Lecture1 CG Introduction

7/29/2019 Lecture1 CG Introduction

1/35

CORPORATE

GOVERNANCE

An Introduction

1


2/35

Definition2

According to OECD:

Corporate Governance is the system by which businesscorporations are directed and controlled. The corporategovernance structure specifies the distribution of rights

and responsibilities among different participants in thecorporation, such as, the board, managers,

shareholders and other stakeholders, and spells out therules and procedures for making decisions on corporate

affairs. By doing this, it also provides the structure

through which the company objectives are set, and themeans of attaining these objectives and monitoring

performance.


3/35

Another Definition3

According to LaPorta et al., (2000),Corporate governance is a set of mechanisms

through which outside investors protect

themselves against expropriation by theinsiders. They define the insiders as both

managers and controlling shareholders.


4/35

Yet Another Definition4

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)


5/35

Governance and

Management5

How do these terms differ?

Does Governance include Management?

Or

Does Management include Governance?


6/35

Governance & Management

Governance 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

6


7/35

Governance7

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


8/35

Management8

Current Affairs

Implementing the Plans

Developing Suggestions and Alternatives

Operational Matters


9/35

What is a Corporate Body?9

Any Company is a corporate body. However, ina broader sense only public limited companiesare taken to be the subject matter of CG.

So far the thrust of CG is only on listedcompanies.

Greatest emphasis is on those that arecontrolled by closed groups.

In USA and Europe, companies are frequentlyrun by minority shareholders. Hence, theyrequire even greater degree of CG.


10/35

Stakeholders in a Company10

Management and Employees

Lenders

Suppliers and Clients

Shareholders

Society at large (this includes government)


11/35

Opportunity to protect

individual interests11

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


12/35

Shareholders12

Controlling Groups (Internal Equity)

Outsider Shareholders (External Equity)


13/35

Controlling Groups13

If in Majority:

Can protect their interest easily

Need monitoring

If in Minority:

Can protect their interest easily

Need highest degree of monitoring


14/35

Outsider Shareholders14

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.


15/35

Lenders15

Institutional Investors

Have some means of protecting their interest

through legal documentation, are relatively at

lower risk but still require protectionIndividual or General Public

They require the greatest degree of protection,

as they have virtually no means of protectingtheir interest.


16/35

Society at Large16

Government (Taxes, Law and Order)

Clients (Value for money)

Community (Social Rights)

How do we ensure that these

stakeholders get their dues?


17/35

Corporate Hierarchy17

1. Shareholders

2. Board of Directors

3. Management CEO

Executive Directors

Senior Managers

4. Employees


18/35

Key Players18

Shareholders (Voting power)

Board of Directors (Represents interests)

CEO (Delegated executive powers)

Senior Managers (Delegated executive powers)


19/35

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

Individ

ual

Interests

Diff B d T


20/35

20

Different Board Types:

The Good, Bad, and Ugly

Yes-men Board

Rubber StampBoard

Country Club

Board

Good Old Boys

Board

The Real Thing

Paper

Board

?

Trophy Board


21/35

Responsibilities of the Board21

Oversight

Directional

Advisory


22/35

The Oversight Function22

Approving and monitoring Companys

Strategic Plans.

Approving annual budgets and plans.

Engaging outside auditors.

Ensuring integrity of financial statements

Review of major operational activities.


23/35

The Directional Functions23

Setting Mission Statement, Vision Statementand Value Statement.

Appointment of CEO / Senior Managers

Planning for succession of these managers aswell as outside directors

Appointing various committees

Prescribing code of conduct for themanagement.


24/35

The Advisory Function24

General guidance to management.

What is happening in the rest of the world.

Specialized input in certain areas


25/35

Responsibilities of CEO & Senior

Management25

Operating the company in an effective andethical 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


26/35

Tools Available to the Board26

Composition of the Board

Independence

Committees

Incentives

External Help

Government Intervention


27/35

Balance on the Board27

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 viewsDifferent temperaments and views


28/35

Independence28

Independent from those who appointed them

(?)

Management

Stakeholders

No special interests (linked directorships)

Meeting in absence of CEO or Chairman


29/35

The Concept of Independent

Directors29

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

Th R l f I d d t


30/35

The Role of Independent

Directors30

Providing Independent Professional View point

Protecting the interest of all stakeholders

Serving on Independent Committees


31/35

Committees31

Audit Committee (only independent directors)

CG Committee (only independent directors)

Other Committees

Ad hoc Committees (e.g. investigation)

Permanent Committees (e.g. HR)


32/35

Functions of C G Committee32

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


33/35

Incentives to the Board33

Financial (Carrots)

Others (Carrots)

Legal Obligations (Sticks)


34/35

Code of Corporate Governance34

Constitution of Board element ofindependence

Conduct of Meetings how, when and what

Management and Corporate Reportingcontents and frequency

Committees so far only Audit Committee ismandatory

External AuditorAll common sense, should be done even if not

required by law


35/35

Objectives of CCG35

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

Documents

Lecture1 CG Introduction