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Owner Accreditation - Concept Paper for Discussion, March 1996

Dr Jack Jacoby
DBA, MBA, BA, CMC, MIMC, AFAIM
Managing Director - Jacoby Consulting Group

Contents

1.0 What is Owner Accreditation

2.0 Objectives of Owner Accreditation

3.0 Why is Owner Accreditation needed

4.0 How does Owner Accreditation work

4.1 The Owner Accreditation Process

4.2 How does a company become Owner Accredited

4.3 Re-Accreditation

4.4 Use of consultants/licensees

4.5 Cost of Accreditation

5.0 Benefits of Owner Accreditation

5.1 Shareholders

5.2 Board of Management and Management

5.3 Brokers

5.4 Regulators and Legislators and Government 

6.0 Answers to frequently asked questions

 

1.0 What is Owner Accreditation

Owner Accreditation is a process, analogous to Quality Accreditation, but based on independently verified metrics, whereby owners of organisations (ie. the shareholders) are able to ensure that their organisations are aligned toward the achievement of their collective objectives. The metrics relate to owner expectations relating to benefit, value, growth and risk.

 

2.0 Objectives of Owner Accreditation

To provide the means by which existing and potential shareholders of corporations can:

2.1 Make more informed investment decisions through the provision of independent and quantified representation of shareholder objectives of specific corporations.

2.2 Make more effective investment choices by identifying and thus enhancing the probability of satisfying each individual investor's objectives.

2.3 Diminish investment risk for investors.

2.4 Provide a reliable and objective method for measuring the performance and competence of a corporation and its C.E.O. in their ability to fulfil shareholder objectives.

To provide the means by which the directors and management of corporations can:

2.5 Identify legitimate, recognised, owner-approved and quantified objectives which form the raison d'etre for a corporation's existence and which define its objectives and form the context for its mission, vision, strategies and actions.

2.6 Provide directors with the information against which management and board decisions and actions can be made and against which their outcomes can be assessed.

2.7 Provide directors with the information needed to assess corporate, C.E.O. and management performance.

2.8 Provide clear and unambiguous expectations against which directors and management are held accountable.

 

3.0 Why is Owner Accreditation needed

Some notable quotes assist in setting the context.

"Shareholders cannot simply look to the regulators to take action on their behalf, which is properly action that the shareholders themselves should take....Shareholders must look after their own interests, and shareholder activism is central to the proper functioning of our capital markets" (Alan Cameron, Chairman, Australian Securities Commission, in address to Corporate Governance 1995 Conference, Melbourne, Page 7)

"Institutional investors will be continuing to seek closer, continuing relationships with management and boards. Shareholders are interested in performance, and management and boards need to acknowledge the interests and powers of ownership. Formal communication through annual meetings or presentations to institutions does not provide a sufficient connection." (Ian Matheson, Executive Director, Australian Investment Managers' Association, in address to Corporate Governance 1995 Conference, Melbourne, Page 8)

"Corporate governance is nothing more, nor less, than the system each country, or culture ... develops to balance the need for managerial risk-taking, entrepreneurial energy, and high capability, with the need for some form of monitoring, so that management's direction is aligned with the interests of those who have entrusted their capital to the enterprise,..." (Ira M. Milstein, in address to Corporate Governance 1995 Conference, Melbourne, Page 2)

"...despite the huge size of modern institutional ownership (in the U.S.) and its concentration, the power of ownership does not encompass control of the corporation." (Ira M. Milstein, in address to Corporate Governance 1995 Conference, Melbourne, Page 9)

"Even as shareholding becomes increasingly institutionalised, 'representation' as in 'constituency representation' of these shareholders on the board is not generally the rule." (Ira M. Milstein, in address to Corporate Governance 1995 Conference, Melbourne, Page 9)

"Individual shareholders are arguably becoming more demanding of those who manage and oversee their investments. Brokers, corporate advisers, auditors and lawyers would also agree that we are entering a new age of 'investor consumerism', where there is no place to hide." (Ivan Deveson AO, in address to Corporate Governance 1995 Conference, Melbourne, Page 5)

 

4.0 How does Owner Accreditation work

It is intended that an Owner Accreditation Entity will be established to design, develop and oversee Owner Accreditation. Qualified organisations will be licensed by the Owner Accreditation Entity to work with corporations to assist them in becoming accredited

4.1 The Owner Accreditation Process

There are four fundamental elements of the Owner Accreditation process.

