ACCA SBL Syllabus B. Governance - Shareholders - Notes ^{2 / 6}

Now time for the big boys… the most important external actors in corporate governance.

They do, after all, own the business that we are looking to run and direct properly.

“Other Investors” include fixed‑return bond‑holders

Shareholders have the right to . . .

1. Elect representatives to the board of directors at the annual shareholder meeting

2. Recall board members who are not doing their job

3. Recommend amendments or propose policy to the Board

4. Call special meetings

5. Request shareholder education/training programs

Shareholders have the responsibility to . . .

1. Attend the annual meeting, and other important shareholder meetings

2. Vote competent representatives to the board of Directors

3. Take a turn serving on the Board, if elected

The shareholders are the principals . They expect agents (directors) to act in their best economic interests

An agency relationship is one of trust between an agent and a principal which obliges the agent to meet the objectives placed upon it by the principal.

As one appointed by a principal to manage, oversee or further the principal’s specific interests, the primary purpose of agency is to discharge its fiduciary duty to the principal

Shareholders incur agency costs in monitoring the agents (directors).

If they didn’t have to keep checking the managers then there would be agency costs.

When a shareholder holds shares in many companies, the total agency costs can be prohibitive;

shareholders therefore encourage directors’ rewards packages to be aligned with their own interests so that they feel less need to continually monitor directors’ activities.

So let’s look at some examples of costs of monitoring and checking on directors’ behaviour

1. Attending relevant meetings (AGMs and EGMs)

2. Studying company results

3. Making direct contact with companies

Types of Investor

• Small investors

  • Individuals who hold shares in unit trusts, funds and individual companies. 

    They typically buy and sell small volumes and tend to have fewer sources of information than institutional investors.

    They also often have narrower portfolios, which can mean that agency costs are higher, as the individuals themselves study the companies they have invested in for signs of changes in strategy, governance or performance.

• Institutional investors

  • The biggest investors in companies, dominating the share volumes on most of the world’s stock exchanges.

    Examples include Pension funds, insurance companies and unit trust companies each fund being managed by a fund manager.

    Fund managers have some influence over the companies so need to be aware of the performance and governance of many companies in their funds, so agency costs can be very large indeed.

When should institutional investors intervene in company affairs?

• Concerns over strategy

• Consistent underperformance (without explanation)

• NEDs not doing their job properly

• Internal Controls persistently failing

• Failure to comply with laws and regulations

• Inappropriate remuneration policies

• Poor approach to social responsibility (reputation risk)