Be ready for AGMs, EGMs


  • Business
  • Wednesday, 09 Jul 2003

First and foremost... the annual report.  

Indeed, the annual report is a good starting point for minority shareholders to keep track of companies' performance. Contrary to general belief, you do not need in-depth knowledge of financial analysis to grasp the essential information from an annual report. For those who do not have the time or resolve to go through the entire document in detail, we would highlight several 'must read' pages so that you can glimpse through key issues and be armed with sufficient facts to meet the board of directors (BoD) and management at AGMs. 

... and the 'must read' pages 

Firstly, chairman's statement and/or CEO's review should give a good snapshot of the operating performance and prospects of respective companies. Next, profit and loss statement (P&L) and balance sheet are also crucial 'must read' information, while for those who need greater depth, the cash flow statement would also be helpful. Within the P&L, one should gauge underlying profit trend by isolating exceptional one-off gains or losses. 

In the event of substantial one-off items, the cash flow impact, if any, should be noted. Balance sheet wise, shareholders should at least keep an eye on net current assets and the total borrowings position. As a rule of thumb, current assets should not be lower than current liabilities while total borrowings above 80% shareholders' funds would be considered rather stretched. 

The latter would entail further cross check with P&L to gauge the interest service capability where typically, pre-tax profit below interest expense would signal an initial red flag on the financial position. 

As a matter of fact, the P&L, balance sheet and cash flow statements should be read and assessed in totality. As an example, low shareholders' funds, high borrowings and continuing losses would warn against the risks of breaching PN 4 due to negative shareholders' funds. 

Significant events?  

Meanwhile, directors' reports would provide a summary of significant events during the financial year under review, as well as events subsequent to the balance sheet date, up to the cut-off date of the annual report. These are the areas which you should keep an eye on to make sure that companies are on the right track. 

You may wish to find out as to whether companies are buying into non-synergistic investments. Are they expanding at the expense of high borrowings, and/or are there related-party deals that may pose concerns? In the event of very significant transactions, what would be the impact on the P&L and balance sheet? These are issues which minority shareholders have the right to question while BoD/management should also be well positioned to address any related concerns. 

No absolute benchmark for directors' pay 

Although directors' pay and remuneration is a 'hot' topic during many AGMs, the more important issue, in our view, is directors' ability to improve shareholders' wealth by consistently delivering share price-enhancing results and proposals. 

There is, of course, the broad market and economic environment which are beyond control, but within this context, a good BoD/management should still be able to do better than peers facing similar conditions. In this respect, it has been our longstanding position that shareholders should gauge directors' pay in relation to their performance. 

As mentioned previously, it would be better to pay someone more if he can enhance the value of your company rather than going 'cheap' for an under-performer who could ultimately cost shareholders more through the non-performance of their share prices. Generally, we believe shareholders need not raise alarm unless the trend of directors' pay runs contrary to underlying corporate results. 

Contingent liabilities? 

Meanwhile, contingent liabilities have traditionally not been a big issue with Malaysian companies but we note that the crystallising of such liabilities has aggravated the plight of several PN 4 candidates. As such, do also keep an eye and raise questions in the event of a sharp jump in contingent liabilities, especially those which may have a higher chance of crystallising. 

What about share buyback? 

Elsewhere, shareholders' mandate is required for companies to initiate and/or continue share buyback on an annual basis. 

For companies seeking mandate renewals at AGMs, we would suggest that shareholders take a closer look at the actual impact of an ongoing share buyback vis-a-vis the alternate uses of funds. 

As we see it, although share buybacks do send a positive message to the investment community, they do not necessarily help in stabilising share prices. On the other hand, funds directed towards buybacks could have been channelled towards the payment of dividends, even should productive new investments be harder to come by. 

Dividend policy 

In the event a share buyback does not achieve the originally stated objectives, a case could be raised on re-directing the buyback allocation to increase dividends instead. 

Generally, it is also appropriate for shareholders to know the dividend policy of respective companies, as to whether they adopt a specific payout ratio (i.e. paying a certain ratio out of earnings as dividends) or any other policy  

When it comes to companies with huge cash surpluses, shareholders may demand higher dividends, especially when there are no alternate productive uses. Certainly, dividends have taken on greater significance in the current market conditions when capital appreciation is harder to come by while bank deposit rates are reduced to dismal levels. 

As a shareholder, you indeed have the right to know more about your company's dividend policy, and also the reasons, if any, of profitable companies not raising dividends despite abundant cash resources. 

Future investment activities 

One valid reason would be to preserve cash for future investments, which is understandable as companies keep a war chest to capitalise on investment opportunities that may come along. If so, shareholders should find out how companies evaluate their future investment plans and their areas of focus. 

Certainly, companies would not be able to divulge sensitive information on potential transactions, but it would be of comfort to know the direction and the broad investment guidelines used in evaluating future deals. As a shareholder, you would want to ensure that companies stay focused and not strain their financial and management resources. 

More than just annual update 

As you attend more than one AGM of the same company, you should start to know your BoD and management better, and will be better able to form opinions, check its progress and pinpoint any deviations against stated targets. You would then be able to better assess management capability and credibility, which we feel is the most important quality in any company. 

We stress that an AGM is only an annual event, and that shareholders need to keep a lookout throughout the year to make sure that there is no adverse turn in events (especially those within management control), or any unfavourable proposals that may be detrimental, especially to minority shareholders. 

Also, increased disclosure requirements by the authorities means that minority shareholders would have at their disposal a much better flow of information than previously. 

In concluding, we would urge that minority shareholders do their homework and prepare for AGMs as most of the time, this is their only chance in a year to meet face to face with BoD/management to make sure that their investments are on the right track and in safe hands. 

As empirical evidence would show, the voices of minorities are increasingly being heard on the KLSE and you can indeed make a difference to enhance corporate governance and transparency! 

Part One 

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