Phase 1 Establishing shareholder metrics. 

Phase 2 Aligning quantified shareholder objectives with quantified corporate objectives.

Phase 3 Assessing the corporation's internal planning and other processes to ensure that they support and are consistent with the achievement of corporate, and therefore shareholder, objectives. 

Phase 4 Assessing the corporation's internal performance measures to ensure that they reinforce those outcomes that are required to satisfy shareholder objectives.

Elements of Owner Accreditation

 4.2 How does a company become Owner Accredited

The typical steps in gaining Owner Accreditation might be as follows:

Step 1: A corporation requests information from the Owner Accreditation Body (the Body) on Owner Accreditation.

Step 2: The Body either provides the inquiring corporation with detailed literature relating to Accreditation and its requirements, or a representative of the Body calls on the corporation to talk through Accreditation issues and requirements.

Step 3: The enquiring corporation determines that it is interested to pursue Accreditation but needs to establish what it needs to do to satisfy Accreditation requirements.

Step 4: The corporation contacts the Body who provide it with a list of licensed Owner Accreditation specialists. The corporation is free to choose any of the specialist providers listed.

Step 5: The licensed Owner Accreditation specialist calls on the corporation who contracts them to conduct a Pre-Accreditation Assessment (PAA). This PAA is intended to identify those areas within the corporation that require change, amendment or refining in order to comply with Owner Accreditation requirements. All PAAs are registered with the Body.

The PAA will specify not only what has to be done, but also will describe the outcome needed from the change. This outcome should be sufficient to pass the Accreditation requirements.

The corporation may undertake the change process itself, or may elect to use the PAA outcome as the terms of reference to brief external change providers. The corporation would be free to choose any suitably qualified change agent to undertake the change needed. Such change agents need not be licensed Owner Accreditation providers, but in the corporation's best interest, they should be reputable and skilled in the areas in which they have been asked to assist.

Step 6: When the corporation feels itself ready to formally seek Accreditation, it contacts the Body and requests that an Assessment for Accreditation be undertaken.

Step 7: The Body and the corporation discuss the "ground rules", including timeframes, scope of assessment, documents required, access to management personnel, access to key shareholders, costs incurred and payment terms, preparedness to re-accredit, etc. Based on a clear and formal understanding between the Body and the candidate corporation, the assessment commences.

It is made clear at the outset of all assessments, that Accreditation is not automatic and that candidate corporations must satisfy the Body's criteria before Accreditation will be granted at each level of Accreditation.

As each of the Phases in the Accreditation process will consume considerable elapsed time, the Body will grant candidate corporations Phased Accreditation as they progressively satisfy the requirements of each phase. The three phased and one final Accreditation levels are:

Phase 1 Accreditation - Shareholder Metrics

Phase 2 Accreditation - Alignment

Phase 3 Accreditation - Process

Phase 4 Comprehensive Accreditation

Comprehensive Accreditation will only be granted following satisfactory compliance with Phases 1 to 4 requirements.

Where a corporation fails to satisfy the requirements at any phase, then Accreditation will be denied it for that phase. However, all failures will result in a detailed statement from the Body of the areas of deficiency and what is required for the corporation to rectify the issue and thereby gain Accreditation.

Corporations will then be given a specified time (commensurate with the scope of the rectification needed) within which they must rectify the issues identified and submit to re-assessment. As it is not the intention of the Body to "punish" corporations for trying to comply, the Body will re-test as often as required until compliance is secured. Naturally, the costs of re-assessment must be born by the candidate corporation.

4.3 Re-Accreditation

As shareholder objectives change over time, it is vital to ensure that the corporation's ability to satisfy those changed objectives remains congruent and relevant. Accordingly, it will be necessary for all Accredited corporations to be re-accredited.

As a guide, re-accreditation would be undertaken once every second year after the initial Comprehensive Accreditation. However this may be varied with the differing character of certain industries. Corporations in industries with demonstrably stable share registries and long term planning horizons may require re-accreditation only every, say, five years, while those corporations in volatile industries may require more frequent re-accreditations.

It may be that the determinant of frequency of re-accreditation will be the degree of churn on the corporation's share-registry. The higher the churn, then the higher the frequency of re-accreditation. Corporations will therefore be motivated to satisfy owners in order to minimise negative registry churn in order to minimise the risk associated with longer planning horizons.

