Corporate Governance (Introduction)..

1
An IntroductionAn Introduction
to Corporateto Corporate
GovernanceGovernance
Ahmed Ullah ShahAhmed Ullah Shah

2
What is it about?What is it about?
 CorporateCorporate
A legal entity that is separate and distinct from its owners.A legal entity that is separate and distinct from its owners.
enjoy most of the rights and responsibilities that anenjoy most of the rights and responsibilities that an
individual possesses e.gindividual possesses e.g
enter into contracts, loan and borrow money, sue and beenter into contracts, loan and borrow money, sue and be sued,sued,
hire employees, own assets and pay taxes.hire employees, own assets and pay taxes.
limited liabilitylimited liability

 refers to "all processes of governing, whetherrefers to "all processes of governing, whether
undertaken by a government, market orundertaken by a government, market or
network, whether over a family, tribe, formal ornetwork, whether over a family, tribe, formal or
informal organization or territory and whetherinformal organization or territory and whether
through laws, norms, power or language.through laws, norms, power or language.
 It relates to "the processes of interaction andIt relates to "the processes of interaction and
decision-making among the actors involved in adecision-making among the actors involved in a
collective problem that lead to the creation,collective problem that lead to the creation,
reinforcement, or reproduction of social normsreinforcement, or reproduction of social norms
and institutionsand institutions
3

What is a Corporate Body?What is a Corporate Body?
 Any Company is a corporate body. However, inAny Company is a corporate body. However, in
a broader sense only public limited companiesa broader sense only public limited companies
are taken to be the subject matter of CG.are taken to be the subject matter of CG.
 So far the thrust of CG is only on listedSo far the thrust of CG is only on listed
companies.companies.
 Greatest emphasis is on those that are controlledGreatest emphasis is on those that are controlled
by closed groups.by closed groups.
 In USA and Europe, companies are frequentlyIn USA and Europe, companies are frequently
run by minority shareholders. Hence, theyrun by minority shareholders. Hence, they
require even greater degree of CG.require even greater degree of CG.
4

DefinitionDefinition
According to OECD:According to OECD:
Corporate Governance is the system by whichCorporate Governance is the system by which
business corporations are directed andbusiness corporations are directed and
controlled. The corporate governance structurecontrolled. The corporate governance structure
specifies the distribution of rights andspecifies the distribution of rights and
responsibilities among different participants inresponsibilities among different participants in
the corporation, such as, the board, managers,the corporation, such as, the board, managers,
shareholders and other stakeholders, and spellsshareholders and other stakeholders, and spells
out the rules and procedures for makingout the rules and procedures for making
decisions on corporate affairs.decisions on corporate affairs.
5

Another DefinitionAnother Definition
According to LaPorta et al., (2000),According to LaPorta et al., (2000),
Corporate governance is a set of mechanismsCorporate governance is a set of mechanisms
through which outside investors protectthrough which outside investors protect
themselves against expropriation by the insiders.themselves against expropriation by the insiders.
They defineThey define ““the insidersthe insiders”” as both managersas both managers
and controlling shareholders.and controlling shareholders.
6

Yet Another DefinitionYet Another Definition
Corporate governance refers to the mannerCorporate governance refers to the manner
in which the affairs of a corporate body should bein which the affairs of a corporate body should be
conductedconducted
in order to serve and protectin order to serve and protect
the individual and collective intereststhe individual and collective interests
of all stakeholders.of all stakeholders.
((Safdar A ButtSafdar A Butt))
7

8
CompanyCompany
 Characteristics of a CompanyCharacteristics of a Company
 Types of CompaniesTypes of Companies

9
Characteristics of a CompanyCharacteristics of a Company
 Ownership in sharesOwnership in shares
 Freely transferable sharesFreely transferable shares
 Separate entity apart from shareholdersSeparate entity apart from shareholders
 Liability of shareholdersLiability of shareholders
 Indefinite lifeIndefinite life
 Board of directorsBoard of directors

10
Types of CompaniesTypes of Companies
 Limited or UnlimitedLimited or Unlimited
 Limited by shares or by guaranteeLimited by shares or by guarantee
 Private or PublicPrivate or Public
 Listed or UnlistedListed or Unlisted

