The Rights of Shareholders - Assignment Example

Student Name: Tutor: Title: Final Assessment Course: Question one Shareholders have some rights at the AGM. AGMs provide a forum for reporting important company information, passage of crucial shareholder resolutions, as well as scrutiny of company directors. There are basic rights that are dedicated to shareholders regardless of a company being public or private. The rights of shareholders are based on their shares’ rights as defined by the articles of association of a company. Shareholders enjoy different rights accorded to different share categories possessed by the company (Lhuillery, 2011). All shareholders have a right to attend annual general meeting and make their voices heard. They can attend the meeting in person or using representatives. Each share except the preferred shares has a voting right. The shareholders have a right to ask any question during the AGM concerning matters affecting the management of the company. Any affected shareholder can bring an action in court to prevent any action that breaches the Memorandum of Association. The engagement and participation of shareholders within the company happens within the parameters of corporate governance of delegated authority. Shareholders have voting rights and they can decide who will be the directors of the company hence influencing the decisions or actions being made in the company. The shareholders can vote against some of the resolutions at the AGM until they are convinced they are for the good of the company and increasing shareholder return (Ackermann & Eden, 2011). The shareholders have delegated their authority to the executives but they have a say in the decisions being made at the annual general meetings. The shareholders pass resolutions at the general meeting through voting their shareholder capacity. The AGM give an opportunity for shareholders to exercise their ultimate control on the company and the manner in which it is managed. Ordinary resolutions are passed by shareholder with a simple majority of shareholders present through the show of hands. More than fifty percent votes have to be in favour of the proposal. Special resolutions must be voted by 75% of the shareholders present (Lhuillery, 2011). Special resolution is needed where it is stipulated in the company’s articles or statute. Shareholders can influence decisions by voting out a director from office who is not representing their interests. Shareholders can also authorize a service contractor in favour of a good director hence giving him job security for above two years. The shareholders have minimal powers over directors but they attend meetings and discuss the agenda of ensuring the directors do not go beyond their powers. The shareholders have to use their voting rights wisely to ensure that the resolutions passed at the annual general meeting increase the value of the shareholder and direct the growth of the company into the best course. The voices of the shareholders are heard through their voting patterns in approving resolutions. The shareholders have the power to replace the board members through voting. The shareholders can vote against remuneration reports that do not serve the interests of the company (Mallin & Melis, 2012). Analysis shows that many votes have been cast against remuneration reports by shareholders. Research has also shown that shareholders are giving companies yes votes where there is consistency and clarity in their approach as well as disclosures. Shareholders play a very vital role in the company’s governance. Question two The rights of shareholders with regard to remuneration reports vary in different countries like the UK, USA and Australia. In the United Kingdom, companies are needed to put their remuneration policy to shareholders at least once in three years and this is expected to happen more often where there is a change. When the remuneration policy is voted down, it is required that the company will revert to the previous policy. Some of the reasons for low support for companies include fixed remuneration increases, huge incentive payouts not supported by performance and inadequate disclosure surrounding Short-term incentives. In the United States, shareholders voice is also required at least once in three years. There should be a total disclosure of the annual compensation of the CEO compared to the median annual total compensation to all employees. The reporting requirement has little impact on the regulatory ramifications for Australia but it requires additional disclosures to shareholders and factored to be considered when voting against and for a company’s remuneration policy. Australian Prudential Authority has shown interest in influencing executive remuneration by constituting a committed team to tackle the issue. The authority is also proposing giving power to Board chairs to turn down bonus payments that are not justifiable (An, Davey & Eggleton, 2011). These rights are important for companies since they regulate how much compensation is given to the executive with regard to their performance. The companies can plan for long term and short term objectives while factoring in how much is owed to the executives. The shareholders benefit since they are able to monitor what is happen in the company and take part by voting down unfavourable remuneration reports. The voice of the shareholder can be heard and the executives make decisions with the welfare of the shareholder at the back of their minds. Question three Shareholder Association is concerned about the increasing application of qualitative hurdles in executive compensation because more executives will continue o draw large sums of payout in future. Prior to this, Commonwealth Bank (CBA) executives were measured against the total shareholder return as well as customer satisfaction hurdles for their long-term incentives. In the 2015/16 financial year CBA did not fulfil its total shareholder return hurdle as well as customer satisfaction hurdles for their long-term incentives. The total shareholder return has been watered down from the previous 75% to 50%. A new hurdle that measures progress in areas of inclusion and diversity, culture and sustainability will make up 25%. Such hurdles cannot change the behaviour of executives if there are no incentives that will make them to work as part of the company. The qualitative hurdles make it easier for executives to meet long-term incentive hence increasing the financial obligation to the company (Westphal