpose of corporate social responsibility. Singular motive of wealth creation can be ruthless if fair distribution and social welfare are neglected. A company owes responsibility towards it’s employee’s for improving their quality of life as much as it owes to it’s customers for rendering quality at reasonable prices. .Wal-Mart is a case in point. This example demonstrates that commercial quests should not be divorced from social responsibilities.Wal Mart is the largest retailer in the world with a 20% market share in America and a formidable presence in retail in most parts of the world. It has gone overboard in its attempts to cut costs and increase profit margins. Recently exposed practices include locking overnight workers in its stores, allowing Wal-Mart maintaince contractors to use illegal immigrants as janitors. It is also known to pay less to its employees and cover fewer benefits than most big companies. The pay packages for starting employees are low and it does not cover all its employees with health care. The Times reported that a survey by Georgia officials found that “more than 10,000 children of Wal-Mart employees were in the state’s health program for children at an annual cost of nearly $10 million to the taxpayers. “It also said, “North Carolina Hospital found that 31% of 1900 patients who described themselves as Wal-Mart employees were on Medicad, while an additional 16% had no insurance at all.” Word count b)396 c)293 Task Two a) The Maxwell financial empire was based on two major publicly quoted companies, Maxwell Communication Group and Mirror Group Newspapers. After Robert Maxwell’s death it emerged that the group’s liabilities vastly outweighed it’s assets and some 440 million pounds were missing from the companies pension funds, leaving 32000 pensioners fearing for their financial security. Robert Maxwell had resorted to fraudulent practices in the capitalization of his companies, assumed excessive power and was guilty of misrepresentation to shareholders. As the scandal unfolded, it is estimated that some one billion pounds was lost on shareholders as the value of public companies crashed. Flawed corporate governance, utter lack of transparency with respect to financial activities and unmistakable violation of the corporate governance code are apparent in this case in certain ways. 1. As per the corporate governance code(2003)”,the role of the chairman and chief executive cannot be exercised by the same indivisual.The division of responsibilities between the chairman and chief executive should be clearly established, set and in writing agreed by the board”. In this case, there was concentration of power with one indivisual.Robert Maxwell had held the position of both chief executive and chairman of Maxwell Communication Corporations. Excessive concentration of control facilitated the financial abuses. He controlled the movement of cash within and between his companies and was the sole signatory authority for an unlimited amount over the bank account. 2. Pertaining to appointment of directors, the code specifies, “non executive directors should be declared by the board to be independent.” However Maxwell himself appointed the non-independent directors, they proved incompetent and did not diligently perform their roles in the capacity of independent board members. The procedure for the appointment of directors was certainly not transparent and that was a violation of the code as well, as it recommends, “there should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.” 3. Financial disclosures as ordained by the corporate governance code were not met with. The audit functions were faulty and did not trace the financial movements out of pension funds. Cash was borrowed by Maxwell’s private companies from pension funds without the knowledge of the pension fund trustees (thereby perpetrating misrepresentation).Pension funds were misused, as they are not company funds, quintessentially.Nothwithsatnding, a sizeable chunk of investment in MCG shares came from pension funds. Limited disclosure was made regarding companies’ position with pension funds. Word count b) 397 Task three a)“Stakeholders in a corporation are the individuals and the constituencies who contribute, either voluntarily or involuntarily to its wealth creating capacity and activities, and are therefore its potential beneficiaries and/or risk bearers.” The passengers, train operators, customers and shareholders can be identified as the main stakeholders in Railtrack.Unsound management policies did not synthesize the interest of the different stakeholders. With respect to train operators downsizing was done resulting in the loss of experienced staff and reduction in the number of drivers. The underlying assumption was that the business growth prospects in railways are limited. The management obviously wanted to boost profits by cutting down expenditure, which did not affect the employees’ favorably. During the initial years, the passengers stood to gain by lower ticket prices. The passenger numbers leapt by 25% in three years. John Edmond, the first chief executive had pursued a policy of dispensing engineers, which eroded the ability of the company to maintain networks. Customers, passengers and freight train operators were desperate for regulatory action to force the company to improve the stewardship of the network and its performance. The share prices quadrupled during the initial years, however post liquidation the shareholders formed groups to press for increased compensation. b) On 3 April 2000 the Guardian newspaper reported “Rail track declares war on regulator”.Railtrack