11
Hierarchy of a CompanyHierarchy of a Company
 ShareholdersShareholders
 Own the company, do not run it.Own the company, do not run it.
 Board of DirectorsBoard of Directors
 Elected by and reporting to shareholdersElected by and reporting to shareholders
 ManagementManagement
 Appointed by and reporting to directorsAppointed by and reporting to directors
 Includes executive directorsIncludes executive directors

12
Top PlayersTop Players
 Shareholders: Voting powerShareholders: Voting power
 Chairman:Chairman:
 May be executive or non-executiveMay be executive or non-executive
 DirectorsDirectors
 May be executive or non-executiveMay be executive or non-executive
 Chief Executive OfficerChief Executive Officer
 May or may not be a directorMay or may not be a director
 Senior Managers:Senior Managers:
 May or may not be directorsMay or may not be directors

13
Classification of StakeholdersClassification of Stakeholders
 OwnersOwners
 LendersLenders
 EmployeesEmployees
 Business AssociatesBusiness Associates
 Suppliers and CustomersSuppliers and Customers
 SocietySociety
 Includes governmentIncludes government

14
Opportunity to protectOpportunity to protect
individual interestsindividual interests
 Managers and Employees have the greatestManagers and Employees have the greatest
opportunity to protect their interest(s)opportunity to protect their interest(s)
 Suppliers and Clients essentially go by eachSuppliers and Clients essentially go by each
transaction or contract.transaction or contract.
 Lenders and Shareholders are most vulnerable.Lenders and Shareholders are most vulnerable.
 Society depends entirely on lawSociety depends entirely on law

15
Classified onClassified on
basis of Rolebasis of Role
in the Companyin the Company
Classified on basis of opportunity to protect individual interestsClassified on basis of opportunity to protect individual interests
Those withThose with
Full OpportunityFull Opportunity
Those with aThose with a
Partial OpportunityPartial Opportunity
Those withThose with
Virtually No opportunityVirtually No opportunity
Minority and individualMinority and individual
shareholders with no boardshareholders with no board
RepresentationRepresentation
ControllingControlling
ShareholdersShareholders
Institutional InvestorsInstitutional Investors
with Board representationwith Board representation
OwnersOwners
Financial institutionsFinancial institutions
with elaborate lendingwith elaborate lending
ContractsContracts
Buyers of listed bondsBuyers of listed bonds
with trustee arrangementswith trustee arrangements
LendersLenders Other lendersOther lenders
Other employeesOther employees
on regular oron regular or
contract termscontract termsEmployeesEmployees Executive DirectorsExecutive Directors Senior ManagersSenior Managers
Suppliers who sellSuppliers who sell
only on cash termsonly on cash terms
Major Suppliers andMajor Suppliers and
clients with contractsclients with contracts
Smaller suppliersSmaller suppliers
and smaller clientsand smaller clients
Business AssociatesBusiness Associates
SocietySociety GovernmentGovernment Public at largePublic at large
Classification of StakeholdersClassification of Stakeholders

16
Need for Corporate GovernanceNeed for Corporate Governance
 To protect and serve individual interest of eachTo protect and serve individual interest of each
stakeholderstakeholder
 To protect and serve the collective interest of allTo protect and serve the collective interest of all
stakeholdersstakeholders
 To ensure no one benefits at the expense ofTo ensure no one benefits at the expense of
anotheranother
 To ensure no stakeholder has monopoly ofTo ensure no stakeholder has monopoly of
decision-making.decision-making.

17
Governance & ManagementGovernance & Management
 How do these terms differ?How do these terms differ?
 Does Governance include Management?Does Governance include Management?
OrOr
 Does Management include Governance?Does Management include Governance?

18
Governance & ManagementGovernance & Management
GovernanceGovernance FunctionFunction ManagementManagement
Approval of PlansApproval of Plans PlanningPlanning Preparation of plansPreparation of plans
Providing overallProviding overall
leadershipleadership
LeadingLeading Leading those whoLeading those who
implement plansimplement plans
ArrangingArranging
resourcesresources
OrganizingOrganizing Tasks division &Tasks division &
resource usageresource usage
Controlling managersControlling managers ControllingControlling ControllingControlling
employeesemployees

19
 StrategicStrategic
 Setting ObjectivesSetting Objectives
 Devising plans to achieve these objectivesDevising plans to achieve these objectives
 Setting rules or parametersSetting rules or parameters
 Not directly concerned with routine affairsNot directly concerned with routine affairs
 Protection of Interests of all stakeholdersProtection of Interests of all stakeholders

20
ManagementManagement
 Current & Operational AffairsCurrent & Operational Affairs
 Taking directions from the BoardTaking directions from the Board
 Implementing the PlansImplementing the Plans
 Developing Suggestions and AlternativesDeveloping Suggestions and Alternatives

21
Approaches toApproaches to
Corporate GovernanceCorporate Governance
 Shareholders ApproachShareholders Approach
 Stakeholders ApproachStakeholders Approach
 Enlightened Shareholders ApproachEnlightened Shareholders Approach
 Which approach is best?Which approach is best?

