Chapter 6

Why has the influence of institutional investors grown so much in

recent years?
Reason behind grown influence are as follows I.I. have become largest shareholders in many countries More
shareholdings, more power
Decrease of individual investors
Non-viable Exit option because of size of holdings or policy of
holding a balance portfolio
Voting rights
For Sustainable future
Steady profit
Comply with code local law and code & abroad
Transparency & accountability
Power to Implement own view
What Role institutional Investors should play in corporate
governance?
For setting good governance in organization I.I should do the followings Monitor investee company performance
Compliance of code
Meeting board & senior management
Conflict of interest
Strategy on intervention
When & how further action may be taken
Voting policy
Sovereign Wealth Fund vs Traditional Institutional investors?
SWF
Institutional investor
Fund owned by government
owned by large pension funds,
insurance companies, mutual
funds etc
Funded by revenues from
Gathers large sum of money from
commodity exports or from foreign various source
exchange reserves
SWF do not actively engage in CG
II actively engage in CG
as II
SWF are not nearly homogeneous
II are homogeneous
SWF has inadequate transparency
II has adequate transparency
SWF does not act as intermediaries II act as intermediaries between
lender and borrower
Internationalization of investment portfolios responsible for I.Is
increased interest in CG?
The global opportunity of investment created a new horizon for
investor but soon global financial crisis emerged. Investors lost hope and
feared of losing it all. Then for restoring trust among investor has
highlighted the importance of CG. Because CG ensures responsibility,
trust, ethics, value and lower riskiness on behalf of the beneficiaries.
Tools of Governance I.I. have?

The tools are1. One to one meetings communication between II & company
2. Voting 3. Shareholder proposals
4. Focus list
5. Corporate governance rating system
Evidence for improving corporate performance?
Nesbitt (1994), Millstein & MacAvoy (1998), MacKinsey (2002),
Gompers et al. (2003), Deutsche Bank (2004 a,b), Harmes 2005,07
II have a responsibility to vote the shares in their investee
companies discuss.
Vote is a right attached to voting share and is a basic prerogative of
share ownership. It is important because II can exercise ownership and
control in corporation via voting right. It can be seen as fundamental for
controlling some element by shareholders. For any contentious issues or
on a particular issue, they may abstain from voting or may vote against a
resolution. Appropriate voting could contribute to effective CG.

Chapter 7
Why might II be interested in SRI?
SRI is no longer a niche investment option nor it can be neglected
Sustainable and long term investment
Its an integral part of CG policies
Green Environmental awareness
Increasing concern about Human rights
Employment condition
Client demand
Corporate citizenship
Potential economic benefit
Why are more companies becoming interested in their Social and
environmental policies?
Client demand
Corporate citizenship
Potential economic benefit
Growing interest in special fund
In what ways might II decide on which companies to invest in
when considering their Social Responsibility policies?
EIRIS has identified three basic strategies for SRI Engagement,
Preference & Screening
Do you think investor should be willing to sacrifice financial
return, if necessary, in order to have a comprised SRI portfolio?
I think investors should sacrifice financial return if necessary for a
comprised SRI portfolio. Because, in the long run this comprised SRI
portfolio will generate more economic benefit than present. SRI guidelines
identifies risk arising from social, environmental and ethical issues that
may affect short term or long term business value. SRI implication ensures
corporate responsibility by encompassing environment, ethical, social,
governance and relationship management effectively. Which in turn

maximizes shareholder value in the long term rather than as an end in

itself.
Companies are about making money, not about social
responsibility discuss critically
In recent years profit objective of companies has lost interest prominently.
With boards responsibility for relation with stakeholders Social
responsibility has gained more interest. Business and society are related to
each other. Companies should not pursue profit without regard to the
impact on wider societal interests. Purely financial aspects of business are
no longer appropriate in an evolving society like in present. Encompassing
economic profit is not enough anymore. Social, environmental
performance, human rights, ethical issues are now more concerning than
before. These demand from various aspects of business, individual and
social area becoming more important.

