Classification of Stakeholders

(a) Internal stakeholders
Employees, management

(b) External stakeholders
The government, local government, the public, pressure groups, opinion leaders

(c) Connected stakeholders
Shareholders, customers, suppliers, lenders, trade unions, competitors
***************


(a) Direct stakeholders
Those who know they can affect or are affected by the organisation’s activities – employees, major customers and suppliers


(b) Indirect stakeholders
Those who are unaware of the claims they have on the organization or who cannot express their claim directly- wildlife, individual customers or suppliers of a large organization, future generations
*************



(a) Narrow stakeholders
Those most affected by organisation’s strategy- shareholders, managers, employees, suppliers, dependent customers


(b) Wide stakeholders
Those less affected by the organisation’s strategy – government, less dependent customers, the wider community
************



(a) Primary stakeholders
Those without whose participation the organization will have difficulty continuing as a going concern, such as customers, suppliers and government (tax and legislation)


(b) Secondary stakeholders
Those whose loss of participation won’t affect the company’s continued existence such as broad communities
*************



(a) Active stakeholders
Those who seek to participate in the organisation’s activities. Stakeholders includes managers, employees and institutional investors, but may also include other groups not part of an organization’s structure such as regulators or pressure group


(b) Passive stakeholders
Those who do not seek to participate in policy-making such as most shareholders, local communities and government
**************



(a) Voluntary stakeholders
Those who engage with the organization voluntarily – employees, most customers, suppliers and shareholders


(b) Involuntary stakeholders
Those who become stakeholders involuntarily – local communities, neighbours, the natural world, future generations
**************



(a) Legitimate stakeholders
Those who have valid claims upon the organisation


(b) Illegitimate stakeholders
Those whose claims upon the organization are not valid
**************




(a) Recognized stakeholders
Those whose interests and views managers consider when deciding upon strategy


(b) Unrecognized stakeholders
Those whose claims aren’t taken into account in the organisation’s decision making – likely to be very much the same as illegitimate stakeholders
**************



(a) Known stakeholders
Those whose existence is known o the organisation


(b) Unknown stakeholders
Those whose existence is unknown to the organisation (undiscovered species, communities in proximity to overseas suppliers)
*************

Organisational Culture

A pattern of shared basic assumptions that was learned by a group as it solved its problems of external adaptation and internal integration, that has worked well enough to be considered valid and, there fore, to be taught to new members as the correct way to perceive, think and feel in relation to those problems.


1. It is an acceptable way of thinking and acting that is embedded into processes and people.

2. It tends to be driven top down but can also shift and change without strong leadership.

3. It shapes attitudes of staff towards objectives of growth, return and risk, and their attitude towards economic, social and environmental objectives and to ethics and morality.

4. The right culture can promote business success so that agreed objectives are more likely to be met.

5. It can be managed. Good management creates culture that supports company objective.

6. The stance or perceived stance of a company, in terms of attitudes to stakeholders and their interests is a crucial part of a company culture.

7. The implication of the concept of company culture is there may be separate culture for management and staff. These cultures need to be aligned to achieve company objectives.

8. It is composed of many interrelated and sometimes conflicting objectives and values. Some companies focus on profit, others on the 3 Ps = People, Planet and Profits.


********

Stakeholders

Definition

There are a number of definitions of a stakeholder. Freeman (1984), for example, defined a stakeholder in terms of any organisation or person that can affect or be affected by the policies or activities of an entity. Hence stakeholding can result from one of two directions: being able to affect and possibly influence an organisation or, conversely, being influenced by it.

Any engagement with an organisation in whom a stake is held may be voluntary or involuntary in nature.
*********


Importance of identifying all stakeholders

Knowledge of the stakeholders is important for a number of reasons.

1. This will involve surveying stakeholders that can either affect or be affected by company’s project. Stakeholders in the company’s project include the local government authority, the local residents, the environmental group, the local school and the customers.

2. Stakeholder identification is necessary to gain an understanding of the sources of risks and disruption. Some external stakeholders, such as the local government authority, offer a risk to the project and knowledge of the nature of the claim made upon the company by the stakeholder will be important in risk assessment.

