Corporate Governance

An Introduction
by
SAIF ULLAH [MS FINANCE]
0321 6633271, SAIFULLAH271@YAHOO.COM

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 Definition
According to OECD:
Corporate Governance is the system by which business
corporations are directed and controlled. The
corporate governance structure specifies the
distribution of rights and responsibilities among
different participants in the corporation, such as, the
board, managers, shareholders and other
stakeholders, and spells out the rules and procedures
for making decisions on corporate affairs. By doing
this, it also provides the structure through which the
company objectives are set, and the means of
attaining these objectives and monitoring
performance.

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

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 Yet Another Definition
Corporate governance refers to the manner
in which the affairs of a corporate body should be
conducted
in order to serve and protect
the individual and collective interests
of all stakeholders.
(Safdar A Butt)

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 Governance and
Management
How do these terms differ?
Does Governance include Management?
Or
Does Management include Governance?

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 Governance
Strategic
Setting Objectives
Devising plans to achieve these objectives
Setting rules or parameters
Not directly concerned with routine affairs
Protection of Interests of all stakeholders

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 Management
Current Affairs
Implementing the Plans
Developing Suggestions and Alternatives
Operational Matters

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 What is a Corporate Body?
Any Company is a corporate body. However,
in a broader sense only public limited
companies are taken to be the subject matter
of CG.
So far the thrust of CG is only on listed
companies.
Greatest emphasis is on those that are
controlled by closed groups.
In USA and Europe, companies are frequently
run by minority shareholders. Hence, they
require even greater degree of CG.
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 Stakeholders in a Company
Management and Employees
Lenders
Suppliers and Clients
Shareholders
Society at large (this includes government)

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 Classification of Stakeholders
Classified on Classified on basis of opportunity to protect individual interests
basis of Role
in the Company Those with Those with a Those with
Full Opportunity Partial Opportunity Virtually No opportunity

Minority and individual

Controlling Institutional Investors
Owners shareholders with no board
Shareholders with Board representation
Representation

Financial institutions
Buyers of listed bonds
Lenders with elaborate lending Other lenders
with trustee arrangements
Contracts

Other employees
Employees Executive Directors Senior Managers on regular or
contract terms

Suppliers who sell Major Suppliers and Smaller suppliers

Business Associates
only on cash terms clients with contracts and smaller clients

Society Government Public at large

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

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 Shareholders
Controlling Groups (Internal Equity)
Outsider Shareholders (External Equity)

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 Controlling Groups
If in Majority:
Can protect their interest easily
Needs monitoring
If in Minority:
Can protect their interest easily
Needs highest degree of monitoring

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 Outsider Shareholders
Institutional Investors
Have some means of protecting their interest but
still require protection
Individual or General Public
They require the greatest degree of protection, as
they have virtually no means of protecting their
interest.

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 Lenders
Institutional Investors
Have some means of protecting their interest
through legal documentation, are relatively at
lower risk but still require protection
Individual or General Public
They require the greatest degree of
protection, as they have virtually no means of
protecting their interest.

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 Society at Large
Government (Taxes, Law and Order)
Clients (Value for money)
Community (Social Rights)

How do we ensure that these

stakeholders get their dues?

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 Corporate Hierarchy
1. Shareholders
2. Management
Board of Directors
CEO
Senior Managers
3. Employees

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 Key Players
Shareholders (Voting power)
Board of Directors (Represents interests)
CEO (Delegated executive powers)
Senior Managers (Delegated executive powers)

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Scope of Corporate Governance
Stakeholders Objectives / interests Tools / Techniques

Shareholders Sustainable growth in net worth

Lenders Security / timely interest payments

Individual
Interests

General Management
Employees Continued employment at good Legal frame work
terms Professional Codes
Industrial practices
Business Continued business at good terms
Associates

Society Good citizenship by the company

Continued profitable existence

Collective Interest of Strategic Management
all stakeholders Risk Management

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 Different Board Types:
The Good, Bad, and Ugly
Yes-men Board
Rubber Stamp Good Old Boys
Board Board

The Real Thing

Country Club
Paper
Board
Board
Trophy Board

?
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 Responsibilities of the Board
Oversight (Watchful and Responsible)
Directional
Advisory

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 The Oversight Function
Approving and monitoring Companys Strategic
Plans.
Approving annual budgets and plans.
Engaging outside auditors.
Ensuring integrity of financial statements
Review of major operational activities.

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 The Directional Functions
Setting Mission Statement, Vision Statement and
Value Statement.
Appointment of CEO / Senior Managers
Planning for succession of these managers as
well as outside directors
Appointing various committees
Prescribing code of conduct for the management.

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 The Advisory Function
General guidance to management.
What is happening in the rest of the world.
Specialized input in certain areas

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 Responsibilities of CEO & Senior
Management
Operating the company in an effective and
ethical manner.
Drawing the strategic plans
Drawing annual plans and budgets
Selection of managerial and other staff
Identifying business risks
Financial reporting
Internal Controls
Code of Conduct for all staff

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 Tools Available to the Board
Composition of the Board
Independence
Committees
Incentives
External Help
Government Intervention

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 Composition of the Board
The Board should not represent interests alone.
Experienced and qualified practitioners
Pool of talent covering all areas

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 Independence
Independent from those who appointed them (?)
Management
Stakeholders
No special interests (linked directorships)
Meeting in absence of CEO or Chairman

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 The Concept of Independent
Directors
Relatively a new concept in Pakistan
Only public sector companies have tried it
Private sector companies rarely appoint
independent directors
No pool of professional directors available
Regulators trying to popularize the concept

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 The Role of Independent Directors
Providing Independent Professional View point
Protecting the interest of all stakeholders
Serving on Independent Committees

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 Committees
Audit Committee (only independent directors)
CG Committee (only independent directors)
Other Committees
Ad hoc Committees (e.g. investigation)
Permanent Committees (e.g. HR)

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 Functions of C G Committee
Compliance with CG Regulations
Nominating Independent directors
Monitor and Safeguard the independence of
directors
Review of all information to the Board from
Management
Drawing up CG Policy and processes

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 Incentives to the Board
Financial (Carrots)
Others (Carrots)
Legal Obligations (Sticks)

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 Code of Corporate Governance
Constitution of Board element of
independence
Conduct of Meetings how, when and what
Management and Corporate Reporting
contents and frequency
Committees so far only Audit Committee is
mandatory
External Auditor
All common sense, should be done even if not
required by law

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 Objectives of CCG
Protect the interest of all stakeholders
Infuse some independence in the Boards
Bring Transparency in conduct of meetings
Improve reliability of financial reporting
Introduce Professionalism in BoDs
Reduce undue influence of controlling groups
Develop a corporate culture

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 Thank you

from
Saif Ullah

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