Governance in a Globalizing World - Assignment Example

Governance in a Globalizing World (Course Instructor) (University Affiliation) (Student’s Name) Date 1. Shareholders have rights at the AGM. What are they? How can they influence company activities or decisions? (10 marks) Agency theory is a corporate governance concept deals with the problem of the corporate directors controlling the company that is owned by the shareholders. According to article 02, agency theory states that in the past the problem would arise where the directors of the company were thought not to act in the interest of the other stakeholders especially the shareholders (Fried & Jacobson 2012). The agency theory considers the problem and looks into what could be done to avoid it. The theory, according to the article on the theory of corporate governance advocates for the creation of an agency relationship between the agent and the principal (Australian Shareholders’Association Limited 2016b). The shareholders in this case being the principal while the directors are the agents of the shareholder interests in the running of the company. This means the directors of the company are trustees of the shareholder interests in running the organization by exercising their rights in the annual general meeting (Thomsen and Conyon, 2012). A shareholder of a group of shareholders with a proportion of not less than five percent of the voting rights in the company can request the directors to call for a general meeting. The court according to the article cannot seek the intervention of a government body or a court of law in calling for a general meeting (Australian Shareholders’Association Limited 2016a). The shareholders of the company also have a right to demand that the company circulates to the other shareholders a statement of not more than a thousand words to the issue being referred to in the proposed resolution as long as the prescribed number of shareholders required for that to happen is met (NASDAQ, 2016). The shareholders will receive notice of the general meeting with the agenda of the meeting. In some specific cases, the shareholders would receive copies of the documents with the resolutions to be dealt with (Australian Shareholders’Association Limited 2016a). The shareholders also have the right to attend the annual general meeting. Major decisions regarding the management of the organization are made at the annual general meeting and it is important that each and every shareholder is given the opportunity to exercise this right. The article 02 on corporate governance however, stipulate that where the shareholder is not in a position to be physically present, then they have a right to appoint a proxy who will act on his or her behalf in the general meeting. The shareholders also have the right to participate in the debates by speaking in the annual general meetings on the matters under consideration (NASDAQ, 2016). The shareholders also have the right to information in the annual general meeting. The information according to the article include the registrar of shareholders, records of debentures, directors’ shareholdings, the register of directors, the managers and the secretaries, the minutes of the annual general meetings, a copy of the audited books of accounts which should be circulated 14 days to the annual general meeting. The shareholders will receive notice of the general meeting with the agenda of the meeting (Three models of corporate governance from developed capital markets, 2009). 2. Compare and contrast shareholder rights at AGMs in relation to Remuneration Reports between Australia, the UK and the USA. Why are these rights important for companies, and for shareholders? (10 marks) According to the article on corporate governance, the Australia’s two strikes law gives the shareholders the right to curb the excessive executive remuneration packages. In the amendment of the Australian corporations amendment act, if 25 percent or more of the votes cast in two consecutive annual general meetings oppose the adoption of the remuneration report, the company should formally respond by requesting the board of directors except the managing director to stand for re-election within a period of 90 days (Australian Shareholders’Association Limited 2016a). Additionally, the article stipulates that the key persons whose remuneration has been disclosed are not allowed to vote meaning that those people who have a direct interest in the matter do not get to be part of the decision making process (Thomsen and Conyon 2012). The United Kingdom shareholders enjoy more rights as compared to shareholders in others countries such as Australia and the United States of America. The article gives the universal one share one vote presumption but the shareholders may be able to put forward their resolutions as well as nominating the candidates of the annual general meetings, a yearly advisory vote on remuneration policy and a binding vote of the remuneration policy in the future. The shareholders in the United Kingdom also enjoy the rights over the rights to offer new shares and may also convene the general meeting (Wetzstein, 2012). In the United States of America, shareholders