The desire to identify changing owner objectives (and doing something about it) must be counter-balanced by the need for management to have a relatively "stable" environment over which to manage corporate issues and make critical operational and strategic decisions. The issue is not how frequently one gathers the information, but rather, the frequency that the information of changing owner objectives is used to change the focus, strategies and actions of the corporation.

4.4 Use of consultants/licensees

There are two key relationships with consultants and licensees.

During the time required to fully develop the Owner Accreditation process, Jacoby Consulting Group, in conjunction with the Body and its constituent members, would be used to design, develop, pilot and make operational the necessary elements of Owner Accreditation processes and systems. During this period JCG would be an observer on the Body's Board, but the work undertaken would be on the basis of a consultancy relationship between the Body and JCG.

When development of Owner Accreditation has been determined by the Body to be "complete", JCG would become an automatic licensee of Owner Accreditation Services (Steps 4 and 5 in Point 4.2 above). In so doing, it would relinquish its observer status on the Board in order to avoid conflicts of interest. Thereafter, JCG would be granted renewals of its licence on the same basis and conditions that would apply to all licensees.

It is the intention of the Body to licence legitimate, competent and reputable practitioners to undertake Owner Accreditation Services (Steps 4 and 5 in Point 4.2 above) in order to ensure the widest commercial coverage, support and appeal of the Owner Accreditation process. The Body would determine the characteristics and attributes required of licensees and the timing that licences will be granted.

4.5 Cost of Accreditation

The costs associated with Accreditation will vary depending on the character, size and dispersion of candidate corporations.

To conduct an Accreditation assessment for a large corporation with 200,000 shareholders spread around the globe and with many fully-autonomous subsidiaries using their own processes and systems; will be more costly than the conduct of an assessment for a small public company with 500 shareholders, a single operation with standardised corporate-wide processes.

It is envisaged that the costs will vary in proportion to the complexity of the candidate corporation. Similarly, the fees charged by licensees to conduct a PAA will vary for the same reasons as will the cost of preparing candidates for accreditation as this will be based on "what has to be done" which will vary among corporations.

The actual fees to be charged will be calculated on the basis of the Accreditation process requirements and will be presented to the Body for ratification.

 

5.0 Benefits of Owner Accreditation

5.1 For Shareholders/Investors/Owners

a. Decreased risk in making investment decisions by matching overall shareholder objectives with their own objectives.

b. Informed investment decisions through the provision of independent and quantified representation of shareholder objectives for each company.

c. Enable more effective investment choice by allowing investors to select from a range of shareholder objectives of different companies. The investor would select the investment that provided the greatest probability of fulfilment.

d. Provide a reliable and objective method for measuring the performance and competence of a corporation and its C.E.O..

e. More easily identify areas of poor performance or under-performance and a greater ability to scope the impact of such under-performance.

f. More easily able to "gather the evidence" to justify a change to the Board as a result of poor performance.

5.2 For Boards and Management

a More effective and easier corporate governance through the identification of legitimate, recognised, owner-approved and quantified objectives which form the raison d'etre for a corporation's existence and which define its objectives and form the context for its mission, vision, strategies and actions.

b. More easily able to determine and resolve efficacy and appropriateness of management and board decisions and actions.

c. More easily able to monitor and assess the outcomes of management and board decisions and actions.

d. Better able to assess corporate, C.E.O. and management performance.

e. Clearer and less ambiguous expectations against which directors and management are held accountable.

f. Better able to match shareholder objectives with management objectives and strategies therefore better able to meet shareholder expectations.

g. Ability to communicate and individually report to each shareholder based on that shareholder's personal objectives.

5.3 For Brokers

a. Better able to gauge investment options for clients using the Investor Profile tool.

b. Better able to provide effective investment-specific performance measures which will assist in identifying performing and under-performing investments.

c. Better able to decrease broker/client risk by increasing the frequency that broker advice will satisfy client expectations.

d. Better able to decrease the perception of risk in the investor community and thereby bring otherwise risk-averse investors into the market.

e. Decrease the "speculative" character of investments.

f. Increase the opportunity of enhancing the relationship between investor and broker through a better understanding of the character of client objectives.

g. Enhance the opportunity for brokers to develop their own owner profile methodologies which mirror Owner Accreditation, and which enable account relationships to be personalised and enhanced.

