Chapter 6 Why has the infuence o institutional institutional investors grown so much in recent years? Reason behind grown infuence are as ollowsI.I. have become largest shareholders in many countries – More shareholdings, more power Decrease o individual investors on-viable !"it option – because o si#e o holdings or policy o holding a balance portolio $oting rights %or &ustainable uture &teady pro't (omply with code – local law la w and code ) abroad *ransparency *ransparency ) accountability +ower to Implement own view What Role institutional Investors should play in corporate governance? %or setting good governance in organi#ation I.I should do the ollowingsMonitor investee company perormance (ompliance o code Meeting board ) senior management (onfict o interest &trategy on intervention hen ) how urther action may be taen $oting policy Sovereign Wealth Fund vs Traditional Institutional investors? & % Institutional investor %und owned by by go government owned by by large pe pension unds, insurance companies, mutual unds etc %unded by revenues rom athers large sum o money rom commodity e"ports or rom oreign various source e"change reserves &% do not actively engage in ( II actively engage in ( as II &% &% ar are not not near nearly ly homo homoge gene neou ous s II are are hom homog ogen eneo eous us &% &% has has inad inade/u e/uate ate tra trans nspa parrency ency II has has ade ade/u /uate ate tra trans nspa pare renc ncy y &% does does not not act as inter intermed mediar iaries ies II act as as interm intermedi ediarie aries s between between lender and borrower Internationalization Internationalization o investment investment portolios responsible or IIs increased interest in !"? *he global opportunity o investment created a new hori#on or investor but soon global 'nancial crisis emerged. Investors lost hope and eared o losing it all. *hen or restoring trust among investor has highlighted the importance o (. 0ecause ( ensures responsibility, trust, ethics, value and lower risiness on behal o the bene'ciaries. *ools *ools o overnance – I.I. have1 •
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*he tools are2. 3ne to one meetings meetings – communicat communication ion between between II ) company company 4. $otin oting g5. &hare &harehol holder der pro propos posals als 6. %ocus ocus list list 7. (orporate (orporate governance governance rating system system #vidence or improving corporate perormance? esbitt 82996:, Millstein ) Mac;voy Mac;voy 8299<:, Mac=insey 84>>4:, ompers et al. 84>>5:, Deutsche 0an 84>>6 a,b:, ?armes 4>>7,>@ II have a responsibility to vote the shares in their investee companies $ discuss $ote is a right attached atta ched to voting share and is a basic prerogative o share ownership. It is important because II can e"ercise ownership and control in corporation via voting right. It can be seen as undamental or controlling some element by shareholders. %or any contentious issues or on a particular issue, they may abstain rom voting or may vote against a resolution. ;ppropriate voting could contribute to eAective (.
Chapter 7 Why might II be interested in SRI? &RI is no longer a niche investment option nor it can be neglected &ustainable and long term investment ItBs an integral part o ( policies reen !nvironmental awareness Increasing concern about ?uman rights !mployment condition (lient demand (orporate citi#enship +otential economic bene't Why are more companies becoming interested in their Social and environmental environmental policies? (lient demand (orporate citi#enship +otential economic bene't rowing interest in special und In what ways might II decide on which companies to invest in when considering their Social Responsibility policies? !IRI& has identi'ed three basic strategies or &RI – !ngagement, +reerence +reerence ) &creening %o you thin& investor should be willing to sacri'ce 'nancial return( i necessary( necessary( in order to have a comprised SRI portolio? I thin investors should sacri'ce 'nancial return i necessary nece ssary or a comprised &RI portolio. 0ecause, in the long run this comprised &RI portolio will generate more economic bene't than present. &RI guidelines identi'es ris arising rom social, environmental and ethical issues i ssues that may aAect short term or long term business value. &RI implication implicati on ensures corporate responsibility by encompassing environment, ethical, social, governance and relationship management eAectively. eAectively. hich in turn • • • • • • • • •
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ma"imi#es shareholder value in the long term rather than as an end in itsel. !ompanies are about ma&ing money( not about social responsibility responsibility $ discuss critically In recent years pro't obCective o companies has lost interest prominently. prominently. ith boardBs responsibility or relation with staeholders &ocial responsibility has gained more interest. 0usiness and society are related to each other. other. (ompanies should not pursue pro't without regard to the impact on wider societal interests. +urely 'nancial aspects o business are no longer appropriate in an evolving evolvi ng society lie in present. !ncompassing economic pro't is not enough anymore. &ocial, environmental perormance, human rights, ethical issues are now more concerning than beore. *hese demand rom various aspects o business, individual and social area becoming more important.