3. Stakeholder identification is important in terms of assessing the sources of influence over the objectives and outcomes for the project (such as identified in the Mendelow model). In strategic analysis, stakeholder influence is assessed in terms of each stakeholder’s power and interest, with higher power and higher interest combining to generate the highest influence.

4. It is necessary in order to identify areas of conflict and tension between stakeholders, especially relevant when it is likely that stakeholders of influence will be in disagreement over the outcomes for the project.

5. There is a moral case for knowledge of how decisions affect people both inside the organisation or externally.




********

Institutional Investors

Who are Institutional Investors?

• Institutional Investors manage funds invested by individuals.
• They are the biggest investors in many stock markets.
• They can wield great power over the companies in which they invest.
• Examples are: Pension funds, insurance companies, investment and unit trusts.



Ways of exercising institutional investors’ influence:

1. One-to-one meeting – discussion with chairman, directors or auditors.

2. Voting – Propose resolutions in AGM or EGM, not to re-elect directors.

3. Focus list – putting companies names on a list of underperforming companies

4. Contributing to corporate governance voting systems that measures the corporate governance performance indicators

5. Complain to regulators


*********

Four Roles of Remuneration Committee

(1) Complying with laws and best practice
 To ensure that executive directors do not set their own remuneration.
 Remuneration committee should be staffed by non-executive directors.
 To ensure compliance with any relevant legislation.


(2) Establishing General Remuneration Policy
 Consider pay scales foe directors, taking into consideration the remuneration offered by comparable companies.
 Consider what relation remuneration should have to measurable performance or enhanced shareholder value.
 Consider when directors should receive performance-related benefits.


(3) Determining remuneration packages for each director
 To establish packages that will retain, attract and motivate directors whilst taking into account the interests of shareholders.
 To consider how different aspects of the package are balanced.
 To consider what measure are used to assess the performance of individual directors.


(4) Determining disclosure
 To consider what disclosures should be made in the remuneration committee report in the accounts, in the corporate governance section.
 The report includes details of overall policies and the remuneration o individual directors.



***********

How can Director's Remuneration Package be more aligned to Shareholders' Interest

Explain how the different components of the director’s remuneration package might be more aligned to shareholders’ interests

Balanced package is needed for the following reasons:

The overall purpose of a well-designed rewards package is to achieve a reduction (minimisation) of agency costs. These are the costs the principals incur in monitoring the actions of agents acting on their behalf. The main way of doing this is to ensure that executive reward packages are aligned with the interests of principals (shareholders) so that directors are rewarded for meeting targets that further the interests of shareholders. A reward package that only rewards accomplishments in line with shareholder value substantially decreases agency costs and when a shareholder might own shares in many companies, such a ‘self-policing’ agency mechanism is clearly of benefit. Typically, such reward packages involve a bonus element based on specific financial targets in line with enhanced company (and hence shareholder) value.


(1) Basic salary

 It is the salary laid down in the contract of employment.
 Generally is not related to performance (although increase in it may be).
 Length of contract may not be of excessive length, to protect shareholders’ interests, however, it may not provide enough incentive for directors to perform well.


(2) Performance related bonus

 Cash bonus paid for good performance.
 Performance measures need be determined carefully so that they are not subject to manipulation of profits, do not focus excessively on short-term results and reward individual contribution.
 Example the bonus payable to a sales director - reward based on revenue or profits would play an important part in rewarding performance, on an annual or more frequent basis.


(3) Share and share options

 Rights to purchase shares of a specified exercise price over a specified time period in the future.
 If share price goes up (due to good company performance) and it exceeds the exercise price, director would be able to purchase shares at lower than their market value.
 Share option can be used to align director’s interests with shareholder wishes to maximise company value.
 Share options can be used to reward long-term performance whereas bonuses can be used to reward short-term performance, by specifying that the options may not be exercised for some years.


(4) Benefits in kind

 Car, health care provisions and life insurance.
 It may be difficult to relate these elements to directors’ performance.
 one symptom of the breakdown of the agency relationship is the directors are being rewarded with excessive perks.
 Remuneration committee should ensure that the benefits are not excessive.


