Ownership, Control
and Compensation
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Who is a shareholder
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Owner
Beneficiary
Risk bearer
Decision maker
(internal control).
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Types of Shares
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Ordinary shares
Preference Shares
Other types
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Features of Ordinary Shares
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Permanency
No nominal cost to the company
Residual claim on profits
Residual claim on assets
Voting rights
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Cumulative voting rights
Right of purchasing new shares
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Classification of
Equity shareholders
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Internal (invest to own and run)
Corporate shareholders (holding companies)
 Families, groups of friends
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External (invest only for a return)
Individuals
 Institutional investors.
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Internal Shareholders
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Controlling shareholders
Majority not a necessity
Scene in the West
Situation in Pakistan
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External Shareholders
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Generally not on the board.
Lack of unity
Lack of interest
Therefore, lack of influence
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Small Private Shareholders
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Individuals
Only interest in share price change
No long term interest
Only a little interest in earnings
Reactive buyers/sellers
Big losers when things go bad
No influence over Boards
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Large Private Shareholders
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Individuals (but may be acting through trusts,
private limited companies, etc.)
Have long term interest in the company
May have great influence on the company
May provide bulk of executive directors
In Pakistan, these people are the focus of
corporate governance endeavors.
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Corporate Shareholders
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Holding companies
Multinationals
Groups
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Institutional Investors
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Mutual Funds
Managed Funds
Pension Funds
Life Insurance companies
Banks
In UK, it is believed that institutional
shareholders hold, on an overall basis, a majority
of shares of all listed companies.
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Institutional Investors
Perspective
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Long term interest in share value growth.
Current returns are still important.
Ability to evaluate performance.
Power and ability to influence Boards.
But do they have the time to pay attention to
every single company.
Monitoring systems for danger signals.
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Role of II’s
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Capability and Capacity to influence.
Dialogue with directors
Regular evaluation of financial reports
Flag off danger signals
 Sharing info with other stakeholders
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Judicious use of Vote
Could / should seek representation on board
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Some interesting facts
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10% of EDs in European companies do not
know who their top 50 shareholders are.
25% of their CEOs had met only half of their
top 50 shareholders
In Pakistan, most listed companies have majority
held by a family or group and they do not seem
to attach any importance to any other
shareholder.
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Shareholders’ Expectations
from a Company
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Accountability of board members
Transparency in all transactions
Company interest over self interest
Effective and efficient management leading to
good returns and capital growth.
Fair share of real profits.
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Shareholders’ Hold on Board
Shareholders must approve:
 Class 1 transactions
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Related party transactions
Financial statements
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Large size relative to size of the company
Audit report is for shareholders
Directors remuneration
Shareholders elect and can remove directors.
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Tools of Control
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Defined Procedures
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CONTROLS
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Only one way of doing an action
Segregation of duties (internal check)
Physical (cash in safe, maintenance)
Managerial (e.g. budgets, limits, approvals, etc.)
Supervision
Accounting and auditing checks
Selection of right personnel
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Communication between
Shareholders & Board
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Direction: One way reporting or Two way
communication
Nature: Formal or Informal communication
Scope: All or some shareholders
Frequency: Regular or irregular, need based.
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Communication Instruments
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Statutory reports
Chairman’s report (OFR)
Compliance reports
Newsletters, circulars
Meetings with major shareholders
Correspondence
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Shareholders Activism
Refers to stand taken by shareholders against
recommendations of the Board.
 Do they have adequate rights or power?
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Result less important than show of dissent.
Can work only if institutional investors
participate.
Do institutional investors have a duty to
communicate with other shareholders?
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Shareholders’ Activism - 2
If institutional investors join hands with smaller
shareholders:
 Monitoring of board performance
 Direct intervention
 Regular evaluation and sharing of analysis
 But remember, institutional investor
organizations are all run by managers so they
have affinity for managers.
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Areas of Dissent
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Re-election of directors
Re-appointment of auditors
Approval of directors’ remuneration
Approval of annual accounts
Dividend recommendations
Changes in share capital
Other approvals
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