Shareholders hierarchy of needs (series 22)

CHAPTER 2 of the ZimCode addresses ownership and control of the company. In a company, shareholders provide risk capital which the management controls under the leadership of a board of directors. The primary reason for shareholders providing capital is for their investment to create value. In order to safeguard their investment shareholders need to be in control of the board.

They need to have a say on who sits on the board and must be satisfied with their competence.

The board has a legal or statutory responsibility to ensure it runs the business effectively and creates long-term value and ensure that it represents the interests of all shareholders.

Several surveys conducted on the shareholder needs pointed out that they need to be kept in the loop of what is transpiring in the company.

This requires the board to give shareholders adequate, accurate information and in the right form.

This will ensure shareholders gain confidence in the leadership of the company as well as agility to make certain decisions concerning their investments.

The lack of information causes shareholders to be frustrated, it breeds mistrust and eventually they may accept takeover bids or may sell their shares on the free market.

ZimCode’s principles 12, 25 and 32 as well as 316 on integrated reporting highlights that shareholders have rights to be given timely and adequate information regarding the operations of the business.

Principle 32 of the ZimCode highlights the important documents that should be made available to the shareholder. These include a summary of the company’s strategic plan, annual reports, reports on the company’s performance indicators and growth prospects, management practices and policies pursued by the board, reports on analyst briefings, including positive and negative media reports.

When shareholders look at the annual report of a company in which they have invested, they will be mainly concerned with earnings per share, price/earnings ratio, intangible and tangible assets and dividend yield.

The decisions made by board and managers determine what they can expect both in terms of dividends, or profits, and capital growth.

If a company in which they have invested is not producing returns for them, they may sell their shares and invest elsewhere.

Sales by large institutional shareholders can create uncertainty about the company’s performance and future and cause the share price to fall. This can limit the company’s ability to grow and develop.

In light of the above, transparency and disclosure issues have gained so much traction in many companies such that the need to provide accurate information and timely disclosures to shareholders has become the expected standard.

Strong disclosure promotes transparency; basically they are two sides of the same coin. Shareholders also expect accountability from the board and its management.

This is achieved through faithfulness in various aspects especially reporting. When all players are accountable to each other, confidence of shareholders is increased.

Fairness is another aspect that shareholders focus on. In this regards they want equal treatment at all times. It ensures that all shareholders get relevant information without discriminating against minority shareholders.

Previously shareholders had prioritized generating profit from their investment more than getting adequate information on all aspects of the company they have invested in. The demise of Enron was an eye opener to many who had thought making profit was more important.

This is why ZimCode’s principles 316-320 emphasise the need for the board to produce integrated and sustainability reports.

These can give shareholders a complete picture of the business, its financial performance, governance issues, strategy, stakeholder relations, its future outlook as well as sustainability issues. This holistic approach to reporting is very useful to the shareholder. The shareholders also need to be informed concerning the human resource that is responsible for creating value on their investment.

In particular they have to know about CEO whom in most cases they have no direct influence over his/her appointment.

The CEO is responsible for co-ordinating effective operating, marketing, financial, cultural and legal strategies that maximize shareholder value. The CEO is like a ship captain who steers it in the right direction and can sometimes sink the ship; hence it is important to know the company’s CEO and their experience.

The shareholder doesn’t necessarily need the CEO’s biography, but just a brief overview of their business background.

This information is usually provided in the annual report but if changes that have material effect on the business occur the shareholder has the right to know right away. If the shareholders needs are adequately met by the board and management, when crisis occurs chances are they can all work together without resorting to blame games.