Department of Accounting and Finance

FINANCIAL MANAGEMENT
AAF002-3


An investigation into the effect of Corporate Governance in
shareholders wealth maximization the case of AMEC Plc

By
Trinh Phuong Thao
1126458


An assignment submitted in partial fulfillment of the assessment for the Financial Management
(AAF002-3) unit

January 7, 2013
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Assignment 1

An investigation into the effect of Corporate Governance in
shareholders wealth maximization the case of AMEC Plc

Abstract
From late 1980s, a series of corporate scandals has occurred drawing peoples attention to
corporate governance issues. In order to prevent those failures from spread, Corporate
Governance Code has been developed base on several leading theories in economics and
finance with the purpose of improving corporate governance standards to be more
effective and suitable for continuously changing business environment. Indicated in this
report is the outcome of reviewing main related theories as well as the evaluation of the
applications of the Code to a selected company, namely AMEC Plc, in order to clarify
how corporate governance could contribute to the maximization of shareholder value.
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Table of Contents

I. Introduction ................................................................................................................... 3
1. Report objectives.................................................................................................... 3
2. Company overview ................................................................................................ 3
II. Theoretical foundation .................................................................................................. 4
1. Shareholders wealth maximization ....................................................................... 4
2. Agency theory ........................................................................................................ 5
3. Corporate Governance Code .................................................................................. 5
III. Evaluation of AMECs corporate governance .............................................................. 6
1. Leadership .............................................................................................................. 6
2. Effectiveness .......................................................................................................... 7
3. Accountability ........................................................................................................ 8
4. Remuneration ......................................................................................................... 9
5. Relations with shareholders ................................................................................. 10
IV. Relation between company performance and corporate governance ......................... 10
V. Conclusion .................................................................................................................. 12
VI. Recommendations ....................................................................................................... 12
Appendix ........................................................................................................................... 13
A. Foundation of Shareholders wealth maximization paradigm ............................. 13
B. Description of Agency theory .............................................................................. 13
C. The development of corporate governance code ................................................. 15
D. AMECs risk management system....................................................................... 16
E. AMECs remuneration package ........................................................................... 17
F. AMECs ownership structure .............................................................................. 18
Reference ........................................................................................................................... 19

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I. Introduction
1. Report objectives
In the last two decades collapsed several prominent firms such as Enrol,
Worldcom and Royal Bank of Scotland, which has to a certain degree broken the
confidence of investors. The cause of those events has been blamed for the failures of
corporate governance since it is considered the system by which companies are directed
and controlled (Cadbury Committee, 1992). Therefore, Corporate Governance Code has
been developed from mainstream theories in economics and finance to propose
instruction framework for companies to follow in order to achieve better shareholder
value. This report is carried out with three main objectives:
- To review some leading theories influencing the development of corporate
governance;
- To evaluate corporate governance system of AMEC Plc which is chosen as a case
study to examine the relationship between those theories and actual application of
corporate governance; and
- To refer to the question of how corporate governance contribute to shareholders
wealth maximization.

2. Company overview
AMEC was first founded in 1848 in the UK. For more than 160 years of
continuous growth, the company has become a large supplier of consultancy, engineering
and project management services in several sectors including oil and gas, minerals and
metals, clean energy, environment and infrastructure. With the head office in London,
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their business has expanded to 40 countries around the world with over 27,000
employees.
Their recorded revenues in 2011 were 3,261 million, an increase of 10.5% over
financial year 2010, which gives a profit of 232 million. Their adjusted diluted earnings
per share also increase from 62.5p to 70.5p and the dividend per share for the year is
30.5p in total.


II. Theoretical foundation
1. Shareholders wealth maximization
In modern financial management implies a main idea of why businesses exist. The
answer makes corporate owners wealth maximization the primary objective of business,
which means operations are run to increase the market value of ordinary shares. The
foundation of this paradigm as well as a simple comparison between it and profit
maximization model will be stated more clearly in Appendix A.
This paradigm run across this report as it is considered to be the aim of corporate
governance. The analysis of AMECs control system will be performed by reference to
whether those arrangements support or restrict shareholder value maximization.

