1 An Introduction to Corporate Governance

2 What is it about? Corporate Corporate Governance Governance

3 Company What is a company? What is a company? Characteristics of a Company Characteristics of a Company Types of Companies Types of Companies

4 Characteristics of a Company Ownership in shares Ownership in shares Freely transferable shares Freely transferable shares Separate entity apart from shareholders Separate entity apart from shareholders Liability of shareholders Liability of shareholders Indefinite life Indefinite life Board of directors Board of directors

5 Types of Companies Limited or Unlimited Limited or Unlimited Limited by shares or by guarantee Limited by shares or by guarantee Private or Public Private or Public Listed or Unlisted Listed or Unlisted

6 Hierarchy of a Company Shareholders Shareholders Own the company, do not run it. Own the company, do not run it. Board of Directors Board of Directors Elected by and reporting to shareholders Elected by and reporting to shareholders Management Management Appointed by and reporting to directors Appointed by and reporting to directors Includes executive directors Includes executive directors

7 Top Players Shareholders: Voting power Shareholders: Voting power Chairman: Chairman: May be executive or non-executive May be executive or non-executive Directors Directors May be executive or non-executive May be executive or non-executive Chief Executive Officer Chief Executive Officer May or may not be a director May or may not be a director Senior Managers: Senior Managers: May or may not be directors May or may not be directors

8 Classification of Stakeholders Owners Owners Lenders Lenders Employees Employees Business Associates Business Associates Suppliers and Customers Suppliers and Customers Society Society Includes government Includes government

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

10 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 OwnersControllingShareholders 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 SocietyGovernment Public at large Classification of Stakeholders

Need for a System There is therefore a need for a system that would ensure that: Individual interest of each stakeholder is protected and served. Individual interest of each stakeholder is protected and served. Collective interest of all stakeholders is protected and served. Collective interest of all stakeholders is protected and served. Corporate Governance is that system. 11

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 stakeholders. (Dr Safdar A Butt) 12

13 Governance & Management How do these terms differ? How do these terms differ? Does Governance include Management? Does Governance include Management?Or Does Management include Governance? Does Management include Governance?

14 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

15 Approaches to Corporate Governance Shareholders Approach Shareholders Approach Stakeholders Approach Stakeholders Approach Enlightened Shareholders Approach Enlightened Shareholders Approach Which approach is best? Which approach is best?

16 Corporate Sins Sloth Sloth Unwillingness to take initiative or risk, prefer status quo, be lazy. Unwillingness to take initiative or risk, prefer status quo, be lazy. Greed Greed Putting self above company Putting self above company Fear Fear Not annoy or stand up to any stakeholder / investor / boss. Not annoy or stand up to any stakeholder / investor / boss.

17 Agency Theory What is Agency Theory? What is Agency Theory? Does it apply to companies? Does it apply to companies? Two-party and three-party model Two-party and three-party model Principal-Watchdog-Agent Principal-Watchdog-Agent

18 Key Issues Financial reporting Financial reporting Directors’ remuneration Directors’ remuneration Risk management Risk management Effective communication Effective communication Corporate Social Responsibility Corporate Social Responsibility

19 Financial Reporting Accuracy Accuracy Reliability Reliability Internal and external audit Internal and external audit Comprehensiveness Comprehensiveness Timeliness Timeliness

20 Directors Related Issues Remuneration Remuneration Powers Powers Balance between: Balance between: executive and non-executives executive and non-executives Election and re-election Election and re-election Representation Representation

21 Risk Management Risk profile Risk profile What risks to take? What risks to take? Avoidable and non-avoidable risks Avoidable and non-avoidable risks What not to take? What not to take? How to handle risks taken? How to handle risks taken?

22 Communication Transparency Transparency Regular communication Regular communication With who? With who? In what format? In what format?

23 Corporate Social Responsibility Business Ethics Business Ethics Being a good citizen Being a good citizen Doing business responsibly Doing business responsibly

24 Why is CG Important? Good reputation is good business Good reputation is good business Protection of stakeholders’ interest Protection of stakeholders’ interest Support to capital markets Support to capital markets Support to society Support to society Every one wins Every one wins

25 Thank you