Shareholders ApproachShareholders Approach
 Generally believed that the board of directors ofGenerally believed that the board of directors of
a company should govern the company in thea company should govern the company in the
best interest of its shareholders, i.e. the ownersbest interest of its shareholders, i.e. the owners
of the company. This approach is lent credenceof the company. This approach is lent credence
and weight by the fact that all the directors areand weight by the fact that all the directors are
elected by and answerable to shareholders.elected by and answerable to shareholders.
 Make such policy that aim at maximization theMake such policy that aim at maximization the
shareholders value (Profit) often at the expenseshareholders value (Profit) often at the expense
of other stake holders.of other stake holders.
 In Pakistan this approach is most prevalentIn Pakistan this approach is most prevalent
22

Stakeholders Approach to CGStakeholders Approach to CG
 Also known as Plurist Approach and consideredAlso known as Plurist Approach and considered
as the ideal approach by the proponents of CG.as the ideal approach by the proponents of CG.
 BOD formulates such policies the providesBOD formulates such policies the provides
equal care of the interests of all Stakeholders.equal care of the interests of all Stakeholders.
 It is not a practical approach for the simpleIt is not a practical approach for the simple
reason that directors are elected by andreason that directors are elected by and
accountable only to the shareholders.accountable only to the shareholders.
23

Enlightened ShareholdersEnlightened Shareholders
ApproachApproach
 This approach offers compromise between theThis approach offers compromise between the
afore-said two approaches. It requires the BODafore-said two approaches. It requires the BOD
to work for the interest of shareholders, butto work for the interest of shareholders, but
without damaging the interests of the otherwithout damaging the interests of the other
stakeholders. i.e. having a fair balance of interest.stakeholders. i.e. having a fair balance of interest.
24

25
Agency TheoryAgency Theory
 What is Agency Theory?What is Agency Theory?
 Does it apply to companies?Does it apply to companies?
 Two-party and three-party modelTwo-party and three-party model
 Principal-Watchdog-AgentPrincipal-Watchdog-Agent

26
Key IssuesKey Issues
 Financial reportingFinancial reporting
 Directors’ remunerationDirectors’ remuneration
 Risk managementRisk management
 Effective communicationEffective communication
 Corporate Social ResponsibilityCorporate Social Responsibility

27
Financial ReportingFinancial Reporting
 AccuracyAccuracy
 ReliabilityReliability
 Internal and external auditInternal and external audit
 ComprehensivenessComprehensiveness
 TimelinessTimeliness

28
Directors Related IssuesDirectors Related Issues
 RemunerationRemuneration
 PowersPowers
 Balance between:Balance between:
 executive and non-executivesexecutive and non-executives
 Election and re-electionElection and re-election
 RepresentationRepresentation

29
Risk ManagementRisk Management
 Risk profileRisk profile
 What risks to take?What risks to take?
 Avoidable and non-avoidable risksAvoidable and non-avoidable risks
 What not to take?What not to take?
 How to handle risks taken?How to handle risks taken?

30
CommunicationCommunication
 TransparencyTransparency
 Regular communicationRegular communication
 With who?With who?
 In what format?In what format?

31
Corporate Social ResponsibilityCorporate Social Responsibility
 Business EthicsBusiness Ethics
 Being a good citizenBeing a good citizen
 Doing business responsiblyDoing business responsibly

32
Why is CG Important?Why is CG Important?
 Good reputation is good businessGood reputation is good business
 Protection of stakeholders’ interestProtection of stakeholders’ interest
 Support to capital marketsSupport to capital markets
 Support to societySupport to society
 Every one winsEvery one wins

33
Thank youThank you
Dr S A ButtDr S A Butt

Corporate Governance (Introduction)..

Related slideshows

More Related Content

Corporate Governance (Introduction)..