(5) Pension

 Pension contribution tends to be linked to basic salary.
 Usually not connected to performance.
 UK combined code stresses that the remuneration committee should consider the pension consequences and associated costs to the company of basic salary increases and changes in pensionable remuneration.



**************

Ways in which company directors leave a board

1. Death

2. Resignation
Directors can leave the board if they resign by notice in writing.

3. Failure to seek re-election
When they are required by the retirement by rotation provision in company constitutions to seek re-election, but they decide not to offer themselves for re-election.

4. Voted out
• Directors being nominated for re-election at an AGM, but members voted against their re-election.
• Directors can also be removed from office by ordinary resolution at an AGM of which special notice has been given to the company.

5. Disqualification
• Disqualified by legislation or court
• Become bankrupt
• Enter arrangement with creditors
• Become unsound mind.
• Commission of serious offence in connection with management of company






***********

Time-limited Appointments

1. Some roles have fixed periods e.g. Chairman, Chief Executive Officer or Directors.


2. It is provided under company’s constitution/articles of association, service contract, legislation, CG codes, etc..


3. Examples are:

• Retirement age at 55 or 60,
• NED to serve for preferably 6 years max under UK Code of CG,
• Higgs Report which recommends annual reelection after 9 yrs.,
• Retirement by rotation after 3 years.
• Fixed period contract of service for ED of Public Listed Companies except in 1st year of contract.
• Company’s Acts require directors over 70 to seek reelection annually.
• 1st year must stand for reelection at AGM as per Company’s Acts and UK Code.



************

Roles of Remuneration Committee

Firstly, the committee is charged with determining remunerations policy on behalf of the board and the shareholders. In this regard, they are acting on behalf of shareholders but for the benefit of both shareholders and the other members of the board. Policies will typically concern the pay scales applied to directors’ packages, the proportions of different types of reward within the overall package and the periods in which performance related elements become payable.


Secondly the committee ensures that each director is fairly but responsibly rewarded for their individual contribution in terms of levels or pay and the components of each director’s package. It is likely that discussions of this type will take place for each individual director and will take into account issues including market conditions, retention needs, long-term strategy and market rates for a given job.


Third, the remunerations committee reports to the shareholders on the outcomes of their decisions, usually in the corporate governance section of the annual report (usually called Report of the Remunerations Committee). This report, which is auditor reviewed, contains a breakdown of each director’s remuneration and a commentary on policies applied to executive and nonexecutive remuneration.


Finally, where appropriate and required by statute or voluntary code, the committee is required to be seen to be compliant with relevant laws or codes of best practice. This will mean that the remunerations committee will usually be made up of nonexecutive members of the board and will meet at regular intervals.



***********

Roles of Employee Representatives

Trade unions are the most usual example of employee representation in corporate governance. Trade unions represent employees in a work facility such as an office or a plant. Membership is voluntary and the influence of the union is usually proportional to its proportion of membership.


Although a trade union is by default assumed to have an adversarial role with management, its ability to ‘deliver’ the compliance of a workforce can help significantly in corporate governance. When an external threat is faced, such as with the reputation losses following the 1970s leak, then the coalition of workforce (via Forward Together) and management meant that it was more difficult for external critics to gain support.


A trade union is an actor in the checks and balances of power within a corporate governance structure. Where management abuses occur, it is often the trade union that is the first and most effective reaction against it and this can often work to the advantage of shareholders or other owners, especially when the abuse has the ability to affect productivity.


Trade unions help to maintain and control one of the most valuable assets in an organisation (employees). Where a helpful and mutually constructive relationship is cultivated between union and employer then an optimally efficient industrial relations climate exists, thus reinforcing the productivity of human resources in the organisation. In defending members’ interests and negotiating terms and conditions, the union helps to ensure that the workforce is content and able to work with maximum efficiency and effectiveness.




