Corporate Governance Hassan Tariq

The Shareholders
The Shareholders
Who is a shareholder?
A person who owns shares in a company
He is considered member of the company
A company may issue different types of shares
Shareholders powers, rights and duties depend upon the type of share
Types of Shares
There are two types of shares
1. Ordinary Shares
2. Preference Shares
Ordinary Shares
It is a British term which is widely used in Pakistan
American calls it Common Stock
The term Equity Shares is also used
Ordinary shares are any shares that are not preferred shares and do not have any
predetermined dividend amounts
An ordinary share represents equity ownership in a company and entitles the owner to a vote in
matters put before shareholders in proportion to their percentage ownership in the company.
Salient Features of Ordinary Shares
1. Permanency
2. Residual claim on profits
3. Residual claim on Assets
4. Voting power

1. Permanency
Amount received cant be refunded during life time
Only repaid at the time of liquidation
No obligation of the company to buy-back the shares
Shareholders also cant demand the buy-back
Company doesnt have plan for repayments
It has to meet investors expectations in form of dividends and growth in earnings
2. Residual Claims on Profits
Equity holders are entitled to only residual profit of a company
Equity holders are paid after remunerating other classes of capital
All profit belongs to equity holders after compensating others
In lean years, equity holders get very low profit while in goods years, this can translate
into high rate of return

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Corporate Governance Hassan Tariq
The Shareholders

3. Residual Claims on Assets

In case of companys liquidation, equity shareholders have claim after the claims of
creditors and other types of shareholders
Claim of creditors and preference shareholders are limited to the amount of their debts
or shares
The claim of ordinary shareholders is on all the remaining assets

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Corporate Governance Hassan Tariq
The Shareholders
4. Voting Rights
Ordinary shareholders are true risk bearers of the company and only they have voting
rights
They have right to vote on different matters such as elections of directors, declaration
of dividends and major policy issues
Any person or group having more than 50% of share effectively controls the company
through voting right
TYPES OF VOTING

1. Statutory/Regular/Non-Cumulative Voting
Noncumulative voting is a corporate voting system in which a shareholder can only vote
up to the number of shares s/he owns for a single candidate during the board elections.
Example:
Justice Industries Limited has paid up capital of Rs. 40000
4000 shares of Rs. 10 each
It shareholding pattern is follow;
Mr. Jamil Ahmad (companys chairman) own 2100 shares
ABC Mutual Fund owns 700 shares
XYZ Investment Bank own 500 shares
QRT Insurance Company own 400 shares
The remaining 300 shares are held by individuals.
2. Cumulative/Proportional Voting
Cumulative voting is the procedure of voting for a company's directors;
each shareholder is entitled one vote per share times the number of directors to be
elected.
Example:
ABC Mutual Fund put up two (2) candidates for elections
XYZ Investment Bank put up one (1) candidate for election
QRT Insurance Company put up one (1) candidate for election
Let assume that all individuals get united and put up one (1) candidate
Mr. Jameel can put up ten (10) candidates

Right to Purchase New Shares

Equity shareholders have first right to new shares that a company offer for sale
Public limited companies are required by law to issue new shares to existing shareholders in
accordance with proportionate of existing shareholding pattern
Shareholders are not obliged to buy new shares.
Since most of the companies in Pakistan issue fresh shares at a price below than prevailing
market price so that shareholders can sell these shares
Preference Shares
American calls it Preferred Stock
A share which entitles the holder to a fixed dividend, whose payment takes priority over that of
ordinary share dividends.
In the event of a company bankruptcy, preferred stock shareholders have a right to be paid
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company assets first.

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Preference shareholders usually do not have voting rights

Features of Preference Shares
Their claim on companys profits comes before ordinary shareholders, but restricted up to pre-
determined limit
Dont carry the same degree of risk like ordinary shareholders
Their claim on company properties comes after outsiders but before ordinary shareholders
Corporate Governance Hassan Tariq
The Shareholders

Real Owners of a Company

Ordinary shareholders (real risk-bearers) are real owners of a company because;
They have last claim on the companys profits and assets
They are entitled to all that is left after claims of outsiders
They only have right of vote at companys meetings
They elect directors, choose the external auditor, right to amend companys
constitution, approve companys financial statements and decide the quantum of
dividends to paid each year

