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Understanding Governance

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					Shareholder & stakeholder activism
(This is an abridged version of the full report (Issue 51) which is available for internal use within your company)

“Be alive in your power, develop a check-list of good corporate citizenship, attend general meetings, vote, understand your rights and obligations. My invitation to each of you, perhaps as a first step in your own shareholder activism, is to collaborate, to develop and publicize the checklist. It is the least you owe to yourself and future generations.”
Finance Minister Trevor Manuel
CGF Research Institute (Pty) Ltd Reg. No. 2004/000744/07 + 27 82 373 2249 + 27 11 476 8264 / 3013 tbooysen@cgf.co.za kstyane@cgf.co.za gmeyer@cgf.co.za

Executive summary Shareholder & stakeholder activism
(This is an abridged version of the full report (Issue 51) which is available for internal use within your company)

“Shareowners collectively have the power to direct the course of corporations. The potential impact of this power is staggering. Through shareowner action, economic wealth can either be created or destroyed.” www.calpers-governance.org

All CGF Research Institute (Pty) Ltd (“CGF”) rights are reserved. No part of CGF’s reports may be reproduced or transmitted in any form without the express permission of CGF. The information on the Corporate Governance Framework products, updates, stand alone features & the associated newsletters is intended to provide a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. CGF accepts no responsibility for loss arising from any action taken or not taken by anyone using the publications. The information contained therein does not necessarily reflect the opinion of CGF, or that of any of its associates.

One of the foundations of good corporate governance is the equitable treatment of shareholders
Shareholder treatment

• The equitable treatment of shareholders, particularly minority shareholders, is one of the most important aspects of corporate governance. This principle may be effected in one of two ways:
1. Indirectly: through the structures & practices established within the company to safeguard the interests of shareholders 2. Directly: in the manner by which shareholders are enfranchised by the company - to enable them to vote in an informed way & in terms of interest

• Company shareholders are entitled to expect company officers to apply guidelines, as articulated in the OECD principles, that support good governance, namely with fairness, transparency, accountability & responsibility • Active owners/investors should insist on the following key areas of performance from the companies in which they invest:
– communication & disclosure – financial & economic performance – effective leadership – respect for shareholders' rights – meeting stakeholder obligations – embracing the challenges of the business environment in which they operate

• Modern company laws oblige companies with a widely dispersed ownership to organize & invest in a meeting at least once a year
– whilst there has been debate regarding the value of shareholder meetings, more recently the international corporate governance discussion has highlighted the need to reform institutional shareholder meetings because shareholders serve as “watchdogs” to guard against misaligned company practices & poor governance

Shareholder activism consists of the shareholder’s use of dialogue, proposals & proxy votes to influence companies to act in a specified way
Shareholders & activism

• As the owners of publicly-traded companies, shareholders:
– have a material stake in the performance of a company – delegate the responsibility for taking care of their interests to a board of directors

• Shareholder activism means taking active ownership responsibility for the company in which you own shares through, inter alia; meaningful & open dialogue. Active ownership requires:
– careful monitoring of the company – accessing & assessing relevant information – engaging with the company by exercising shareholders powers & rights

• Shareholder activists range from the single share-owning activist to the powerful institutional investors, pension funds, unions, religious bodies, investment firms, universities & foundations • Corporate governance issues addressed by shareholder activists may include:
– financial performance (profitability) – social responsibility, including; environmental sustainability, human rights (worker rights) and safety & health – board composition & balance – diversity, employment equity / transformation

• Increasingly, directors are being brought to account for the corporate misdemeanors & failures by individual unit & / or policy holders • When shareholders believe the board is not acting in their best interests, they have 3 broad options:
1. to sell their shares; divesture 2. hold their shares & do nothing; hope that the necessary change will occur 3. hold their shares & express dissatisfaction through dialogue, proxy voting or filing of shareholder proposals; seek the necessary change that is required - i.e. shareholder activism – in extreme cases, the board could be removed

Shareholder activism can take many forms & can be extremely effective
Forms of shareholder activism

