Corporate Governance – Principles, Policies and Practices 3e

1. Corporate Governance – Principles, Policies and Practices 3e Chapter 10 The Governance of Listed Companies

2. The governance of listed companies - In which we consider: - ownership of listed companies - shareholder rights -shareholder activism and the role of institutional investors -shareholder relations -disclosure of substantial share-holdings and directors’ interests -the governance of complex corporate structures -block-holders and universal ownership -dual-listed companies -dual class shares.

3. Ownership of listed companies Differences in shareholder power • A listed company with shares widely spread between many individual and institutional shareholders • A listed company dominated by institutional shareholders • A listed company with a single majority shareholder A listed company in which some large shareholders form a block • A family company, listed with outside shareholders but with a majority of voting shares in family hands • A company which is listed still run by the founder • A company which is listed but is the subsidiary of another company.

4. Ownership of listed companies Complex chain of intermediaries, acting as agents, between company and owner. • the ultimate owner is an individual who invests in a private pension fund, • which invests some of its funds in a hedge fund, • which in turn invests in a fund of funds to hedge its risk, • which invests in a commercial property fund, • which places some of its funds in the hands of a financial institution, • which invests ultimately in a listed company, • but lends the shares as collateral for a deal it has made.

5. Shareholder rights Ownership of a share usually provides the right to: • have your details in shareholder members’ register • receive notice of all shareholder meetings • receive the formal company accounts, directors’ and auditors’ reports and other statutory notices • attend all shareholders’ meetings • vote, either in person or by proxy, at shareholder meetings • view the company’s statutory records, including the register of members, the register of loans charged against the company’s assets, the register of directors, officers and company secretary, and the register of their share interests • receive dividends that have been duly declared for that class of share.

6. Shareholder rights Shareholders do not have a right to: • attend internal meetings of the company • access management accounts or other corporate information • get involved in management matters.

7. Shareholder rights In shareholders’ annual general meetings (AGM) decisions made by ordinary resolution with simple majority of the members voting in person or by proxy include the: • approval of the accounts presented by the directors • approval of the re-appointment of auditors • payment of dividends proposed by the directors • approval of transactions between company and connected persons • appointment and re-appointment of directors.

8. Shareholder rights 2007, European Union (EU) published a Shareholder Rights Directive, to improve shareholders’ rights and solve problems in the exercising of such rights across borders in the member states. The directive applies to companies whose shares are traded on stock markets n the European Economic Area (which covers the EU countries plus Iceland, Liechtenstein and Norway: but NOT Switzerland).

9. Shareholder rights 2009, UK Companies (Shareholder Rights) Regulations implemented the EU Directive. Shareholders acquired the right to ask questions at shareholder meetings, which companies must answer unless they can show that disclosure would not be in the company’s interest Companies must provide a website, with information relevant to shareholders interests, including their right to ask questions and how to vote.

10. Shareholder activism In the 19th century model of the company, shareholders were individuals and met with then directors periodically at company meetings Shareholder democracy, with one share-one vote, reflected power of ownership.

11. Shareholder activism But today, in most listed companies, • the shareholders are numerous, geographically spread, and have different expectations of the company. • shareholders include corporate institutional investors as well as individuals • shareholder democracy, one share-one vote, no longer provides shareholder power.

12. Shareholder activism Recent calls for investors (particularly institutional investors) to be more active in exercising governance power Some suggest that increasing shareholder activism as irresistible Shareholder activism can take a number of forms often communication and negotiation directly with management But activism can involve: • media campaigns • blogging to change corporate practices • proxy battles advancing shareholder resolutions to force change • calling shareholder meetings • litigation against companies or their directors Some shareholder activists use their shareholding to advance their own social, environmental or political agenda to influence corporate behaviour.

13. Shareholder activism But shareholder activism can be controversial. • Shareholders, having elected their directors, should allow them freedom to act without having their business decisions second-guessed. • Separation between shareholders and top management, it is argued, lies at the heart of the governance system.

14. Shareholder relations Companies with pro-active shareholder relation activities have a two-way channel of information, informing and hearing from: • both existing and potential shareholders • securities analysts • the financial community.