Chapter 8 Function o a board? Determining ;im, &trategies, +lan, +olicy and how to achieve theme Monitoring progress progress ;ppointing (!3 !nsure accountability !nsure high /uali'ed e"ecutive team Reporting to shareholder )ow does board unction contribute to !" o company? 0oards o directors are responsible or the governance o their companies. 0y providing strategic guidelines, plan and policy to assist achieving aims board ensures growth o company. Monitoring progress and ensuring accountability helps to t o eep a good governance in company. company. 0y appointing (!3 and having high /uali'ed /uali 'ed e"ecutive team ensures eAectiveness and high perormance. Reporting to shareholder, staeholder, employees, customers, suppliers, regulators and the community elevates transparency and accountability. What are main sub*committees o the board? Role o each Sub* !ommittee? ;udit (ommittee – *o ensure the interest o shareholders are properly protected in relation to 'nancial reporting and internal control. It is the duty o audit committee to review the scope and outcome o the audit and to try to ensure that the obCectivity o the auditors is maintained. Remuneration (ommittee – the establishment o a remuneration committee prevents e"ecutive directors rom setting their own remuneration levels. *hey should mae recommendation to the board within agreed terms o reerence. omination (ommittee – ; maCority o members o the nomination committee should be independent non-e"ecutive directors. *hey should evaluate e"isting balance o sills, nowledge and e"perience on the board and utili#e this thi s when preparing a candidate pro'le or appointment. *hey should choose best candidate. • • • • • •
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Ris (ommittee – should comprehend the riss involved by, inter alia, using derivatives and this would necessitate /uite a high level o 'nancial e"pertise and the ability to see e"ternal proessional advice where necessary. necessary. ot recommendation o combined code, can set as audit and ris committee. !thics (ommittee – ensure a strong org. ethic by cascading an ethics code throughout the company.
+nitary ,oard System vs %ual board system? nitary 0oard &ystem Dual board system 3ne single board two board supervisory ) e"ecutive nitary board is responsible or all supervisor board oversees company activity direction o businessE management board is responsible or running the business ;ll director wor or same goal separate board di director responsible or separate unction ;ll member wors in one board 3ne mem memb ber cann annot be member o other board &hareholders elect directors in &hareholder appoint the member o general meeting supervisory boardE supervisory board appoints members o management board Ways o %irectors appointment to the board? *here should be ormal, rigorous rigorous and transparent procedure procedure or the appointment o new directors to the board. *here should be a nomination committee which should lead l ead the process and mae recommendations recommendations to the board. (ommittee should evaluate the balanced sills, e"perience, independence and nowledge. *hen prepare a description o role and capabilities re/uired. on-e"ecutive directors should appointed or speci'c terms. ;ny term beyond F years or non-e"ecutive should be rigorously reviewed. ; separate section o the annual report should describe the wor o the nomination committee. %irector appointment methods advantages and disadvantages? disadvantages? ;dvantages are +ossibility o choosing a handul, silled, e"perienced director8s:. Diverse individual will enrich board with new capabilities *ransparent *ransparent ;ppointment process Disadvantage are *ime (onsuming DiGcult +rocess +rocess -ppointment process process impact on board diversity? • • •
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Diversity enables diAerent perspectives to be taen on various issues given that men and women may approach a pproach issues rom diAerent viewpoints and may have diAerent behavioral patterns patte rns as wellE similarly individuals rom diAerent ethnic bacground may bring additional cultural insights i nsights to the board room. ;ppointment process should be enable the nomination committee to choose appropriate diverse individual who will strengthen the board and will be more capable o refecting the views o various shareholder, staeholder group. In turn which will enrich board to address a ddress more eAectively the remote part o the opportunity. opportunity. %e'ne independence o non*e.ecutive non*e.ecutive %irectors? HIndependenceB is generally taen as meaning that there is no relationships or circumstances that might aAect the directorBs Cudgment. &hehe will not be independent when meets these criteriaJ%ormer %ormer employee o company or group in last 7 year ;dditional remuneration was received rom company (lose amily ties with director or advisors Material business relationship in last 5 years &erved board more than 2> years Represents Represents signi'cant shareholder /on*e.ecutive /on*e.ecutive directors are a waste o time They oten have little involvement with a company and are not aware o what is really going on0 !ritically discuss on-e"ecutive directors can add value rom a number o acts such as their e"perience in related industry, the city, public lie or other appropriate bacground. *heir nowledge o a particular unctional specialismE nowledge o particular technical processE their reputationE their insight into issuesE to as /uestions /ue stions etc. as well as they would contribute in ey board committees. 3R ; on-!"ecutive Director is not an employee and is not involved in the operational aspects o the company, rather he she is involved in planning and policymaing and brings independent Cudgment, outside e"perience and obCectivity on all issues which come beore the 0oard. 3ver and above their normal directorsB duties, on-!"ecutive Directors are e"pected to monitor and challenge the perormance o the !"ecutive Directors and the Management, and to tae a determined stand in the interests o the company and its staeholders. on-!"ecutive Directors should ac/uire and maintain a suGciently detailed nowledge o the companyBs business activities and on-going perormance to enable them to mae inormed decisions on the issues beore the 0oard. ;t the same time, they the y should recogni#e the division between the 0oard and Management and ordinarily not become involved in management issues or in managing the implementation o 0oard policy. • • • • • •
Chapter 10 What actors have infuenced the e.ecutive director0s remuneration debate?