in quoted companies have the right to vote on the director’s remuneration report. This according to the article has allowed the shareholders to influence the policies that govern the remuneration of directors in a company. There is the recent introduction of the binding vote on further remuneration annually, the increase in the level of support needed on voting in the future remuneration as well as voting on the implementation of a remuneration policy of the previous years (Wetzstein, 2012). The rights have benefits both to the companies as well as the shareholders. For the companies, it gives the management the opportunity to have a clear remuneration policy that applies to all so as to attract the best talent to its board of management. It also gives the company the opportunity to disclose their director remuneration so as to avoid excessive payment of money to the directors. The voting rights on remuneration reports gives the shareholders access to control over the remuneration policy of the companies they have stake in (Wetzstein, 2012). Being the real owners of the company, it is important that the shareholders make sure that the individuals who run the organization on their behalf do not use that opportunity to award themselves allowances and other packages in a manner that is likely to curtail the ability of the company to meet its financial objective of wealth maximization as well as profit maximization (PricewaterhouseCoopers, 2015). 3. Why would the Shareholder Association (ASA) be concerned about the increasing use of qualitative hurdles in executive compensation? Do you think such hurdles will change executive’s behaviour? (10 marks) The concern by the association of Australian shareholders was that the executive remuneration was getting out of hand and that something needs to be done. The perception was created by the act of financial institutions in the international market that is perceived to be the key contributor to the global financial crises that hit so many countries causing a number of companies to fail (Australian Shareholders’Association Limited, 2016). It is reported that the value of the shareholder wealth was the lowest in 2008 is due to the imported crises where some companies and industries that were propped up by the taxpayer, executive remuneration seemed not to have been affected, leading to a conclusion that the directors were being rewarded unfairly for not doing the right. Their concern is that a number of chief executive officers set themselves low standards which they can achieve. They, however, argue that directors are custodians of shareholder wealth and therefore need to work to the interest of the organization (Walker, 2011). The concerns were raised at a time when there was a longstanding discomfort amongst the shareholders about the widening gap between the executive remuneration and those of other employees including the huge termination packages without any valid justification. Studies that have been done over the past decades indicate that most of the respondents believe that the executives of quoted companies are overpaid. The studies however indicate that most of the respondents do not have any knowledge of the parameters that the companies used in making their executive remuneration policies. With the growth rates for the executive payments exceeding growth in weekly earnings for the past 20 years, the gap between the two parameters widened further (Volker, 2008). Nearly all the growth in the executive pay was attributed to an increase in the incentives especially the long term incentives which are reported to have widened between 2004 and 2007. The problem of remuneration gives the agency theory one of the longstanding problems. The theory according to the article stipulates that some managers act in a criminal manner by embezzling shareholder funds. The problem is excess expenditure where there is a tradeoff between private earnings of the executives and what the company earns. It is expected that these concerns will have an effect on the performance of the employees. As the shareholders demand for more accountability from the company directors, the directors are likely to improve their performance t match the returns earned by the organization (Volker, 2008). This would ensure that the remuneration policy would ensure that the remuneration is proportional to the earnings. The hurdles are therefore expected to change the behavior of the executives so that they would improve their performance and that of the organization so that it would not be based on the performance of the organization. The company on the other hand will have the benefit of reduced expenditures and improved organizational behavior which would lead to improved shareholder wealth (Volker, 2008). 