An Introduction
to Corporate
Governance
Dr Safdar A Butt
1
What is it about?
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
Corporate
Governance
2
Company
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What is a company?
Characteristics of a Company
Types of Companies
3
Characteristics of a Company
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Ownership in shares
Freely transferable shares
Separate entity apart from shareholders
Liability of shareholders
Indefinite life
Separation of ownership from management:

Board of directors
4
Types of Companies
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Limited or Unlimited
Limited by shares or by guarantee
Private or Public
Listed or Unlisted
5
Hierarchy of a Company
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Shareholders
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Board of Directors
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Own the company, do not run it.
Elected by and reporting to shareholders
Management
Appointed by and reporting to directors
 Includes executive directors
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6
Top Players
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Shareholders: Voting power
Chairman:
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Directors
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May be executive or non-executive
Chief Executive Officer
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May be executive or non-executive
May or may not be a director
Senior Managers:

May or may not be directors
7
Classification of Stakeholders
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Owners
Lenders
Employees
Business Associates
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Suppliers and Customers
Society
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Includes government
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Opportunity to protect
individual interests
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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
9
Classification of Stakeholders
Classified on
basis of Role
in the Company
Classified on basis of opportunity to protect individual interests
Those with
Full Opportunity
Those with a
Partial Opportunity
Those with
Virtually No opportunity
Owners
Controlling
Shareholders
Institutional Investors
with Board representation
Minority and individual
shareholders with no board
Representation
Lenders
Financial institutions
with elaborate lending
Contracts
Buyers of listed bonds
with trustee arrangements
Other lenders
Employees
Executive Directors
Senior Managers
Other employees
on regular or
contract terms
Business Associates
Suppliers who sell
only on cash terms
Major Suppliers and
clients with contracts
Smaller suppliers
and smaller clients
Government
Public at large
Society
10
Individual Vs Collective Interest

Interests of various stakeholders differ
Shareholders: Share Value & Profit
 Management: Survival & Job Security
 Lenders: Debt security, low risk
 Society: Environmental/Economic Issues

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How to create a balance?
6 February 2022
Corporate Governance - Dr S A Butt
11
Need for a System
There is a need for a system to ensure that:
 Individual interest of each stakeholder is
protected and served.
 Collective interest of all stakeholders is
protected and served.
 No one usurps any one else’s rights.
 No one has monopoly of making decisions.
Corporate Governance is that system.
6 February 2022
Corporate Governance - Dr S A Butt
12
Definition
Corporate governance refers to
the mechanism used to
control and direct
the affairs of a corporate body
in order to serve and protect
the individual and collective interests
of all its stakeholders.
6 February 2022
Corporate Governance - Dr S A Butt
13
Governance & Management
How do these terms differ?
 Does Governance include Management?
Or
 Does Management include Governance?

14
Governance & Management
Governance
Function
Management
Approval of Plans
Planning
Preparation of plans
Providing overall
leadership
Leading
Leading those who
implement plans
Arranging
resources
Organizing
Tasks division &
resource usage
Controlling managers
Controlling
Controlling
employees
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Governance
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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
16
Management
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Current & Operational Affairs
Taking directions from the Board
Implementing the Plans
Developing Suggestions and Alternatives
17
Approaches to
Corporate Governance
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Shareholders Approach
Stakeholders/Plurist Approach
Enlightened Shareholders Approach
Which approach is best?
18
Corporate Sins
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Sloth
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Greed
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Unwillingness to take initiative or risk, prefer status
quo, be lazy.
Putting self above company
Fear
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Not annoy or stand up to any stakeholder / investor
/ boss.
19
Agency Theory
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What is Agency Theory?
Does it apply to companies?
Two-party and three-party model
Principal-Watchdog-Agent
20
Key Issues in CG
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Financial reporting
Directors’ remuneration
Risk management
Effective communication
Corporate Social Responsibility
21
Financial Reporting
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Accuracy
Reliability
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Internal and external audit
Comprehensiveness
Timeliness
22
Directors Related Issues
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Remuneration
Powers and functions
Balance between:

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executive and non-executives
Election and re-election
Representation
23
Risk Management
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Risk profile
What risks to take?
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Avoidable and non-avoidable risks
What not to take?
How to handle risks taken?
24
Communication
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Transparency
Regular communication
With who?
In what format?
25
Corporate Social Responsibility
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Business Ethics
Being a good citizen
Doing business responsibly
26
Why is CG Important?
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Good reputation is good business
Protection of stakeholders’ interest
Support to capital markets
Support to society
Every one wins
27
Thank you
Dr S A Butt
28