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2. Agency theory
There are various theories associated with the development of corporate
governance but agency theory can be considered the most influencing theory. The main
concept of it is about the relationship when one part (the principles) contracts with
another part (the agents) to make decisions on behalf of the principals (Daniel and
Alina Badulescu, 2008). In the context of corporate governance, the principle means
shareholders and the agent is talked about management. A detailed description of this
theory is put in the Appendix B along with the brief mention of some other corporate
governance theories.
This theory will be used as the main one in the analysis and evaluation of AMECs
corporate governance. It is very suitable since the company is a public limited firm where
the directors of the company do not hold a large proportion of its ownership.
Consequently, the conflicts of interest as well as the need for a mechanism to put the
control back to the hand of shareholders will arise. The analysis of AMECs control
system will focus on how it contributes to the purpose of reducing agency costs.

3. Corporate Governance Code
The UK Corporate Governance Code is designed to provide the guide of best
practice related to corporate governance with the aim of improving the effectiveness of
control and ensuring the benefit of shareholders. It has been continuously improved from
1992 with many reviews and modification. The newest edition of the Code is Combined
Code 2010 which applies to all quoted companies. It consists of main principles,
supporting principles and provisions in five main areas, namely Leadership,
Effectiveness, Accountability, Remuneration and Relations with shareholders. The case
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study of AMEC corporate governance will be examined in accordance with this Code.
For details of the development process of the Code, see Appendix C.


III. Evaluation of AMECs corporate governance
A companys corporate governance consists of numerous arrangements in many
business and management aspects. Much time and effort is required to run an in-depth
investigation into the whole system. This report will concentrate only on remarkable
features of AMECs corporate governance that directly influences the benefits of their
shareholders. Mostly under this section is the evaluation of the company control system,
if there is a need for further description and analysis of the mechanism they use, it will be
put on the Appendix.

1. Leadership
Corresponding to the Combined Code, there is a distinction between Chairman
who runs the board and Chief Executive who runs the company business in AMEC Plc,
which prevents any individual from having too much power to dominate the firm. Thanks
to this restricted authority of directors, resource misusage as well as unethical behavior
which are considered agency costs can be diminished. Chairman and Chief Executive can
oversee each other reducing the possibility of fraud, so this separation is in great help for
AMECs shareholders to ensure their managers to take appropriate actions.
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The board holds regular meetings throughout the year. In 2011, there were ten
board meetings and twelve committee meetings. This figure can be considered high
number compared to AMECs competitors of similar size. One of its advantages is that
non-executive directors had favorable conditions to closely grasp the company situation
in order to effectively support or challenge executive directors. However, how the board
spent their time is not clearly stated in AMECs corporate governance, which may create
ambiguity and make the evaluation of the board more difficult.

2. Effectiveness
In relation to the companys size, the size of the board, formed of eight people, is
fairly small. The board of their competitors often consists of ten to twelve directors.
Moreover, though AMEC agrees to the new supporting principle B.6 of the Code to take
gender as a relevant factor of effectiveness, there is no woman in AMECs board. Both of
these characteristics limit the board diversity, which may bring some weaknesses due to
the lack of different perspectives to AMECs corporate governance system. However,
AMEC at least pays attention to the balance between executive and non-executive
directors among its board.
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Source: Adapt from AMECs Annual Report 2011
As can be seen from the chart, then number of non-executive directors excluding
Chairman is greater than the one of executive directors, which is completely complied
with the requirements of the Code. This system is used to ensure the neutrality of the
board in the issue of interest conflicts arising from agency theory, which safeguards the
benefits of shareholders.

3. Accountability
Risk management is one of the strengths of AMECs corporate governance. For
detailed review of this system, see Appendix D.
AMECs key risks, especially financial risks, are carefully stated in their annual
report along with the methods of mitigation. They are divided into detailed item,
concretely analyzed, with general direction of settlement. Therefore, AMECs
Chairman
12%
Non-executive
Director
50%
Executive
Director
38%
Chart 1: Balance of Executive and Non-executive
Directors of AMEC
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shareholders can understand clearly the risks that the firm has to face and obviously
express their attitude towards risk to board of directors, which supports in reducing the
possibility for directors to take inappropriate high risks for short-term profits. In other
words, the clear structure of risk management of AMEC greatly contributes to the work
of returning control back to companys shareholders.

