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Chapter 2: Ownership and Control
Ownership and control is at the heart of corporate governance. Ownership can be defined as the owning of cash flow rights, whereas control refers to voting rights. In some countries ownership is not necessarily equivalent to control due to the existence of dual-class shares, ownership pyramids, voting coalitions, proxy votes and clauses in the articles of association that confer additional voting rights to long-term shareholders. A company is made up of “two organs” the board of directors and its shareholders.
The view that directors would do as instructed by shareholders has long disappeared. After the 20th century, this view had been altered to the effect that the board were capable of exercising powers independently from shareholders.
With this and the growth of public listed companies on the stock exchange, whereby shares are available for the public to buy; shareholder control of the company become more difficult to contain.
This meant that shareholders were more geographically dispersed and the amount of shares shareholders held differed considerably, affecting voting rights. This can be contrasted with company structures such as sole-traders, partnerships or small private companies where those who own shares generally manage the company.
It is therefore critical for every company to think through its ownership and control structure and put proper structures in place at the inception of the company.
This entails verifying calibre of shareholders, crafting policies that uphold good corporate governance and compiling key shareholder rights and responsibilities.
The essential governance documents such as share certificates, memorandum of association, articles of association and so forth have to be water tight because they have a huge bearing on how the company is governed and controlled.
The ZimCode was prompted to provide guidance in this area having noted the arguments and misconceptions emanating from ownership and control that often lead to corporate failures. It gives clarity on the rights and responsibilities of the shareholder that can ensure success of the company. The ZimCode proposes a balance of power among the shareholder, board and the management. It affirms that these three groups must always promote and protect the interests of the company and all its stakeholders.
A myriad of ownership and control issues are also centred on power concentration. Challenges always emerge when power is wielded by one person or few people in the company. In Zimbabwe there is growing concern that institutional investors are acting as silent giants by not making ‘considered use of their votes’ in general meetings which is a concern as some see them as ‘effectively policing large companies for the benefit of all’ and help to maintain high standards of corporate governance.
This allows power to remain concentrated in the board which is a concern. Concentration of corporate power creates room for corruption, fraud and other dodgy deals to take place which will eventually affect the company.
It often leads to corporate failure, which is why the ZimCode advocates for functional balance of power. Shareholders should be able to disclose their shares and be guided by company policies on what controlling powers they are entitled to without overriding the rights of the minority shareholders.
Shareholders play a crucial role in governing a company, but this depends on their ability to take active steps to review performance of the board and management and hold them to account. ZimCode reserves certain rights exclusively for shareholders.
These include varying the constitution of the company, altering the rights attached to shares and approving certain contracts between the directors and the company. Shareholders also have additional governance responsibilities such as reviewing the performance of the board and taking action if they believe that performance is not up to expectations, this may include removal of directors.
In some instances, shareholders are not interested in using the powers conferred to them by the articles in holding the board to account and reviewing performance. They argue that the time and effort required by shareholders to hold management into account did not make it worthwhile.
The alternative of accepting takeover bids or selling shares which are easily sellable on the free market provided a trouble-free solution to shareholders.
Some commentators still argue that listed companies should communicate risks and uncertainties, which would better explain the current situation of the company, which may influence shareholder-board relationship.
This provides the emphasis on the institutional shareholder “voicing” concerns rather than exiting. However, the success of this approach is currently uncertain.
Shareholders can exercise their rights in terms of the statutes of the company and the law at the Annual General Meeting (AGM)/ shareholders meeting which is the ultimate authority of any company. At least a twenty one day notice should be given before convening the meeting to give ample time for preparation to respond to agenda items and ensuring availability of all members.
Chairpersons of committees of the Board should be invited to attend shareholders meetings to respond to issues which relate to their areas of jurisdiction.
At the AGM, shareholders are given the opportunity to participate in formulating strategies for the company. In line with the principles of transparency, accountability and disclosure, shareholders should be given access to relevant documents such as financial reports, dividend reports, company’s strategic plan, company performance and growth prospects, annual reports as well as the agenda so that they can make informed decisions.
It is at the AGM that voting for the adoption and ratification of specific principles takes place. Therefore, voting rules have to be clearly articulated in the company’s article of association such that each shareholder fully understands the voting and control rights that are derived from the shares they own in the company.
The ZimCode advocates for a one share one vote basis which must be aligned with economic rights. The voting process has to be clear, objective and simple. The use of technology is greatly encouraged so that virtual meetings can be conducted and members can exercise absentia voting via email.
The AGM should not be conducted out of principle but has to be understood as a platform to discuss strategies and to adopt resolutions that can propel the company forward.
For the AGM to be effective, the meeting should be conducted in a simple and inexpensive manner that can accommodate the participation of all parties. An important aspect is that principles adopted at the annual general meeting should be regarded as binding and no party should reverse them without full consultation and following subsequent procedures as agreed to in the company policies.
Historically, AGMs were often well attended with vigorous debate and meaningful voting. Now, it is no longer as effective as it used to be owing to various reasons. Some analysts consider it as ‘weak and ineffectual method of control’ as it is poorly attended and shareholders are ill-informed. Moreover, those that do attend come in small numbers and are unrepresentative of all shareholders. Shareholders also allow general meetings to be captured by single-issue pressure groups who wish to communicate self-interest issues. It remains the duty of the company to ensure that AGMs are effective if they are to continue to be an important arena for members to voice concerns.
ZimCode further proposes that nominee shareholders should disclose the beneficial owners of the shares upon request by the relevant company or regulatory authorities. This enables the company to know who they are ‘getting in bed with’ and enable them to conduct background checks and make a choice.
This disclosure of beneficial owners can also be of assistance to the indigenisation policy which requires 51 percent of shares of foreign companies to be owned by local people.
Disclosing the company’s shareholding structure gives insight on whether the indigenisation policy has been adequately adopted or not. Such clarity gives both parties a way forward and how best the situation can be handled.
Closely related to the indigenisation policy is the share ownership scheme. The ZimCode advocates for company’s managers and employees to be given the opportunity to own shares in the company through share ownership schemes as may be approved by the shareholder in general meeting.
As part of a company’s corporate-social responsibilities, the community in which a company operates should benefit from its operations. This ensures that the triple bottom line of profit, people and planet is satisfied.
For more information on the ZimCode contact: [email protected]
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