Profiling the Corporate Structure - Essay Example

?Table of Contents Core operating activities 2 Current investment assets/ projects 3 Current financial structure 4 Management Structure 5 Future Investment Opportunities 7 Potential Agency Problem 7 Question 4 9 Question 5 10 Question 6 & 7 12 Systematic (market wide and industry wide) risks: 12 Unsystematic (market wide and industry wide) risks: 12 Section A: Profiling the corporate structure, and discussing the agency problems Core operating activities AMP Limited is a financial corporation based in Australia, New Zealand. It started its operation in 1849 as the Australian Mutual Provident Society. It was a non-profit organization which worked as a life insurance provider. The major twist came when AMP demutualized in 1998 and got listed in Australia and New Zealand stock exchanges. During which the share holders received 1.6 millionshares. Amp Limited demerged itself from Henderson Group plc in 2003 which was done on regional basis where AMP was based in Australia; The Henderson group took the hold of UK. AMP Limited’s financial data of 2011 shows that the company has 949,037 shareholders with a total share capital of 2,854,672,784 ordinary shares. The total number of Employees that work under the banner of AMP Limited is 6000, with 4131 employed and self-employed planners and has relationship with 6,000 independent financial planners. The company has two major business units, the first works under the name of AMP Financial Services where 4100 aligned and employed planners provide services regarding income protection, disability and life insurance, superannuation and superannuation services for business, retirement income, selected banking products and financial advices to its customers based in Australia and New Zealand. The second unit AMP Capital is diversified investment managers, who invest in fixed interest, property, diversified funds, equities and infrastructure. Currently they are managing $123 billion in assets for those who believe in AMP Capital and their strategies of creating wealth for their clients. The growth is on going with emergence into different countries worldwide. The merger between AMP with AXA Asia Pacific Holding in 2011 gave a boost to the growth of AMP Limited as being the strongest business of Australia and New Zealand enhancing their services while it creates a competitive force in the financial sector. Current investment assets/ projects The investment in AXA Pacific Holding has proved to be a strong policy for the company’s future growth as the merger has increased sales, company has become more competitive and an expanding advisory force. Based on financial report the company maintains its payout ratio of 75 to 85 percent by announcing a dividend of 14 cents per share for the year 2011. However the net profit attributable to shareholder of the company declined by 11% and reached $688 million compared to $775 million in 2010. The underlying profit shows 20% increase of $909 million than previous year, as the 9 months contribution from AXA Asia Pacific Holding has been included in 2011 financial results. The decline in the Net Profit was due to the cost of merger of AXA as the cost of transaction was $222 million and the negative movements of investments in market which had a cost of $50 million. The overall gain on the investment in 2011 was $1,464 million which was 69% lower than the previous year. The total investment assets the company owned in 2011 were $96,972 million compared to investment assets of 2010 which accounted to $85,120 million; there was an increase of 13% in AMP’s investment assets. The company also gained $3 million from exchange differences on translation of foreign operation in 2011, where in 2010 there was a loss of $21 million under exchange losses. The assets of the AMP under management increased by $44 billion being $115 billion in 2010 reached $159 billion by December 2011, there was an increase of 38% in its total assets smoothing the base of the company further, giving a firmness to its future activities and supporting its growth, so that AMP can become Australia and New Zealand’s strongest competitive financial services organization. Current financial structure The AMP Limited moves firmly towards financial stability even during the time of falling investment markets, which was faced during 2011. The company kept on maintaining its strong capital position which was $1.5 billion surplus capital which was above the regulatory requirements minimum level. The equity and reserves jumped to $6,829 million in 2011 from $2,938 million in the corresponding period last year. The growth was impressive with a 113% boost in equity and reserves of the AMP group attributable to the shareholders. The unusual growth was due to the addition in the share capital issued due to the merger with the AXA Australian and New Zealand businesses. It is also a result of the new strategy adopted by AMP Limited of Dividend Reinvestment Plan and profits as the payout ratio which was 75% to 85% had been revised to 70% to 80% as the company plans to focus on the future growth. This will show more improved position of capital as post merger the demand for capital intensive product and increment in the regulatory capital requirement is anticipated. The total liabilities the company had, have increased from $88,607 million in 2010 to $ 103,393, the posted increase was of 16%, and the major role played in the increment of liabilities was of investment contract liabilities