2 DefinitionAccording 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 DefinitionAccording 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 Corporate governance refers to the direction & oversight provided for conducting the affairs of a corporate bodyin a manner that ensures thatthe individual and collective interestsof all stakeholders are served and protected.(Safdar A Butt)
5 Governance and Management How do these terms differ?Does Governance include Management?OrDoes Management include Governance?
6 Governance & Management FunctionManagementApproval of PlansPlanningPreparation of plansProviding overall leadershipLeadingLeading those who implement plansArrangingresourcesOrganizingTasks division & resource usageControlling managersControllingControlling employees
7 Governance Strategic Setting Objectives Devising plans to achieve these objectivesSetting rules or parametersNot directly concerned with routine affairsProtection of Interests of all stakeholders
8 Management Current Affairs Implementing the Plans Developing Suggestions and AlternativesOperational Matters
9 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.
10 Stakeholders in a Company Management and EmployeesLendersSuppliers and ClientsShareholdersSociety at large (this includes government)
11 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
12 Shareholders Controlling Groups (Internal Equity) Outsider Shareholders (External Equity)
13 Controlling Groups If in Majority: Can protect their interest easily Need monitoringIf in Minority:Need highest degree of monitoring
14 Outsider Shareholders Institutional InvestorsHave some means of protecting their interest but still require protectionIndividual or General PublicThey require the greatest degree of protection, as they have virtually no means of protecting their interest.
15 Lenders Institutional Investors Have some means of protecting their interest through legal documentation, are relatively at lower risk but still require protectionIndividual or General PublicThey require the greatest degree of protection, as they have virtually no means of protecting their interest.
16 How do we ensure that these stakeholders get their dues? Society at LargeGovernment (Taxes, Law and Order)Clients (Value for money)Community (Social Rights)How do we ensure that thesestakeholders get their dues?
19 Scope of Corporate Governance StakeholdersObjectives / interestsTools / TechniquesShareholdersSustainable growth in net worthGeneral ManagementLegal frame workProfessional CodesIndustrial practicesLendersSecurity / timely interest paymentsEmployeesContinued employment at good termsBusiness AssociatesContinued business at good termsSocietyGood citizenship by the companyCollective Interest of all stakeholdersContinued profitable existenceStrategic ManagementRisk ManagementIndividualInterests
20 Different Board Types: The Good, Bad, and Ugly ‘Yes-men’ Board‘Rubber Stamp’ Board‘Good Old Boys’ Board‘The Real Thing’‘Country Club’ Board‘Paper’Board?The typical board may be like a good old boys or gentlemen’s club, characterized by conformity and ceremony.Unfortunately, only very few boards truly view themselves as boards that challenge and inquire, that seek to actually add value without meddling or micro-managing mgmt.Only a select few make the general director more effective, yet managing performance to ensure that this individual does not become all-powerful.‘Trophy’ Board
21 Responsibilities of the Board OversightDirectionalAdvisory
22 The Oversight Function Approving and monitoring Company’s Strategic Plans.Approving annual budgets and plans.Engaging outside auditors.Ensuring integrity of financial statementsReview of major operational activities.
23 The Directional Functions Setting Mission Statement, Vision Statement and Value Statement.Appointment of CEO / Senior ManagersPlanning for succession of these managers as well as outside directorsAppointing various committeesPrescribing code of conduct for the management.
24 The Advisory Function General guidance to management. What is happening in the rest of the world.Specialized input in certain areas
25 Responsibilities of CEO & Senior Management Operating the company in an effective and ethical manner.Drawing the strategic plansDrawing annual plans and budgetsSelection of managerial and other staffIdentifying business risksFinancial reportingInternal ControlsCode of Conduct for all staff
26 Tools Available to the Board Composition of the BoardIndependenceCommitteesIncentivesExternal HelpGovernment Intervention
27 Balance on the Board Balance of talents Balance of representation Finance, Marketing, Production, Law, etc.Balance of representationAs many stakeholders as possible on the boardBalance of powerDistribution of power between directorsBalance of viewsDifferent temperaments and views
28 Independence Independent from those who appointed them (?) ManagementStakeholdersNo special interests (linked directorships)Meeting in absence of CEO or Chairman
29 The Concept of Independent Directors Relatively a new concept in PakistanOnly public sector companies have tried itPrivate sector companies rarely appoint independent directorsNo pool of professional directors availableRegulators trying to popularize the concept
30 The Role of Independent Directors Providing Independent Professional View pointProtecting the interest of all stakeholdersServing on Independent Committees
32 Functions of C G Committee Compliance with CG RegulationsNominating Independent directorsMonitor and Safeguard the independence of directorsReview of all information to the Board from ManagementDrawing up CG Policy and processes
33 Incentives to the Board Financial (Carrots)Others (Carrots)Legal Obligations (Sticks)
34 Code of Corporate Governance Constitution of Board – element of independenceConduct of Meetings – how, when and whatManagement and Corporate Reporting – contents and frequencyCommittees – so far only Audit Committee is mandatoryExternal AuditorAll common sense, should be done even if not required by law
35 Objectives of CCG Protect the interest of all stakeholders Infuse some independence in the BoardsBring Transparency in conduct of meetingsImprove reliability of financial reportingIntroduce Professionalism in BoDsReduce undue influence of controlling groupsDevelop a corporate culture