Board of directors

Markets And Economy

Shareholder Engagement or Activism ?

  Continuing from my last post ‘ Is shareholder engagement good for companies? ’,  here we look at the scope of shareholders engagement and different approaches to shareholder engagement. What is the scope of shareholder engagement? Shareholders have a legitimate role in areas pertaining to: Corporate Strategy – such as mergers, diversification, restructuring, non core asset sale. Capital Structure – such as capital allocation discipline, use of cash on balance sheet. Governance – such as audit-related issues, board structure, managerial remuneration. However shareholders are not expected to micromanage companies. Nor is it desirable that shareholders push for short term profitability over sustainability and long term value creation. It is important that shareholders and board members engage effectively in the shared pursuit of high quality governance. What are the different ways in which shareholders engage with companies? Shareholders can either have a proactive approach for engagement with a company or may adopt a passive approach towards a company. Passive investors sell off their shares if they are dissatisfied with the corporate decisions. On the other hand, active investors engage proactively with the management, prior to a corporate decision being affected, in order to change the outcome of the decision. While the term…

Markets And Economy

Is shareholder engagement good for companies?

  Shareholder activism has increased significantly in the last few years, particularly after the financial crisis of 2008. However, it has since then been a debatable topic, as it is difficult to quantify “appropriate” level of shareholder engagement, which is desirable for achieving effective governance, while adding to business value. Quite often there is an apprehension that excessive shareholder intervention may consume a lot of valuable management time and result in short term profit orientation. Why should shareholders engage with company management and boards? A business needs capital to finance its growth Shareholders are the providers of capital to a business and as such are part owners of the business. Shareholders invest in the business hoping for a higher potential return from the investment while accepting a greater potential risk than other providers of capital. As shareholders own a share of the organization in which they have invested, this entitles them to ownership rights (i.e. rights to profits and assets in proportion to their shareholding) and in most cases control rights (i.e. rights to have a say in the running of that company, e.g. they may vote on key issues). Management makes use of the capital to run the business…

Markets And Economy

Companies Bill 2012– Giving Voice to Minority Investors in India

  The passing of The Companies Bill 2012 by Rajya Sabha on 8th August 2013,  is a step forward towards transformation in the corporate governance practices of the country. The new bill that requires President’s assent for it to become law, replaces the Companies Act of 1956. The bill, when enacted will bring in reforms to enhance corporate governance by giving voice to the minority investors in India, strengthening the role of independent directors and expanding the responsibility on auditors. A key objective of corporate governance in India has been to strike a balance between the rule of majority shareholders and the protection of the rights of minority shareholders. The protection of minority shareholders rights is particularly critical given the often concentrated ownership of Indian companies. Unlike in the developed countries such as US & UK, where ownership of a company is widely dispersed and is generally separate from the management of the company. In India, listed companies are usually parts of a large business group, characterized by a promoter or a controlling shareholder.

Industry

Changing Global Energy Landscape with US Shale Gas – Part I

In the year 2009, United States surpassed Russia to become the world’s leader in natural gas production, with production continuing to increase to 80 billion cubic feet/day in 2012. U.S. natural gas reserves are at their highest point since 1971, and year-on-year reserve additions doubled from 2010 to 2011, as a result of shale production. Shale gas, a natural gas found trapped in sedimentary rocks, made up only 1 % of U.S. natural gas production in 2000. It now amounts to 25 % of U.S. natural gas production and is expected to increase to nearly 50 % by 2035. Natural gas, cost-competitive with coal at half the carbon emissions, is becoming the fuel of choice for electricity generation. New EPA regulations on particulates, mercury, and other toxic emissions are forcing the closure or retirement of 28 GW or more of coal-burning capacity, or about 8.9 percent of total U.S. coal-burning capacity. Recent increases in coal transportation costs are also problematic for coal. In addition, demand for electricity is forecast to exhibit slow but steady growth over the next few decades. These factors, taken together, are expected to be the primary driver of demand for natural gas in electricity generation over…

Markets And Economy

Role of Independent board directors in Indian companies

The probe into Satyam scam is finally over.  SEBI has barred Satyam Computer’s founder B Ramalinga Raju and four others from markets for 14 years and asked them to return Rs 1,849 crore worth of unlawful gains with interest. Following the takeover of scam-hit firm Satyam by Tech Mahindra in 2010, Mahindras were contemplating to sue the company’s erstwhile independent directors to recover Rs 11 million paid as commission to non-executive directors during the financial year 2008-09. Each of Satyam’s former independent directors were paid a commission of Rs 12 lakh over and above sitting fees for the financial year 2008-09. The Independent Directors of Satyam included renowned people like management guru Krishna G Palepu, Pentium chip innovator Vinod Dham, former Indian School of Business dean Prof Mendu Rammohan Rao, former cabinet secretary TR Prasad, former IIT Delhi director V S Raju and US-based academician Mangalam Srinivasan. It is ironical to note that in the presence of such eminent independent directors, the company’s founder Ramalinga Raju could manage to fudge the company’s accounts for several years.

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