Chapter 8
Function of a board?
Determining Aim, Strategies, Plan, Policy and how to achieve theme
Monitoring progress
Appointing CEO
Ensure accountability
Ensure high qualified executive team
Reporting to shareholder
How does board function contribute to CG of company?
Boards of directors are responsible for the governance of their companies.
By providing strategic guidelines, plan and policy to assist achieving aims
board ensures growth of company. Monitoring progress and ensuring
accountability helps to keep a good governance in company. By appointing
CEO and having high qualified executive team ensures effectiveness and
high performance. Reporting to shareholder, stakeholder, employees,
customers, suppliers, regulators and the community elevates transparency
and accountability.
What are main sub-committees of the board? Role of each SubCommittee?
Audit Committee To ensure the interest of shareholders are
properly protected in relation to financial reporting and internal
control. It is the duty of audit committee to review the scope and
outcome of the audit and to try to ensure that the objectivity of the
auditors is maintained.
Remuneration Committee the establishment of a remuneration
committee prevents executive directors from setting their own
remuneration levels. They should make recommendation to the
board within agreed terms of reference.
Nomination Committee A majority of members of the nomination
committee should be independent non-executive directors. They
should evaluate existing balance of skills, knowledge and experience
on the board and utilize this when preparing a candidate profile for
appointment. They should choose best candidate.

 Risk Committee should comprehend the risks involved by, inter

alia, using derivatives and this would necessitate quite a high level
of financial expertise and the ability to seek external professional
advice where necessary. Not recommendation of combined code, can
set as audit and risk committee.
Ethics Committee ensure a strong org. ethic by cascading an ethics
code throughout the company.

Unitary Board System vs Dual board system?

Unitary Board System
Dual board system
One single board
two board supervisory & executive
Unitary board is responsible for all
supervisor board oversees
company activity
direction of business; management
board is responsible for running the
business
All director work for same goal
separate board director
responsible for separate function
All member works in one board
One member cannot be member of
other board
Shareholders elect directors in
Shareholder appoint the member of
general meeting
supervisory board; supervisory
board appoints members of
management board
Ways of Directors appointment to the board?
There should be formal, rigorous and transparent procedure for the
appointment of new directors to the board. There should be a nomination
committee which should lead the process and make recommendations to
the board. Committee should evaluate the balanced skills, experience,
independence and knowledge. Then prepare a description of role and
capabilities required. Non-executive directors should appointed for specific
terms. Any term beyond 6 years for non-executive should be rigorously
reviewed. A separate section of the annual report should describe the work
of the nomination committee.
Director appointment methods advantages and disadvantages?
Advantages are
Possibility of choosing a handful, skilled, experienced director(s).
Diverse individual will enrich board with new capabilities
Transparent Appointment process
Disadvantage are
Time Consuming
Difficult Process
Appointment process impact on board diversity?

Diversity enables different perspectives to be taken on various issues

given that men and women may approach issues from different viewpoints
and may have different behavioral patterns as well; similarly individuals
from different ethnic background may bring additional cultural insights to
the board room. Appointment process should be enable the nomination
committee to choose appropriate diverse individual who will strengthen
the board and will be more capable of reflecting the views of various
shareholder, stakeholder group. In turn which will enrich board to address
more effectively the remote part of the opportunity.
Define independence of non-executive Directors?
Independence is generally taken as meaning that there is no
relationships or circumstances that might affect the directors judgment.
She/he will not be independent when meets these criteria: Former employee of company or group in last 5 year
Additional remuneration was received from company
Close family ties with director or advisors
Material business relationship in last 3 years
Served board more than 10 years
Represents significant shareholder
Non-executive directors are a waste of time. They often have little
involvement with a company and are not aware of what is really
going on. Critically discuss
Non-executive directors can add value from a number of facts such as
their experience in related industry, the city, public life or other
appropriate background. Their knowledge of a particular functional
specialism; knowledge of particular technical process; their reputation;
their insight into issues; to ask questions etc. as well as they would
contribute in key board committees.
OR
A Non-Executive Director is not an employee and is not involved in the
operational aspects of the company, rather he / she is involved in planning
and policymaking and brings independent judgment, outside experience
and objectivity on all issues which come before the Board. Over and above
their normal directors duties, Non-Executive Directors are expected to
monitor and challenge the performance of the Executive Directors and the
Management, and to take a determined stand in the interests of the
company and its stakeholders. Non-Executive Directors should acquire and
maintain a sufficiently detailed knowledge of the companys business
activities and on-going performance to enable them to make informed
decisions on the issues before the Board. At the same time, they should
recognize the division between the Board and Management and ordinarily
not become involved in management issues or in managing the
implementation of Board policy.

