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Corporate Governance An Introduction.

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1 Corporate Governance An Introduction

2 Definition 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 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
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
How do these terms differ? Does Governance include Management? Or Does Management include Governance?

6 Governance & Management
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

7 Governance 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 Current Affairs Implementing the Plans
Developing Suggestions and Alternatives Operational 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 Employees Lenders Suppliers and Clients Shareholders Society 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 monitoring If in Minority: Need highest degree of monitoring

14 Outsider Shareholders
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 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 How do we ensure that these stakeholders get their dues?
Society at Large 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 Board of Directors Management
CEO Executive Directors Senior Managers Employees

18 Key Players 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 Individual Interests

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
Oversight Directional Advisory

22 The Oversight Function
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
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 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 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
Composition of the Board Independence Committees Incentives External Help Government Intervention

27 Balance on the Board Balance of talents Balance of representation
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 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
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
Providing Independent Professional View point Protecting the interest of all stakeholders Serving on Independent Committees

31 Committees 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
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
Financial (Carrots) Others (Carrots) Legal Obligations (Sticks)

34 Code of Corporate Governance
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 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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