Re: Consultancy report
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Re: Consultancy report
Table of contents
Title page 1
Your rights and responsibilities as corporate shareholders; division of responsibility between shareholders and directors; statutory rights and responsibilities under the UK legislation and the provisions of the UK Stewardship Code 3
The German two-tier corporate board, how it’s structured, what are the advantages and disadvantages, does this structure have to be followed in a German incorporate company? 7
The key features of CSR and what to look for from the management of a socially responsible company 11
- Your rights and responsibilities as corporate shareholders; division of responsibility between shareholders and directors; statutory rights and responsibilities under the UK legislation and the provisions of the UK Stewardship Code
Shareholders, who are in essence the owners of businesses, play an integral role in ensuring corporate governance structures are in place for the smooth running of their business. The Cadbury report, which is deemed to be the anchor for corporate governance highlights that the relationship that subsists between shareholders and directors is that of employer and employee, with shareholders formally electing directors to run their business on their behalf, and subsequently reporting to the shareholders on their stewardship role. Shareholders, therefore, are responsible for ensuring that there is a board of directors in place who help in the management of the business and provision of strategic leadership and reporting to the shareholders on the performance of the business through the annual general meeting. Shareholders, through the annual general meetings, get the opportunity to interrogate the annual report presented to them by the board of directors, ratify business transactions that the business has already entered into and approve future extraordinary business; they elect board members and independent auditors.
Besides the traditional responsibilities and rights enjoyed by ordinary shareholders, institutional shareholders such as Westland’s who manage funds on behalf of clients, have additional responsibilities that are expected of them by virtue of their stewardship role as fund managers. According to principle 1 of the UK Stewardship Codes, as institutional shareholders Westland’s Group Plc. have a responsibility to publicly declare how they intend to discharge their responsibilities. To this end, it’s expected that they will play a key role in influencing the strategy, capital structure, corporate governance structures, culture, and remuneration. They also have a duty to disclose how their stewardship activities enhance and protect the value of their shareholding for the benefit of the ultimate client.
More often than not, as an institutional shareholder, Westland’s Group Plc. will find itself in situations that bring conflicts of interests in relation to its stewardship role. In order to maintain objectivity in the conduct of its affairs, such conflicts of interest must be declared and disclosed. Since their duty is to act in the best interest of their clients or beneficiaries, institutional shareholders have a duty to have and publicly disclose their policies on identification and management of conflicts of interests, in a way that the interests of beneficiaries or clients are prioritized. Such a policy should also address issues such as what happens when the interests of clients of beneficiaries differ, especially in times when the institutional shareholder is called to vote.
One of the key rights and responsibilities of Westland’s as an institutional shareholder is to actively monitor their investee companies. Since effective monitoring is one of the key components of stewardship, Westland’s Group Plc. is expected to keep tabs on the developments in the investee companies whether internal or external, satisfy themselves as to the effectiveness of the investee’s leaderships, and the quality of the company’s reporting frameworks and generally ensure that the board of directors adhered to the UK Code of Corporate Governance, through attending and actively participating in annual general meetings and making their contributions in any other available platforms as to the organization and management of the company.
As institutional shareholders, Westland’s Group Plc. Must also establish the relevant guidelines that govern when and how to intervene in the running of the investee companies. In instances such as when there are concerns about a company’s strategy, governance, and performance, risk management, the shareholder must consider the appropriate actions necessary to steer the company onto the path of profitability. In this case, shareholders may hold additional meetings with the management to address those concerns express their concerns through the advisors of the company and in some cases even make public statements ahead of general meetings and in extreme cases requesting for the decomposition of the board of directors.
It’s important to note that companies often have many shareholders, which demands of collaboration with other shareholders in coming up with unanimously useful decisions. Collective engagement is helpful especially when the company is in distress or when the risk exposure threatens to diminish shareholder value. To this end, Westland’s Group Plc. should disclose their policy on collective engagement, indicating their readiness to work with other investors for the overall good of all. Such disclosure must also indicate the circumstances under which the shareholders would consider participating in collective engagements.