• Shareholder activism can take many forms including, but not limited to:
– evaluating AGMs (Annual General Meetings) & other meeting issues – attending & participating in the AGM by shareholders - both individuals & institutional – voting in a manner that ensures that companies are run by managers & directors in the best long-term interest of shareholders & key stakeholders – removal & replacement of the non-performing directors or even the entire board – research & dialogue with companies where governance issues, company strategy & social and environmental matters need effective resolution – disinvestment by shareholders from companies who fail to practice sound governance & sustainability activities

“It is essential that support be given to the development of these bodies [shareowner activists] as they will ensure the critical governance levels that will be necessary to attract foreign capital.” King II, 2002

Similarly, stakeholders are becoming more demanding of fair treatment . . .
Stakeholder treatment

• Corporate governance is seen to extend beyond the company’s own shareholders to include other key stakeholders affected by a company’s corporate behaviour, such as:
– creditors – employees – customers – the environment – the community at large – government – NGO’s

• Stakeholders around the world have become more demanding of companies to be transparent in their governance practices & reporting, particularly since the corporate collapses such as those of Enron (USA), WorldCom (USA), Parmalat, Macmed (SA), Tigon (SA), Regal Bank (SA), Leisurenet (SA)
– such lapses in corporate governance have highlighted the need for independent audits, independent opinions & independent ratings on corporate governance practices & processes within companies

• Communication with stakeholders must be open, transparent & balanced
– sub-standard communication, minimal disclosure or secrecy regarding the company’s actions, plans & results is generally considered to be poor governance practice

. . . stakeholders also have an ability to influence a company’s direction through their stakeholder activism mechanism
Stakeholders & activism

• As stakeholders become more aware of their rights, including their motivation to act against companies with poor / little and / or no regard for governance practices, they are becoming increasingly litigious against companies:
– in South Africa, King II encourages the introduction of the contingency fee system, where lawyers do not charge a fee, but share in the damages awarded – class action law suits will become more prevalent, particularly where a group of stakeholders sue a company under one action

• Other forms of stakeholder activism include:
– consumer boycotts of company products – consumer purchase patterns – pressure group activities highlighting poor performance – launching offences against the company & its management through the media – employee choice of employment – demonstrations – alternate “reporting”

• Corporate governance Codes which are made public, further heighten the awareness of stakeholders’ rights regarding the duties expected of public companies in particular, e.g.:
– Cadbury Report (UK): 1992 – King I (SA): Nov 1994 – Greenbury Report (UK): 1995 – Combined Code (UK): 1998 – Turnbull Report (UK): 1999 – King II (SA): 2002 – The Codex (German CG Code): 2002 – Protocol on Corporate Governance (SA): 2002 – Higgs & Smith Reports (UK): 2003 – PIC Codes (SA): 2007 – King III (SA): Dec 2008

How companies may respond to activism?
Typical actions & issues

• The company should ensure there is appropriate, timely, balanced & fair disclosure covering both financial & non-financial matters • There should be engagement & regular dialogue with shareholders. This would include:
– shareholder road shows, meetings with shareholders, understanding their expectations, etc. The most brutal form of shareholder activism is selling the company’s shares - appropriate dialogue can assist in minimising this

• The chairperson & directors must be appropriately briefed & well prepared ahead of the shareholder meeting with a full understanding of the AGM & company specific issues • It is important that the company’s board & key shareholders understand the relationship with their particular stakeholder groups
– boards that co-operate & engage with their stakeholders are likely to have a better understanding of the organization’s impacts on society & the environment

• To enhance & manage stakeholder relations, organizations should:
– identify stakeholder groupings – establish communication channels with stakeholder groupings – understand the impacts of its operations – establish a set of ethics & core values, together with principles & practices to support these values, principles & strategies should be communicated to shareholders & stakeholders – address the impact of its operations at both a strategic & operational level – continuously monitor & update strategies & programs – participate in broader initiatives that contribute to lowering negative impacts of business & to developing a more equitable society


				
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