Zajac, 2013). Increase use of the qualitative hurdle make it is easier for the board to control the payout to executives. CBA executives were previously measured against the total shareholder return. The qualitative hurdles are not accurately determined hence watering down the total shareholder return. The concern of the association of shareholders is that the CBA board has altered its bonus structure in order to make it easier for the executive to receive large payouts in future. According to agency theory, the executives are custodians of the shareholders interests should not control how much they receive in terms of payout. Whereas this changes show crucial sentiments in reality where the proposed hurdles are based on qualitative measures in the short-term incentives, there is a lot of flexibility in the interpretation that payment of bonus will be largely be in the hands of the board to decide. In agency theory it is believed that in modern corporations where share ownership is widely held, the actions by the management are geared towards maximizing the returns of shareholders. The owners or shareholders are regarded as principals while the managers are regarded as agents. The agency loss refers to the extent to which accredited to the residual claimants fall below what they should be if the principal exercised direct control of the company (Ackermann & Eden, 2011). Agency theory suggests ways of reducing agency loss and these include incentives schemes for managers which make sure they are rewarded financially for the purpose of maximizing the interests of the shareholder. Plans to have senior executives own shares in the company at a reduced cost are another way of aligning executives’ interests and those of the shareholders. In agency theory the interests of the shareholders need protection through separation of incumbency of roles of chief executive officer and board chair. The agency theory brings in checks and balances in organization governance (Van Puyvelde et al, 2012). The board should not have such leeway of controlling how much is paid out to executives in the future. The underlying perception in agency theory is that a rational actor will seek to maximize his utility using least expenditure. The change of the compensation structure is a problem that has to be resolved to ensure the executives are not serving their interests. Agency loss will be greater and the Shareholder Association has a reason to be concerned. Question four There is a challenge when directors sit on numerous boards. Findings indicate that the risk of noncompliance with governance practices escalates when directors sit on numerous boards. The directors have diverted attention hence bring into question how much time and resources do they dedicate to a particular company. The demands placed on such directors means that they have little to fulfill their fiduciary duties (Westphal Zajac, 2013). The directors will have to apportion their time among direct companies hence do not give their best in terms of management and governance practices. Corporate governance refers to the processes and structures by which a company is governed. The aim of good corporate governance is to boost confidence in listed companies, enhance the value for shareholders as well as safeguard financial strength. Using clear corporate governance, participants and shareholders on financial markets get to understand that decisions are taken on a rational basis, hence better decisions, and consequently higher value for the company. The directors in discharging of their duties are held accountable for any decisions they make by shareholders (Wagner Mainardes, Alves & Raposo, 2011). The shareholders are entitled to remove and appoint directors. The directors will have to skip some other companies’ meeting and attend others if they fall on the same day. There is a problem since the directors will have to catch up instead of participating directly in the decision making. The stakeholder theory refers to the composition of an organization as being a collection of various individual groups having different interests. These interests considered all together represent the will of the organization (Van Puyvelde et al, 2012). Consequently business decisions made in the organizations have to factor in the interests of the collective group and support overall cooperation. Many times conflict represents erosion of the interests. Sitting in numerous boards by directors can bring about this conflict. Regardless of the firm’s size or its ownership, it requires a structure in place for monitoring performance as well as planning for the future. It is important for an organization to apply one of the corporate governance theories as a model and its breakthrough can only depend on selecting the right model. Stewardship theory holders that managers can act as responsible stewards of assets they are in charge when left on their own. Stewardship theory make managers to be responsible in their action because have special interest to work for those who put them in charge (Westphal Zajac, 2013). It not easy to hold the directors accountable when they skip some meetings while attending others since they sit on numerous boards. The directors should have the interests of the company at heart. References Ackermann, F. and Eden, C 2011. Strategic management of stakeholders: Theory and practice. Long range planning, 44(3), pp.179-196. An, Y., Davey, H. and Eggleton, IR., 2011. Towards a comprehensive theoretical framework for voluntary IC disclosure. Journal of Intellectual Capital, 12(4), pp.571-585. Lhuillery, S 2011. The impact of corporate governance practices on R&D efforts: a look at shareholders’ rights, cross-listing, and control pyramid, Industrial and Corporate Change, 20(5), pp.1475-1513. Mallin, C. and Melis, A 2012. Shareholder rights, shareholder voting, and corporate performance. Journal of Management and Governance, 16(2), pp.171-176. Van Puyvelde, S., Caers, R., Du Bois, C. and Jegers, M 2012. The governance of nonprofit organizations integrating agency theory with stakeholder and stewardship theories. Nonprofit and Voluntary Sector Quarterly, 41(3), pp.431-451. Wagner Mainardes, E., Alves, H. and Raposo, M 2011. Stakeholder theory: issues to resolve. Management Decision, 49(2), pp.226-252. Westphal, J.D. and Zajac, EJ 2013. A behavioral theory of corporate governance: Explicating the mechanisms of socially situated and socially constituted agency. The Academy of Management Annals, 7(1), pp.607-661. Read More