4. Remuneration
Compliance with the Code, the company clearly discloses the system of
remuneration calculation. The remuneration package of AMEC Plc consists of four
components which are set up for different purposes of motivation. An in-depth analysis
of this will be presented in Appendix E.
AMECs remuneration package is design to prevent underperforming reward. The
policy as well as formula to calculate the award is stated clearly. The use of financial
ratios that measures overall company performance as indicators for the bonus payment
reduces the difficulty in remuneration computation. However, how the amount paid links
to individuals actual performance is still in ambiguity. It is found to be insufficient to
shareholders since they want to know whether bonus schedule is reasonable or not in
accordance with directors virtual contribution. The announcement related to this issue
needs further development through implementation of best practice guidelines rather than
by Regulation.

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5. Relations with shareholders
Because of AMECs share ownership structure where a large number of small
ownership exists, there is a high probability of free rider problem. The details on this
structure are stated in Appendix F.
In order to prevent this problem, AMECs board of director needs to take the
active role in engaging with the companys owners and they are doing quite well. Apart
from common communication tools of annual reports and accounts, presentations, annual
general meetings and website information, AMECs directors, especially new appointed
Chairman, take the initiative in contacting and learning about the view of investors. They
hold both scheduled and unexpected meetings with significant shareholders. In December
2011, a wide group of investors has been invited to attend the group lunch arranged by
the Chairman. Moreover, he also writes to all major shareholders to remind them that
meetings and telephone calls from these investors are welcome. On the other hand, the
company forms an investor relation team to respond to the meeting request of
shareholders. Last but not least, the AMECs board of directors continuously seeks for
deeper knowledge of their investors by employing a third party to run perception research
on shareholders view annually.

IV. Relation between company performance and
corporate governance
AMEC Plc closely complies with the Code 2010, which help them support their
corporate governance to be more effective in order to improve company operations with
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the final objective of increasing shareholder value. To have a better vision of how AMEC
perform in 2011, lets look at the table below.
Table 1: AMECs financial ratios

2011 2010 2009 2008
Net working capital turnover 5.12 4.48 3.99 4.18
EBITA
1
299.00 269.00 208.30 184.90
Earnings per share (pence) 70.50 62.50 46.90 63.10
Dividend per share (pence) 30.50 26.50 17.70 15.40
Source: AMECs Annual Report 2011
The first ratio presents the ability of AMEC to generate work out of their working
capital, which shows a development in the efficiency of asset utilization. This can be
achieved by improving the company internal control for smoother operation.
Concurrently, the firms level of profitability is implied under EBITA ratio, which has
continuously increased from 2008. On the other hand, the last two indicators reveal the
ability to make profit from the shares of AMEC. For current shareholders of the
company, these ratios indicate return of their money. These ratios of AMEC have gone
up for four-year period, which can imply an increase in their shareholders wealth.
This profit can only be achieved if the operation of the company successfully takes
place and resource misusage is mitigated, which is supported by corporate governance.
Like this, the maintenance of appropriate governance system has created a favorable
environment for the company to continue and improve their operations, which is
necessary to maximize shareholder value.

1
Earnings before interest, tax and intangible amortization
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V. Conclusion
To sum up, this report provides an overview about the application of corporate
governance base on the foundation of Agency theory into the specific case of AMEC Plc.
The investigation into outstanding features of their governance system as well as the
analysis of the relation between these features and company performance shows that
good corporate governance has certain positive impacts in the result of the firm operation,
which directly contributes to the maximization of shareholders wealth.

