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Understanding Shareholder Relations: Key Issues and Relationships

Explore the intricate dynamics between shareholders and boards, types of shareholders, and their expectations. Dive into the nature of relationships, communication strategies, and shareholders' rights in the corporate world.

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Understanding Shareholder Relations: Key Issues and Relationships

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  1. The Board & Shareholders Their relationship and attendant issues

  2. Nature of Relationship • Shareholders are the owners, but directors’ duties are to the company – not to any particular class of stakeholders. • While directors’ duties are to the company, it cannot be ignored that shareholders are the owners of the company.

  3. Types of Shareholders • Institutional shareholders • Small private shareholders • Large private shareholders • Corporate Shareholders

  4. Institutional Shareholders • Mutual funds • Pension Funds • Insurance Companies • Investment institutions • In UK, it is believed that institutional shareholders hold, on an overall basis, a majority of shares of all listed companies.

  5. Institutional Investors Perspective • Long term interest in share value growth • Current returns are still important • They have the power and ability to influence Boards • But do they have the time to pay attention to every single company • Monitoring systems for danger signals

  6. Small Private Shareholders • Individuals • Only interest in share price change • No long term interest • Only a little interest in earnings • Reactive buyers/sellers • Biggest losers when things go bad • No influence over Boards

  7. Large Private Shareholders • Individuals (but may be acting through trusts, private limited companies, etc.) • Have long term interest in the company • May have great influence on the company • May provide bulk of executive directors • In Pakistan, these people are the focus of corporate governance endeavors.

  8. Corporate Shareholders • Group, or holding companies. • Differ from institutional investors. • Have a long term interest in the company. • Can influence the Board most. • Tax structures often inhibit holding companies. • How SBP/SECP rules are creating groups

  9. Some interesting facts • 10% of EDs in European companies do not know who their top 50 shareholders are. • 25% of their CEOs had met only half of their top 50 shareholders • In Pakistan, most listed companies have majority held by a family or group and they do not seem to attach any importance to any other shareholder.

  10. Concentrated Shareholding • Rules on disclosure of shareholding pattern. • Important changes in shareholding pattern are required to be notified to SEs (The 3% level for UK). • Register of Directors’ interest in shares or debentures of the company (UK)

  11. What do shareholders expect? • Accountability of the Board • Transparency / communication • Minimizing conflicts of interest between directors and shareholders • Good management leading to: • Good returns • Capital growth • Fair division of spoils

  12. Shareholders Hold on Board Shareholders must approve: • Class 1 transactions • Large size relative to size of the company • Related party transactions • Financial statements • Audit report is for shareholders • Directors remuneration

  13. Communication between Shareholders & Board • Direction: One way reporting or Two way communication • Nature: Formal or Informal communication • Scope: All or some shareholders • Frequency: Regular or irregular, need based.

  14. Planned meetings • Between Board and institutional investors • Large companies: many institutional investors • Small companies: not enough attention from Institutional Investors • Between NEDs and major shareholders • Chairman is often an NED • Role of SID

  15. Non-financial Reporting • Chairman’s Statement • OFR (including analysis) • Compliance Statement (with CCG) • CSR – Sustainability reports

  16. The AGM Combined Code says: • Encourage attendance • Let them ask questions • Separate voting (avoid grouping issues) • Vote counting: • Show of hands / one vote per share • Proxies • Electronic voting

  17. Role of Institutional Investors • Dialogue with companies • Evaluating their disclosures • Judicious use of vote

  18. Shareholders Activism Refers to stand taken by shareholders against recommendations of the Board. • Do they have adequate rights or power? • Result less important than show of dissent. • Can work only if institutional investors participate. • Do institutional investors have a duty to communicate with other shareholders?

  19. Areas of Show of Dissent • Re-election of directors • Re-appointment of auditors • Approval of accounts and reports • Approval of directors’ remuneration • Justification for past payments • Proposed Schemes • Dividend recommendations • Changes in share capital

  20. Bodies supporting Activism • Association of British Insurers (ABI) • National Association of Pension Funds (NAPF) • Institutional Shareholders Committee (ISC) • International Corporate Governance Network (ICNG)

  21. Rights of Equity Shareholders • Residual rights to property and profits • Right to equitable treatment • Protection against inside trading and market abuse • Disclosure and transparency

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