Governance in a Globalizing World - Essay Example

GOVERNANCE IN A GLOBALIZING WORLD By Name Name of Class Name of Professor Institution Affiliation City and State Date Governance in a Globalizing World There is a need for shareholders to play an active part in exercising their rights as companies’ owners. Shareholders can bring to task the company directors if they see that the business is not actually being operated in the company’s best interests. By actively participating, shareholders encourage transparency, integrity and, most importantly, accountability of the board which promotes good corporate governance. For instance, there is a mounting concern by Australian Shareholders’ Association (ASA) with the growing number of corporations that have introduced qualitative and non-financial performance targets in their executive compensation structures. This can be highlighted by the $12.3 million that was received by Commonwealth Bank (CBA) CEO, Ian Narev (Australian Shareholders’ Association 2016, par.2). More than 50% of this amount came from vesting earlier long-term incentive awards. The bigger concern by ASA is the restructuring of the bonus packages by the CBA Board, which has made it quite easier for CBA executives and directors to continue receiving huge payments in the future. CBA previously used to measure executives’ payouts against the total shareholder return as well as customer satisfaction goals for their long-term incentives (Australian Shareholders’ Association 2016, par.2-4). The relationship between shareholders and board members can best be described by agency theory. The agency theory explains the existing relationship between the principals and agents in business and focuses on addressing problems, which may arise in the agency relationships as a result of unaligned objectives or different views of risk. ASA has brought up the question of whether Rob Murray, Metcash Chairman, should resign or at least seek re-election at the company’s annual general meeting. The concerns about Mr. Murray revolved around his ability to deliver in his role as the company’s chairperson given that, at the time of Dick Smith’s collapse, he was its chairperson (Australian Shareholders’ Association 2016, par.2). To make the situation worse, the receiver of Dick Smith, Ferrier Hodgson, revealed that Mr. Murray was among ten former Dick Smith’s managers and directors who were supposed to be cross-examined in the New South Wales Supreme Court. While a report released did not point fingers to the former executives and directors of Dick Smith, ASA believes that it is important for Mr. Murray to either resign from his role as Metcash’s Chairman or seek re-election at the coming AGM. ASA holds that when cross-examining directors of listed companies, the performance and behaviour of other companies that they are involved with play an important part. For many years, ASA has called for the boards of listed firms to take accountability in such circumstances because the directors are elected by the shareholders so as to protect their investments, rights, and interests and this protection ultimately falls on the Chairman. When Mr. Murray became Metcash’s chairperson, he stated that an effective chairperson must always take responsibility for the company’s results, including its strategy (Australian Shareholders’ Association 2016, par.5). If he chooses not to resign, good corporate governance would at least require him to seek re-election at the company and allow Metcash’s shareholders to make a decision. Historically, the power of decision-making of a company always lies with its shareholders mainly during the annual general meeting of the company. However, this can only be possible in small companies that have few shareholders who may often double as directors. In big organizations, it is not practical and is even impossible for many shareholders to not only operate but also manage the many functions and responsibilities of a company. Therefore, shareholders are not able to control the directors directly. Instead, they operate indirectly by acting together during the companies’ general meeting by choosing to re-elect or vote out the directors. The law gives the shareholders several basic rights related to general meetings, including the right to demand and convene general meetings, appoint proxies and speak at the general meetings, vote at the general meetings, and access to information such as register of the directors and their shareholdings, and the booklet containing minutes of the general meetings. Copies of audited financial reports must also be given to shareholders at least two weeks before the meeting. Media coverage seems to suggest that the recent annual general meetings for companies have been quite bruising, with deeper analysis showing that was an increase in the percentage of votes that were cast against remuneration reports for companies which were nearly a third of ASX200 compared to the previous year (PwC 2015, par.1). However, almost 50% of companies got a vote within 1% of their previous year vote, while a further 25% decreased the percentage of votes that were cast against their individual remuneration reports. This trend may not indicate dissatisfaction with the current remuneration approaches. Rather, the shareholders seem to highlight the need to have continuous improvement of the companies’ fundamentals, backed by transparent disclosures as well as effective communication. Seven organizations in the ASX200 got strikes on their individual annual remuneration report (PwC 2015, par.2). So far, there is no company within the ASX200 that has recorded second strike. The median percentage of the votes that were cast against remuneration reports in the ASX200 stands at 2.8% compared to 2.4% in 2014 (PwC 2015, par.2). The increase in the percentage of votes cast against the remuneration reports can, partly, be attributed to the determination of shareholders to make their own decision on remuneration voting results willingly instead of merely deferring the responsibility to other people. This has resulted in an apparently more ‘active’ voting pattern this season. The areas of great concern for continuous improvement that were highlighted in the voting outcomes included