5.4 For Regulators, Legislators and Government

a. Sees that the onus for corporate governance is accepted and exercised by shareholders.

b. Sees the initiation of an effective non-government regulatory process that is equally applicable for all organisations.

c. Avoids accusations of "big-brother" regulation.

d. Sees leading edge and world first corporate practices introduced into Australia.

e. Relieves some pressure from the Australian Securities Commission, Australian Stock Exchange and others to enhance regulation.

f. Enables Australian commerce to be seen as less risky for investors.

g. Will attract capital into Australia.

h. Supports new corporate structures and philosophies which will avoid a repetition of the heady days of the 1980s.

 

6.0 Answers to frequently asked questions

6.1 Ascertaining shareholder objectives:

6.1.1 How would shareholder objectives initially be ascertained?

Shareholder objectives would be ascertained primarily through personal interview of the top 50 shareholders and questionnaire to all remaining shareholders.

It is difficult at this stage to suggest specific questions that may appear in the questionnaire as these may be misinterpreted and the style and construction of such questions is necessarily a specialist skill. Furthermore, the Owner Accreditation Body with its constituent members would significantly assist in identifying the issues requiring examination. 

However, the following is an indication of the types of issues that might require examination within the interview and questionnaire process:

What benefits does the investor seek from the investment?

What importance (ranked) have each of the following for the investor: dividend, asset growth, capitalisation, security, share price, etc

How important is dividend to the investor?

What dividend would the investor regard as satisfactory?

What dividend would the investor regard as poor?

What dividend would the investor regard as exceptional?

Over what time does the investor want to achieve the desired dividend outcome?

What dividend result would motivate the investor to sell his investment?

What dividend result would motivate the investor to buy more equity?

How important is asset growth to the investor?

What asset growth would the investor regard as satisfactory?

What asset growth would the investor regard as poor?

What asset growth would the investor regard as exceptional?

Over what time does the investor want to achieve the desired asset growth outcome?

What asset growth result would motivate the investor to sell his investment?

What asset growth result would motivate the investor to buy more equity?

How important is capitalisation to the investor?

What level of capitalisation would the investor regard as satisfactory?

What level of capitalisation would the investor regard as poor?

What level of capitalisation would the investor regard as exceptional?

Over what time does the investor want to achieve the desired capitalisation outcome?

What capitalisation result would motivate the investor to sell his investment?

What capitalisation result would motivate the investor to buy more equity?

How important is risk to the investor?

Is gearing seen by the investor as a risk element?

Is diversification seen as a risk element?

Are there other issues that are perceived as risk issues by the investor?

For each type of risk, what level of risk would the investor regard as satisfactory?

For each type of risk, over what level of risk would the investor regard as excessive?

For each type of risk, what risk level would motivate the investor to sell his investment?

For each type of risk, what risk level would motivate the investor to buy more equity?

When the investor assesses investments, what criteria does he/she use to make the assessment?

Which ratios, if any, does the investor use to assess an acquisition opportunity?

Which ratios, if any, does the investor use to assess the performance of the investment?

How important are each of these ratios to the investor?

If the corporation satisfies the investor's objectives, what, if anything, would motivate the investor to quit the investment or buy more stock? Issue such as environmental and ethical issues could/would be examined here.

Against what alternative investment options does the maintenance of equity in this corporation need to compete for the investor?

6.1.2 How often (and in what manner) would shareholders be consulted to ascertain changes in objectives? (eg many companies change quite considerably over time leading to rapid changes in shareholder expectations?)

This is an issue that requires considerable care as the identification of changing owner objectives (and doing something about it) must be counter- balanced by the need for management to have a relatively "stable" environment over which to manage corporate issues. The issue is not how frequently one gathers the information, but rather, the frequency that the information of changing needs is used to change the focus of the corporation.

The reality is that at the moment, management is generally only aware of trends in the top echelon of shareholders (if at all), and then not necessarily in quantifiable terms. This suggests that management currently assumes, infers, implies, deduces or guesses the objectives of the lower echelons of shareholders. It is quite accurate to suggest that the shareholding community is dynamic and is prone to considerable change. It is exactly for this reason that Owner Accreditation maintains the necessity to monitor such changes in owner objectives.

It is envisaged (but entirely open to other suggestions) that the entire shareholding population would be "consulted" on the following occasions:

  • once as part of the accreditation procedure
  • once every second year after accreditation as part of a company re-accreditation process. However this may be varied with the differing character of certain industries. Corporations in industries with demonstrably stable share registries and long term planning horizons may require re-accreditation only every, say, five years, while those corporations in more volatile industries may require more frequent re-accreditations.

