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An IntroductionAn Introductionto Corporate to Corporate GovernanceGovernance

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What is it about?What is it about?

CorporateCorporate GovernanceGovernance

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CompanyCompany

What is a company?What is a company? Characteristics of a CompanyCharacteristics of a Company Types of CompaniesTypes of Companies

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Characteristics of a Characteristics of a CompanyCompany

Ownership in sharesOwnership in shares Freely transferable sharesFreely transferable shares Separate entity apart from Separate entity apart from

shareholdersshareholders Liability of shareholdersLiability of shareholders Indefinite lifeIndefinite life Board of directorsBoard of directors

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Types of CompaniesTypes of Companies

Limited or UnlimitedLimited or Unlimited Limited by shares or by guaranteeLimited by shares or by guarantee Private or PublicPrivate or Public Listed or UnlistedListed or Unlisted

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Hierarchy of a CompanyHierarchy of a Company

ShareholdersShareholders Own the company, do not run it.Own the company, do not run it.

Board of DirectorsBoard of Directors Elected by and reporting to Elected by and reporting to

shareholdersshareholders ManagementManagement

Appointed by and reporting to directorsAppointed by and reporting to directors Includes executive directorsIncludes executive directors

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Top Players Top Players

Shareholders: Voting powerShareholders: Voting power Chairman: Chairman:

May be executive or non-executiveMay be executive or non-executive DirectorsDirectors

May be executive or non-executiveMay be executive or non-executive Chief Executive OfficerChief Executive Officer

May or may not be a directorMay or may not be a director Senior Managers:Senior Managers:

May or may not be directorsMay or may not be directors

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Classification of Classification of StakeholdersStakeholders

OwnersOwners LendersLenders EmployeesEmployees Business AssociatesBusiness Associates

Suppliers and CustomersSuppliers and Customers SocietySociety

Includes governmentIncludes government

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Opportunity to protect Opportunity to protect individual interestsindividual interests

Managers and Employees have the Managers and Employees have the greatest opportunity to protect their greatest opportunity to protect their interest(s)interest(s)

Suppliers and Clients essentially go Suppliers and Clients essentially go by each transaction or contract.by each transaction or contract.

Lenders and Shareholders are most Lenders and Shareholders are most vulnerable.vulnerable.

Society depends entirely on lawSociety depends entirely on law

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Classified on Classified on basis of Rolebasis of Rolein the Companyin the Company

Classified on basis of opportunity to protect individual interestsClassified on basis of opportunity to protect individual interests

Those with Those with Full OpportunityFull Opportunity

Those with aThose with aPartial OpportunityPartial Opportunity

Those withThose withVirtually No Virtually No

opportunityopportunity

OwnersOwners ControllingControllingShareholdersShareholders

Institutional Institutional InvestorsInvestors

with Board with Board representationrepresentation

Minority and Minority and individualindividual

shareholders with no shareholders with no boardboard

RepresentationRepresentation

LendersLenders

Financial Financial institutionsinstitutions

with elaborate with elaborate lendinglending

ContractsContracts

Buyers of listed Buyers of listed bondsbonds

with trustee with trustee arrangementsarrangements

Other lendersOther lenders

EmployeesEmployees Executive Executive DirectorsDirectors Senior ManagersSenior Managers

Other employeesOther employeeson regular oron regular orcontract termscontract terms

Business Business AssociatesAssociates

Suppliers who sellSuppliers who sellonly on cash only on cash

termsterms

Major Suppliers andMajor Suppliers andclients with clients with

contractscontracts

Smaller suppliers Smaller suppliers and smaller clientsand smaller clients

SocietySociety GovernmentGovernment Public at largePublic at large

Classification of StakeholdersClassification of Stakeholders

Need for a SystemNeed for a System

There is therefore a need for a system There is therefore a need for a system that would ensure that:that would ensure that:

Individual interest of each Individual interest of each stakeholder is protected and served.stakeholder is protected and served.

Collective interest of all Collective interest of all stakeholders is protected and stakeholders is protected and served.served.

Corporate Governance is that system.Corporate Governance is that system.

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DefinitionDefinition

Corporate governance refers to the Corporate governance refers to the mechanism used to control and mechanism used to control and

direct the affairs of a corporate bodydirect the affairs of a corporate body

in order to in order to serveserve and and protectprotect

the the individualindividual and and collectivecollective interests interests

of all stakeholders.of all stakeholders.

(Dr Safdar A Butt)(Dr Safdar A Butt)

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Governance & Governance & ManagementManagement

How do these terms differ?How do these terms differ? Does Governance include Does Governance include

Management?Management?

OrOr Does Management include Does Management include

Governance?Governance?

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Governance & Governance & ManagementManagement

GovernanceGovernance FunctionFunction ManagementManagementApproval of Approval of

PlansPlansPlanningPlanning Preparation of Preparation of

plansplans

Providing Providing overall overall

leadershipleadership

LeadingLeading Leading those Leading those who implement who implement

plansplans

Arranging Arranging

resourcesresourcesOrganizingOrganizing Tasks division & Tasks division &

resource usageresource usage

Controlling Controlling managersmanagers

ControllingControlling Controlling Controlling employeesemployees

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Approaches to Approaches to Corporate GovernanceCorporate Governance

Shareholders ApproachShareholders Approach Stakeholders ApproachStakeholders Approach Enlightened Shareholders ApproachEnlightened Shareholders Approach Which approach is best?Which approach is best?

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Corporate SinsCorporate Sins

SlothSloth Unwillingness to take initiative or risk, Unwillingness to take initiative or risk,

prefer status quo, be lazy.prefer status quo, be lazy. GreedGreed

Putting self above companyPutting self above company FearFear

Not annoy or stand up to any Not annoy or stand up to any stakeholder / investor / boss.stakeholder / investor / boss.

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Agency TheoryAgency Theory

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

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Key IssuesKey Issues

Financial reportingFinancial reporting Directors’ remunerationDirectors’ remuneration Risk managementRisk management Effective communicationEffective communication Corporate Social ResponsibilityCorporate Social Responsibility

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Financial ReportingFinancial Reporting

AccuracyAccuracy ReliabilityReliability

Internal and external auditInternal and external audit ComprehensivenessComprehensiveness TimelinessTimeliness

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Directors Related IssuesDirectors Related Issues

RemunerationRemuneration PowersPowers Balance between:Balance between:

executive and non-executivesexecutive and non-executives Election and re-electionElection and re-election RepresentationRepresentation

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Risk ManagementRisk Management

Risk profileRisk profile What risks to take?What risks to take?

Avoidable and non-avoidable risksAvoidable and non-avoidable risks What not to take?What not to take? How to handle risks taken?How to handle risks taken?

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CommunicationCommunication

TransparencyTransparency Regular communicationRegular communication With who?With who? In what format?In what format?

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Corporate Social Corporate Social ResponsibilityResponsibility

Business EthicsBusiness Ethics Being a good citizenBeing a good citizen Doing business responsiblyDoing business responsibly

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Why is CG Important?Why is CG Important?

Good reputation is good businessGood reputation is good business Protection of stakeholders’ interestProtection of stakeholders’ interest Support to capital marketsSupport to capital markets Support to societySupport to society Every one winsEvery one wins

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Thank youThank you