*************

Mandatory and Voluntary Disclosures

Mandatory disclosures

These are components of the annual report mandated by law, regulation or accounting standard. Examples include (in most jurisdictions) statement of comprehensive income (income or profit and loss statement), statement of financial position (balance sheet), cash flow statement, statement of changes in equity, operating segmental information, auditors’ report, corporate governance disclosure such as remuneration report and some items in the directors’ report (e.g. summary of operating position). In the UK, the business review is compulsory.


Voluntary disclosures

These are components of the annual report not mandated in law or regulation but disclosed nevertheless. They are typically mainly narrative rather than numerical in nature. Examples include (in most jurisdictions) risk information, operating review, social and environmental information, and the chief executive’s review.



**************

Integrity in Corporate Governance

Meaning of ‘integrity’

Integrity is generally understood to describe a person of high moral virtue. A person of integrity is one who observes a steadfast adherence to a strict moral or ethical code notwithstanding any other pressures on him or her to act otherwise.

In professional life, integrity describes the personal ethical position of the highest standards of professionalism and probity.

It is an underlying and underpinning principle of corporate governance and it is required that all those representing shareholder interests in agency relationships both possess and exercise absolute integrity at all times. To fail to do so is a breach of the agency trust relationship.


Importance of integrity in corporate governance

Integrity is important in corporate governance for several reasons:

1. As corporate governance cannot cover every situation, maintenance of good corporate governance will sometimes depend on judgement not backed by codes. In these instances integrity is particularly important.

2. As integrity is partly about proper dealing in relationships, it also underpins the principles of fair and equitable dealing with shareholders in corporate governance, particularly in relation to directors exercising an agency relationship in respect of shareholders.

3. Good corporate governance is also about maintaining market confidence that the company is being run honestly, firm belief that directors have integrity will promote confidence in the company.



************

Insider dealing/trading

Insider dealing (also called insider trading) is the buying or selling of company shares based on knowledge not publicly available. Directors are often in possession of market-sensitive information ahead of its publication and they would therefore know if the current share price is under or over-valued given what they know about forthcoming events. If, for example, they are made aware of a higher than expected performance, it would be classed as insider dealing to buy company shares before that information was published. Similarly, selling shares in advance of results publication indicating previous over-valuation, would also be considered as insider dealing.



Why is insider trading unethical and often illegal?

By accepting a directorship, each director agrees to act primarily in the interests of shareholders. This means that decisions taken must always be for the best long-term value for shareholders. If insider dealing is allowed, then it is likely that some decisions would have a short-term effect which would not be of the best long-term value for shareholders. For example, businesses which are about to be taken-over often see a significant rise in their share price. In this situation directors might purchase shares in their own companies, seek potential buyers for the company and recommend the sale to shareholders, in order to make a profit on their own share investments. For this reason, a blanket ban on insider dealing ensures that such short-term measures are not taken.

There is also the potential damage that insider trading does to the reputation and integrity of the capital markets in general which could put off investors who would have no such access to privileged information and who would perceive that such market distortions might increase the risk and variability of returns beyond what they should be.




***********

Grounds for Institutional investor intervention

Seven reasons are typically cited as potential grounds for investor intervention.

Whilst it would be rare to act on the basis of one factor (unless it was particularly unfavourable), an accumulation of factors may have such an effect. Furthermore, institutional investors have a moral duty to use their power to monitor the companies they invest in for the good of all investors, as recognised in most codes of corporate governance. Institutional investors have the expertise at their disposal to understand the complexities of managing large corporations. As such, they can take a slightly detached view of the business and offer advice where appropriate. The typical reasons for intervention are cited below.

1. Concerns about strategy, especially when, in terms of long-term investor value, the strategy is likely to be excessively risky or, conversely, unambitious in terms of return on investment. The strategy determines the long-term value of an investment and so is very important to shareholders.


2. Poor or deteriorating performance, usually over a period of time, although a severe deterioration over a shorter period might also trigger intervention, especially if the reasons for the poor performance have not been adequately explained in the company’s reporting.


3. Poor non-executive performance. It is particularly concerning when non-executives do not, for whatever reason, balance the executive board and provide the input necessary to reassure markets. Their contributions should always be seen to be effective. This is especially important when investors feel that the executive board needs to be carefully monitored or constrained, perhaps because one or another of the factors mentioned in this answer has become an issue.