It is also envisaged that new entrants into an accredited company's share registry would receive a questionnaire, possibly with their share script, but at least at an early stage of their association with their new investment (possibly within three months of entry).

Over and above this level of contact, would be entirely at the discretion of the Board and Management.

The manner in which shareholders would be consulted would be one of two ways: for top 50 shareholders, each would be interviewed on a face-face basis. For all other shareholders, a pre-coded questionnaire would be used. New entrants into the registry would be sent a questionnaire irrespective of the size of their holding. This data would be immediately added to the existing shareholder data-base which would enable ongoing monitoring of the changing character of owner objectives (if any) by the Management and/or Board.

Re-accreditation would involve re-interviewing the top 50 shareholders as they stand at the time of re-accreditation with all other shareholders receiving a questionnaire.

6.1.3 Are the objectives of other stakeholders to be ascertained and if so, how?

The Owner Accreditation concept rests on the premise that organisations exist to satisfy their owners' objectives. As such, the accreditation process is intended to provide a tool/technique for making organisations more accountable to their owners and more likely to satisfy owner objectives. The paradigm upon which owner accreditation rests suggests that non-owner stakeholders are enablers (or barriers) that impact on the owners' ability to secure the desired benefit from their organisations.

Furthermore, the paradigm maintains that no organisations exists expressly to satisfy non-owner stakeholders per se, but non-owner stakeholder satisfaction is critical to ensure owner satisfaction. Owners invest in corporations because of the benefit that they will derive from it and are not concerned, per se, with the management of stakeholders needed to achieve that objective.

Therefore the effective management and satisfaction of stakeholder objectives is the domain of the Board and of Management. Owners require their objectives satisfied irrespective of non-owner stakeholder objectives or demands.

6.2 Making sense of shareholder objectives

6.2.1 Do individual shareholders have the expertise to make sense of their own objectives and might these necessarily be right for the company as a whole?

It is certainly accepted that owners do not function with "full knowledge", but the notion that owners' objectives are "invalid" due to such "partial knowledge" is rejected.

The Owner Accreditation process will achieve a number of outcomes:

a. It will provide more information to owners and prospective owners of what the likely outcome may be from their investment. This is due to the accredited organisation being independently verified as having the systems and processes to better enable its stated and declared outcome (ie. its Investor Profile) coming to fruition.

b. The owner and prospective owner will be able to choose the "Investor Profile" that most closely matches his/her own needs, rather than rely on other criteria which do not necessarily represent the outcomes desired by that owner (such as industry generic ratios and media reports).

c. The process of asking the shareholder to respond to questions regarding his/her desires relating to benefit, risk, security, growth, etc, will "force" them to think about the issues, and in so doing, lift their consciousness of the issues. Consumer and behavioural research supports the contention that heightened consciousness irrevocably leads to the desire to seek more information on the issue and therefore become more knowledgeable in the process.

d. Where a shareholder has an investment in more that one company, and where one of those investments is an accredited company, then the shareholder will inevitably experience and compare the different relationships between him/her and the two types of organisations. Currently, where shareholders are never asked to state their objectives, it is easy to become cynical in the belief that the small shareholder is "irrelevant" to the functions and destiny of its investment. Accreditation will bind the desires of the owners more closely with the functions and destiny of the corporation than ever before.

As the Owner Accreditation concept rests on the premise that organisations exist to satisfy their owners' objectives, the concept of owners objectives not "being right for the company" is inconceivable.

Certainly there will be some shareholders whose objectives differ from those of the vast majority of shareholders (ie from the company's Investor Profile) and from whom the company takes its bearing and direction. In such a case, their objectives will not be fulfilled which will logically motivate them to look at alternate investments which will better enable them to satisfy their objectives. This happens now where shareholders quit the registry when they no longer feel confident that their objectives have a high probability of satisfaction.

6.2.2 Given that it is likely there would be a wide range of shareholder objectives how would these be melded into a cohesive set of objectives for the company?

It is certainly inevitable that there will be a range of shareholder objectives. However, it is envisaged that the range prior to or at accreditation will be wider than post-accreditation, as the accreditation process, over time, will enable a much better match between corporate aspirations and owner aspirations.

