FEDERAL POLYTECHNIC, NEKEDE
P.M.B 1036 OWERRI
ASSIGNMENT ON
DISCUSS THE ROLE OF SHAREHOLDER'S IN
CORPORATE GOVERNANCE
BY
NAME: ONUKOGU MIRIAN CHIAMAKA
DEPARTMENT: BUSINESS ADMINISTRATION
COURSE TITLE: COOPERATE GOVERNANCE
COURSE CODE: BAM 329
SERIAL NO: 100
LEVEL: HND 1 EVENING
AUGUST, 2024
INTRODUCTION
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Corporate governance
Corporate Governance refers to the way in which companies are governed
and to what purpose. It identifies who has power and accountability, and who
makes decisions. It is, in essence, a toolkit that enables management and
the board to deal more effectively with the challenges of running a company.
Corporate governance ensures that businesses have appropriate decision-
making processes and controls in place so that the interests of all
stakeholders (shareholders, employees, suppliers, customers and the
community) are balanced.
Governance at a corporate level includes the processes through which a
company’s objectives are set and pursued in the context of the social,
regulatory and market environment. It is concerned with practices and
procedures for trying to make sure that a company is run in such a way that
it achieves its objectives, while ensuring that stakeholders can have
confidence that their trust in that company is well founded.
As the home of good governance, the Institute believes that good
governance is important as it provides the infrastructure to improve the
quality of the decisions made by those who manage businesses. Good
quality, ethical decision-making builds sustainable businesses and enables
them to create long-term value more effectively.
Important of corporate governance
There are internal processes, practices, and rules used to control and
manage an organization. This includes the company strategy, planning,
values, ethics, risk management, compensation, and more.
But each stakeholder group has a distinct role to play, with different interests
and differing levels of impact and influence, which is important to keep in
mind when managing your stakeholders.
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Stakeholder groups and their roles in corporate governance:
1. The Board of Directors
Out of all the stakeholders, the Board of Directors holds the greatest
influence over corporate governance. The Chair leads the Board, and is
responsible for its overall management, agenda, effectiveness, and flow of
information. The CEO reports to the Chair and is accountable to the Board,
with all other members of the leadership team reporting to the CEO.
A company’s Board of Directors’ main role is to ensure the company’s long-
term, sustainable success. They need to consider the impacts and interests
of all stakeholders while generating value for shareholders. Boards typically
meet regularly throughout the year (e.g. monthly or quarterly) to review
performance, establish/refine high level strategy, purpose, culture, and
values, establish governance frameworks, and more.
2. CEO & Management
Corporate governance involves creating rules and controls for your
organization that help to guide your leadership team while ensuring
stakeholder interests are in alignment.
This means that the role of the CEO and management team is to take action
based on the rules put in place by the Board when making decisions and
engage with other stakeholders as the organization’s (and Board’s) key
representative. They also consult with the Board on any major decisions and
report back to them.
3. Employees
Although most employee stakeholders may not have a direct say on
corporate governance issues, these stakeholders have an interest in how the
organization’s decisions might impact their salary, job security, and work
environment. Plus, employees are expected to carry out the board and
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leadership team’s plans in line with their strategy, purpose, culture, and
values.
4. Shareholders
Shareholders have an important role to play in corporate governance. As
part owners, they have a financial interest in the company’s performance.
They may also be concerned with the company’s social, environmental, and
economic impacts, as well as risk management.
When companies are perceived to have good corporate governance, it can
drive up share prices and of course, the opposite is also true. Because
shareholders are less likely to want to buy in or stick around if an
organization is badly governed.
5. Lenders
Banks and other lenders take a similar view to shareholders they’re primarily
interested in risk management and the company’s financial performance.
Good governance can help a company raise capital via lenders. But if a
company isn’t governed well, these stakeholder groups might start to doubt
whether it’s being run well and whether it can be financially successful. And
that might impact their willingness to lend money in future.
6. Suppliers
Nearly every organization has external suppliers they rely on to deliver the
products, parts, services, buildings, transportation, or underlying
software/infrastructure on which the company runs. It’s important to
maintain good relationships with these stakeholders so that the company
can continue to deliver quality products or services (and deliver them on
schedule).
