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CORPORATE
GOVERNANCE
An Introduction
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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.
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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.
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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)
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Governance and
Management5
How do these terms differ?
Does Governance include Management?
Or
Does Management include Governance?
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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
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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
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Management8
Current Affairs
Implementing the Plans
Developing Suggestions and Alternatives
Operational Matters
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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.
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Stakeholders in a Company10
Management and Employees
Lenders
Suppliers and Clients
Shareholders
Society at large (this includes government)
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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
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Shareholders12
Controlling Groups (Internal Equity)
Outsider Shareholders (External Equity)
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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
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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.
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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.
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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?
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Corporate Hierarchy17
1. Shareholders
2. Board of Directors
3. Management CEO
Executive Directors
Senior Managers
4. Employees
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Key Players18
Shareholders (Voting power)
Board of Directors (Represents interests)
CEO (Delegated executive powers)
Senior Managers (Delegated executive powers)
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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
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Individ
ual
Interests
Diff B d T
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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
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Responsibilities of the Board21
Oversight
Directional
Advisory
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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.
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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.
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The Advisory Function24
General guidance to management.
What is happening in the rest of the world.
Specialized input in certain areas
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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
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Tools Available to the Board26
Composition of the Board
Independence
Committees
Incentives
External Help
Government Intervention
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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
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Independence28
Independent from those who appointed them
(?)
Management
Stakeholders
No special interests (linked directorships)
Meeting in absence of CEO or Chairman
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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
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The Role of Independent
Directors30
Providing Independent Professional View point
Protecting the interest of all stakeholders
Serving on Independent Committees
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Committees31
Audit Committee (only independent directors)
CG Committee (only independent directors)
Other Committees
Ad hoc Committees (e.g. investigation)
Permanent Committees (e.g. HR)
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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
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Incentives to the Board33
Financial (Carrots)
Others (Carrots)
Legal Obligations (Sticks)
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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
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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