Chapter 9: Applications of the legislative and regulatory framework (1) Flashcards
g.ii) the legislative and regulatory framework
Explain what is meant by a trust, trust deed and give
Trust law
Trusts:
- Relationship between two parties, in which legal owner or trustee owns the property whilst beneficial owner (or beneficiary) receives all benefits from that property
- Trustees are then appointed to carry out the provisions below
Trust deed
- divides legal and beneficial ownership
- - Trustee has the right to possession, the priviledge of use and the power to convey these rights and priviledges
- - beneficiary receives all the benefits of the property
- specifies the purpose of the trust fund and how it is to be admnistered
Legal and beneficial owner
g.ii) the legislative and regulatory framework
Provide examples of areas covered by a trust deed
Legal and beneficial owner
Trustees:
- Personal details
- Resignation/replacement
- Discretionary powers
- Remuneration
Admnistration:
- admin requirements
- termnination
- trust aims
Investmets
- description and restrictions on assets
- procedure and restrictions on investments
g.ii) the legislative and regulatory framework
Outline the roles and concerns of trustees when carrying out duties.
Trustees
Roles:
- To act in the best interests of beneficiaries
- common law requires trustees to exercise proper care when investing funds
concerns of trustees when carrying out duties:
- act prudently
- act in beneficiaries interest
- demonstrate fairness and equity between benefiaries of the trust
- not to benefit directly from action taken
- to act in line with the constraints of the trust deed and rules and any overriding legislation
g.ii) the legislative and regulatory framework
State two main roles of trusts in the context of investment funds.
Collective representation and protection
- Means of segregating assets for protection of beneficiaries, e.g., pension scheme separate from sponsoring company. Thus, insulating them any consequencies of the settlers actions and subsequent settlement.
- Mechanism for collective representation and protection of people linked by common interest, e.g., trustees look after interests of bond holders or pensions scheme members.
- Another advantage is that trustees provide a powerful lobby for the pension scheme in representing views of the company, e.g., distribution of any surplus or level of funding.
g.ii) the legislative and regulatory framework
State:
- what is meant by corporate governance
- the aim of good corporate governance
- Refers to a high level framework within which managerial decisions are made in a company
- Responsibility of BoDs comprising of executive and non-executive directors
- Aim of good corporate governane is is to manage company to best meet appropriate requirements of stakeholders.
- In particular, management (as agents) should act primarily in the best interest of shareholders (as principals).
Corporate governance
g.ii) the legislative and regulatory framework
Give two Mechanisms for ensuring that company management act in the best interests of the shareholders.
- Ensuring remuneration aligns the interests of management and shareholders, and so incentivises managment to act in the best interest of shareholders, e.g., via share options or actual shares.
- Appointing non-executive directors to provide impartial view on behalf of shareholders
- Monitor management performance
- Committee to audit the financial reports (pay a role)
- Appoint and nominate directors (pay a role)
- Remuneration setting for executive directors
- Strategy development and contribution
g.ii) the legislative and regulatory framework
List five examples of each of the following factors:
- Environmental
- Social
- Governance
ESG
Environmental:
- Climate change
- resource depletion
- Waste
- Pollution
- deforestation
Social:
- Child labour
- Modern day slavery
- Human rights
- working conditions
- employee relations
Governance:
- Bribery and corruption
- executive pay
- Board diversity and structure
- political lobbying and donations
- tax strategy
g.ii) the legislative and regulatory framework
Define four investment approaches that incorporate non-financial ESG objectives.
ESG
- Sustainable investing - takes into account ESG issues in such a way that is consistent with the long-term sustainability of society and the natural environment
- Impact investing - seeks to generate positive and/or environmental impact as well financial return
- Socially reponsible investment - incorpoorates social, environmental and/or ethical objectives as well as financial
- Ethical investment - incorporates one or more ethically or morally motivated constraints.
g.ii) the legislative and regulatory framework
outline six Principles of Responsible Investment (PRI)
Principle 1: We will incorporate ESG issues into investment analysis and decision making processes.
Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
Principle 3: We will seek appropriate disclousure on ESG issues by the entities we invest
Principle 4: We will promote acceptance and implementation of the Principles within the investment industry
Principle 5: We will work together to enhance our effectiveness in implementing the principles .
Principle 6: We will each report on activities and progress towards implemeting the Principles
ESG
g.ii) the legislative and regulatory framework
List six ways that ESG can affect the financial performance of companies.
ESG
- reduce costs through more efficient use of energy and raw materials
- face higher costs if governments introduce or increase pollution taxes or minimum wages
- attract new customers or charge a premium is strong ESG practices enhance their brand
- suffer reputation damage if found to be involved in contraversial practices, e.g., modern day slavery.
- Perform better if staff enjoy good working conditions because this aids recruitment, retention and motivation (a virtuous circle)
- underperform if pay structures do not align executive incentives with shareholders’ long-term interests
g.ii) the legislative and regulatory framework
Outline three categories of risk arising from climate change.
ESG and climate change
- Physical risks
- arising from effects of a changing climate itself
- effects are long-term, such as rising temperatures, rising sea levels and changes to rainfall patterns
- these lead to damage to propety, business interruption due to extreme weather and injuries - Transition risks
- arising from the shift away from fossil fuel use.
- risks particularly for fossile dependent companies
- examples of changes are policy measures, technological change and customer preferences - Liability risks
- relating to the potential costs from third parties seeking compensation because they have suffered loss or damage from the effects of climate change
g.ii) the legislative and regulatory framework
Explain what is a listing authority responsible for.
List the five main concerns of listing authorities.
Role of the listings authority
Responsible for ensuring that:
- any issue of shares is conducted in orderly and fair way
- conduct of company remains consistent with listing of shares after issue
Five main concerns:
- production of information on issue of shares
- process by which shares are offered to potential shareholders (& price)
- continuing production and dissemination of information on timely basis by listed companies
- continuing conduct of market in listed securities with the view that the market is fair to all participants and that the pricing process is fair and reasonable
- rules to ensure that listed companies continue to behave in manner that doesn’t conflict with their objectives.
g.ii) the legislative and regulatory framework
Outline why a privately held company would wish to publicly offer shares.
Role of the listings authority
- access investment capital
- enable expansion of business
- reduce financial gearing
- enabling existing owners to realise capital and/or exit the business
g.ii) the legislative and regulatory framework
List typical information found in a share prospectus.
Role of the listings authority
- Number of shares on offer and the number in circulation
- The offer price
- The underwriters
- How money will be used
- Audited financial statements
- Aims and objectives of the company
- Senior management and BoD and their salaries including staff share incentive schemes and potential dilution impact for shareholders.
- (Details of the number of shares owned by existing company owners)
- Allocation if oversubscription
- (Management view on company and industry prospects and significant risks)
- Dividend policy
g.ii) the legislative and regulatory framework
State the main aims of competition and monopolies regulation.
Give two potential difficulties for competition regulators.
Competition and fair trade controls, monopolies regulators
Aim to:
- protect the interest of customers and suppliers.
- encourage competition and prevent mergers that could reduce competition through exercise of market power
- prevent the sellers from expoiting members of the public who might be in a weak bargining position
Potential difficulties
- Multinational companies that operate in many countries
- Defintion of the product (high market share in narrowly defined product vs more widely defined product area, e.g., ice cream stand vs national confectionery market)
