Module 4 Flashcards
What are the common causes of financial failure
- Poor Strategic decision-Management fail to understand the main business drivers when they want to expand to new product
- Greed and desire for power-High achieving executives may become greedy for power and try to grow the company when it might not sustain
- Overexpantion and ill-judged acquitions-Integration cost exceeding the anticipation benefits
- Dominant CEOs - Board sometimes might not adequately scrutinise the CEO
- Failure of internal control-lead to gap in information flow, control and risk management
- Ineffective boards -Directors are supposed to act independently but sometimes they they are financially obligated to management
- Poor cashflow
Other issues
8. Remuneration
9. wilful blindness
10. Poor risk management
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2 major issues in remuneration
- Linking executive remuneration to high rick or short term performance rather than long term sustainability and reliable growth and profit
- Concern by shareholders regarding excessive remunaration to executive directors. Because, the shareholders return are after the deduction of executive remunaration
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Wilful Blindness
This is a situation where the individuals seek to avoid their legal liabilities for their unlaw to act, by pointing out the situation that they are unaware of the fact
This can be avoided by asking the CEO and CFOs to sing the financial accounts and to certify that appropriate internal control is taken.
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Poor management
This is due to lack of expertise of board of directors in understanding and effectively managing the risks arising due to complex financial trading, which is a global financial risk (GFS)
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Appointment of Directors
- A normal person with at least 18 yeas of age can be appointed as director
- A person disqualified from managing a company cannot be appointed as directors
- Though the directors are appointed by shareholders, they are strongly influenced by board
- Directors having required qualification to appointed role is sufficient to be a director
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Election of directors - 2 approaches
- Staggered approach
It emphasis on ensuring that there is a preservation of corporate memory and consistent in decision making.
The standard period of directors appointment is 3 yrs
For a 3-year staggered vote cycle, atleast 1/3rd of directors should resign and either all of most of them can stand for re-election. - Destaggering approach
Under this approach all directors should resign and stand again for re-election by shareholders.
This approach ensures the accountability of directors and power of shareholders
The tenure of independent shareholders should be 10yrs
In most companies, the managing directors are the CEOs and they try to get out with election from shareholders
Evaluation of Board Performance
Board should review their own performance annually to ensure that their performance is at its optimum level
Their performance and effectiveness can be measures by following dimensions
1. Quality of monitoring and risk-management role
2.Quality of strategic and other business related advice.
3.Board dynamics and board members pro-active participation
4. Board composition and diversity
Also see figure 4.1 on page 239
Departure of Directors
The directors can resign as a director during their current term or choose not to stand for re-election after their current period.
The directors resignation will create a vacancy and allow the board to appoint a temporary directors and later to be elected by shareholders
The directors should inform the shareholders with reason of their resignation.
In Australia, the shareholders and stakeholders are informed through ASX disclosure process or Australian Prudential Regulation authorities (APRA).
Removal of directors
In Australia, an individual director can be removed within the expire of their term by shareholder voting power in general meeting.
Under Australian law, the shareholders have 3 ways to force to remove individual directors, with support of 50% votes
1. An individual or group of individuals holding 5% of votes can require the board to call for an extraordinary general meeting, where the expense is taken care by company
2. An individual or group of individuals holding 5% of votes can call for general meeting with their own expense
3. Where a company has already called for general meeting, shareholders holding 5% votes or 100 members entitled to vote, can give the company the resolution to be passed at the meeting, including removal of directors.
How voting to remove the director is carried out
In listed company, at least 28 days of notice should be given for general meeting.
If a meeting to be called within a short period, at least 95% of votes should agree beforehand.
If a meeting is called less than 21 days, the directors cannot be removed
The voting can be
By show of hand (one vote from one shareholder)
By poll (one vote per shares held by shareholders)
The Poll may be demanded by
1. at least 5 member entitled to vote on resolution
2. members with 5% votes casted
3. chair
Members can request to vote by poll
1. before the vote in taken
2. before the voting result on show of hand is declared
3. just after the voting result on show of had is declared.
Two strikes Rule
The two-strike rule provides that the entire board can be removed after the shareholders vote to spill the board. This occurs when eligible shareholders vote twice against the remuneration report
When there is large number of ineligible shareholders (when managers hold large number of shares), it gives significant power to individual shareholders to reject the remuneration report and eventually to spill the board
The first strike occurs when 25% of eligible shareholders vote “NO” to remuneration report presented in annual report
After the 1st strike, necessary action taken and all information should be disclosed in 2nd year.
The 2nd strike occurs when 25% of eligible shareholders vote “NO” again
After the 2nd strike, in same annual general meeting the board can be spilled.
The spill occurs if at least 50% of eligible shareholders vote in favor of the spill
The shareholders meeting to elect the new board must be held within 90 days. In the interim, the shareholders should nominate new persons to board.
Note, at least two of old spilled directors must continue as directors along with new unspilled directors.
Disqualification
A person is disqualified and is not permitted to hold of the office of corporation either as directors or senior officer.
Automatically disqualification means that disqualified person is not informed of his disqualification if he is involved in any corporate or non-corporate criminal activity.
The term of disqualification is 5yrs
Non-Executive directors
ASX principle states that all listed companies should separately disclose all policies and practice regarding remuneration for executive and non-executive directors
Non-executive directors should not be remunerated based on the performance achieved or to be achieved
They should be remunerated based on number of shares they held and the benefits from raising share price
They should not receive incentive based payment but basic additional payment like superannuation at reasonable level.
Executive Directors and other senior executives
Remuneration to executive directors and senior executives can be of two types
Fixed - The remuneration is paid irrespective of their or entity performance. A flat salary and superannuation is paid annually.
At risk - The remuneration is paid based on directors and/or entity (short term or long term) benchmark goals and performance. These benchmark is called KPI.
The short-term incentives are paid annually in form of cash
Long-term incentives are paid once in 3 or 4 years and it could be in from of bonuses, shares and allowances for 2nd home.
Criminal Proof, Penalties and redress
Focus on offences against the society
A criminal is a person who has found guilty after being charged with crime
Criminal cases are always carried by agencies of the state
The onus of proof is on the prosecution, who must prove his case against the accused at high standard of beyond reasonable doubt
Criminal sanctions can take many forms but most common form is fines and/or jail
In Australia, the penalties is upto 15 years of imprisonment and fines maximum of $10M or 10% of group turnover