Finally, as an institutional shareholder managing funds on behalf of clients, Westland’s has a responsibility to periodically report on their voting and other stewardship activities. As asset managers, they should periodically account to their clients how they have discharged their responsibilities, in both qualitative and quantitative terms. To this end, there should at least be an annual reporting to the beneficiaries/clients on how they have executed their stewardship policies.
Principles of corporate governance envision a collective responsibility among all stakeholders i.e. shareholders, management, the board of directors and auditors to ensure that the business is run smoothly and in compliance with legal and corporate governance requirements. It also envisions a clear separation of duties and responsibilities all stakeholders as envisioned in the principles of corporate governance. While shareholders as the owners of the business have the overall supervisory role over all other stakeholders, directors also play a key role in monitoring the management of the business. Principles of corporate governance (OECD Principles of Corporate Governance , 2004), envision a board of directors that is distinctly separate from the day to day management of the business, and with the capacity to effectively guide the strategic direction of the business besides supervising the management. To effectively accomplish this role, the board of directors provides entrepreneurial leadership within a prudent risk management framework that sets the strategic aims of the business, ensures that there are adequate resources for the running of the business and finally reviews the performance of the management.
Besides driving strategic objectives in the business, directors are tasked with the responsibility of appointment of directors and senior management through the appointments committee, preparation and presentation of financial statements that present a true and fair view of the company operations and institution of appropriate internal controls and risk management measures that ensure that financial statements are free from errors and material misstatements. Finally, the duties of the board of directors extend to their interactions with shareholders, with clear duties to ensure that there is adequate dialogue with shareholders that is based on mutual understanding of objectives. Through the annual general meetings, directors should adequately communicate with shareholders and encourage participation through the appropriate means. The resolutions of the general meetings should be made available and deliberated by all board members with a view of enhancing the company’s general performance and corporate governance.
- The German two-tier corporate board, how it’s structured, what are the advantages and disadvantages, does this structure have to be followed in a German incorporate company?
In Germany, corporate law is based on a variety of both statutory and non-statutory regulations. Some of the statutes that have a wide discretion allow a certain category of companies to adopt a voluntary two-tier board structure, which if implemented, is governed by the company’s articles of association. A company that adopts a European-limited liability framework has the ability to choose its own board structure which is governed by the Council Regulation SE97 or the German Implementation act98. There is however other statutes which make a two-tier board structure a mandatory requirement, such as the German Stock Corporation act.
Under the mandatory two-tier board structure, there are executive directors that sit on the management board, who are tasked with the responsibility of deciding on the company objectives and implementing the company-wide strategic measures. This is a board of directors that is involved in the day to day management of the company, make strategic decisions and generally ensure implementation of company policies and procedures. Then there is the supervisory board, which is comprised specifically of non-executive directors whose role is to monitor the decisions taken by the management board on behalf of the shareholders and other parties. In its supervisory capacity, the supervisory board has the mandate to recruit and fire the member of the management board. In practice, the number of board members varies mostly depending on the company size, with an average of 5.6 members according to a 2012 study (Weil, Gotshal & Manges, 2014). It’s the responsibility of the management board to jointly run the company by providing strategic direction and focus of operations. Its day to day responsibilities revolve around managing workforce, coordinating tasks such as maintaining proper accounting records and informing the shareholders, supervisory board and the federal authorities informed of the financial and operational state of affairs of the business.