*he overall level o directorsB remuneration and the role o share options &uitability o perormance measures lining directorsB remuneration with perormance Role o remuneration committee in setting director remuneration *he infuence that shareholders are able to e"ercise e"ercise on directors remuneration Why is the area o e.ecutive director0s rumination o such interest to investors and particularly to institutional investors? - *o addres address s ongoing ongoing issues issues relating relating to direct directors ors remunerat remunerations ions - ?uge ?uge remu remuner neratio ation n pac pacage ages s with with less less peror perorman mance. ce. - !/ui !/uity ty rewa reward rd may may llea ead d to to lac lac o publ public ic hand hands s - %or &us &usta tain inab able le utu uturre - the the gap gap in inc incom ome e ine/ ine/ua ualit lity y is als also o wide widenin ning g What are the main components o e.ecutive director0s remuneration pac&ages? 0ase &alary 0onus &toc options Restricted share plans 8&toc grants: +ension 0ene'ts 8car, health care etc.: •
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!ritically discuss the role o remuneration remuneration committee in setting e.ecutive directors remunerations? *here should be a ormal and transparent transparent procedure or developing policy on e"ecutive remuneration and or '"ing the remuneration pacages o individual directorsB. In practice, this normally results in the appointment a ppointment o a remuneration committee. *he remuneration committee should mae recommendations to the board, within agreed terms o reerence, on the companyBs ramewor o e"ecutive remuneration and its costE it should determine on their behal speci'c remuneration pacages or each o the e"ecutive directors, including pension rights and any compensation payments. *he remuneration committee mechanism should also provide a ormal, transparent procedure or the setting o e"ecutive remuneration levels, including the determination det ermination o appropriate targets or any perormance-related pay schemes. ;lthough non-e"ecutive directors may not be willing to stipulate demanding perormance criteria because they may have a sel-interest in ensuring that they themselves can go on earning a high salary without unduly demanding perormance criteria being set by their own companiesB remuneration committees. *here is also another aspect, which is that remuneration committees will generally not wish the e"ecutive directors to be earning less than their counterparts in in other companies, so they will be more inclined to mae recommendations that will put the directors into the top or second /uartile /uartil e o e"ecutive remuneration levels. It is certainly the case that e"ecutive remuneration
levels have increased airly substantially since remuneration committees were introduced which, o course, was not the intended eAect. !ritically discuss the perormance criteria that may be used in determining e.ecutive director0s remunerations? remunerations? +erormance +erormance criteria may diAerentiate between bet ween 5 broadly conceived types o measuresJ maret maret based, accounts based, individual i ndividual based. &ome potential criteria areJ K &hareholder return K &hare price 8and other maret based measure: K +ro't base measure K Return on capital employed K earning per share K Individual director perormance 8in contrast to corporate perormance measures: !ritically discuss the importance o e.ecutive director remuneration disclosure? !"perience has shown that variable pay schemes have become increasingly comple" ;nd that in certain instances this has led to e"cessive remuneration and manipulation. ;s part o the accountabilitytransparency process, the remuneration committee membership should be disclosed in the companyBs annual report, and the chairman o the remuneration committee should attend the companyBs annual general meeting to answer any /uestions that shareholders may have about the directorsB remuneration. *he disclosure should contain suGcient detail to enable shareholders ully to understand the components o directorsB remuneration as well as progress progress towards the achievement o previously granted awards and should include details on pension entitlements and increases thereo and per/uisites and other bene'ts in ind. ithout such disclosure shareholder control over director remuneration is illusory ill usory.. In some countries, e"ecutives seem to consider the disclosure o the precise amount o remuneration to be a ris to their personal saety. saety.
