Governance in a Globalizing World - Assignment Example

GOVERNANCE IN A GLOBALIZING WORLD Student’s name Professor’s name Course title Date Question One Shareholders have rights at the AGM. What are they? How can they influence company activities or decisions? It is through the Annual General Meeting that the shareholders appoint both the management and the company auditors who are watchdogs. Shareholders have rights at the Annual General meeting (AGM) which include the right to vote, which is one of the most important rights. Shareholders have the power to appoint and dismiss the management because at times they lack faith in the management regarding the ability of the management to represent their interests (Shareholders) or their own interests (Management), contrary to the Stewardship theory which beliefs that left on their own, management will always act to the best interest of the shareholders (Schlueter, 2007). Additionally, mostly, the management pay themselves hefty allowances which might not be justified by the performance of the company, thereby going against the socio economic theory. Therefore, the only tool the shareholders have to safeguard their assets is through voting An example that demonstrates the right to vote is in relation to the case of Mr Murray, who was the chairman of Metcash (IS IT TIME FOR METCASH CHAIRMAN ROB MURRAY TO RESIGN?, 2016) . Having been previously the chairman of Dick Smith at its collapse and later appointed to be the Chairman of Metcash, shareholders felt he should be changed (IS IT TIME FOR METCASH CHAIRMAN ROB MURRAY TO RESIGN?, 2016) . However, though he himself never wanted to resign, the shareholders wanted him to resign and the only way this could be done was to enable the shareholders vote in an Annual General Meeting (AGM) and decide whether Murray was going to be appointed back or not. This clearly demonstrates how shareholders can exercise their right to vote and influence company decisions and activities. How they affect company activities and decisions Voting is a very powerful right. Through voting, the management structure can change (Brennan, 2010). However, not all members of the management who have been appointed have the interests of the shareholders at heart. Others aim at setting themselves at the helm of management with the aim of enriching themselves (PricewaterhouseCoopers, 2015). In the case of Metcash, the shareholders, through voting can decide in the AGM not to appoint back Mr Murray. This would therefore mean another person will be appointed in as the chairman of Metcash to replace Mr Murray. If the incoming chairman again doesn’t serve to the expectation of the shareholders, the only way change can be made is through voting in an AGM to appoint another person. This therefore shows how voting influences company decisions and activities Question Two 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? Australia In most western nations, executive compensation has been a bone of contention for long. However, with an aim to cut down and reduce executive compensation, Australia introduced new laws and regulations governing executive compensation (Monem and Ng, 2013). According to the new legislation, if the remuneration report of a particular firm receives a proportion of dissent votes of 25% or more from exactly two consecutive years, the board of directors with the exception of the CEO may be re-elected by the shareholders (Business Council of Australia, 2004). Therefore currently, in Australia shareholders, under the new legislation have a unique right to vote and reject remuneration report unlike previously where their vote did not carry any form of consequence (Australian Shareholders’Association Limited 2016a). UK For more than a decade, executive compensation in the UK has attracted a lot of attention from media, scholars and other practioners regarding the hefty allowances and pay executives receive (McGuire, 2012). In the UK, a proposal was made to change how executive remuneration is determined (McGuire, 2012). Currently, therefore, in the UK, shareholders‘ voting rights have been strongly enhanced and shareholders have therefore been given more powers through the use of binding votes in order to enable them to hold companies’ management responsible for their own actions (McGuire, 2012). Additionally, shareholders have the power, through voting to ensure establishment of transparent remuneration reports and to ensure that executive remuneration is performance based. Therefore, in UK, shareholders have a right to determine executive remuneration through voting at an AGM (Australian Shareholders’Association Limited 2016a). USA Remuneration to executives in the USA has been also a bone of contention. This, has however resulted in numerous proposals being made in relation to shareholders involvement if executive pay determination. In the USA, shareholders, trough binding votes in an AGM, have a right to determine executive pay and criticize the remuneration report (Kimbro and Xu, 2016). Additionally, according to Kimbro and Xu (2016), shareholders have a right to make management accountable for unapproved payments. Importance of these rights for companies and shareholders These rights are important to both the company and the shareholders because to the shareholders, it enhances accountability and transparency. On the other hand, to the company, it results to growth and the consequent achievement of set objectives (Australian Shareholders’Association Limited 2016b). Through transparency and accountability, the company is able to improve on its value ad attract more investors. Question Three 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? Australian Shareholders Association (ASA), being the biggest not-for profit making organization in Australia is mandated to ensure that the rights of the shareholders are observed and that their interests are well represented (Business Council of Australia, 2004). In relation to compensation, every organization should establish and implement an adequate compensation policy to be a guide in compensation matters to all employees including the management. Mostly, all financial benefits and rewards to employees should be highly encouraged, but of importance is that is must be performance based. Most companies have resorted to the use of qualitative hurdles in order to determine executive compensation (Australian Shareholders’Association Limited 2016b). Most companies have changed their remuneration structure to a system which allows executives’ pay themselves hefty allowances. For example, there is a case relating to the Commonwealth Bank of Australia (CBA) where it is claimed that the CEO, Mr. Ian Narev received more than $ 12.3 million at the end of the year (Australian