The Equitable Treatment of

Shareholders
Equal shareholder rights
CG should ensure 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.

A. All shareholders of the same series of a class

should be treated equally.
1.Within any series of a class, all shares should carry the
same rights. All investors should be able to obtain
information about the rights attached to all series and
classes of shares before they purchase.
Equal shareholder rights
2. Minority shareholders should be protected from
abusive actions by, or in the interest of, controlling
shareholders.
3.Votes should be cast by custodians or nominees in a
manner agreed upon with the beneficial owner of the
shares.
4. Impediments to cross border voting should be
eliminated.
5. Processes and procedures for GSM should allow for
equitable treatment of all shareholders.
Equal shareholder rights
B. Insider trading and abusive self-dealing should be
prohibited.
C. Members of the board and key executives should be
required to disclose to the board whether they, directly,
indirectly or on behalf of third parties, have a material
interest in any transaction or matter directly affecting the
corporation.
Disclosure of shareholder rights
Some companies issue preferred (or preference) shares
which have a preference of receipt of the profits but have
no voting rights.
The Principles do not take a position on the concept of
one share one vote.
Investors can expect to be informed regarding their
voting rights before they invest.
Once they have invested, their rights should not be
changed unless they have the opportunity to participate
in the decision.
Disclosure of shareholder rights
Minority shareholder should be protected from abusive
action:
direct private benefits via high pay and bonuses for
employed family members and associates,
inappropriate related party transactions,
systematic bias in business decisions and changes in the
capital structure through special issuance of shares
favouring the controlling shareholder.
Disclosure of shareholder rights
Solutions to protect minority shareholders:
disclosure,
duty of loyalty by board members to the company and all
shareholders,
class action law suits,
pre-emptive rights in relation to share issues,
qualified majorities for shareholder decisions and possible
to use cumulative voting.
Related party transactions
Ownership and Control in the Asian Context
- Simple majority ownership (family, state)
- Complicated network ownership (pyramids)

The definition of related party is sufficiently broad to

capture the kinds of transactions in the jurisdiction that
present a real risk of potential abuse, it is not easily avoided
and is effectively enforced.

Check WB ROSC CG, Table 4: Comparison of Rules

Covering Significant Transactions
Related party transactions
Type of RPTs: continuing transaction or non-recurring
transaction.
Related party transactions
non-recurring transactions, for example, a holding
company might acquire an asset from a listed subsidiary,
or vice-versa.
Related party transactions
Most related party transactions are not abusive.
However, under certain conditions it can allow controlling
shareholders or executives of a company to benefit
personally at the expense of non-controlling shareholders
Abusive related party a loss of business opportunity,
overpayment of an asset, or simply making use of financial
services in a way that places the listed entity at risk.
Related party transactions
Often termed tunnelling
The transactions could also include:
selling an asset at an inflated price,
purchasing an asset at a reduced price, and
the controlling shareholder securing a loan guarantee
from the listed entity.
Related party transactions
Also, there are many cases of misrepresentation of
companys financial situation.
A pursuit of private benefits by a controlling shareholder,
such as extracting wealth from the listed company at the
expense of public shareholders.
Management misrepresenting their financial statements,
including by means of related party transactions, in order
to meet market expectations under strong pressure from
shareholders.
Related party transactions
Ex-Ante Protection: Disclosure and Shareholder
Approval
Ex-post Enforcement and Shareholder Redress
Bapepam-LK requirements: affiliated transactions must be
disclosed to Bapepam-LK and announced to public no
later than 2 days after; conflict of interest transactions must
first be approved by independent shareholders
Related party transactions
Independent shareholders must preapprove certain RPTs
(sometimes disclosed ex-ante).
National accounting standards also require ex-post disclosure
in the notes to the financial statement.
In Indonesia: the rules are adequate but enforcement
and implementation remain a challenge.
Bapepam-LK: charges against companies for violating rules
related to conflict of interest.
Related party transactions
Disclosure
Related party transactions would be disclosed, along with the
terms and conditions of the transactions. For example:
- the transaction date;
- the parties to the transaction;
- the relationship between the parties;
- a description of the transaction;
- the rationale for entering into the transaction;
- the total consideration and terms of the transaction; and
- the extent to which the related parties or company will
benefit economically from the transaction.
Related party transactions
Redress
Insider trading
Video: https://www.youtube.com/watch?v=u40snvSXLkE
Insider trading
Insider trading is prohibited, but has not been prosecuted.
Insiders include commissioners, directors, employees,
major shareholders, and others who acquire information
from their relationship with the company.
Securities companies are also prohibited from trading on
inside information.
Commissioners, directors, and significant shareholders are
also required to disclose their changes in ownership.
Market participants agree that Bapepam is making an
effort to bring cases, but also feel that insider trading and
market manipulation continue.
Insider trading
Abusive self-dealing occurs when persons having close
relationships to the company, including controlling
shareholders, exploit those relationships to the detriment
of the company and investors.
It is prohibited by securities regulations, company law
and/or criminal law in most OECD countries but not all
jurisdictions prohibit such practices, and in some cases
enforcement is not vigorous.
The Principles reaffirm that it is reasonable for investors
to expect that the abuse of insider power be prohibited.
In cases where enforcement is not effective, it will be
important for governments to remove any such gaps.
Role of accountants
The board is charged with making decisions in the
interests of all shareholders.
Within the decision making process of the board,
independent directors, the audit committee, and
internal/external auditors are all required to play a
significant role in monitoring abusive related party
transactions.

Video:
https://www.youtube.com/watch?v=KBV-
JHJcB7c&list=PLA3kzgLG3GmXKtfGB8BPf-n2ovnqTeP1i
Role of accountants
Role of Accountant:
1. External: auditor
2. Internal: management accountant

Principle V.C of the OECD Principles recommends that:

an annual audit should be conducted by an independent,
competent and qualified, auditor in order to provide an external
and objective assurance to the board and shareholders that the
financial statements fairly represent the financial position and
performance of the company in all respects.
References
ASEAN CG Scorecard
KNKG
OECD, 2004
OECD, 2009
WB Key findings