With this in mind, the role of suppliers in corporate governance is to provide
input on the decisions that might impact the supply chain including what,
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when, and how their product/service is delivered. These stakeholders will
also benefit from reassurance that the organization will continue to need and
pay for its products and services over time.
7. Auditors
Some organizations may establish an audit committee that supports the
Board of Directors and overall corporate governance. Their role is to monitor
financial reporting, risk management, internal controls, and audit processes
to ensure they’re effective and accurate. These stakeholders play an
important role in supporting accountability, transparency, and integrity so
that the Board can feel confident in the information being used to guide the
decision-making process and govern the company.
8. Government
Governments and regulators are also an important part of corporate
governance. Their role is to ensure that the company adheres to any
relevant laws and regulations, while contributing to the local economy. For
instance, they may undertake external audits to ensure that organizations
are accurately reporting their financials and prosecute organizations (and
their directors) for wrongdoing.
This external regulation is important to ensure that rules are enforced fairly
after all, some organizations might self-govern responsibly, while others
might not. If members of the public feel that existing regulatory systems are
unfair, they may also apply pressure to governments to further increase
corporate regulation, change business practices, ensure accountability, and
discourage bad behavior.
9. Media
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Media coverage of corporate governance issues has increased over the last
two decades, with the media applying pressure to directors and others in
positions of power, encouraging them to behave in socially acceptable ways.
The media plays an important role in ensuring that organizations are not only
responsive to the needs of shareholders, but also to environmental and
social issues. Their coverage can shape corporate policy and support good
governance even if local laws are inadequate.
10. Communities
Community stakeholders include the people (and groups) that live, work, or
operate within the same regions as the company. They’re primarily
interested in how the company might impact the local economy and
environment, and whether they’re acting in a way that is socially
responsible.
If community stakeholders are opposed to the organization or project, they
may make it difficult to move forward by resisting change, withholding social
acceptance, attracting negative attention, or creating delays. And of course,
some community stakeholders may have knowledge and resources that
could help lead to better outcomes.
11. Customers
Similar to employees, customers may not have a direct influence on
corporate governance, but because customers are the ones that pay the
bills, decision makers must consider how the strategy, actions, and values of
the company might impact customers. So, any decisions that impact the
reliability, safety, value, ethics, and quality of the products or customer
experience could lead to the company gaining or losing customers,
impacting the organization’s financial performance. As such, it’s well worth
regularly engaging and consulting with customers to understand their
interests and expectations, and manage the impacts of any planned
changes.
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Roles of a shareholder
Shareholders are the owners of a company and provide financial backing in
return for potential dividends or other compensation over the lifetime of the
company. A person or corporation can become a shareholder of a company
in three ways:
By subscribing to the constitution of the company during incorporation
By investing in return for new shares in the company
By obtaining shares from an existing shareholder by purchase, by gift
or by will
Subscribers are usually the party who initiate the incorporation of a company
and automatically become the first shareholders after incorporation. The
payment of shares may be made in money or in money's worth including
goodwill and expertise. While it is possible for shareholders to transfer their
shares, it is also possible for private companies to place restrictions on this
process in the constitution of the company.
Shareholders duties
The fundamental duty of a shareholder is to make decisions. A shareholder
doesn’t manage the day-to-day business of the company as this is handled
by the board of directors. However, decisions in relation to the company’s
goals and overall performance often require shareholder approval, which
include (but are not limited to) the following:
Changes to the constitution of the company
Declaring a final dividend
Reducing the capital of the company
Re-appointing a Statutory Auditor
Winding up the company by way of voluntary liquidation
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Shareholder decisions can be made by written resolution or at general
meetings, where shareholders discuss the company’s performance and vote
on relevant resolutions. There are two types of general meetings, annual
(AGM), which are held once a year and extraordinary (EGM), which take
place when required. Unless the company’s constitution provides otherwise,
it is possible for a shareholder to appoint a proxy to attend and vote in their
place when they are unable to attend a general meeting.
