Stakeholder Management: Keeping Everyone Happy | CFA Level I Corporate Issuers
Welcome back as we take a look at stakeholder management. This is one of the drier lessons. Do bear with it, we’ll be through in no time.
Stakeholder management refers to the management of company relations with stakeholders and is based on having a good understanding of stakeholder interests, and maintaining effective communication with stakeholders.
Infrastructures for Stakeholder Management
The management of stakeholder relationships is based on four types of infrastructures:
- Legal infrastructure: Identifies the laws relevant to and the legal recourse of stakeholders when their rights are violated.
- Contractual infrastructure: Refers to the contracts between the company and its stakeholders that spell out the rights and responsibilities of the company and the stakeholders.
- Organisational infrastructure: Refers to a company’s corporate governance procedures, including its internal systems and practices that address how it manages its stakeholder relationships.
- Governmental infrastructure: Refers to regulations imposed on companies.
Mechanisms of Stakeholder Management
Although there is no standard set of rights and practices across all companies, there are similarities and standardisation in some areas.
Shareholder Relationship Management
With respect to shareholder relationship, general meetings are standard practice. Companies are generally required to hold an annual general meeting (AGM) within a certain period following the end of their fiscal year. At the AGM, the management provides shareholders with the audited financial statements for the year, addresses the company’s performance and significant actions over the period, and answers shareholder questions.
A shareholder can miss the meeting and still vote by proxy, meaning that she assigns her right to vote to another who will attend the meeting. This person can be a director, member of management, or the shareholder’s investment advisor. A proxy may specify the shareholder’s vote on the issues, or leave the vote to the discretion of the assignee.
Ordinary resolutions require just a simple majority of the votes cast, while special resolutions may require a supermajority vote, which is typically two-thirds or three-fourths of the votes cast.
Voting for Directors
When voting for directors, 2 types of voting systems are allowed:
- Statutory voting system: Each share held is assigned one vote in the election of each board member.
- Cumulative voting: Shareholders are allowed accumulate their votes to cast on any candidate they wish. This system helps protect minority shareholders.
Besides such protection mechanisms, minority shareholders can also be granted rights to protect their interests in the event of a company takeover.
Other Mechanisms of Stakeholder Management
Some other mechanisms worth mentioning include:
- Board of directors mechanisms: Spells out the responsibilities of the directors, which is to primarily act in the interests of shareholders, and to ensure the proper governance of the company.
- Audit function: Represents the systems, controls, and procedures in place to examine the company’s operations and financial records. Internal audits are conducted by an independent internal audit unit, while external auditors are required to audit the company’s annual financial records.
- Reporting and transparency mechanism: Ensures that investors have access to the company’s financial and non-financial information through annual reports, proxy statements, and timely disclosures.
- Policies on related-party transactions: Establish the procedures for mitigating, managing, and disclosing any potential conflicts of interest.
- Remuneration policies: Dictate the terms of compensation for the company’s management. The board of directors have the responsibility of setting and approving salary, bonuses, and perquisites for the management.
- Company incentive plans: Include a variable component that is contingent on the company’s performance. They are typically in the form of profit sharing, stocks, or stock options.
- Clawback provisions: Allow a company to recover previously paid remuneration if misconduct can be proven.
- “Say on pay”: Enables shareholders to vote on management remuneration matters.
- Rights of creditors: Established by laws and according to contracts executed with the company. Bond indentures are legal contracts that describe the structure of a bond, the obligations of the issuer, and the rights of the bondholders. Some agreements can include covenants to limit risks to creditors.
- Employee relations: Often governed by employee laws and contracts. Labor laws dictate basic employee rights such as labor hours, pension, hiring and firing, and vacation. Employees also have the right to create unions to fight for better terms and working conditions.
- Contractual agreements with customers and suppliers: Specify the products and services underlying the relationship, prices and payment terms, rights and responsibilities of each party, after-sale relationship, and any guarantees. Some contracts also specify actions to be taken and recourse available if either party breaches the terms of the contract.
And that’s all for stakeholder management. We shall dive deeper into understanding the functions and responsibilities of the board of directors in our next lesson. See you again!