resisted regulatory action and serious shortcomings in the company’s stewardship became apparent. Customers, passengers and train operators among other stakeholders wanted the company to improve its performance. Quintessentially the creation of Railtrack and fragmentation of infrastructure and services was a flawed idea; this fundamental error was compounded by series of managerial errors, which brought about the demise of the company. The railways were characterized by underinvestment for years and this was apparent by the condition of tracks and the subsequent failure to meet soaring demand from passengers. The management wanted to restrict spending in order to enlarge the profits. Reduction in the number of drivers and experienced staff was followed by dispensing with engineers, which further weakened the ability of the company to maintain tracks. Costs on the massive west coast main line spiraled to two billion pounds. The Hatfield crash was the last straw, which was caused by broken rails because of defective maintaince system. After the Hatfield crash, the company went from being a profit making entity to losing 543 million pounds. After the company went into liquidation, the shareholders had formed two groups to press for increased compensation. A lawyer speaking for on of those groups remarked on GMTV that his strategy was to sue the Government for providing incorrect information at the time of formation of the company. An increased offer of upto 262p per share was adequate for the larger shareholder group to abandon legal action. The legality of the decision to put Railtrack into Railway administration was challenged by the smaller shareholders group. The company’s resources were not used appropriately in the interest of its stakeholders and marginally for its shareholders, and managerial errors cannot be overlooked. The initial buoyancy about its shares in the stock market was not sustainable. Word count. a)201 b) 301 Task four a) The Board of Marconi is composed of the Chairman, six executive directors and six non-executive directors. The composition of the Board complies with the provisions set out in the Combined Code. The office of the Chairman and chief executive should not be held by the same person as per the Combined Code. The responsibilities of the Chairman and chief executive should be distinctly set out. The Chairman is primarily responsible for spearheading the Board and with him lies the responsibility of keeping the directors relevantly and adequately informed about matters relating to the company, policies and strategies. The Chief Executive is responsible for the implantation of policies and the must look after the functional aspects. The Chairman is at the helm of the chain of command. The non-executive directors are concerned independent by the board. As recommended by the Combined Code there is a position of a senior independent non-executive director, which was filled by D C Bonham in July2001. The effective functioning of the board necessitates Board meetings. During the financial year ending 31 March 2001, the Board met six times to review the progress of company affairs. Furthermore, the non-executive directors meet the Chairman and the Chief Executive at least twice a year for discussion and appraisal of corporate and other strategies. According to Wikipedia, a committee is a “type of small deliberative assembly that is usually subordinate to a larger deliberative assembly.”Commitees are a necessary aspect of big organizations; usually they are assigned a specific area and are composed of people with the relevant expertise. This facilitates smooth and specialized functioning in the company. The chief committees in Marconi plc and their functions are: Audit Committee: Review of financial reports, statements in addition to formulation and appraisal of accounting policies.Independant non-executive directors are the members. Nomination Committee. Makes all recommendations on all proposed appointment of directors. Membership includes Chairman and the non-executive directors. Remeuratuion Committee: makes recommendations for the structure of remunerations payable to the Board. Comprises independent non-executive directors. Executive Committee. Deals with the day-to-day operations of the organization. Comprises executive directors and senior executives. b)One of the objectives of the Remuneration policy of Marconi states “to align executive interest with those of the shareholders through establishment of competitive long term incentives” Executives directors can participate in the 1999 stock option plan and the long term incentive plan. The plan entails, granting of options for a period put 10 years from 30 Nov 99.Options mature or become exercisable upon the fulfillment o some laid conditions; which is, percentage increase in Marconi earnings per share must be equal to or greater than percentage increase in the retail price index plus 3 percent p.a.Thus the minimum span for gauging performance is 3 years. This encourages pursuit of excellence on part of the directors to maximize their compensation. This in turn leads to better commercial performance. Improvement of company performance is correlated to escalation of share prices, which in turn upholds the interests of the shareholders. Word count a)351 b) 146 References Combined Code for Corporate Governance 2003 Robert Maxwell Case Study Marconi plc Case Study Railtrack plc Case Study Friedman, Thomas (2005), The World is Flat,(p-163-167),Penguin Wikipedia Encyclopedia Moore, Geoff (1999), Tinged Shareholders Theory. Business Ethics: A European Review.(p-117-127) Read More