It is anticipated that an Investor Profile for a corporation for one criteria, say one aspect of risk, might look something like the following:

The debt/equity range where
shareholders regard the gearing
ratio as an unacceptably high risk

Wiggitt Limited
Shareholders
as at 30 June 19XX

 

Number

Percentage

No long term debt

Nil

 

20% or lower

128

0.15

21% to 50%

1,356

1.69

51% to 70%

15,679

19.57

71% to 90%

45,674

57.01

Over 90%

13,457

16.79

Don't Know

2,056

2.56

No response

1,765

2.20

Total

80,115

100.00

 

Wiggitt Limited Shareholders by value of Shareholding ($'000) as at 30 June 19XX

The debt/equity range where shareholders regard the gearing ratio as an unacceptably high risk

<5

5 to 50

50 to 250

250 to 1,000

1,000 to 10,000

10,000 to 50,000

> 50,000

Total

No long term debt

Nil

Nil

Nil

Nil

Nil

Nil

Nil

Nil

20% or lower

59

45

12

8

4

Nil

Nil

128

21% to 50%

697

345

215

62

25

12

Nil

1,356

51% to 70%

8,204

6,366

765

246

76

21

1

15,679

71% to 90%

24,783

19,006

1,152

541

132

54

6

45,674

Over 90%

6,904

5,735

543

186

69

18

2

13,457

Don't Know

1,310

632

75

27

12

Nil

Nil

2,056

No response

1,111

486

109

37

18

3

1

1,765

Total

43,068

32,615

2,871

1,107

336

108

10

80,115

 

Issue

Wiggitt Limited Policy and Objectives

Debt/equity ratio

It is the objective of Wiggitt Limited to reduce its gearing ratio to below 50%. This will satisfy 93.37% (as at 30/6/XX) of shareholders by number who regard gearing in excess of 50% as representing extreme risk.

A gearing level of 50% or lower will ensure that extreme risk will be avoided for the following shareholders by value of their shareholdings:

Share Holdings Percentage

($'000)

Less than 5 98.38%
5 - 50 98.76%
50 - 250 91.55%
250 - 1,000 93.28%
1,000 - 10,000 90.52%
10,000 - 50,000 88.57%
Greater than 50,000 100.00%

The strategies it will use to decrease gearing to 50% are:

Strategy A
Strategy B
Strategy C

It is not the intention of the Accreditation Process to usurp the responsibility of either the Board or of Management as to how it should interpret the above owner profile. The challenge for both the Board and Management is to resolve the dilemma of different objectives and perceptions in a way that satisfies the owners. Currently, both Board and Management establish a policy and a direction for their company without the knowledge of their shareholders' objectives. The accreditation process provides them with better information but does not absolve them of their responsibility or accountability.

Where they perform the task well, and satisfy many/most shareholders, then those shareholders will value that stock more highly and are less likely to quit the registry. Conversely, where Board and Management fail to satisfy shareholders then they will either quit the registry, change the Board, or change Management. These three options are currently available to shareholders (albeit some more easily achieved than others).

Over time however, it is anticipated that it will become easier for the Board and Management of an accredited company to solve the above dilemma, as the Investor Profile will ensure that extreme mismatches between differing owner objectives will occur less frequently. Shareholders driven by personal benefit will be attracted to those companies that provide them with the highest probability of satisfaction.

6.2.3 Which shareholders would the company listen to or would the majority view prevail?

To some extent, this has been answered above. Generally speaking, the company should "listen" to all shareholders, but that does not mean that all shareholders will be satisfied in terms of their own objectives.

In the illustration in point 6.2.2 above, it is clear that Wiggitt Limited's decision to set its gearing at 50% will satisfy the vast majority of its shareholders. That does not mean that it ignored the very small minority, but rather that the interests of the vast majority were better satisfied at the 50% gearing level than at the zero gearing level. For the minority shareholders who desire zero gearing, and for whom gearing is a vital issue, then they can seek out a company with an Investor Profile where its Board have determined that a zero gearing is the best way to satisfy its shareholders.

Currently, the absence of this type of information means that satisfying minority shareholders is very much based on subjective assessment and judgement. The Accreditation process provides the information against which Boards and Managements can make informed decisions.