4. Major internal control failures. These are a clear sign of the loss of control by senior management over the operation of the business. These might refer, for example, to health and safety, quality, budgetary control or IT projects. In the case of ZPT, there were clear issues over the control of IC systems for generating fi nancial reporting data.


5. Compliance failures, especially with statutory regulations or corporate governance codes. Legal non-compliance is always a serious matter and under comply-or-explain, all matters of code non-compliance must also be explained. Such explanations may or may not be acceptable to shareholders.


6. Excessive directors’ remuneration or defective remuneration policy. Often an indicator of executive greed, excessive board salaries are also likely to be an indicator of an ineffective remunerations committee which is usually a non-executive issue. Whilst the absolute monetary value of executive rewards are important, it is usually more important to ensure that they are highly aligned with shareholder interests (to minimise agency costs).


7. Poor CSR or ethical performance, or lack of social responsibility. Showing a lack of CSR can be important in terms of the company’s long-term reputation and also its vulnerability to certain social and environmental risks.




*************

Fiduciary responsibility of company

Definition of ‘fiduciary responsibility’

A fiduciary responsibility is a duty of trust and care towards one or more constituencies. It describes direction of accountability in that one party has a fiduciary duty to another.

Traditionally, the fiduciary duty of directors in public companies is to act in the economic interests of shareholders who invest in the company but are unable to manage the company directly.


The case for company extending fiduciary responsibility

1. It clearly demonstrates that the company values the community of which it considers itself a part.

2. It would help to maintain and manage its local reputation, which is important in business.

3. To broaden the fiduciary responsibility would be an important part of the risk management strategy, especially with regard to risks that could arise from the actions of local stakeholders.

4. It could be argued that there is a moral case for all organisations to include other stakeholders’ claims in their strategies as it enfranchises and captures the views of those affected by an organisation’s policies and actions.



*********

Distinguish between AGM and EGM

• Annual general meetings (AGMs) are a part of the normal financial calendar for all limited companies and take place on the occasion of the year-end results presentation and the publication of the annual report.

• Extraordinary general meetings are called to discuss strategic and other issues with shareholders outside the normal financial calendar.


Purposes

Both types of meetings are formal meetings between company directors and the shareholders of the company. They typically involve presentations by the board (typically the chairman and/or CEO) and a chance for shareholders to question the board.

AGMs
The AGM is a formal part of a company financial year. Its purpose is to allow the board to present the year’s results, discuss the outlook for the coming year, present the formal, audited accounts and to have the final dividend and directors’ emoluments approved by shareholders. Shareholder approval is signalled by the passing of resolutions in which shareholders vote in proportion to their holdings. It is usual for the board to make a recommendation and then seek approval of that recommendation by shareholders. The dividend per share, for example, is recommended by the board but only paid after approval by the shareholders at the AGM. Institutional shareholders may employ proxy voting if they are unable to attend in person.


EGMs
Extraordinary meetings are called when issues need to be discussed and approved that cannot wait until the next AGM. A full year can be a very long time. In some business environments when events necessitate substantial change or a major threat, an EGM is sometimes called. Management may want a shareholder mandate for a particular strategic move, such as for a merger or acquisition. Other major issues that might threaten shareholder value may also lead to an EGM such as a ‘whistleblower’ disclosing information that might undermine shareholders’ confidence in the board of directors.




***********

Differences between Charities and Listed Companies

Firstly, the two types of organisation are different in terms of regulation.

• Listed companies are subject to all the provisions of company law plus any listing rules that apply. Listing rules, such as the need to adopt the Combined Code in the UK, impose a number of obligations upon listed companies such as non-executive directors, committee structures, a range of reporting requirements, etc.

• Charities, in contrast, must receive recognition by a country’s charity authority to operate and they then receive the concessions that charitable status confers. This often involves favourable tax treatment and different reporting requirements. Because charities are not public companies they are not subject to listing rules although, depending upon the country’s rules, they may be subject to audit and have some reporting requirements.


