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Safdar H. Tahir PhD-Scholar (Finance) Mohammad Ali Jinnah University (MAJU) Islamabad 2

 CORPORATE GOVERNANCE: An introductory text for Pakistan, 2 nd edition by Safdar A Butt, Available from: Azeem Academy Aminpur Bazar Faisalabad 3

 Governing the corporate entity  What is a company? 4

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. 5

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. 6

Corporate Governance is the:  System by which companies are directed and controlled,  Structure that specifies distribution of rights and responsibilities among stakeholders,  Spells out the rules and procedures for decision making,  Provides structure for setting and attaining company objectives and monitoring its performance. (IFC) 7

Corporate governance refers to the manner in which the affairs of a corporate body are or should be conducted in order to serve and protect the individual and collective interests of all stakeholders. (Safdar A Butt) 8

a) Unlimited Companies b) Limited Companies: a)Company Limited by Guarantee b)Company Limited by shares: a)Private limited company b)Public limited company: a)Listed public Limited b)Unlisted Public Limited 9

 Shareholders  Creditors  Management and Employees  Suppliers  Customers  Society at large (this includes government) 10

 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 11

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

If in Majority:  Can protect their interest easily  Needs monitoring If in Minority:  Can protect their interest easily  Needs highest degree of monitoring 13

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. 14

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. 15

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

 Shareholders ( Voting power )  Board of Directors ( Represents interests )  CEO ( Delegated executive powers )  Senior Managers ( Delegated executive powers) 17

 Accountability  Fairness  Transparency  Responsibility 18

1. Shareholders 2. Management Board of Directors CEO Senior Managers 3. Employees 19

 Sloth  Greed  Fear 20

 Is corporate governance an extension of Agency theory???  What is agency theory? 21

 Shareholders Approach  Stakeholders Approach  Enlightened Approach  Which approach is the best? 22

1. Financial Reporting 2. Directors Remuneration 3. Risk Management 4. Effective communication 5. Corporate Social Responsibility 23

 Improve image of the company,  Reduce company’s cost of funds,  Reduce agency costs: ◦ Divergence costs ◦ Monitoring costs ◦ Incentive costs  Improve company performance, 24

from SAFDAR H. TAHIR 25