Though it is not possible for shareholders to amend decisions made by
directors or interfere with the running of the company, it is possible for them
to convene a general meeting and raise a motion to remove a director, or
the full board, or they can amend the constitution to restrict the director’s
powers.
Shareholder decisions
There are two types of shareholder resolutions, ordinary and special, and
both have distinct rules and requirements. An ordinary resolution requires a
simple majority of the members present to vote in favour of the resolution
and this is acceptable for most shareholder decisions. For Irish private
limited companies, special resolutions require the approval of 75% or more
of those eligible to vote.
Votes at general meetings can be cast either by way of a show of hands or
by poll. A show of hands results in every shareholder or proxy present
having one vote only, while a poll allows each shareholder to have one vote
for each share they hold.
Shareholder liability
A shareholder’s liability is limited as the company’s debts are the
responsibility of the company itself. The shareholder is liable only for the
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price they paid for the shares however it should be noted that if the shares
are partially paid, the shareholder will be required to pay the remaining
balance, either when the directors or an administrator (if the company is in
financial difficulty) call up the unpaid amount.
Guiding Principles of Corporate Governance
The following core guiding principles:
1. The board approves corporate strategies that are intended to build
sustainable long-term value; selects a chief executive officer (CEO);
oversees the CEO and senior management in operating the company’s
business, including allocating capital for long-term growth and
assessing and managing risks; and sets the “tone at the top” for
ethical conduct.
2. Management develops and implements corporate strategy and
operates the company’s business under the board’s oversight, with the
goal of producing sustainable long-term value creation.
3. Management, under the oversight of the board and its audit
committee, produces financial statements that fairly present the
company’s financial condition and results of operations and makes the
timely disclosures investors need to assess the financial and business
soundness and risks of the company.
4. The audit committee of the board retains and manages the relationship
with the outside auditor, oversees the company’s annual financial
statement audit and internal controls over financial reporting, and
oversees the company’s risk management and compliance programs.
5. The nominating/corporate governance committee of the board plays a
leadership role in shaping the corporate governance of the company,
strives to build an engaged and diverse board whose composition is
appropriate in light of the company’s needs and strategy, and actively
conducts succession planning for the board.
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6. The compensation committee of the board develops an executive
compensation philosophy, adopts and oversees the implementation of
compensation policies that fit within its philosophy, designs
compensation packages for the CEO and senior management to
incentivize the creation of long-term value, and develops meaningful
goals for performance-based compensation that support the
company’s long-term value creation strategy.
7. The board and management should engage with long-term
shareholders on issues and concerns that are of widespread interest to
them and that affect the company’s long-term value creation.
Shareholders that engage with the board and management in a
manner that may affect corporate decision making or strategies are
encouraged to disclose appropriate identifying information and to
assume some accountability for the long-term interests of the
company and its shareholders as a whole. As part of this responsibility,
shareholders should recognize that the board must continually weigh
both short-term and long-term uses of capital when determining how
to allocate it in a way that is most beneficial to shareholders and to
building long-term value.
8. In making decisions, the board may consider the interests of all of the
company’s constituencies, including stakeholders such as employees,
customers, suppliers and the community in which the company does
business, when doing so contributes in a direct and meaningful way to
building long-term value creation.
This post is intended to assist public company boards and management in
their efforts to implement appropriate and effective corporate governance
practices and serve as spokespersons for the public dialogue on evolving
governance standards. Although there is no “one size fits all” approach to
governance that will be suitable for all U.S. public companies, the creation of
long-term value is the ultimate measurement of successful corporate
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governance, and it is important that shareholders and other stakeholders
understand why a company has chosen to use particular governance
structures, practices and processes to achieve that objective. Accordingly,
companies should disclose not only the types of practices they employ but
also their bases for selecting those practices.
Conclusion
The above is a brief introduction to the role of a company shareholder and
how decisions are made, however it should again be noted that not all
companies are identical, and some may have amended their own rules by
preparing bespoke regulations in the constitution or a shareholder
agreement. Therefore, it is vital that the company’s constitution and relevant
agreements are reviewed before shareholder approval is sought.
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