SHAREHOLDERS AND SHAREHOLDERS ACTIVITIES

Module 4

A mutual shareholders or stockholders

Is an individual or company (including a corporation) that legally owns one or more shares of stock in a joint stock company.

Stockholders are granted special privileges depending the class of stock. These rights may include:

The right to vote on matter such as elections to the board of director. Usually, stockholders have one vote per share owned, but sometimes these is not the case. The right to propose shareholder

The right to share in distributions of the companys income. The right to purchase new shares issued by the company. The right to a companys assets during, a liquidation of the company.

Stockholders rights to a companys assets are subordinate to the rights of the companys creditors. -means that stockholders typically receive nothing if a company liquidated after bankruptcy. SHAREHOLDERS play an important role in raising capital for organizations.

INTERNATIONAL PERSPECTIVE
A shareholder is an individual or owning stock in a company. Pension funds and mutual funds are examples of shareholders that are also organizations. Shareholders have an legal claim on a percentage of the companys earnings and assets and the share the same level of limited liability as the company itself.

WHAT ARE THE NON EXECUTIVE DIRECTORS?

A non executive directorship is an appointment to the board of a company on a part on a part time basis. The work of non executive director generally involves attending some board meetings and company functions, with the aim of providing experienced, intelligent advice to the company board.

Non executive directors can offer advice from the perspective of somebody not absorbed in the day to day of business based on the view point on an outsider looking in.

Non-executive directors responsibilities -according to the Higgs report, commissioned by the British Government

Strategy: Non-executive directors should constructively challenge and contribute to the development of strategy.

Performance: Non-executive directors should scrutinize the performance of management in meeting agreed goals and objectives and monitoring, and where necessary moving, senior management and in succession planning. Risk: Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and system of risk management are robust and defensible.

People: non-executive directors are responsible to determining appropriate levels of remuneration of executive directors and have a prime role in appointing, and where necessary removing, senior management and in succession planning. The role of independent non-executive directors features prominently in corporate governance codes.

WHAT ARE SHAREHOLDERS ACTIVISM?

Shareholders activism defined by Sjostrom as the use of ownership position to actively influence company policy and practice. Shareholders activism is controversial. Proponents argue that companies with active and engaged shareholders are more likely to be successful in the long term than those that are left to do what they choose.

TYPES OF SHAREHOLDER ACTIVITY

Operational Activist includes operational restructuring improvement and cost reductions that can be made to enhance margins and improve. Corporate Governance Activist includes improvements in the quality and effectiveness of the board and management team, while also reevaluating incentives offered to both.

Financial Activist includes optimizing balance sheets, recapitalizing, buying back shares, and offering special dividends. Strategic Activist includes refocusing corporate strategy, pursuing merges and acquisitions, or divesting underperforming or unrelated business.

3.EXAMPLE OF HEDGE FUND ACTIVISM: Third point LLC

A hedge fund is an investment fund open to a limited range of investors that undertakes a wider range of investment and trading activities than long-only investment funds, and in general, pays a performance fee to its investment manager. As the name implies, hedge funds often seek to hedge some of the risks inherent in their investments using a variety of method, most notably short selling and

Hedge funds are typically open only to a limited range of professionals or wealthy investors. It provides the with an exemption in many jurisdiction from regulations governing short selling, derivatives, leverage, fee structures and the liquidity of interest in the fund.

EXAMPLE OF EXISTING SHAREHOLDERS ACTIVISM: Barclays Bank in the UK

Barclays plc is a global British financial services firm operating in Europe, North America, the middle east, Latin America, Australia, Asia and Africa . It is a holding company that is listed on the London and New York stock exchanges, and was listed on the Tokyo Stock Exchange until 2008. It is also a consistent of the FTSE Index.

Barclays PLC is ranked as the 25th largest company in the world by Forbes 2009 (2008 list) and the 4th largest financial services provider in the world by Tier capital ($ 32.5 Billion). According to Datamonitor, by the market share, Barclays is the largest financial services provider globally with ($ 3.7 trillion) of assets. It is the second largest bank in the United Kingdom and the world based on asset size.

WHAT KEEPS SHAREHOLDERS FROM BECOMING ACTIVE: The Free Rider Problem

In economics, collective bargaining, psychology, and political science, free riders are those who consume more than their fair share of a public resource, or shoulder less than a fair share of the cost of its production.

Free riding is usually considered to be an economic problem only when it leads to the non-production or under-production of a public good and when its leads to the excessive use of common property resource.
The Free rider problem is the question of how to limit free riding (or its negative effects) in some situations.

The name Free Rider comes from a common textbook example: some using public transportation without paying the fare. If too many people do this, the system will not have enough money to operate. In the context of labor union , FREE RIDER means an employee who pays no union dues or agency shop fees, but nonetheless receives the same benefits of union representation as dues-payers.

FREE RIDING is also a term used by brokerages when a client purchase shares beyond his or her means. Free riders are those who purchase shares then do not pay for them.

ACTIVISM BY AN INDIVIDUAL SHAREHOLDERS IN THEORY AND PRACTICE

Shareholders (investors) activism can also force better corporate governance. Individual shareholders, whether institutions or private persons, have had little chance of influencing the board or management given the fragmentation of ownership.

