Governance in a Globalising World - Assignment Example

Governance in a Globalising World Student’s name Institution’s Affiliation Course +Code Professor’s name Date Governance in a Globalising World Q1: Shareholders have rights at the AGM. What are they? How can they influence company activities or decisions? Companies established under the law have a duty to conduct Annual General Meetings (AGMs) that provide a forum for shareholders to carry out certain rights to ensure that their interests and perhaps public interests are protected. More fundamentally, shareholders exercise these rights because they are members of a company in question. These members may be individuals holding shares, institutional investors and proxy advisers (Deloitte 2016). AGMs offer a forum for the shareholders’ participation in evaluating the directors’ accountability and engagement. For instance, elections provide shareholders with the opportunity to implement their resolutions to impact the decisions of the board. A good example is the Australian Shareholders Association’s calls to have Rob Murray, the board chairman of Metcash to stand for elections because he has declined the offer to resign. Such a move implies that the rights and influence of shareholders cannot be ignored by boards of organizations. Shareholders have the right to pass and scrutinize the annual financial reports of a company based on the information presented. Secondly, shareholders have voting rights during such meetings, especially if the executive and non-executive directors are supposed to be elected. Thirdly, the shareholders have the right, during AGM, to pass and adopt resolutions reached at the meeting. They have the right to ask the directors to account for their practices, performance, and remuneration packages that they enjoy (Deloitte 2016). Fourthly, shareholders have different information rights, for instance, access to the annual reports during an AGM and the right to participate in the meeting and other specified meetings. Additionally, they can only vote on or propose resolutions within their powers. Shareholders, in some circumstance, can initiate derivative proceedings on a company’s behalf. However, it must be noted that according to the existing legislation on companies and ASX listed companies’ procedures, the rights of shareholders are limited in the decision-making process because of the limitations placed on their obligations. Shareholders can influence company activities and decisions in different ways. Their influence arises from the engagement that they have with an organization in different ways. They influence the activities of the organization by scrutinizing annual reports during AGMs, voting for or electing directors to the board, and seeking to create corporate governance practices through adoption of resolutions to encourage best practices within in a company (IBU5GW Week 6). For instance, raising concerns on huge gap that exist in remuneration of top executives and other employees, yet the compensation fails to reflect performance, as the case of the CEO of Commonwealth Bank Ian Narev who received bonuses that do not justify his performance (Ilyncky 2016). However, in Australia like in a majority of common law jurisdictions, shareholders cannot influence companies through decisions. The decision-making process is the primary role of the board of directors. Unless stated by a company’s constitution, the decision-making process is managed by the board of directors that has the power to start and adopt corporate plans, actions and commitments (IBU5GW Week 7). Q2: Compare and contrast shareholder rights at AGMs in relation to Remuneration Reports between Australia, the UK and the USA. Why are these rights important for companies, and for shareholders? Remuneration reports’ rights during AGMs are fundamental part of shareholder participation that organizations cannot ignore. Shareholders in different jurisdictions have different rights at AGMs regarding these reports (Price Waterhouse Coopers 2015). For the purpose of this assignment, the paper compares three countries that include Australia, the United Kingdom and the United States. One similarity that exists among these nations on shareholder rights at AGMs on remuneration reports is that they are mandatory as the boards of directors are expected to make disclosures to the shareholders. Therefore, the right to access this information and express resolutions or views is a common occurrence in these countries. Conversely, the shareholders’ rights in relation to remuneration reports differ in some aspects (Le Couteur & Pender 2015). For instance, mandatory advisory resolution and the 2 strikes rule guide the process of making these declarations in Australia. Under the resolution, shareholders can only approve remuneration reports. However, in the United Kingdom, shareholders do not have such provisions. In the United States, they exercise “say-on-pay” resolution. Effectively, shareholders have a right to file specific resolutions that seek to amend the pay arrangements of the executives, including the CEO Le (Couteur & Pender 2015). Imperatively, the content of annual reports is keenly regulated in Australia, where detailed disclosure requirements are supplemented by additional general duties to disclose information about a company’s overall performance and growth prospects. The rights related to annual reports during an AGM are fundamental to the shareholders and companies in several ways. Shareholders need the management to disclose all the activities that the organization has engaged in for their interests and investment decisions (Price Waterhouse Coopers 2015). Shareholders have different interests such that when they exercise these rights, they can assess if their interests and the interests of other stakeholders are protected by the business. Shareholders’ opinions are crucial in driving forward changes in remuneration reporting so that the management through the board of directors can formulate governance practices. They exercise these powers through their binding votes and ensure that they hold directors and management to account. Conversely, these rights allow companies to make full disclosures and pass resolutions based on the reports for adoption by the shareholders during the AGMs (Thomsen & Conyon 2012). Imperatively, organizations need these rights to validate their decisions and account for packages paid to the directors and other corporate executives like the CEO. These organizations must get resolutions from the members of the company before they can set salaries for their directors and CEOs. Shareholders are expected to hold management and board of companies to account so that crises and scandals are reduced or prevented in the most effective manner (Corkery & Medarevic 2013). However, when concerns are raised about the degree of complexity of these reports, there is a need to reforms the standards that must be met to ensure that the reports have information that shareholders need and can access and understand the details. Q3: Why would the Shareholder Association (ASA) be concerned about the increasing use of qualitative hurdles in executive compensation? Do you think such hurdles will change executive’s behaviour? The Shareholders Association is concerned of the increased application of