which increased by 8% in 2011, and life insurance contract liabilities which increased by 38% in 2011 compared to 2010. The debt to equity ratio which shows a company’s financial position and the financial risk shows that the total assets AMP Limited had is $110,290 million and the total liabilities is $ 103,393 million which makes the ration to 1 : 0.93. Where for each liability the company owes it has 0.93 assets it owns. Making the financial position risky as AMP Limited works in a financial service sector where D/E ratio commonly is 1:2 which shows a smooth position of the company making AMP risky for investment purposes. The major borrowings were from AMP Bank and securitization trusts which were of $9,277 million of this balance $4,204 million is expected to be settled after the 12 months of the reporting date. Management Structure The management structure consists of Peter Mason (Chairman), who was appointed in AMP Limited Board in October 2003, and started his chairmanship in September 2005. His studies include, BCom (Hons), MBA, Hon.Dbus (UNSW), FAICD. Investment banking experience of 40 years, Peter Mason at the age of 65 is the senior advisor to UBS investment bank. He had an experience of 5 years at JP Morgan Chase Bank in Australia. He contributed 12 years to the children hospital which made him get appointed as a member of Order of Australia in 1995. Craig Dunn the Chief Executive Officer and Managing Director of AMP Limited had completed BCom and FCA. He was appointed as CEO and MD in January 2008, but has been a director since 2002. He joined the organization in 2000 and since then has served as CEO, MD and director, with a past experience of being a CEO in a Malaysia based insurance company. Patricia (Patty) Akopiantz was appointed as a director of AMP Bank in November 2011, while was appointed on the AMP board of People and Remuneration Committee in March 2011. She has done her BA and MBA and has over 25 years of senior management and consultancy experience in retail and consumer industries in Australia and overseas. Richard (Rick) Allert AO is FCA and a director of AMP Limited Board and the Audit Committee since March 2011. 40 years of experience of senior business appointments with appointment in Order of Australia for serving business community in 1997 and centenary Medal in 2003 for services through rail transport, he was re-appointed in Order of Australia in 2007 for his services. Catherine Brenner BEc, LLB, MBA a director at AMP Limited Board since June 2010, she is a member of Diversity Advisor Committee. She was appointed on the board of AMP Life in May 2009 and became Chairman in May 2011. She is now a member and former Chairman to AMP Life Audit Committee. She was worked as a Managing Director at ABN AMRO, prior to which she was a corporate lawyer. Brian Clark director since 2008 is a member of Nomination Committee, Diversity Advisory Committee and People Remuneration Committee. He has done his DSc and Advance Management Program from Harvard Business school and has 10 year experience at senior executive roles at Vodafone internationally and recently in UK as group Human Resource Director. He has 3 years experience as CEO of Telkom SA Ltd in South Africa. Paul Fegan is a director since 2009 has completed his MBA and has an experience of 30 years in financial service industry. He has worked as a CEO at St George Bank and as group Managing Director, Strategy and corporate services with Telstra. He was appointed to AMP Bank Board in April 2010, was also appointed in the Audit Committee in 2009 and became its Chairman in 2010. John Palmer ONZM has a vast experience of director and chairman of companies in agricultural and finance sectors. He received the bledisloe Cup in 1998 for outstanding contribution to the New Zealand fruit industry. In 1999 he was awarded the order of merit (ONZM). He has done BAgrSc and FNZID. Dr Nora Scheinkestel is LLB (Hons), PhD, FAICD and was appointed on the board in 2003 being the director of AMP Bank Limited and AMP Capital Holdings Limited and is a member of their committees. She is also the Chairman of Diversity Advisory Committee and nomination Committee. With a vast experience and services in the field she was awarded a Centenary Medal for services in business leadership in Australian Society. Professor Peter Shergold AC was appointed in May 2008 he is the member of the Audit and Diversity Advisory Committee and is also a member of AMP life. He has served as a secretary of department of Prime minister and cabinet for 5 years. He was appointed as a member of order of Australia in 1996 and received centenary medal in 2003. Future Investment Opportunities A business association with Mitsubishi UFJ Trust and Banking Corporation (MUTB) which included the sale to MUTB of a 15% interest in AMP Capital Holdings limited this will give a further boost to the growth of AMP Limited and its strategies. Potential Agency Problem Agency problem is a common problem that occurs in an organization. It is between the management (authority) and the shareholders (principle), it is the disagreement between the two parties over simple matter or can even take place for the matters where benefits are involved. When the management decides to invest in growth and share holders prefer their higher return on investment. AMP Limited has high possibilities of agency problem. The company is highly focusing on the growth of the organization by merging with the AXA’s Australian and New Zealand business the future growth is expected