Chapter 10
What factors have influenced the executive directors
remuneration debate?

 The overall level of directors remuneration and the role of share

options
Suitability of performance measures linking directors remuneration
with performance
Role of remuneration committee in setting director remuneration
The influence that shareholders are able to exercise on directors
remuneration
Why is the area of executive directors rumination of such
interest to investors and particularly to institutional investors?
- To address ongoing issues relating to directors remunerations
- Huge remuneration packages with less performance.
- Equity reward may lead to lack of public hands
- For Sustainable future
- the gap in income inequality is also widening
What are the main components of executive directors
remuneration packages?
Base Salary
Bonus
Stock options
Restricted share plans (Stock grants)
Pension
Benefits (car, health care etc.)

Critically discuss the role of remuneration committee in setting

executive directors remunerations?
There should be a formal and transparent procedure for developing policy
on executive remuneration and for fixing the remuneration packages of
individual directors. In practice, this normally results in the appointment
of a remuneration committee. The remuneration committee should make
recommendations to the board, within agreed terms of reference, on the
companys framework of executive remuneration and its cost; it should
determine on their behalf specific remuneration packages for each of the
executive directors, including pension rights and any compensation
payments. The remuneration committee mechanism should also provide a
formal, transparent procedure for the setting of executive remuneration
levels, including the determination of appropriate targets for any
performance-related pay schemes. Although non-executive directors may
not be willing to stipulate demanding performance criteria because they
may have a self-interest in ensuring that they themselves can go on
earning a high salary without unduly demanding performance criteria
being set by their own companies remuneration committees. There is also
another aspect, which is that remuneration committees will generally not
wish the executive directors to be earning less than their counterparts in
other companies, so they will be more inclined to make recommendations
that will put the directors into the top or second quartile of executive
remuneration levels. It is certainly the case that executive remuneration

levels have increased fairly substantially since remuneration committees

were introduced which, of course, was not the intended effect.
Critically discuss the performance criteria that may be used in
determining executive directors remunerations?
Performance criteria may differentiate between 3 broadly conceived types
of measures: market based, accounts based, individual based. Some
potential criteria are:
* Shareholder return
* Share price (and other market based measure)
* Profit base measure
* Return on capital employed
* earning per share
* Individual director performance (in contrast to corporate performance
measures)
Critically discuss the importance of executive director
remuneration disclosure?
Experience has shown that variable pay schemes have become
increasingly complex
And that in certain instances this has led to excessive remuneration and
manipulation. As part of the accountability/transparency process, the
remuneration committee membership should be disclosed in the
companys annual report, and the chairman of the remuneration
committee should attend the companys annual general meeting to
answer any questions that shareholders may have about the directors
remuneration. The disclosure should contain sufficient detail to enable
shareholders fully to understand the components of directors
remuneration as well as progress towards the achievement of previously
granted awards and should include details on pension entitlements and
increases thereof and perquisites and other benefits in kind. Without such
disclosure shareholder control over director remuneration is illusory. In
some countries, executives seem to consider the disclosure of the precise
amount of remuneration to be a risk to their personal safety.