The second difference is in the strategic purpose of the organisation.

• Listed companies exist primarily to make a financial return for their investors (shareholders). This means that they employ and incentivize people, including directors, to maximize long-term cash flows. Value is added by the creation of shareholder wealth and this is measured in terms of profits, cash flows, share price movements and price/earnings.

• For a charity, the strategic purpose is to support the charitable cause for which the organisation was set up. It is likely to be a social or benevolent cause and funds are donated specifically to support that cause and this expectation places a different emphasis on the purpose of governance.


Thirdly, the two are different in terms of stakeholders and societal expectations.

• Society typically expects a business to be efficient in order to be profitable so that, in turn, it can create jobs, wealth and value for shareholders. Society expresses its support for a business by participating in its resource or product markets, i.e. by supplying its inputs (including working for it) or buying its products.

• A charity’s social legitimacy is tied up with the charity’s achievement of benevolent aims. Stakeholders in a business often have an economic incentive to engage with the organisation whereas most stakeholders in a charity have claims more concerned with its benevolent aims.


*************



Governance Arrangements
There can be a number of substantive differences between the governance structures of public companies and charities.

• In a public company, a board consisting of executive and non-executive directors is accountable to the shareholders of the company. The principals are able to hold the board accountable through AGMs (annual general meetings) and EGMs (extraordinary general meetings) at which they can vote on resolutions and other issues to convey their collective will to the board.

• In a charity, the operating board is usually accountable to a board of trustees. It is the trustees who act as the interpreters and guarantors of the fiduciary duty of the charity (because the beneficiaries of the charity may be unable to speak for themselves). The trustees ensure that the board is acting according to the charity’s stated purposes and that all management policy, including salaries and benefits, are consistent with those purposes.



**********

Explain the core aims that underpin corporate governance regulations

Ensuring Integrity

A basic aim of all governance guidance has been to promote ethical fair dealing by companies.


Promotion of Strategic Objectives

Reports have been sought to ensure adherence to and satisfaction of the strategic objectives of the organization, aiding effective management. The UK’s Hampel Report stressed the importance of good governance in contributing to a business’s development.


Control over Companies

CG can be seen as a creating a framework for the control of multinational companies whose interests may not coincide with national interests. CG provides a framework for enforcing companies with laws on this sort of company.


Enhancing Risk Management

CG guidelines have promoted risk management principles, especially financial, legal and reputation risks. They have required compliance with accepted good practice in the jurisdiction in question and appropriate systems of control to be in place.


Involvement of Shareholders

As well as protecting shareholders, governance recommendations are designed to enhance shareholder involvement, particularly institutional shareholder involvement, in companies. This is achieved by giving them more detail about company activities, and improving proceedings at annual general meetings by recommending votes on remuneration policy and the report and accounts.



Protection of Shareholders and Stakeholders

Governance reports aim to protect shareholders in the same way that investors are protected who buy any other financial investment product, such as insurance or a pension. Governance reports are also concerned with fulfilling responsibilities to all stakeholders. This includes minimizing potential conflicts of interest between the owners, managers and wider stakeholder community, and treating each category fairly.


Establishment of accountability

Governance reports are designed to address the problem of the over-mighty managing director by emphasizing the role of the whole board in major decisions, and the need for a clear division of responsibilities at the head of companies so that one person does not enjoy unfettered power.


Maintenance of Effective Scrutiny

Governance provisions have stressed the importance of the board exercising oversight over the company’s activities by regular meetings and regular review of key areas, for example the adequacy of control systems. Governance provisions have also aimed to ensure the independence of those with primary responsibility for scrutinizing company activities. This include prescribing what constitutes, or what might jeopardize the independence of non-executive directors, it also means enhancing their position by prescribing that a certain number of directors be non-executive, and giving the internal and external auditors the right to communicate with an audit committee staffed by non-executive directors.


Provision of Accurate and Timely Information

Governance reports are designed to complement developments in financial reporting guidance by emphasizing the need for accounts to present a true and balanced picture of what is happening in the organization. They also emphasize the importance of timely information as an aid enabling directors to supervise company activities better.