poor disclosure of the short-term incentives, insufficient long-term incentive performance hurdles, and addressing the relationship between compensation and performance (PwC 2015). Results also show that shareholders tend to reward organizations with yes votes for their consistency and clarity in their approaches and disclosures. Companies in the UK are required to give their remuneration policy reports to their shareholders once at least every three years, although it could be more frequent whenever a change occurs in the company. If shareholders vote down remuneration policy, the company will have to revert to the earlier approved remuneration policy (PwC 2015). UK FTSE100 had some similarities to Australia in that the median percentage of votes cast in support for the remuneration policies by shareholders was 96%. Common reasons for lower support for the remuneration policies for companies included considerable fixed remuneration increases, huge incentive payouts not justified by performance and insufficient disclosures of short-term incentives. Important reporting developments included enhanced quality of retroactive disclosure of short-term incentives and increase in long-term incentive measures, whereby more than half have three measures. Another important development included an increase in post-vesting holding locks, where around 50% of organizations operate a five-year period between grant dates and release of awards (PwC 2015). The US which has a ‘say on pay’ policy also requires shareholders to vote at least once in every three years and has adopted another rule that requires the disclosure of annual total compensation of CEOs which is compared to the median yearly total remuneration of all the staffs. Although the reporting requisite may less likely have regulatory impacts for Australia, it may possibly make shareholders to demand more disclosures in voting in favour of or against an organization’s remuneration structure. Various companies have received strikes where more than a quarter of shareholders voted against the companies’ annual remuneration reports. Examples of these companies include AusNet (41%), Ansell (33%), ALS (27%), Downer EDI (27%), Liquefied Natural Gas (34%), Premier Investments (34%), and Village Roadshow (32%) (PwC 2015). A second strike can trigger a vote on the board spill in which all board members can be replaced and shareholders can pass a spill resolution if at least 50% of the shareholders cast their vote in favour of the resolution. While there has not been any second strike in the ASX200, this reporting season, UGL, which is not within the ASX200 received a second strike though it managed to avoid a board spill (PwC 2015). Observations from annual general meetings have so far showed that almost 30% of organizations experienced a rise in votes cast against their remuneration reports relative to the past year. Among the companies which experienced a rise in the no votes, about 40% of recorded a vote against their remuneration reports of below 5% while nearly two-thirds recorded a vote against of below 10%. This brings the net effect of the median vote cast against remuneration reports to 2.73% (PwC 2015). For companies that showed a substantial improvement in voting in favour of their annual remuneration reports elicited mixed reasons. Major themes included sensible approaches to remuneration structures. Companies that were able to improve their remuneration report votes largely showed restraints in adopting fixed pay raises with clearly expressed rationale wherever this was applied. These companies also implemented structural changes so as to be in line with long-term focus as well as market norms (PwC 2015). Companies that received a strike during the previous year introduced various structural changes including short-term claw-back, deferral, compulsory holding locks, and removing discretionary performance measures. Generally, this had a positive effect on the voting patterns of shareholders in support of remuneration reports. Improved disclosures also showed how reward is aligned to performance and companies which received a strike or recorded considerable increase in the no votes responded by focusing on improving the disclosure of their remuneration strategies and structure, particularly their short-term incentive plans. There is also the subject of ‘over-boarded’ directors, whereby directors serve on boards of different companies, which has elicited different debates. The issue is of great importance given that board of directors plays a key role in overseeing the operations of companies, and directors wield power to hire or fire the CEO and help to oversee the company’s long-term strategy. Findings by Fich and Shivdasani (2006, p.689) showed that organizations that had busy boards, in which most of directors hold more than directorships positions, had less market-to-book ratios, lower profitability, as well as less sensitivity of the CEO’s turnover to the organization’s performance. CEOs of organizations with busy directors are also paid excessively, which suggests that busy boards are less likely to monitor management effectively (Core, Holthausen & Larcker 1999, p.371). Sitting on many boards may also make it hard for directors to prepare adequately for meetings and bring the senior management to task regarding the business operations and policies. It is therefore, recommended that limitations should be put in place with regard to the number of boards that directors can be allowed to serve. Bibliography Australian Shareholders’ Association, July 2016. Is It Time For Metcash Chairman Rob Murray To Resign? Australian Shareholders’ Association Limited, Media Release. Australian Shareholders’ Association, September 2016. ASA questions increasing use of qualitative hurdles in executive remuneration structures. Australian Shareholders’ Association Limited, Media Release. Core, J., Holthausen, R., Larcker, D., 1999. Corporate governance, chief executive officer compensation, and firm performance. Journal of Financial Economics 51, 371-406. Fich, E., Shivdasani, A., 2006. Are busy boards effective monitors? Journal of Finance 61, 689-724. PwC 2015. Annual General Meeting season - Remuneration report voting outcomes 2015. Read More