ANGLO-AMERICAN FIRMS & FINANCE IN TRANSITION EB434 ENTERPRISE + GOVERNANCE

Transcription

1 ANGLO-AMERICAN FIRMS & FINANCE IN TRANSITION 15 EB434 ENTERPRISE + GOVERNANCE

2 THE BOARDROOM

3 why a board? Nemo solis satus sapit no one on their own is wise enough Wisdom, as well some checks and balances, through collective decision-making Boards that are too big can become ineffective Boards that are very small sacrifice expertise, diverse opinions, and the ability to divide important tasks of the board through board committees with distinct memberships 8-12 members is widely considered to be optimal much fewer than is widely practiced.

4 Board roles : variety a board of directors role may vary.. rubber stamp for the decisions of the firm s senior management Nominal review More active review and nominal participation, act in crises active participant in strategic and policy decisions major catalyst for a change in the firm s mission, objectives, strategy & policies

5 central role of board The Board of Directors is the bridge between those to whom the board is accountable and those who are accountable to the board (Cadbury, 2002) The board is the link between: 1. Shareholders and managers in publicly listed companies 2. other providers of funds and those who put them to use 3. The company and the outside world Therefore the board is the center of the governance system.

6 chairman s role first amongst equals in the board of directors The chairman, formally, often is no more than the person who chairs each meeting of the board In theory, and sometimes in past practice, the chairman need not continue as the same person from board meeting to meeting In the UK the legal responsibilities of all directors are essentially equal (including chairman) BUT the chairman provides leadership and is essentially to the good functioning of boards

7 directors Executive directors board members who are also employed as senior management executives by the firm (and therefore answerable to the chief executive officer ) Non-executive directors those whose only employment relationship with the firm is as a director Independent (non-executive) directors those who have no financial interest in the firm either than directors fees and shareholdings (and the latter is not necessary) Current good practice (eg. UK Combined Code) specifies that at least onethird of directors be independent non-executive directors

8 board committees Audit committee responsible for supervising financial control of the firm and coordinating independent external auditing (should be comprised of independent non-executive directors) Remuneration committee decides on the pay and conditions of senior executives as well as director fees (again, should be dominated by independent directors) Nomination committee recommends appointments to the board (and a CEO search committee is often created when the position needs filling) Risk committee increasingly common

9 chairman-ceo relationship Corporate governance experts generally advocate separation of the roles The chairman should take the lead for the board in supervising the CEO (albeit in a positive partnership between senior management and directors) Historically (and still often now) directors were nominated by the chairman So combining the role of chairman and CEO can significantly weaken the discipline imposed by the board on the CEO and the senior management team

10 other stakeholders? Representative directors - a concept that places representatives of other stakeholders, typically employees, or sometimes other creditors like a bank representative, on the board (eg. in some European nations) But this conflicts with the concept that a board should be unitary in both the legal position and responsibilities of each director, as well as in motivations (consistent too wit the idea of directors being agents of shareholder principals) Diversity of experience in board membership can be valuable - and so director selection will always consider the mix of expertise in any given board.

11 board & shareholders Appointments to directorships must be ratified by a general meeting of shareholders The board derives its authority from such shareholders meetings Changes to the firm s articles of association, and certain significant decisions potentially impacting on the firm s value (eg. return of capital to shareholders etc) need ratification at an AGM In Anglo-American law the firm is legally distinct from shareholders and shareholders have diverse interests But the board clearly owes its duty to shareholders

12 individual + institutional investors

13 individual investors Individuals declined in significance as shareholders as share markets became more prominent in public & economic life... (eg. from 54% in the UK in 1963 to 14% in 2002) BUT that reflects the huge growth of equities markets and in fact a larger proportion of people now own some shares than in the past Yet stock broking firms serving largely individual clients are far less influential and are being displaced by discount e-brokerages

14 institutional investors.. take capital on behalf of individual or corporate investors (often for employee retirement plans and sometimes spare cash) and invest it. include pension funds either defined benefit or performance-based (ie. Based on market values of assets held) insurance companies life insurance (lifetime income products like annuities, investment trusts (listed and unlisted hold shares in specified listed and unlisted firms and assets; unit price paid by investors shifts like a share price)

15 rise of institutions Institutional investors share of share ownership in the UK has more than doubled in the last 40 years to more than 2/3rds. In the USA they account for over 55% and some 80% of share trades such active trading enhances market liquidity and efficiency (and helps smooth price volatility contrary to popular perceptions) Institutional investors especially managed funds remain less important as shareholders in many continental European and Asian economies In Germany banks historically have taken individual shareholding on deposit and can exercise the attached voting rights

16 institutional investors: role + value I Institutional investors have control over portfolio selection, within limits presented to clients in advance hold shares in their name for clients, and may exercise voting rights attached to shares Institutional investors compete to outperform market indices by more than others

17 institutional investors: role + value II Institutional investors provide economies of scale in analysis, stock trade execution, general administration Large institutional investors will generally get market sensitive information before individuals can Individuals can diversify through such managed funds reducing downside risk (and upside windfalls)

18 managers for managers Institutional investors in turn often assign funds under management to other institutional investors to: to tap distinct expertise (eg, in emerging market equities or particular sectors) to enhance fund performance through promoting competition between funds managers To promote confidence of clients and to dissuade them from spreading their investments around fund managers

19 governance Historically institutional investors tended to be relatively passive shareholders Yet the large scale of funds under management, and so size of share holdings in particular firms, often now makes exit through selling shares costly More expression of voice but typically through informal channels Firms both senior management and board directors give priority to investor relations active communication with key institutional investors and stockbrokers who act for them Individual investors are given far less attention

20 Institutional investors increasingly contribute to better corporate governance through: Their industry associations publishing guidelines to good governance practice Assessing firms against those guidelines with the threat of less investment capital flowing to poor performers Monitor specific firm (and sector and country) performance Voting of shares to support and oppose boards Action most common in relation to remuneration packages for senior executives, directors Evaluate and report on outcomes of their shareholder activism

21 investor relations Investor relations involves firms in regular analyst and investor briefings This provides private opportunities for voice and indeed for analysts to share their assessments of the firm with other analysts (though competition amongst them will be a limiting factor) Analysts especially from brokerage firms issue recommendations on particular firms (eg. buy, hold, sell, outperform, under-perform etc) Focus lists identify companies judged to be performing poorly on either business fundamentals or governance practices

22 rise & rise... Institutional investors will continue to grow importance Government policies in many countries seek to promote increased individual responsibility for retirement incomes through contributory-based schemes etc Managed funds provide individuals with investment diversification, expertise, simplicity albeit at often a significant cost with entry and management fees Many individuals discouraged from extensive direct share ownership through initial losses, complexity Retirement incomes and social policy objectives therefore make effective corporate governance more important

23 across borders.. Institutional investors are now the main mechanism for cross-border portfolio investment flows American (eg. Fidelity) and British managed funds are major sources of capital in all relatively open economies Countries seeking foreign investment need to give close attention to how their accounting, corporate governance and legal practices are perceived Rising shareholder activism in Anglo-American economies by institutional investors may spread then to other countries Surveys showed that Anglo-American fund managers place a higher premium on good corporate governance practices in other countries eg. Japan