but decreasing the dividend ratio from 75% -85% to 70%-80% might create a negativity for the company shareholder as the return over their investments have fallen significantly, shareholder might find other shares more attractive which are paying higher returns on their investments. The fall in profits due to merger, as the cost is included in the financial statement of 2011 as net profit attributable to shareholders has fallen by 11% this year which may make AMP unattractive to shareholders. AMP might losetheir shareholders to competitors and might face negative volatility in the stock market which may bring down there share prices and create a negative impact on the AMP Limited’s ratings. Agency problems bring with it agency cost for AMP Limited as it is the internal cost incurred due to conflicts between the principle and the authority. Monitoring cost is incurred because of the shareholders, which is the result of conflicts, separation of ownership, control. This can be created in AMP Limited due to change in strategies which might lead shareholder to acquire board meetings, and using different measures to reduce the value of firm. Bonding Cost of AMP which is incurred by agents may rise when their priority become increase in their wealth and position rather than company or shareholder. May lead them to take decisionsregarding their benefits for the organization. (Section B) Question 4 The returns graph of AMP plotted against the returns of market benchmark S&P-ASX200 is shown below for period 1, representing the performance of AMP in the market during the period 31st Dec 2007- 30th Nov 2009. Period 2 is from Dec 2009 to 30th Nov 2011. Company based events Market based events The return table for these graphs is in Appendix 1 & 2 Question 5 The returns graph of AMP shows that the company was under stress due to global financial meltdown, following the trend of financial markets. The global financial crisis was made known by the world media in September 2008, with the failure and merging of several American banking and financial companies (Hinton, 2009). Although the company did well in managing the overall impact on the company’s performance as compared to the conditions at that time. The company has been pulling back some capital to maintain its liquidity status & client’s trust, justified by the under-valuation and performance of the script. Such a stance of pulling back capital was necessary to avoid high vulnerability due to extremely volatile and unpredictable market. As seen in the graph, AMP volatile movement was the result of market volatility. The market kept on changing gears and at every point speculations kept on swirling the market, justified by the continuous downward spikes and some peeks in the graph. It should be noted that despite the market’s tricky performance, AMP didn’t hesitated to take its chances and tried consistently to gain position in the market, while it was falling, where at times it lost few profits and gained some, due to speculations of majority of investors not letting the market follow fundamentals. But still, AMP has managed to deliver solid results and did not suffer major setbacks because of the GFC. The AMP Financial Services report 2008 3Q financial review stated that AMP AFS Contemporary Wealth Management (CWM) average Asset under Management (AUM) was $51.3 billion in Q3 2008 compared to $55.8 billion in the previous corresponding quarter. AMP Capital Investors (AMPCI) average AUM was $101.5 billion in Q3 2008, compared to $111.8 billion in the previous corresponding quarter. This decline is mainly attributable to the investment market downturn since Q3 2007.ANZ. The recovery phase from the global financial crisis, which lasted from September 2008 to September 2009, finally started and the markets began to stabilize. This is noticeable in the Period 2 return graphs for both AMP and the market index. From the share price data provided and return graphs in Appendix 1, it can be noted that share prices drops and gains for both AMP and S&P-ASX200 were in varying proportion during Period 1 as markets were unstable, investors were cautious and trends were unpredictable. Question 6 & 7 Some of the company’s systematic and unsystematic risks identified for both periods are as under Systematic (market wide and industry wide) risks: Global Financial risk is one of the major factors which unfolded on each and every economy, some were dealt with badly and some rarely escaped major losses. It was making of the all evils, it happened due to easy financing and credit lending to almost each and every entity out there and fore most the financial markets out smarted themselves by innovating on the credit lending and converting them to credit securities. Knowing that it once resulted in the sub-prime losses, (history should be remembered) and it might create havoc again, the institutions responsible for controlling it kept on repeating the mistake(and hence history), resulting in a worse credit crunch ever. (financial Risk factor) Banking Sector got the worst hit ever and some banks were on the verge of default. Lehman Brothers Holdings Inc. is one of the examples. Such incidents were enough to shake investor’s confidence. (financial Risk Factor) Shares have had falls from their highs last year(2007) of 19% inthe US, 25% in Europe, 33% in Japan, 25% in Asia ex Japan, 21% in emerging markets and so, 24% in Australia.(Oliver’s insight, 2008) (Financial Risk factor). Unsystematic (market wide and industry wide) risks: Read More