The supervisory board, on the other hand, is appointed by the shareholders during annual general meetings. Depending on the provisions of the articles of association of the company and the size of the workforce, sometimes the employees may elect one-third or half of the supervisory board members. In some cases, the article of association gives a certain class of shareholders the right to directly dispatch sometimes up to one-third of board members. Their removal is determined by the appointing authority, whether employees or shareholders, with the average size of a supervisory board ranging between three and twenty-one members depending on share capital and specific company article of association. According to McKinsey & Company (2007), the code of corporate governance in two-tier boards demands that female board members must comprise at least 30% of the total supervisory board membership.
requirements for membership to a supervisory board are based on member
expertise and specific requirements as per the articles. Mostly, representation
of shareholders, labour unions, employees, business partners, creditors, parent
company and state are some of the key supervisory board member positions.
Roles played by the supervisory board include but not limited to controlling the decisions of the management boards, review and inspection of the books of accounts, annual report and overseeing the work of external auditors, analysis and presentation of information presented by the management board to the shareholders during the general meeting (Siems, Cabrelli, 2013). While the supervisory board cannot necessarily or directly interfere with the decisions of the management of the company, more often than not, the articles of the supervisory boards give it express powers over some management decisions such as extension of credit facilities to management board members, measures that have significant impact on the company’s earnings etc. The supervisory boards have a final mandate of ensuring that there is a balance struck between the interests of the business partners, employees, shareholders and creditors.
Advantages and disadvantages of the two-tier board structures
has been a continuing debate on the relative strengths and weakness of the
two-tier board system, compared to a one-tier board. Scholars agree that the major difference
between the two board systems is anchored on the need for independent
monitoring of decisions made by the management board. One of the main
advantages of the two-tier board system is efficiency. Shareholders, in their
bid to maximize profitability, may avoid sub-optimal corporate governance
systems. It must be remembered that companies with strong corporate governance
systems are able to access huge capital and liquidity outlays from capital
markets, as opposed to those institutions with weaker corporate governance
two-tier board is deemed to be stronger in its supervisory role and therefore
enhances corporate governance for the institution (Block, David,
and Gerstner, Anne-Marie,2016). According to the agency
theory, the management and executive control is delegated by the shareholders
to the managers, which often leads to opportunities for exploitation by the
management, thus lowering the expected returns for the shareholders. Employing
a supervisory board structure increases the shareholders’ control of the
decisions made by the management and therefore improves the prospects of better
management. Essentially, the role of a separate supervisory board over and
above the management board increase efficiency in organizational monitoring.
Having a supervisory board that has the power to influence managerial decision
making is an effective form of organizational monitoring.
A supervisory board that comprises mostly of non-executive directors who are also outsiders present the shareholders with the opportunity to elect members who are experienced and knowledgeable in their areas of specialization, and who will generally be able to add value to the strategic direction taken by the organization. Opponents of a one-tier system argue that a combination of both executive and non-executive directors may jeopardize the ability of the board to monitor the management directors or even to provide independent, professional and objective advice to the management. There is also the argument that one-tier boards which have mostly insider-dominated may miss opportunities that may be easily available to outsiders, who may have a wider view of the business.
The disadvantages of two-tier boards revolve around ease of decision making as a result of increased information asymmetry. It must be noted that non-executive board members are drawn from different fields, and since they are not involved in the day to day running of the business, they may not necessarily grasp the issues that surround the business. Decision making, therefore, may take longer due to such information asymmetry. A two-tier board system with many layers of the boards, therefore, complicate the decision-making process thereby delaying key decisions in the organization. In their study (Block, David, and Gerstner, Anne-Marie, 2016), observed that non-executive directors in two-tier boards experience challenges in areas such as information asymmetry, ability to ask the critical questions to the management, and the relationship management between the executive and non-executive directors.
III: The key features of CSR and what to look for from the management of a socially responsible company
The first characteristic of CSR is that it’s voluntary. Although we have many CSR activities that are spelled in law, most of these activities are voluntary actions taken by the organization towards the furtherance of a cause that benefits the society and surrounding communities.
One of the key features of corporate social
responsibility is a business based social purpose. Corporate social
responsibility at the leadership level is based on programs that directly
reflect on the business, what it does and what it stands for. Such programs must reinforce the company’s
business purpose and leverage its operational competencies for the greater good
of the communities.
