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Corporate Governance

Corporate Governance. Chapter 4: Shareholders. Who is a Shareholder?. A person who owns shares in a company. The shareholders must, show a greater degree of interest and involvement in the appointment of the directors and the auditors.

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Corporate Governance

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  1. Corporate Governance Chapter 4: Shareholders

  2. Who is a Shareholder? • A person who owns shares in a company. • The shareholders must, show a greater degree of interest and involvement in the appointment of the directors and the auditors. • They should indeed demand complete information about the directors before approving their directorship.

  3. AGM • Combined code of corporate governance makes following recommendations in respect of AGM: • Encourage attendance by members • Encourage to ask questions by members • One vote per share • Do not have to be physically present at AGM • Proxy form

  4. Rights of shareholders • Rights, powers & obligations of shareholders will depend on the type of shares held by him. • Types of shares: • Preference shares • Ordinary shares • Permanency • No nominal cost • Residual claim on profits • Residual claim on assets • Voting power • Right to purchase new shares

  5. Ordinary Shareholders’ Rights • Permanency • A company that raises equity doesn’t have to plan for its repayment. • It has only to meet shareholders’ dividend and growth in earnings. • No nominal cost • Company is not obliges to pay any dividends to ordinary shareholders. If management of a company can convince its shareholders that it has lucrative reinvestment opportunities, the shareholders can vote to forego dividends to help build company's’ financial base. • Deferral of dividend payment doesn’t affect the net worth of these shareholders, infact it leads to increase in book value of shares which leads to a better market price.

  6. Ordinary Shareholders’ Rights • Residual claim on profits • Dividends can be paid to equity holders only after all other classes of capital have been compensated. • This means in lean years, they will get low or nil return or in good years they will get high rate of return. • Residual claim on assets • In case of liquidation, ordinary shareholders have claim on the company’s assets after the claim of creditors and other classes of shareholders. • The claim of creditors and preference shareholders are limited to the nominal value of their debt or shares whereas the claim of ordinary shareholders is on all the remaining assets.

  7. Ordinary Shareholders’ Rights • Voting power • They have a right to vote at the company’s meeting on matters like election of directors, declaration of dividends, etc • These voting rights are accumulative. • Right to purchase new shares • Ordinary shareholders have preemptive rights to any new shares that a company may offer for sale to public. • All public ltd companies are required by law to offer all new issue of shares to their existing shareholders. • A shareholder is not obliged to buy these new shares, he has a right which he can exercise himself or simply sell it.

  8. Corporate Investors • Individual Investors • Institutional Investors

  9. Types of Shareholders Corporate Shareholders: MNCs open subsidiaries in other countries rather than opening a branch there but control remains with the holding company.

  10. Types of Shareholders These make a business of investing in shares/bonds of other companies. They have: Professional competence Clout due to size of their shareholding

  11. Expectations of Shareholders • Board should be accountable to them • Transparency in all decision making • Directors are not allowed to give preference to their self-interests over company’s interest • Directors should manage company effectively and efficiently • Profits of company should be shared fairly among the shareholders

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