Shareholders can also ask question at the annual meeting, but they would need a majority of voter in order to pass a motion that was binding on the management. In fact, the majority of shares in multinationals in EUROPE are held by financial institutions rather than private individuals. In the UK, the National Association of Pension Funds (NAPF) is an organization that represents the interest of employersponsored person funds. Its members invest of more than $600 billion.

The International Corporate Governance Network(ICGN) is an example if a worldwide multi-stakeholders coalition within the investment community. It was founded in 1995. Its members are institutional investors such as major pension funds like CalPERS, investment club and insurers, as well as leading corporate governance and shareholders value professionals, and corporate officials.

ACTIVISM BY LARGE SHAREHOLDERS IN THEORY AND MostPRACTICE of the existing evidence on the
effectiveness of large shareholders in the corporate governance has been restricted to a handful of developed countries, notably the UK, US, Germany and Japan. The effectiveness of large shareholding in the corporate governance of enterprise, whereby the equity of an enterprise is concentrated in blocks in the hands of a small number of individuals and institutions, has been the subject of much theoretical and empirical research.

The literature on blockholders focuses on the extent to which these shareholders are in better position to make the management accountable as opposed to single shareholders. The benefits of large shareholding highlighted in the theoretical and empirical literature may be summarized in terms of the converges-of-interest hypothesis and the efficient-monitoring hypothesis.

According to these hypothesis, large shareholders are likely to be more efficient than small and single shareholders in monitoring company management. The potential costs of arising from the presence of large shareholders may be set out in the terms of the conflict-of interest hypothesis and the strategicalignment hypothesis.

Another key feature of developing countries and many transitions economies is the strong evolutionary tendency towards insider control (Aoki,1995) as many state-owned companies are being privatized and existing family-owned companies are becoming highly diversified industrial groups.

INDUSTRIAL SHAREHOLDERS

The combined code [UK Combined Code on Corporate Governance in place for 10 years] also requires institutional shareholders to interact proactively and objectively with the companies in which they are invested.

THREE MAIN PRINCIPLES FOR INSTITUTIONAL SHAREHOLDERS TO OBSERVE:

1.

2.

Institutional shareholders should enter into a dialogue with the companies based on the mutual understanding of objectives. When evaluating companies governance arrangements, particularly those relating to board structure and composition, institutional shareholders should give due weight to all relevant factors drawn to their attention.

3.

Institutional shareholders have a responsibility to make considered use of their votes. The combined code explicitly recommends that constitutional investors should not accept a box-ticking approach to corporate governance and that their consideration of disclosures made by the company in relation to the Code should taken into account size and complexity of the company and the nature of the risks and challenges.

The combined code recommends that City institutions should follow the responsibilities of institutional shareholders and agents statements of principles.

The principles set out best practice for institutional shareholders and investment managers, under which they will:
1.

2.

Maintain and publish statements of their policies in respect of active engagement with the companies in which they invest; Monitor the performance of and maintain an appropriate dialogue with those companies;

3.

4.
5.

Interview where necessary; Evaluate the impact of their policies; In the case of investment manager, report back to the clients on whose behalf they invest.

SHAREHOLDERS OF U.S. by Investor Type

Individuals or firms trading equity (stock) in the markets as their principal capacity are called stock traders. Stock traders usually try to profit from short-term price volatility with trades lasting anywhere from several seconds to several weeks.

The stock trader is usually a professional person can call themselves full or part time stock trader/investors while maintaining other professions. The stock investors are firms or individuals who purchase stocks with the intention or holding them for an extended period of time, usually several months to years.

IMPACT OF SHAREHOLDER ACTIVSM ON IMPROVING CG

Shareholder activism can serve as a complementary governance mechanism, but only for those firms that exhibit some shareholders orientation. Institutional investors, although very supportive of shareholder activism understand that [activism] does not result in improved governance bundles and firm performance for many companies whose governance bundles have fallen below a required minimum.

The general investment community recognizes the potential complementary between shareholder activism and governance bundles for reforming prior poor firm performance. Firms that exhibit sufficient internal monitoring mechanism (at least a minimum governance bundle) prior to targeting by the shareholder activism, are likely to reform their governance bundle with both increased incentive alignment, without reducing monitoring, suggesting a complementary relationship between incentive alignment and monitoring as governance mechanisms in these firms.

POTENTIAL ROADBLOCKS to EFFECTIVE SHAREHOLDER ACTIVISM

Mutual funds and pension funds are trying to make money. One of the shortcomings of chasing after financial gains may be that the process may be also harming the funds.

Darrell R. Rigby of Bain & company asserts that institutional investors might be interested in propping up results for the short term and then selling the stock to more on the some thing else. John C. Bogle founder of vanguard mutual funds.

In a Business Week commentary, John A. Byrne was even more accusatory. He argued that shareholders deserve a good deal of the blame themselves. Bernard S. Black and other Law professor, adamant by argufied that legal restriction stands in the way for large investors to engage in the beneficial oversight of corporation.

Finally, funds have too many different assets to under management and are therefore unlikely to be able to effectively monitor all of their holdings.