The Shareholders

Who is a shareholder?
He is a person who owns shares in a company. He is considered a member of the company and its co-owner with certain rights and obligations. Now a company may issue different types of shares, each with its own peculiar attributes. The rights, powers and obligations of the shareholder will depend on the type of shares held by him.

Types of shares
Ordinary Prefered

Features of Ordinary Shares

Permanency Dividend Residual claim on profits Residual claim on assets Voting rights Right to purchase new shares

Features of Preference shares

No voting power Claim on companys profits Claim on companys assets

The real owners of a company

Ordinary shareholders are entitled to the residual of profits and residual of companys assets. This makes them the real risk-bearers in the company, whose rights on the companys profits and assets come after the claims of every one else have been satisfied in full. At the same time, they are the ones who benefit if the profits or the assets of the company increase.

Classification of Equity shareholders

Equity shareholders can be classified into two broad groups Those who invest in a company with an intention to own, control and run the company, this group of shareholders is considered as internal shareholders. Those who invest in a company with a view to earn a return on their investment but have no intention of participating in the management of the company, or putting their nominees on the board. This group of shareholders is considered as external shareholders.

Types of shareholders

Internal shareholders

External shareholders

Companies that own other companies

Large pvt. Investers

Small Pvt. Investors

Investing Organizations

MNCs,Holding companies, conglomerates

Families closed friends

Individuals

Mutual funds, pension funds, investment & commercial banks

Corporate Investors

Individual investors

Institutional Invesotrs

Internal Shareholders
Controlling shareholders Majority of directors on the board In Pakistan, internal shareholders generally own more than 50% of the shares, which enables them to ensure that all or most of directors on the board are their nominees. In USA & Europe, several companies are controlled by shareholders, holding much less than half of the companys total shares. Nominees are elected with the help of external shareholders who may have trust in the management ability.

External shareholders
No or less representation in the board Seldom able to unite and vote collectively Management scientists studying the performance of company boards believe that the prime cause of corporate governance problems is lack of unity between external shareholders

Capabilities of Institutional shareholders

Large sums of money on behalf of their depositors Wants to earn a reasonable return to keep their clients happy Professional and competent staff Institutional investors are knowledgeable and organized investors They divide their portfolios into various categories like duration of investment or volume. In practice, institutional investors refrain from having direct representation on the board. Instead, they use their influence by having a relationship with the companys board or management. In this way, they can communicate their preferences to the company and be sure of being listened do. In Britain and USA, Institutional investors are the ones who raised voice against huge remuneration of directors.

Institutional Shareholders perspective

Generally institutional shareholders allocate a good percentage of its investment portfolio to long term shareholding. They are interested in the sustainable growth of share price, also dividends Due to the size of their shareholding, they can influence the policy making processes of the investee companies.

Role of Institutional Investors in CG

Institutional investors have two main qualities Professional competence size of investment They are therefore in a position to influence the decision making process at the board. Three principal forms of intervention by institutional investors

Role of Institutional Investors in CG

Three principal forms of intervention by institutional investors are: Having a dialogue with the board of directors of investee company, making them aware of their concerns and preferences Carrying our regular evaluation of financial and other reports issued by the company Making a judicious use of their vote. Even if they are not interested in running the affairs of their investee company.

The shareholders, particularly the external ones, expect the following from the company: The board of the company should be accountable to them There should be transparency in all decision making processes in honest manner. It should be recorded in minutes. Directors should not allow self interest to prevail over the interest of the company, or other stakeholders. Directors should manage their companies effectively and efficiently, showing good profits and good growth in the market value of their shares. Executive directors should not award themselves unreasonably high remuneration at the expense of dividends to the shareholders.

What do shareholders expect from the company?

Tools available to shareholders

Larger transactions made by the company, must be disclosed to and approved by the shareholders. The defining size of such transactions may differ from company to company, but generally any transaction that is in excess of say 25% of companys equity is classified as class 1 transaction. All transactions made by the company with related parties must be disclosed to the shareholders. Related parties in this context include directors, major shareholders and other companies in the group, or other companies in which directors, majority shareholders or managers of the reporting company may have an interest.

Tools available to shareholders

Law requires listed companies to issue periodic financial statements to shareholders. These statements must be audited. The appointment of auditors is approved by the shareholders and the audit report is addressed to the shareholders. Directors remuneration must be approved by the shareholders.