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CORPORATE GOVERNANCE
An Introduction
Definition
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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.
Another Definition
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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.
Yet Another Definition
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Corporate governance refers to the direction &
oversight provided for conducting the affairs of a
corporate body
in a manner that ensures that
the individual and collective interests
of all stakeholders are served and protected.
(Safdar A Butt)
Governance and
Management
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How do these terms differ?
 Does Governance include Management?
Or
 Does Management include Governance?

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
Management
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Current Affairs
Implementing the Plans
Developing Suggestions and Alternatives
Operational Matters
What is a Corporate Body?
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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.
Stakeholders in a Company
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Management and Employees
Lenders
Suppliers and Clients
Shareholders
Society at large (this includes government)
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
Shareholders
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Controlling Groups (Internal Equity)
Outsider Shareholders (External Equity)
Controlling Groups
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If in Majority:
 Can protect their interest easily
 Need monitoring
If in Minority:
 Can protect their interest easily
 Need highest degree of monitoring
Outsider Shareholders
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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.
Lenders
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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.
Society at Large
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Government (Taxes, Law and Order)
Clients (Value for money)
Community (Social Rights)
How do we ensure that these
stakeholders get their dues?
Corporate Hierarchy
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1.
2.
3.
Shareholders
Board of Directors
Management
•
•
•
4.
CEO
Executive Directors
Senior Managers
Employees
Key Players
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Shareholders (Voting power)
Board of Directors (Represents interests)
CEO (Delegated executive powers)
Senior Managers (Delegated executive powers)
Scope of Corporate Governance
Interests
Individual
Stakeholders
Objectives / interests
Shareholders
Sustainable growth in net worth
Lenders
Security / timely interest payments
Employees
Continued employment at good terms
Business
Associates
Continued business at good terms
Society
Good citizenship by the company
Tools / Techniques
General Management
Legal frame work
Professional Codes
Industrial practices
Continued profitable existence
Collective Interest of all
stakeholders
Strategic Management
Risk Management
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Different Board Types:
The Good, Bad, and Ugly
‘Yes-men’ Board
‘Rubber Stamp’
Board
‘Good Old Boys’
Board
‘The Real Thing’
‘Country Club’
Board
‘Trophy’ Board
‘Paper’
Board
?
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Responsibilities of the Board
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Oversight
Directional
Advisory
The Oversight Function
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Approving and monitoring Company’s Strategic
Plans.
Approving annual budgets and plans.
Engaging outside auditors.
Ensuring integrity of financial statements
Review of major operational activities.
The Directional Functions
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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.
The Advisory Function
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General guidance to management.
What is happening in the rest of the world.
Specialized input in certain areas
Responsibilities of CEO & Senior
Management
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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
Tools Available to the Board
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Composition of the Board
Independence
Committees
Incentives
External Help
Government Intervention
Balance on the Board
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Balance of talents
 Finance,
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Balance of representation
 As
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Marketing, Production, Law, etc.
many stakeholders as possible on the board
Balance of power
 Distribution
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of power between directors
Balance of views
 Different
temperaments and views
Independence
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Independent from those who appointed them (?)
Management
Stakeholders
No special interests (linked directorships)
Meeting in absence of CEO or Chairman
The Concept of Independent Directors
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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
The Role of Independent Directors
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Providing Independent Professional View point
Protecting the interest of all stakeholders
Serving on Independent Committees
Committees
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Audit Committee (only independent directors)
CG Committee (only independent directors)
Other Committees
Ad hoc Committees (e.g. investigation)
Permanent Committees (e.g. HR)
Functions of C G Committee
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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
Incentives to the Board
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Financial (Carrots)
Others (Carrots)
Legal Obligations (Sticks)
Code of Corporate Governance
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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
Objectives of CCG
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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