VI. Recommendations
Despite many strong points in the corporate governance of AMEC Plc, there are
several features to which the company should pay more attention in order to improve
their control system.
First, it is recommended for AMECs board of directors to carefully disclose the
allocation of time spending in the discussion and development of different aspects in the
management of the company. It will help them to organize their work more effectively
and illuminate the shareholders inquiries at the same time.
Next, the company is suggested to increase the diversification of member within
the board. A wider group of style and perspective will positively influence the method of
working and management.
Finally, it is necessary to improve the disclosure of remuneration calculation
related to individuals actual performance to give the shareholder a clearer view of the
relation between bonus expense and directors contribution.
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Appendix
A. Foundation of Shareholders wealth maximization
paradigm
The model of shareholders wealth maximization is developed base on the classic
competitive markets assumption. The shareholders are residual claimants, so they can
add to their wealth only after satisfying all the prior claims of every other participant
(Sivarama Krishnan, 2009). Therefore, this model benefits both shareholders and the
society since all the people involved and resources used have been compensated before
the come of shareholders wealth.
This paradigm is different from profit maximization despite some overlap between
the two objectives. According to Geoffey Poitras (1994), profit maximization is
designed for the traditional microeconomic world of no uncertainty, fixed capital stock
and no distinction between owner and manager. The main shortcoming of this model is
that it encourages managers to take high-risk projects for short-term profits. On the
contrary, shareholders wealth maximization is concerned with the present discounted
value of the stream of dividends paid in the future. Hence, it takes into account both
current and future profits and earnings per share, the timing, duration, and risk of
investment, and all other relevant factors.

B. Description of Agency theory
Since managers (the agent side) do not own the company and just manage money
of other people (the principle side), they will not care about it with the same interest as
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for their own money. Therefore, a number of problems may arise when the separation
between ownership and control exists. The biggest disadvantage of this distinction is the
opportunism of the agent which happens when managers misuse company resources to
take advantage rather than maximize profit for shareholders. Also, directors and
shareholders attitudes toward risk may differ making managers take inappropriate risks.
Moreover, managers can have advantage in this relationship for they are the ones
working directly with resources and information. Therefore, corporate governance is a
mechanism used to take the control back to the owners. Its main purpose is to align
shareholders and managers interests and to minimize the problems of opportunism.
Apart from this theory, there are several different ones that is also widely known
in corporate governance. The table below summarizes some of them.
Table 2: Corporate governance theory
Theory name Summary
Agency
Agency theory identifies the agency relationship where one party, the
principal, delegates work to another party, the agent. In the context of
a corporation, the owners are the principal and the directors are the
agent.
Transaction cost
economics
Transaction cost economics views the firm itself as a governance
structure. The choice of an appropriate governance structure can help
align the interests of directors and shareholders.
Stakeholder
Stakeholder theory takes account of a wider group of constituents
rather than focusing on shareholders. Where there is an emphasis on
stakeholders, then the governance structure of the company may
provide for some direct representation of the stakeholder groups.
Stewardship
Directors are regarded as the stewards of the companys assets and
will be predisposed to act in the best interest of the shareholders.
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Class hegemony
Directors view themselves as an elite at the top of the company and
will recruit/promote to new director appointments taking into account
how well new appointments might fit into that elite.
Managerial
hegemony
Management of a company, with its knowledge of day-to-day
operations, may effectively dominate the directors and hence waken
the influence of the directors.
Source: C. mallin (2010), Corporate Governance
3
rd
Edition, Oxford University Press, p. 14

C. The development of corporate governance code
The development of UK Corporate Governance Code has taken place for about ten
years, started in 1992 with the Cadbury Report published. The table below will highlight
the milestone in this process.
Table 3: Development milestones of UK Corporate Governance Code
Year Event
1992 Cadbury Report published
1995 Greenbury Report published
1998
Hampel Report published
Combined Code published
1999 Turnbull Guidance published
2001 Myners Report published
2002
US Sarbanes-Oxley Act introduced
Modern Company Law Review published
Financial Services Authority Review published
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2003
Higgs Report published
Smith Report published
Combined Code modified for the first time
2005 Company Law Reform Bill published
2006
Companies Act 2006 published
Combined Code modified for the second time
2008 Combined Code modified for the third time
2009 Walker Review published
2010 Combined Code modified for the fourth time

D. AMECs risk management system
In AMECs corporate governance, the role and responsibility of each management
level in risk control is clearly defined in order to ensure the control system to be
consistently carried out. The Risk Committee under Chief Executive is responsible for
the review and overall supervision of risk category management while lower hierarchies
undertake specific actions to identify, mitigate and monitor particular risks. This clear
division of responsibility makes the work of risk control to take place more smoothly.
The process of risk management is also stated clearly. First, the company
identifies key risks along with their impacts and probability of occurring. Concurrently,
risk owners as well as the conditions of happening are stuck with them to create the risk
register. Then, action plans are built to reduce or eliminate the risks. On the other hand,
the solution for risk response is investigated at the same time for precautions in case the
risk actually occurs.