15. Shareholder relations Shareholder relation activities take many forms: • routine and special reports • inter-active web sites • newsletters • shareholder meetings • press conferences • road shows • one-on-one communication and meetings with individual shareholders to resolve questions and explore issues about the company’s strategies, policies, and financial standing.

16. Disclosure of substantial share-holdings and directors’ interests Most jurisdictions and many stock exchanges require the disclosure of shareholders with substantial interests in listed companies Disclosure is usually required of directors’ dealings in their company’s shares, to deter directors from benefitting from insider knowledge they have of the company’s affairs.

17. Complex corporate structures • Major companies operate through groups • Complex ownership structures raise board level governance issues • Pyramids • Chains • Networks • Cross-holdings.

18. The governance of private companies and other corporate entities • Corporate groups - some definitions: • A holding company is the company at the head of a group pyramid of companies. Its board of directors is often called the 'main board' • A subsidiary company is one in which the holding or parent company holds all or a majority of the voting shares in that company • An associated company is one in which the holding company, though not holding a majority of the shares, has sufficient interests to control it and determine its actions.

19. Pyramid group Holding company Subsidiary company Associate company Complex corporate structures Governance through the legal corporate structure Governance through the management control structure Protection of minority interests in groups.

20. BP Amoco 1998 merger BP plc Other businesses Exploration and Production businesses Refining and Marketing businesses Etc. Etc. Etc. BP Alternative Energy Ltd BP TrinidadLtd BP Alaska Ltd BP Australia Ltd Deutsche BP gmbh Complex corporate structures BP Plc (British Petroleum) (abbreviated corporate ownership pyramid)

21. Complex corporate structures Why create corporate pyramids? • Corporate strategic grouping • Legal contracting (contracts, employment etc.) • Taxation • Protection of limited liability • piercing the corporate veil • Providing a basis for non-trading activities • Management control.

22. Complex corporate structures

23. Chained group Complex corporate structures

24. Complex corporate structures • Models of corporate governance Figure 10.3: Example of gearing in a chain of companies

25. Complex corporate structures • To influence decisions throughout the chain without full investment • To obtain financial gearing • For taxation benefits.

26. Networked group Complex corporate structures

27. Complex corporate structures

28. Complex corporate structures

29. Block-holders and universal ownership If a few investors own a significant proportion of the voting shares in a company, and act together, they form a shareholders’ block Acting as a block they could influence corporate decisions, on for example: • corporate strategy including acquisition policy • appointment or dismissal of directors • financial strategy including dividend policy • capital restructuring In Italy voting trusts or syndicates (patti di sindacato) are groups of large shareholders who sign an explicit legal agreement to vote together Such voting trusts can: • ensure continuity and stability in management strategies and policies • prevent conflicts of interest between large shareholders.

30. Dual Class, multiple voting shares • Wallenberg family, Sweden • 40% Swedish Stock Exchange value Wallenberg Family interests and trusts (c50%) Investor Ltd (public company 100k investors) Value Votes Saab 19% 38% Ericsson 5% 20% Scania 10% 20% ABB, Scania Bank, Astra-Zeneca, Atlas Copco

31. Carnival Corporation Ltd. Incorporated in Panama Listed on NYSE Carnival Plc. Incorporated in UK Listed on London SE Carnival Cruise Lines, Princess Cruises Holland America Line, Ocean Village Cunard, P&O Cruises Australia, Windstar Cruises Dual listed companies Carnival lines

32. Dual listed companies Benefits of dual-listing include: • continuing existing successful businesses • protecting brand names • taxation benefits • sustaining national pride Disadvantages include: • conflict between the two managements • disagreements between the boards • legal difficulties in applying the inter-company contracts • challenges from shareholders about unfair benefits • taxation difficulties, including transfer prices for inter-group trading • problems if the group wants to unravel the dual-listing agreements.

33. The governance of listed companies - in which we have considered: - ownership of listed companies - shareholder rights -shareholder activism and the role of institutional investors -shareholder relations -disclosure of substantial share-holdings and directors’ interests -the governance of complex corporate structures -block-holders and universal ownership -dual-listed companies -dual class shares.