6.2.4 Might a handful of large shareholders (with their own agenda) combine to influence the setting of objectives and the direction of the company? (eg reduce R & D and go for short term profits)

In fact it is suspected that intuitively, the reverse would occur. At present such influences are largely "hidden" from the scrutiny of the general shareholder population. The accreditation process, due to its objectivity and independence, identifies all shareholders' objectives. Under accreditation, Boards and Management will need to set policies in the context of their overall shareholders' objectives. They will also have to justify those policies in the context of overall shareholders objectives and will be held accountable for their achievement in the context of what, overall, their shareholders want.

The suggestion that large shareholders might combine to influence the setting of objectives and the direction of the company suggests that they would influence the company to adopt a course other than in the best interests of the quantified objectives of its shareholders. It is suspected that Boards and Managements will find such a course harder to justify under accreditation in light of the published quantified objectives of owners. This is because the data upon which the policy is developed will be in the public domain and open to scrutiny, not only by shareholders, but also by the media, analysts and others.

Best case scenario, accreditation will minimise both the frequency and degree of "tampering" with corporate direction by self-interested shareholders.

Worst case scenario, there will be no difference to the current state experience.

6.2.5 Directors must ultimately concur that the objectives are appropriate - is this likely to mean that directors will adopt only those objectives acceptable to them, thereby diminishing the efficacy of the whole process?

Under accreditation, Directors will not have to "concur that the objectives are appropriate" as shareholder objectives will be quantified and described. This will be a given. The task for Directors will be to interpret and translate these shareholder objectives into a delivered benefit.

This question is no different to asking whether it's possible for Directors to make poor decisions. Directors currently make decisions which supposedly are in the shareholders' best interests, but make these decisions without the information which is fundamental to making the decision. Mistakes or mismatches between desire and action are therefore frequent.

The accreditation process provides the necessary information which will enhance the decision making process and therefore minimise poor decisions caused by incomplete or unavailable shareholder data.

Where Directors have been unable to make, or have been unwilling to make appropriate decision which effectively match shareholder objectives with corporate objectives, then they will be deemed to have failed in their responsibility. Shareholders will, as at present, resort to existing remedies of removal and replacement of Directors. Conversely, shareholders might quit the registry and seek other investments which are better able to satisfy their objectives.

The interesting issue that arises here, is that corporations will be pressured to compete amongst themselves on the basis of, among a range of issues, governance effectiveness. It will not take long for poorly governed corporations who are unable to satisfy shareholders to be perceived as poor investment targets. Poor direction from the Board will exact a heavy price in the market.

6.2.6 Is the perception that directors are taking account of shareholder objectives more important than the reality?

Perception is important and the independent Accreditation Standard is the means by which such perception will be generated. However, at the end of the day, the shareholder wants the tangible benefit, and not only the feeling that he is going to get the benefit. Perception without performance will be unsatisfying to a shareholder.

Accreditation certainly enhances a favourable perception of an accredited company in the eyes of shareholders or intending shareholders. It also, in more tangible ways, ensures a much greater probability of the company actually delivering the promise.

The accreditation stages of matching shareholder objectives with corporate objectives is critical. As are the next two stages of ensuring that the company's planning processes and performance measures enable those objectives to be realised.

6.2.7 Would there be any verifiable track between the expressions of shareholder objectives and the objectives finally adopted by the company?

Expressions of shareholder objectives will be tracked at the time of accreditation, and then at re-accreditation. The dynamic tracking of changes to those objectives will be possible at any time through the questionnaire issued to new entrants to the registry.

The accreditation and re-accreditation processes will be undertaken externally to the company by the Accreditation Board or its licensee and as such, will be verifiable. Dynamic tracking between re-accreditations will be undertaken by the company itself.

Stage two of the accreditation process is the independent verification of the match between shareholder objectives and company objectives. If a company cannot justify its corporate objectives by the shareholder data, then accreditation will be withheld or denied.

The Investor Profile may include a tracking section that looks something like this:

Last Year'sShareholder Objective

Last Year'sWiggitt Limited Corporate Objective

Last Year's Actions/Strategies to Achieve Objectives

Last Year's Performance

Objective # S1

Objective # C1

Action # 1

Achieved

Objective # S2

Objective # C2

Action # 2

10.56% short of objective

Objective # S3

Objective # C3

Action # 3

14.34% over objective

Objective # S4

Objective # C4

Action # 4

Achieved

6.3. Confirming objectives with shareholders:

6.3.1 Would shareholders be responded to on a personal basis and if so how and how often?

Shareholders would each receive either an interview request or a questionnaire at accreditation and re-accreditation. This will enable the company to hold shareholder data on its files as well as details of each shareholder's objectives.

