The protection of stakeholders in the corporation is a key
feature of any comprehensive corporate governess regime;
this is recognised by the ASX Corporate Governance
Council’s Principles of Good Corporate Governance that in
Principle 10 states that it is important to ‘recognise the
legitimate interests of stakeholders. This view is also
reflected in the Corporations Act, but it has received varying
levels of attention from law makers.
Shareholders or members of the corporation are probably the
best protected stakeholders within the corporation; they have
a variety of powers available to them, such as the
appointment and removal of directors (s 201G and 203D), the
capacity to bring derivate actions in the name of the company
to protect a company’s interests (s 236), the capacity to bring
action where they have been oppressed (ss 232-235) and the
capacity to seek the winding up of a company (by the court
under s 459A and s 459P(1)(b) and voluntarily under s 497).
A court is empowered to make a variety of orders to protect
the interests of members where oppressive conduct has
occurred. This remedy is available where it is proved that an
action, arising under the affairs of a company involving an
actual or proposed act or omission (including a resolution or
proposed resolution of members), was either contrary to the
interests of the members as a whole or that the action was
oppressive to or unfairly prejudicial to, or unfairly
discriminatory against, a member of the company (s 232).
The orders that may be sought from the court in the event of
such conduct being proved include the winding up of the
company, the amendment of the company’s constitution, and
the purchase of the shares of the member or members who
were subject to such oppressive conduct (s 233). This is an
important means of seeking to protect the interests of members who have been affected by the actions of
controllers. Similar ‘oppression’ grounds for winding up of a
company are also to be found under the winding up
provisions of the Act (s 461(1)(e), (f) and (g)).
The rights and equitable treatment of shareholders
Companies
The system of governance within an entity should seek to protect shareholders’ rights and
ensure the equitable treatment of all shareholders.
The rights of shareholders
The system of governance should protect shareholders’ rights, which include the following:
- Basic shareholder rights include the right to:
- secure methods of ownership registration;
- convey or transfer shares;
- obtain relevant information from the corporation on a timely and regular basis;
- participate and vote in general shareholder meetings;
- elect members of the board; and
- share in the profits of the entity.
- Shareholders have the right to participate in, and to be sufficiently informed on,
decisions concerning fundamental corporate changes such as:
- amendments to the statutes, or articles of incorporation or similar governing
documents of the entity;
- the authorization of additional shares; and
- extraordinary transactions that in effect result in the sale of the entity.
- Shareholders should have the opportunity to participate effectively and vote in
general shareholder meetings and should be informed of the rules, including voting
processes, that govern general shareholder meetings.
- Shareholders should be furnished with sufficient and timely information concerning
the date, location and agenda of general meetings, as well as full and timely
information regarding the issues to be decided at the meeting.
- Opportunity should be provided for shareholders to ask questions of the Board and to
place items on the agenda at general meetings, subject to reasonable limitations.
- Shareholders should be able to vote in person or in absentia, and equal effect should
be given to votes whether cast in person or in absentia.
- Shareholders, including institutional investors, should be encouraged to vote on all
material issues at company meetings. Influencing corporate governance, through the
exercising of proxy votes, is the mechanism available to investors around the world to
address corporate governance issues that are of concern, such as poor performance.
Disgruntled shareholders can also exercise their influence in other ways, for example,
lobbying for the removal of directors, or by selling their shares, etc.
- The system of governance within an entity should ensure the accountability of
management and the equitable sharing of reward between owners and management.
The equitable treatment of shareholders
The system of governance should ensure the equitable treatment of all shareholders,
including minority and foreign shareholders. All shareholders should have the opportunity
to obtain effective redress for violation of their rights.
All shareholders of the same class should be treated equally as follows:
- Within any class, all shareholders should have the same voting rights. All investors
should be able to obtain information about the voting rights attached to all classes of
shares before they purchase. Any changes in voting rights should be subject to
shareholder vote.
- Votes should be cast by custodians or nominees in a manner agreed upon with the
beneficial owner of the shares.
- Processes and procedures for general shareholder meetings should allow for equitable
treatment of all shareholders. The entity’s procedures should not make it unduly
difficult or expensive to cast votes.
Members of the board and managers should be required to disclose any material interests in
transactions or matters affecting the entity.
The responsibilities of shareholders
Effective governance depends heavily on the willingness of the owners of an entity to
behave like owners and to exercise their rights of ownership, to express their views to
boards of directors and to organize and exercise their shareholder franchise if they do not
receive a satisfactory response. The shareholders as owners of the entity elect the directors
to run the entity on their behalf and hold them accountable for its progress. It is for the
shareholders to call the directors to account if they appear to be failing in their stewardship.
Institutional shareholders, because of their increasing influence by virtue of their size,
should take an active interest in the governance of the entity and develop their own
principles of good practice.
Shareholders have certain rights and obligations which include the following:
- Shareholders should make themselves as informed as possible about the activities of
the entity.
- Shareholders should see themselves as owners, not just investors. Their responsibility
as shareholders increases with the size of their shareholding.
- Shareholders should have made a sufficient analysis to vote in an informed manner on
all issues raised at general meetings. Where appropriate, reasons for voting against a
motion should be made known to the board beforehand.
- Shareholders in companies listed on the ASX (other than employee shareholders)
should not involve themselves in the entity’s day-to-day operations.
- Shareholders should take a positive interest in the composition of boards of directors
with particular reference to:
- concentrations of decision making power; and
- the appointment of a core of independent directors of appropriate calibre and
experience.
- Shareholders should take a positive interest in the structure of boards and, in
particular, the appointment of appropriate committees of the board - especially the
audit committee.
- Shareholders in listed companies should take a positive interest in the performance of
the board and should exercise their votes on the election of directors in an informed
manner.
- Shareholders should take an informed interest in the election of auditors and should
exercise their votes in an informed manner.
- Shareholders should take a positive interest in the auditor’s report and the
competence of the auditors and where appropriate should be prepared to ask questions
of the auditor.
- Shareholders should not seek to receive price-sensitive information which is not
available to the market generally.
The role of shareholders in corporate governance
The directors’ relationship with stakeholders is different in kind from their relationship with
the shareholders.
An entity will develop relationships relevant to its success with other stakeholders,
including employees, customers, suppliers, credit providers, governments, etc. It is
generally entity management’s responsibility to develop policies to successfully manage
these relations. It may be the board’s task to approve appropriate policies and to monitor
performance in respect of the entity’s relations with these stakeholders.
While recognizing the rights of shareholders the system of good governance should
consider the interests of stakeholders and encourage active co-operation between entities
and stakeholders in creating wealth, jobs and the sustainability of financially sound
enterprises.
- The system of good governance should ensure that the interests of stakeholders that
are protected by law are respected.
- Where stakeholder interests are protected by law, stakeholders should have the
opportunity to obtain effective redress for violation of their rights.
- The system of good governance should permit performance-enhancing mechanisms
for stakeholder participation.
- Where stakeholders participated in the corporate governance process, they should
have access to relevant information.
Good governance should encourage, where practical, business partners, including suppliers
and sub-contractors, to apply principles of corporate conduct compatible with the entity’s
own principles.
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