THE BOARD S ROLE IN SHAREHOLDERS RIGHTS. Session 7

Transcription

1 THE BOARD S ROLE IN SHAREHOLDERS RIGHTS Session 7

2 Objectives By the end of this session, participants will be able to: Describe the Board s responsibility to shareholders Identity pecuniary and non-pecuniary shareholder rights Compare differences between related party transaction (RPT) and conflict of interest (COI) 2

3 The Board s Role in Shareholder Rights Oversight Value Creation Strategy Risk oversight Risk management Strategy formulation Financial Oversight Control/monitor performance Internal/external audit policies Approval of investments, mergers and acquisitions Ethics/ Duties Create code of conduct (e.g., values, behavior, conflict resolution) Protection of shareholder rights Human Resources Evaluation of management performance Compensation guidelines Approval of HR policies Succession planning Organization Basic organizational design (e.g., dominant axis of management, relations between holdings and subsidiaries) Board Structures Board roles, committees Board policies, proceedings information needs Reporting lines Board calendar Meeting agendas 3

4 The Board s Responsibility to Shareholders Represents interest of all shareholders Authorized to govern the company on behalf of shareholders Enable the ability of shareholders to fully exercise their rights Ensure conflict resolution processes to deal with shareholder disputes 4

5 Typical Shareholder Rights Pecuniary rights Receive a share of the company s profit (dividend) Receive free funds in event of reduction of share capital Receive free shares in the event share capital is increased from the company s reserves Pre-emption rights Receive residual value in the event of liquidation Non-pecuniary rights Receive timely information Pose questions prior to the shareholders meetings Participate and vote at shareholders meetings Claim damages made by the CEO and directors to the company 5

6 Preparing for the Shareholders Meetings What are the key issues? Concerns about results or operational issues? Any adverse media/ngo/legal and regulatory issues (e.g., environmental and social)? Any investor or analyst issues of public interest? Any difficult shareholders? Any controversial transactions, etc.? External auditor qualifications? Discussions with Chairman CEO and Chief Financial Officer Corporate secretary Key investors 6

7 Polling Question: True or False? Conflict of Interest & Related Party Transactions 1. Related party transactions (RPTs) are business deals or arrangements between two parties joined by a special relationship prior to the deal. 2. Related party transactions (RPTs) are common and can be managed by having, e.g., competing offers. 3. A conflict of interest (COI) occurs where your personal interests may obscure your judgment to the detriment of the company s best interests 4. Every related party transaction (RPT) is a conflict of interest 5. Conflicts of interests cannot be managed. 7

8 Conflict of Interest & Related Party Transactions A related party transaction is not necessarily a conflict of interest, although it can lead to one (e.g., at arm s length) Related party transactions (RPTs) are common and can be managed by having, e.g., competing offers A conflict of interest (COI) occurs where your personal interests may obscure your judgment to the detriment of the company s best interests Conflicts of interests must also be managed (e.g., through a formal company process regulating conduct and participation in decisions where the interest occurs) Conflicts of interests and related party transactions are best managed by creating transparency and procedural processes 8

9 Conflicts of Interest Examples of conflicts of interest A company makes a deal in which any of the directors may have a personal interest Direct or indirect purchase by director of the company s shares on basis of non-public information Acceptance by a director of a position in a competing company A director enters into contractual relations with a competing company Dealing with conflicts of interests The chairman is the key person in the whole process The potential conflict of interest should be fully transparent to the board and the corporate officers and reported appropriately The corporate governance rules should describe the process, procedural conduct of the director including whether they are permitted to vote or not Advice! A conflict of interest of itself is not necessarily illegal, the failure to disclose or follow due process may invalidate the transaction in which the conflicted director participated 9

10 Related Party Transactions A business deal or arrangement between two parties joined by a special relationship prior to the deal, e.g., business transaction between a shareholder and corporation, issuing shares to related parties Advice Related parties Controlling company Entities under common control Significant shareholders including members of their families and business associates Key management personnel Board members! Non-related parties Two enterprises with a shared director or manager Two venturers with joint control over a joint venture Providers of finance, trade unions, public utilities, government departments and agencies in the course of their normal dealings Customers, suppliers, etc., with whom an enterprise transacts a significant volume of business The independent directors together with the chairman are the key to manage related party transactions. 10

11 Intra-Group Related Party Transactions Related party transactions are common in the context of groups of companies, e.g. in parent-subsidiary relations. In these cases, the creditors and shareholders of both the subsidiary and parent may be put at risk often unknowingly. The risk for: Creditors at the subsidiary level Creditors at the parent level Shareholders of the subsidiary (but shareholders at the subsidiary level often benefit from being part of the parent s business) 11

12 CASE: ROLE PLAY - Banco Navarra IV Creating a Big Bang or a Big Bust? Read the case Assign the roles Group analysis of the specific role Role play with 1 representative from each group Analysis and discussion 12

13 If you were Carlos, what would you say...? A. Threaten legal action. B. Request fact-finding by an external advisor. C. Ask for an interruption of the Board meeting to call the nominating shareholder. D. Propose a delay of vote to discuss 2 questions. E. Other 13

14 Key Messages The board has a responsibility for creating value for all shareholders protecting against shareholder value destruction Of particular concern should be related party transactions and situations involving conflicts of interest Anti-dilution and profit-sharing rights are important to attract investors and uphold the company s reputation, particularly in closely-held companies and familyowned firms 14

15 Thank you! 15