Internal Shareholders
Also known as controlling shareholders
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These have majority of directors on board of a company and control all decisions of boards
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In Pakistan, more than 50% of issued shares of the company own by internal shareholders which
enables them to ensure that all or most of directors on the board are their nominees
Corporate Governance Hassan Tariq
The Shareholders
External Shareholders
These have no representation at the board due to minority of shares
Lack of interest and unity among external shareholders is the prime cost of perpetuity of control
over listed companies by families and groups holding even slightly more than 50% shares
Management Scientists studying on performance company boards believe that the prime cause
of corporate governance problems is lack of unity between and interest by external
shareholders

Corporate Shareholders
A corporate shareholder is the term used to describe a business entity that owns shares in
another limited company.
The term corporate shareholder may refer to another limited company, a group of companies,
a general partnership or limited liability partnership, or a non-profit organization.
Basically, a corporate shareholder is any non-human entity that is capable of owning shares.
Institutional Shareholders
Mutual Funds
Raise capital by selling units and use the fund to invest in shares and bound of different
companies e.g. National Investment Trust
Pension Funds
Collect money from employers and employees which they to pay back after long time
when an employee retires
They invest these funds into different companies
Insurance Companies
Collect premiums from clients who they promise to repay with profits at the expiry of
policy term
They invest these funds in different companies to earn profit
Banks
Both commercial and investment banks invest in shares of listed companies
Capabilities of Institutional Investors
Institutional investors make investment in very professional and organized manner
Their competent staff analyze performance of various companies and select most appropriate
for investment
Maintain detailed records of financial and related information of companies in which they have
interest
Monitors companys performance carefully before making long-term investment
Refrain from having different representation of on the board. Instead they use their influence by
having a relationship with the companys board or management
A number of reforms related to CG originated to the interventions by institutional investors
They were the first ones to raise voice against huge remunerations being to executive directors
Institutional Shareholders Perspective
Institutional shareholders make a good percentage of investment portfolio to long term
shareholding which means that;
Greater interest in the sustainability of share value and exert influence on the boards of
directors of investee company
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Dividends payments are imperative for them and they put influence companies to pay
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dividend on regular basis

Influence the policy making processes of investee companies e.g. expansion or
investment programs
o Problem: Institutional investors have a large number of investments. Each investee company
represents a very small percentage to their total investment and hence fails to justify
adequate attention from the managers of institutional investors
Corporate Governance Hassan Tariq
The Shareholders
Role of Institutional Investors in Corporate Governance
Contain qualities which other external shareholder dont have; professional competency and
clout (Power and influence over other people)
Principal forms of intervention by institutional investors;
Having discussion with BODs of investee company and aware them about concerns and
preferences
Evaluation of financial and other reports issued by company and (if necessary) share
with other shareholders and stakeholder
Basically there are not interested to control the affairs of investee company but they
can appoint competent and independent directors on board to ensure quality in
decision making processes
What do (External) Shareholders Expect from Company?
BODs should be accountable to them, answer their queries and present an account of whatever
is done at board meetings
Transparency in decision making processes and no pre-decided decisions should be taken
Directors should not allow self-interest to prevail over the interest of company or stakeholders
Directors should manage company effectively that result in good profits and good growth in the
market value of their shares
Directors should not award themselves unreasonably high remuneration at the expense of
dividends to the shareholders
Tool Available to Shareholders
Class 1 (cost 25% of companys equity) transaction should be disclose to and approved by
shareholders [Companies Act]
Contract Related parties (directors and major shareholders) must be disclosed to shareholders
Companies are required to issue audited periodic financial statements to shareholders and
appointment of auditor is approved by shareholders
Directors remuneration must be approved by shareholders suitably disclosed in financial
statements
Communication between Shareholders and Board
Communication can take any form;
Financial statements which are prepared at fixed interval
Chairmans review [Operational and Financial Review (OFR)] on financial statement and
operations of the company
Various statements which are attached to financial statement
Informal communication through newsletter issued at irregular intervals
Specialized reports issued to its major shareholders i.e. institutional shareholders
Annual general meeting
Shareholders Activism
New trend in corporate world
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It involves shareholders taking a stand against the recommendations made by BODs at the AGM
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It is not necessary such a stand would lead to withdrawal of recommendations but it send
signals to the board about how shareholders feel on any particular issue
If institutional shareholders support shareholders activism, the board may find it difficult to get
its recommendations especially on directors remuneration and dividend declaration
Corporate Governance Hassan Tariq
The Shareholders
Shareholders Activism
Areas in which shareholder may show their dissent are:
Re-election of directors
Re-appointment of auditors
Approval of directors remuneration
Approval of annual accounts
Dividend recommendations
Changes in the share capital
Approval of transactions with related parties

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