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E. AMECs remuneration package
In four elements of AMECs remuneration package, base salary is fixedly set at a
competitive level of the industry. It is reviewed annually to take new market changes into
account with the objective of keeping a reasonable competitive wage level compared to
AMECs competitors.
The second element of remuneration system is pension arrangements and other
benefits including provision, allowance and expense insurance for directors facilities to
ensure high-standard treatment at work.
The next component is annual bonus which is used to encourage short-term
achievement. It is calculated by reference to a set target of earnings before interest, tax
and intangible amortization (EBITA), cash flow and personal targets; all of which are
different from year to year and between individuals. AMEC set out a threshold to start
receiving bonus if the directors reach it. The bonus will increase in accordance with the
rise of achievement. Besides, there is a target level, which is usually higher than actual
result of previous year, to be a measure for the managers to receive maximum bonus if
their performance exceeds that figure.
Last but not least, long-term incentive providing share award aims at long-run
motivation. These shares are only vested after three years once the requirements of
performance targets are also satisfied. It includes a basic award up to 175 per cent of
basic salary and a matching award up to 75 per cent of the salary. The basic element is
absolute while the second component is paid depending on directors own investment in
company shares in three-year period. The measure for this incentive stays at the
development of total shareholder return (TSR) and earnings per share growth. This
system is built to align the benefits of executive directors and the ones of shareholders in
order to reduce interest conflicts come from the separation of control and ownership.
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F. AMECs ownership structure
According to the companys disclosure, there are only two institutional investors
who have more than 3 per cent of the firm voting rights and none of their shareholdings
reaches 10 per cent. The chart below shows the proportion of ownership of AMEC Plc.

Source: Adapt from AMECs Annual Report 2011
Since the control rights are dispersed in the hand of numerous shareholders,
investor activism is more difficult to achieve. There is no single shareholder encouraged
to carefully supervise corporate management of the company, which may lead to the
situation where the power is seized and used by the managers for misleading purpose.
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
Blackrock,
Inc
Legal &
General
Assurance
Group of
ownership
below 3%
each
Share ownership 9.94% 3.96% 86.10%
S
h
a
r
e

o
w
n
e
r
s
h
i
p

Chart 2: Ownership structure of AMEC Plc
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Reference
1. C. Mallin (2010), Corporate Governance 3
rd
Edition, Oxford University Press,
Oxford.
2. B. Elliott and J.Elliott ( 2010), Financial Accounting and Reporting 15
th
Edition,
Prentice Hall.
3. P. Atrill (2009), Financial Management for Decision Makers 5
th
Edition, Prentice
Hall.
4. UK Corporate Governance Code 2010.
5. AMECs Annual Report 2011.
6. S. Krishman and C. Oklahoma, Stakeholders, Shareholders and Wealth
Maximization, 2009.
7. G. Poitras, Shareholder Wealth Maximization, Business Ethics and Social
Responsibility, 1994.
8. ABI Research: Corporate governance pays for shareholder and company
performance, ABI, 27 February 2008, REF: 12/08.
9. S. Turnbull, Corporate Governance: Its Scope, Concerns and Theories, 1997.
10. C. Jackson and A. Williams, Corporate Governance Development in the UK and
Continental Europe, 2006.
11. Kingston City Group, Corporate Governance Developments in the UK.
12. A. Agrawal and S. Chadha, Corporate Governance and Accounting Scandals, 2003.
13. OECD, Corporate Governance and the Financial Crisis: Key Findings and Main
Messages, 2009.
14. D. Badulescu and A. Dadulescu, Theoretical Background of Corporate Governance,
2008.
15. Deloltte, Report on the impact of the Directors Remuneration, 2004.