One of the key characteristics of modern CSR efforts is the clear theory of change. Well considered CSR programs are concerned about the development of proprietary approaches that drive measurable social change. A key example is the Canada’s ‘healthy communities’ programs that were designed to spark a wave of change in various national sectors such as education, environment, and health by roping in businesses, governments, and the academia, The program engaged young people through partnerships with non-profit organizations. For its effort, the program was recently awarded the very prestigious 3M GMEA award
Successful CSR programs are anchored on quality and in-depth information. The mere identification of community’s social priorities is no longer adequate. Modern CSR initiatives benefit from strategic leadership in the provision of a significant depth of information, social media, stories, white papers and credible research to employees, external stakeholders and customers. This information not only helps in the conception and execution of CSR programs but also ensures sustainability of beneficial CSR programs.
Successful CSR programs often concentrate on a single subject area, strengthening Colin Powel assertion that people are only able to effectively addressing one objective at a time. Leadership is demonstrated by organizations that focus their efforts on a single social issue by aligning all their allocated internal and external resources with that particular issue. A key example is Proctor and Gamble, which has focused efforts on improving the lives of children through initiatives to ensuring vulnerable girls stay in school and increased access to education, with a current tally of over 210 million children for the last decade alone,
Successful CSR programs benefit from high degrees of credibility through partnering with experts and not-for-profit organizations on particular social issues. Bringing together an entire system of stakeholders with the necessary expertise is a key ingredient in the success of CSR programs. The invaluable knowledge in the possession of stakeholders is necessary for the development of CSR programs that are socially responsive to the communities. Moreover, CSR activities imply a particular set of strategies and business practices that deal with social matters. Modern institutions have entrenched CSR as a key consideration, as opposed to a non-core discretionary activity. Organizations no longer view CSR as a side matter, but rather incorporate it in their budgeting and planning process.
The management of successful CSR programs
and companies have a deep understanding of the interdependence of their
businesses with their environments and therefore appreciate the important role
that CSR plays in giving back to the communities that support such businesses.
These managers are not only interested in short term success of their
businesses but also long-term sustainability of their enterprises. As such,
such leadership is concerned about the welfare of the communities and the
environment in order to guarantee business sustainability in the future.
McKinsey & Company, ‘‘Women on board,’’ Women matter. (2007). https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/31480/11-745-women-on-boards.pdf, accessed December,2016
Siems, Cabrelli ‘‘ Comparative Company Law: A Case-Based Approach’’, (2013) ISBN: 1841138916
Lorraine,T ‘‘ Progressive Corporate Governance for the 21st Century’’, (2012)
Weil, Gotshal & Manges LLP: ‘‘International Comparison of Selected Corporate Governance Guidelines and Codes of Best Practice, network’’ (2014).
Block, David, and Gerstner, Anne-Marie, “One-Tier vs. Two-Tier Board Structure: A Comparison Between the United States and Germany” (2016). Comparative Corporate Governance and Financial Regulation. Paper 1. http://scholarship.law.upenn.edu/fisch_2016/1
C ‘‘Handbook on International Corporate
Governance: Country Analyses’’, (2012)
OECD Principles of Corporate Governance (2004), OECD Publications Service. <http://www.oecd.org/corporate/ca/corporategovernanceprinciples/31557724.pdf> accessed 24 November 2016.
The Cadbury report ‘‘The Financial Aspects of Corporate Governance’’ (1991): Burgess Science Press
Weil, Gotshal & Manges LLP: ‘‘International Comparison of Selected Corporate Governance Guidelines and Codes of Best Practice, network’’ (2014).
The financial reporting council ‘‘The UK Stewardship Code’’ (2012)
Rafael La Porta, Florencio Lopez, Andrei Lhleifer ‘‘Corporate ownership around the world ‘’.Journal of finance, (1999)