The company will therefore have the ability to communicate as and when it sees fit to its shareholders on either a collective basis (which it is able to do now), or more importantly, on an individual basis. Such an individual communication can be used by corporations to report company performance and directions to each shareholder against his own objectives as captured in his most recent questionnaire. Where a shareholder has expressed a low risk tolerance for example, it will be possible to write to him explaining a proposed project and discussing in detail its risk elements thereby diminishing the perception of risk associated with that project by that shareholder. Modern mail merge technology makes such personalisation easy.

It is believed that those corporations who are shareholder-focused, will use this new capability to build and personalise the relationship between company and owner. It is not the intention for the Accreditation Process to dictate when such communications should occur.

However, the ability for such personalised communications has been made possible through the shareholder information collected by the process. It is felt that this new capability will be quickly seen as a major competitive edge in attracting investors and enhancing perceptions of corporate "value".

6.3.2 How would the shareholder wanting big dividends be responded to if overall shareholder objectives indicated otherwise?

What happens now? More often than not, the shareholder only finds out after the company has failed to perform to his expectations. He may then express his disappointment at the AGM, the media or by quitting the registry.

Under accreditation, the shareholder is able to establish from the Investor Profile, his "position" relative to other shareholder objectives before he makes his investment. If he has extreme objectives, then it is quite likely that he would have a low probability for satisfaction and he is best served by looking for an Investor Profile better matching his objectives. If on the other hand he falls within a reasonable range of objectives, then the probability of satisfaction increases.

Where an existing shareholder has extreme objectives such as very high dividends, then the company has a few options. Of course, it may choose not to communicate with the shareholder and allow the shareholder to determine his own "destiny". (This is basically what happens now.)

The company may choose to suggest that although the company's objectives are based on shareholders with more modest dividend objectives, the company has a history of extraordinary performances (assuming of course that this is true) and the shareholder's chance of satisfaction are not as remote as they may appear to be based on the Investor Profile.

It may suggest to the shareholder, (again assuming that this is true) that a number of ventures that the company is involved in have a greater ability to satisfy the shareholder's dividend objectives, and perhaps the shareholder might consider investing in those opportunities.

The company may also explain to the shareholder that in the company's industry, a high dividend often means compromising other areas of necessary expenditure, such as R & D or equipment refurbishment etc. and is not in the long-term best interest of the company and therefore the shareholders of that company. In this way, the company may be able to legitimately re-align a shareholder's expectations with what is achievable. Such a strategy would help diminish disenfranchised shareholders quitting the registry. In so doing, the company's registry would be more stable possibly causing share prices to rise.

6.3.3 Would the agreed objectives be communicated to all shareholders?

Yes. The company would use the same methods it does now to communicate its corporate objectives to shareholders, the investment market, suppliers, customers, analysts, regulators, etc.

It is envisaged that an Investor Profile would be become an integral part of a company's annual report. The Investor Profile would therefore reinforce the statements of vision, mission and objectives which are now commonly found in these documents.

The company may also, at its own discretion, augment these conventional communication channels with additional shareholder communications which discuss or elaborate upon objectives.

For example, it might be a valuable exercise for a company to send copies of the Investor Profile to each investor with a detailed analysis of the implications of various options before a company in terms of the satisfaction of shareholder objectives. An analysis of the trade-off implications of a high-dividend shareholder profile and a risk-averse shareholder profile would be a very valuable discussion for shareholders.

6.3.4 Would management disclose any disparity between shareholder objectives and final corporate objectives?

It is suspected that management would not say "our policy is not to satisfy group X within our shareholder population". Rather, the "disclosure" or "identification of disparity" will come from two sources.

Firstly, shareholders will be able to match stated corporate objectives, their justification as provided by the company, and the Investor Profile and so identify those shareholder objectives not satisfied or addressed by the corporation.

Secondly, the receipt or denial of accreditation or re-accreditation at Stage Two of the process will provide the shareholder with an independent view of the degree of fit or disparity between shareholder objectives and corporate objectives.

6.3.5 Would shareholders be able to take any action where directors clearly failed to accept a shareholder objective?

The same remedies available to shareholders today would be available to shareholders under accreditation. However, under accreditation, it will be easier for shareholders to "dimension" the degree of probable dissatisfaction or disparity between shareholder objectives and company performance and gauge the probable level of support they may gain in a motion to replace Board members.

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