CG Lecture1.ppt

8/10/2019 CG Lecture1.ppt

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1

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 whichthe company objectives are set, and the means of

attaining these objectives and monitoring performance.



2

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.



3

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 )



4

Governance and

Management

How do these terms differ?

Does Governance include Management?

Or Does Management include Governance?



5

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

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



7

Management

Current Affairs

Implementing the Plans

Developing Suggestions and Alternatives Operational Matters



8

What is a Corporate Body?

Any Company is a corporate body. However, in a broader sense only public limited companies aretaken 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 evengreater degree of CG.



9

Stakeholders in a Company

Management and Employees

Lenders

Suppliers and Clients Shareholders

Society at large (this includes government)



10

Classified onbasis 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

Owners ControllingShareholders

Institutional Investorswith Board representation

Minority and individualshareholders with no boardRepresentation

Lenders Financial institutionswith elaborate lendingContracts

Buyers of listed bondswith trustee arrangements

Other lenders

Employees Executive Directors Senior Managers

Other employees

on regular or

contract terms

Business Associates Suppliers who sellonly on cash terms

Major Suppliers andclients with contracts

Smaller suppliersand smaller clients

Society Government Public at large

Classification of Stakeholders



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





13

Controlling Groups

I f in Majori ty:

Can protect their interest easily

Need monitoringI f in M inori ty:

Can protect their interest easily

Need highest degree of monitoring



14

Outsider Shareholders

I nstitutional I nvestors

Have some means of protecting their interest

but still require protection

I ndividual or General Public

They require the greatest degree of protection,

as they have virtually no means of protectingtheir interest.



15

Lenders

I nsti tutional I nvestors

Have some means of protecting their interest through

legal documentation, are relatively at lower risk but

still require protectionI ndividual or General Public

They require the greatest degree of protection, as they

have virtually no means of protecting their interest.



16

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

1. Shareholders

2. Board of Directors

3. Management• CEO

• Executive Directors

• Senior Managers

4. 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 ManagementLegal frame workProfessional CodesIndustrial practices

Lenders Security / timely interest payments

Employees Continued employment at goodterms

Business Associates

Continued business at good terms

Society Good citizenship by the company

Collective Interest ofall stakeholders

Continued profitable existence

Strategic ManagementRisk Management

I n d i v i d

u a l

I n t e r e s t s

Diff B d T



20

‘Yes-men’ Board

Different Board Types:

The Good, Bad, and Ugly

‘Rubber Stamp’Board

‘Country Club’

Board

‘Good Old Boys’

Board

‘The Real Thing’

‘Paper’

Board

?

‘Trophy’ Board



21

Responsibilities of the Board

Oversight

Directional

Advisory





23

The Directional Functions

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

The Advisory Function

General guidance to management.

What is happening in the rest of the world.

Specialized input in certain areas





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

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 appointindependent 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)





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 notrequired 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



36

Thank you

from

Dr SAFDAR A. BUTT

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