**************

GATEKEEPER AND INFLUENCER IN CORPORATE GOVERNANCE

The Gatekeeper

Although good corporate governance pivots on the effectiveness of company directors, the boards often rely on the input of professionals within and outside the companies. Otherwise, how can we expect the directors to approve financial statements, interpret laws, assess the company's internal controls and state of compliance, advise on reliability and quality of disclosures, and provide corporate finance expertise?

These professionals the so-called gatekeepers include company secretaries, internal and external auditors, corporate advisers, lawyers, rating agencies and valuers.

The independence, integrity and professionalism of these advisers are critical in ensuring that decisions made by the board are in the best interest of the company. While the failure of these professionals in carrying out their responsibilities can have adverse consequences on the company, undue or misplaced reliance on them can result in boards being complacent and dependent.


The Influencer

The influencers are the analysts, financial journalists, watchdog groups and other corporate governance advocates. The Blueprint points out that this group does not have explicit nexus with companies or their boards, but they have an important role in promoting corporate governance through their ability to influence public opinion and to highlight poor governance practices.


5 Recommendations to step up the role of gatekeepers and influencers

1. The first is to explore extending whistleblowing obligations, which currently apply to auditors, to corporate advisers and company secretaries.

2. The second recommendation seeks to enhance the role of company secretaries by clarifying their role and looking into qualification requirements needed to raise the skills and professional standards for company secretaries of listed companies..

3. Establish a responsibility-sharing arrangement for corporate advisers in advising on corporate transactions;

4. Develop corporate governance programmes for financial journalists, and encourage provision of awards and scholarships for outstanding financial journalism in promoting corporate governance; and

5. Gatekeepers and influencers to enhance internal codes of conduct and internal controls to prevent the abuse of market-sensitive information, and to promote integrity and ethical conduct.




***********

Director's Remuneration Package

Explain how the different components of the director’s remuneration package might be more aligned to shareholders’ interests

Balanced package is needed for the following reasons:

The overall purpose of a well-designed rewards package is to achieve a reduction (minimisation) of agency costs. These are the costs the principals incur in monitoring the actions of agents acting on their behalf. The main way of doing this is to ensure that executive reward packages are aligned with the interests of principals (shareholders) so that directors are rewarded for meeting targets that further the interests of shareholders. A reward package that only rewards accomplishments in line with shareholder value substantially decreases agency costs and when a shareholder might own shares in many companies, such a ‘self-policing’ agency mechanism is clearly of benefit. Typically, such reward packages involve a bonus element based on specific financial targets in line with enhanced company (and hence shareholder) value.


(1) Basic salary

 It is the salary laid down in the contract of employment.
 Generally is not related to performance (although increase in it may be).
 Length of contract may not be of excessive length, to protect shareholders’ interests, however, it may not provide enough incentive for directors to perform well.


(2) Performance related bonus

 Cash bonus paid for good performance.
 Performance measures need be determined carefully so that they are not subject to manipulation of profits, do not focus excessively on short-term results and reward individual contribution.
 Example the bonus payable to a sales director - reward based on revenue or profits would play an important part in rewarding performance, on an annual or more frequent basis.



(3) Share and share options

 Rights to purchase shares of a specified exercise price over a specified time period in the future.
 If share price goes up (due to good company performance) and it exceeds the exercise price, director would be able to purchase shares at lower than their market value.
 Share option can be used to align director’s interests with shareholder wishes to maximise company value.
 Share options can be used to reward long-term performance whereas bonuses can be used to reward short-term performance, by specifying that the options may not be exercised for some years.


(4) Benefits in kind

 Car, health care provisions and life insurance.
 It may be difficult to relate these elements to directors’ performance.
 one symptom of the breakdown of the agency relationship is the directors are being rewarded with excessive perks.
 Remuneration committee should ensure that the benefits are not excessive.


(5) Pension

 Pension contribution tends to be linked to basic salary.
 Usually not connected to performance.
 UK combined code stresses that the remuneration committee should consider the pension consequences and associated costs to the company of basic salary increases and changes in pensionable remuneration.



********