Shareholders‘ Association, 2016). According to the media report, it is claimed that more than half the amount paid was a result of vesting of previous long incentive awards (Australian Shareholders‘ Association, 2016). It is therefore an indication that the CEO was paid very huge allowances. Therefore, one of the reasons the Australian Shareholders’ Association have raised concern regarding the increasing use of qualitative hurdles in determining executive compensation is because it leads to overpayment of executive allowances (Australian Shareholders’Association Limited 2016a). Whether such hurdle will change executive behaviour Ideally, executive compensation should be measured against customer satisfaction and the returns from the shareholders, commonly refered to as Total Shareholder’s Return (TSR) which is qualitative hurdles (Australian Shareholders‘ Association, 2016). However, it is hard to ascertain and value whether a certain qualitative hurdle meets a specified set criteria. Therefore, the concern is about how certain qualitative hurdles set by an organization can be measured. In my opinion, when such qualitative huddles are used in determining executive compensation, the behaviour of management will change in terms of their management techniques (Australian Shareholders’Association Limited 2016a). The use of such techniques will foster transparency and accountability because payment will be performance based. Similarly, management might be forced to act in ways that impress the shareholders in order to create an impression that they are hardworking thereby justifying why they should be paid more (Australian Shareholders’Association Limited 2016b). Question Four Directors sit on numerous boards. Is this a problem? Why or why not? Discuss A company ventures into business with an aim of making profits which is in line with the profit maximization principle which states that companies should always aim at making profits inorder to increase shareholder value (Brammer, Jackson, and Matten, 2011). Shareholders, being the real owners of accompany, should have their interests well represented by the management, who are the agents (Parkes, 2015). Shareholders, being the principals, are entitled to various rights, ranging from the right to vote in an AGM appointing and dismissing the management. Therefore, the management has a full responsibility of acting in the best interest of the shareholders who are the real owners of the company. However, most often, the management fails to act to the best interest of the shareholders, but rather act to their own interest which is contrary to the stewardship theory. The stewardship theory which states that left on their own, management will act in the best interest of the shareholders. This therefore leads to a problem, known as an agency problem. The agency theory states that the agency problem arises in instances where the management who are the agents fails to represent the best interests of the shareholders who are the principals (Schlueter, 2007) The directors, being part of the management have a duty to manage the resources of the shareholders (Parkes, 2015). Therefore, in order to properly execute the responsibility of management, the management has to sit in various boards that enable them to strategically execute company operations. In those boards, the directors are entitled to allowances provide for in the articles of association (PricewaterhouseCoopers, 2015). The article of association stipulates the number of times the directors meet in boards together with the allowances they are entitled to. One of the problems that mostly arise is that directors most often pay themselves hefty allowances which go beyond the amount they are entitled to, and in most cases, accounting of such amounts of money is not done which is an act of mismanaging shareholder resources. Therefore, on the question of whether directors should meet on numerous boards, my opinion is yes, only and only if the number of times they meet have been stipulated in the articles of association (Australian Shareholders’Association Limited 2016a). Additionally, the meetings should be done with the aim of representing the best interests of the shareholders. Further, the boards should be done within the frameworks of the articles of association and in accordance with the policy of the organization Bibliography Australian Shareholders‘ Association 2016, Our latest media release: ASA concerned re non-performance hurdles in remuneration structures. Retrieved 22nd Oct. 2016 from https://www.australianshareholders.com.au/news/our-latest-media-release-asa-concerned-re-non-performance-hurdles-remuneration-structures Australian Shareholders’Association Limited 2016a, ASA questions increasing use of qualitative hurdles in executive remuneration structures. Retrieved 22nd Oct. 2016 from 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 Australian Shareholders’Association Limited 2016b,  Is it time for metcash chairman rob murray to resign? Retrieved 22nd Oct. 2016 from https://www.australianshareholders.com.au/sites/default/files/media-releases/is_it_time_for_metcash_chairman_rob_murray_to_resign_13_july_2016.pdf Brammer, S., Jackson, G and Matten, D 2011, ‘Corporate social responsibility and institutional theory: New perspectives on private governance’, Socio-Economic Review, vol. 10, no. 1, pp. 3–28. Brennan, D 2010, corporate social responsibility: The corporate governance of the 21st century. Edited by Ramon Mullerat. 2nd edn. Netherlands: Kluwer Law International. Business Council of Australia 2004, Executive Remuneration. Retrieved 22nd Oct. 2016 from http://www.bca.com.au/docs/729E26F2-B737-48C0-8404-09475003F0F6/executive_remuneration_position_paper_final_24-6-2004.pdf Kimbro, M.B and Xu, D 2016, ‘Shareholders have a say in executive compensation: Evidence from say-on-pay in the United States’, Journal of Accounting and Public Policy, vol. 35, no. 1, pp. 19–42. McGuire, N 2012, Executive remuneration reform in the UK - publications - be informed. Retrieved 22nd Oct. 2016 from http://www.minterellison.com/publications/executive-remuneration-reform-in-the-uk/ Monem, R. and Ng, C 2013, ‘Australia’s “two-strike” rule and the pay-performance link: Are shareholders judicious?’ Journal of Contemporary Accounting & Economics, vol. 9, no. 2, pp. 237–254. Parkes, A 2015, ‘Lean Management genesis / Geneza Lean Management’, Management, vol. 92, no. 2, pp. 84–92. PricewaterhouseCoopers 2015, Are companies finding it more difficult to get a yes vote? Retrieved 22nd Oct. 2016 from https://www.pwc.com.au/consulting/assets/publications/ten-minutes-agm-season-feb16.pdf Schlueter, J 2007, ‘Beyond reform: Agency “after theory’, Feminist Theory, vol. 8, no. 3, pp. 315–332. Read More