Sent: 21-11-2005 05:20:15
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Six Signs Your Company Is Treating You Seriously - John A Robertson
We are most of the way through another Annual General Meeting season without any substantial reform of these shareholder meetings. There is a way to make them more useful.
One reason for annual meetings being unsatisfactory is that the key indicators which drive investment performance are largely ignored by all participants as they are, more generally, by accounting standards and corporations laws which form the backdrop to the meetings.
The legal system is designed to click into action in the event of imminent catastrophic failure. There are no graded sanctions in the law for management performance which falls slightly short of complete failure or which is simply below average.
Companies are told how to report performance. They are not required to identify shortcomings and change if improvement is needed.
Nor is there anything in the corporations laws to define what a company's goals should be. Consequently, companies do little to address this most important of all elements of governance.
The AGM could be used to apply governance standards which go to the heart of what is most meaningful for investors.
There is a simple six-point test to discover a company doing the job properly.
- It announces publicly each year its financial performance goals for the year ahead.
- It identifies explicitly how senior executive remuneration will be tied to the achievement of these specific goals.
- At the end of the year, the company presents a scorecard to shareholders, based on the previously announced goals, analyzing its performance - showing both successes and failures.
- In highlighting where it might have fallen short, the company outlines why and unveils remedial action.
- At the same time, it publicly announces revised goals for the following year.
- Where these goals are different from those pursued in the prior year, it explains why that is appropriate.
All companies interested in genuinely reporting to shareholders should be keen to comply with these simple, common-sense standards not just on the odd occasion when they are caught out doing something wrong but year after year so that the discipline becomes deeply imbedded within the organisation.
Unfortunately, too many directors either do not understand what is important or would rather not engage with their shareholders publicly in this fashion. Consequently, it is nearly impossible to find a company passing the six-point test.
Investors have often seen catastrophic losses in the value of their shares while executives were behaving well within what the law required. This is where investors need help. They need to be able to identify shortcomings in management skill much more quickly. That can be done if directors have to engage in more meaningful public reporting.
A company committed to such an investor friendly approach would quickly be recognized for its honesty. Its candor would reduce investment risk and the value of the company would appreciate.
For this to happen, there would have to be some attitude changes. For directors and management, saving face could no longer be a dominant influence on the way in which they communicate with the market.
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