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CORPORATE GOVERNANCE An Introduction 1. Definition 2 According to OECD: Corporate Governance is the system by which business corporations are directed.

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Presentation on theme: "CORPORATE GOVERNANCE An Introduction 1. Definition 2 According to OECD: Corporate Governance is the system by which business corporations are directed."— Presentation transcript:

1 CORPORATE GOVERNANCE An Introduction 1

2 Definition 2 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.

3 Another Definition 3 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.

4 Yet Another Definition 4 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)

5 Governance and Management 5  How do these terms differ?  Does Governance include Management? Or  Does Management include Governance?

6 Governance & Management GovernanceFunctionManagement Approval of Plans Planning Preparation of plans Providing overall leadership Leading Leading those who implement plans ArrangingresourcesOrganizing Tasks division & resource usage Controlling managers Controlling Controlling employees 6

7 Governance 7  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

8 Management 8  Current Affairs  Implementing the Plans  Developing Suggestions and Alternatives  Operational Matters

9 What is a Corporate Body? 9  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.

10 Stakeholders in a Company 10  Management and Employees  Lenders  Suppliers and Clients  Shareholders  Society at large (this includes government)

11 Opportunity to protect individual interests 11  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

12 Shareholders 12  Controlling Groups (Internal Equity)  Outsider Shareholders (External Equity)

13 Controlling Groups 13 If in Majority:  Can protect their interest easily  Need monitoring If in Minority:  Can protect their interest easily  Need highest degree of monitoring

14 Outsider Shareholders 14 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.

15 Lenders 15 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.

16 Society at Large 16  Government (Taxes, Law and Order)  Clients (Value for money)  Community (Social Rights) How do we ensure that these stakeholders get their dues?

17 Corporate Hierarchy Shareholders 2. Board of Directors 3. Management CEO Executive Directors Senior Managers 4. Employees

18 Key Players 18  Shareholders ( Voting power )  Board of Directors ( Represents interests )  CEO ( Delegated executive powers )  Senior Managers ( Delegated executive powers)

19 Scope of Corporate Governance Stakeholders Objectives / interests Tools / Techniques Shareholders Sustainable growth in net worth General Management Legal frame work Professional Codes Industrial practices Lenders Security / timely interest payments Employees Continued employment at good terms Business Associates Continued business at good terms Society Good citizenship by the company Collective Interest of all stakeholders Continued profitable existence Strategic Management Risk Management 19 Individual Interests

20 20 Different Board Types: The Good, Bad, and Ugly ‘Yes-men’ Board ‘Rubber Stamp’ Board ‘Country Club’ Board ‘Good Old Boys’ Board ‘ The Real Thing’ ‘Paper’ Board ? ‘Trophy’ Board

21 Responsibilities of the Board 21  Oversight  Directional  Advisory

22 The Oversight Function 22  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.

23 The Directional Functions 23  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.

24 The Advisory Function 24  General guidance to management.  What is happening in the rest of the world.  Specialized input in certain areas

25 Responsibilities of CEO & Senior Management 25  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

26 Tools Available to the Board 26  Composition of the Board  Independence  Committees  Incentives  External Help  Government Intervention

27 Balance on the Board 27  Balance of talents  Finance, Marketing, Production, Law, etc.  Balance of representation  As many stakeholders as possible on the board  Balance of power  Distribution of power between directors  Balance of views  Different temperaments and views

28 Independence 28  Independent from those who appointed them (?) Management Stakeholders  No special interests (linked directorships)  Meeting in absence of CEO or Chairman

29 The Concept of Independent Directors 29  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

30 The Role of Independent Directors 30  Providing Independent Professional View point  Protecting the interest of all stakeholders  Serving on Independent Committees

31 Committees 31  Audit Committee (only independent directors)  CG Committee (only independent directors)  Other Committees Ad hoc Committees (e.g. investigation) Permanent Committees (e.g. HR)

32 Functions of C G Committee 32  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

33 Incentives to the Board 33  Financial (Carrots)  Others (Carrots)  Legal Obligations (Sticks)

34 Code of Corporate Governance 34  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

35 Objectives of CCG 35  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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