4. Directors sit on numerous boards. Is this a problem? Why or why not? Discuss (10 marks) Ideally, a director should be a shareholder in the company whose board they serve. The directors of the company are appointed by the shareholders at an annual general meeting. It is therefore possible to have a number of directors that sit on a number of boards owing to the fact one could be elected to a number of boards (Quinn & Michal, 2016). Sitting on multiple boards has both positive and negative effects to the individuals as well as the organization. The ability of one to sit on any board however is determined by the terms of engagement that exist between the organization and the company. A person that sits on a number of boards is known as a multiple director (McDonald and Young, 2012). Two firms have what is known as a direct interlock if a director of one firm is also the director of another firm. The practice of a director sitting on multiple boards is widespread and lawful, but has often raised questions on the quality and the independence of the decisions made by the boards. In the United States of America however, the law prohibits interlocking in companies that operate in the same industry, competition and that compete (McDonald and Young, 2012). According to observers, sitting on a number of boards allows for cohesion, coordinated action and unified corporate executives. This allows companies to increase their influence by exerting their power as a group in as far as the decision making is concerned (Quinn & Michal, 2016). Sitting in multiple boards of organizations also enables the sharing of information by enabling enhanced improved communication through the shared directors. The other advantage of sitting on multiple boards is that the individuals get to display their talents in multiple companies that would benefit them both in the short run and in the long run (Quinn & Michal, 2016). Furthermore, the directors are more frequently appointed to a number of positions both in government institutions as well as government institutions and non governmental institutions (Australian Shareholders’Association Limited 2016c). These types of individuals usually contribute disproportionally to the policies as well as the government groups that represent the interests of the corporate institutions (Quinn & Michal, 2016). There are observers however, who argue that multiple directors go against the interest of the companies whose boards they serve, this is because sitting in multiple boards means that one has to shuttle from one assignment to another (Quinn & Michal, 2016). This however would lead to disadvantages brought about by time constraints since the individual will not have the time to attend to all the board meetings. This is more so where one would usually have more preferences in sitting in boards that pay more compared to the rest (Quinn & Michal, 2016). It could also be a disadvantage if the individual is sitting in two competing firms such that they would be tempted to share corporate strategic with the competitors and this would greatly affect the competitiveness of these organizations (Australian Shareholders’Association Limited 2016b). Bibliography Australian Shareholders’Association Limited 2016a, ASA questions increasing use of qualitative hurdles in executive remuneration structures. Available at: https://www.australianshareholders.com.au/sites/default/files/media-releases/asa_questions_increasing_use_of_qualitative_hurdles_in_executive_rem_reports_26_sept_2016.pdf (Accessed: 21 October 2016). Australian Shareholders’Association Limited 2016b,  ASA concerned re non-performance hurdles in remuneration structures. Available at: https://www.australianshareholders.com.au/news/our-latest-media-release-asa-concerned-re-non-performance-hurdles-remuneration-structures (Accessed: 21 October 2016). Australian Shareholders’Association Limited 2016c,  Is it time for metcash chairman rob murray to resign? Available at: https://www.australianshareholders.com.au/sites/default/files/media-releases/is_it_time_for_metcash_chairman_rob_murray_to_resign_13_july_2016.pdf (Accessed: 21 October 2016). COMMONSENSE PRINCIPLES OF CORPORATE GOVERNANCE no date (n.d.). Available at: http://www.governanceprinciples.org/wp-content/uploads/2016/07/GovernancePrinciples_Principles.pdf (Accessed: 21 October 2016). Fried, F.H & Jacobson, LLP 2012, Consultation on enhanced shareholder voting rights. 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Quinn, C & Michal, B 2016, Directors serving multiple corporate boards push trends in governance. Available at: http://www.law.virginia.edu/html/news/2016_spr/barzuza-curtis.htm (Accessed: 21 October 2016). Three models of corporate governance from developed capital markets 2009. Available at: http://www.emergingmarketsesg.net/esg/wp-content/uploads/2011/01/Three-Models-of-Corporate-Governance-January-2009.pdf (Accessed: 21 October 2016). Thomsen, S and Conyon, M 2012, Corporate Governance; Mechanisms and Systems, McGraw Hill. Volker, M 2008, Business basics - the board of directors. Available at: http://www.sfu.ca/~mvolker/biz/bod.htm (Accessed: 21 October 2016). Walker, J 2011, ‘Two strikes’ law for shareholders, but will it curb executive pay? Available at: http://theconversation.com/two-strikes-law-for-shareholders-but-will-it-curb-executive- pay-3912 (Accessed: 21 October 2016). Wetzstein, S 2012, ‘Globalising economic governance, political projects, and spatial Imaginaries: Insights from Four Australasian1Cities’. Geographical Research, vol. 51, no. 1), pp. 71–84. doi: 10.1111/j.1745-5871.2012.00768.x Read More