qualitative hurdles in executive compensation due to some reasons. The association’s concern stems from excessively high bonuses and compensations awarded to executives in the market (Goldin 2016). For instance, an increasing concern has emerged concerning the $12.3 million that was awarded to Ian Nerve; the CEO of Commonwealth Bank (CBA). Most of the compensation package originated from the entrusting of prior long-term incentive awards (ASA, 2016). The greatest worry is that these CEOs are receiving these huge bonuses at the expense of poorly structured and vested long-term incentive award system. The use of qualitative and non-financial performance hurdles into the executive remuneration designs has the potential to erode market performance since executives, through the boards, seek short-term performance gains and neglect long-term total shareholder returns (TSR) (Goldin 2016). Such hurdles make it easier for CEO to receive large pay cheques in the future without the approval of shareholders. Furthermore, these hurdles deny the shareholders their remuneration report rights aimed at questioning the payouts to the CEOs even when they cannot account for their performance. Again, it implies that executives will not be measured based on total shareholder return and customer satisfaction hurdles to earn their long-term incentives. They posit that whilst changes are important assertions in a practical way, the increased hurdles based on qualitative metrics are short-term focused incentives (IBU5GW Week 7). Therefore, they encourage room for flexibility as they give the perception that the payment of bonus will be the preserve of the board without their participation through the adoption of a resolution during an AGM. These hurdles are bound to change how executives behave in a company. For instance, the hurdles encourage great flexibility for the board to decide the bonuses that an executive can be given (Goldin 2016). However, remuneration reports are subjected to resolutions made during an AGM and in the absence of such regulations, boards and their executives may not behave in the best interests of the shareholders (IBU5GW Week 7). The board of directors must ensure that they exercise their duties and responsibilities in the best interest of their shareholders and other stakeholders. Their fiduciary duties require them to honour shareholders’ resolutions, especially those emanating from AGMs. The association expects the boards of listed companies to be accountable through their practices. The executives and directors are elected by shareholders to protect their interests, rights and investments (AS & IC 2014). Therefore, when executives and boards exercise some authority because of increased qualitative hurdles and awarding themselves hefty bonuses with improved total shareholder returns (TSR), they go against the expectations of the shareholders. It suffices to state that such hurdles will change the behaviour of executives as they may exercise the flexibility offered by these hurdles to award themselves huge bonuses without any financial performance (Goldin 2016). Q4: Directors sit on numerous boards. Is this a problem? Why or why not? Discuss Directors in a company board play huge roles for the success of such entities. Imperatively, the duties that directors play are meant to enhance governance and leadership in most organizations. However, when one sits on numerous boards, problems are bound to happen. For instance, they may not have time to discuss the issues presented for approval because of the numerous meetings they have to attend (Prevett 2015). When they cannot make effective decisions based on the level of information that they have, these directors compromise an organization’s performance, especially if they chair such boards. They have duties like fiduciary where they are expected to act in the best interest of the shareholders, loyalty where they need to act in accordance with the company’s best interest and duty of care as they are expected to act with can like prudent persons (AS & IC 2014). Again, world practices have shown that smaller boards of directors are more effective than having large boards. The problem with serving on numerous boards is that one may not add value and can ignore some of the duties expected as a board member (Thomsen & Conyon 2012). The Corporation Act 2001 and amended in 2004 and 2010 and ASX regulations require that an organization’s board should consist of at least three members while in the United States, the maximum number of members is capped at ten (IBU5GW Week 7). Therefore, when one exercises fiduciary duties in almost ten organizations or more, there is bound to be a conflict of interest and inability to protect the rights, interests and investments of the shareholders and other stakeholders (AS & IC 2014). Therefore, a board can be termed as effective when it facilitates efficient discharge of its duties as required by law and directors can add value in a manner that is in line with the organization’s situation. Good corporate governance requires directors to champion the interests of the organization and take responsibility for any decisions made in good faith. However, such can only happen when members of the board, including the chairperson can deliver (Prevett 2015). Sitting on numerous boards compromises one’s ability to deliver and demonstrate excellent performance. Conclusively, directors sitting on several boards may bring expertise and knowledge but the responsibilities they are supposed to execute may overwhelm them altogether, creating governance problems. Bibliography Australian Stakeholders Association 2016, ASA questions increasing use of qualitative hurdles in executive remuneration structures, ASA. Australian Securities & Investments Commission 2014, Members of a Company. Accessed on October 21, 2016 from http://asic.gov.au/for-business/running-a-company/members-of-a-company/ Corkery, J. and Medarevic, S 2013, "Executive remuneration under scrutiny: The cutting edge of the 'shareholder spring’ Corporate Governance Journal, pp.1-16: ISSN 1836-1110. Deloitte 2016, Shareholder Rights and Institutional Investors, Accessed on October 21, 2016 from http://www.iasplus.com/en-gb/standards/corporate-governance/shareholder-rights-and-institutional-investors Goldin, A 2016, ASA questions increasing use of qualitative hurdles in executive remuneration structures. Australian Shareholders’ Association. IBU5GW, Week 6, Governance in a Globalising World: Board of directors. IBU5GW, Week 7, Governance in a Globalising World: Board processes. IBU5GW, Week 8, Anglo-American governance. Ilyncky, V., 2016, September. ASA questions increasing use of qualitative hurdles in executive remuneration structures. Le Couteur, C. and Pender H., 2015. Shareholder resolutions on ESG issues at listed public companies: comparative practice in Australia, the US & the UK. Australian Centre for Corporate Responsibility ((ACCR), pdf. Prevett, H 2015, March. So just how many boards can you sit on? Accessed on October 21, 2016 from http://appointments.thesundaytimes.co.uk/article/so-just-how-many-boards-can-you-sit-on/ Price Waterhouse Coopers 2015, Annual General Meeting season-Remuneration report voting outcome 2015 Thomsen, S., and Conyon, M 2012, Corporate Governance; Mechanisms and Systems, McGraw Hill. Read More