corporate governance
DESCRIPTION
Corporate Governance By Safdar A. ButtTRANSCRIPT
Definition
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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.
Another Definition
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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.
Yet Another Definition
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Corporate governance refers to the manner in which the affairs of a corporate body
should be conducted in order to serve and protect
the individual and collective interests of all stakeholders.
(Safdar A Butt)
Governance andManagement
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How do these terms differ?Does Governance include Management?OrDoes Management include Governance?
Governance
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StrategicSetting ObjectivesDevising plans to achieve these objectivesSetting rules or parametersNot directly concerned with routine affairsProtection of Interests of all stakeholders
Management
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Current AffairsImplementing the PlansDeveloping Suggestions and AlternativesOperational Matters
What is a Corporate Body?
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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.
Stakeholders in a Company
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Management and EmployeesLendersSuppliers and ClientsShareholdersSociety at large (this includes government)
Classification of Stakeholders
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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
Opportunity to protect individual interests
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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
Shareholders
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Controlling Groups (Internal Equity)Outsider Shareholders (External Equity)
Controlling Groups
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If in Majority:Can protect their interest easilyNeeds monitoringIf in Minority:Can protect their interest easilyNeeds highest degree of monitoring
Outsider Shareholders
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Institutional InvestorsHave some means of protecting their
interest but still require protectionIndividual or General PublicThey require the greatest degree of
protection, as they have virtually no means of protecting their interest.
Lenders
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Institutional InvestorsHave some means of protecting their
interest through legal documentation, are relatively at lower risk but still require protection
Individual or General PublicThey require the greatest degree of
protection, as they have virtually no means of protecting their interest.
Society at Large
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Government (Taxes, Law and Order)Clients (Value for money)Community (Social Rights)
How do we ensure that these stakeholders get their dues?
Corporate Hierarchy
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1. Shareholders2. Management Board of Directors CEO Senior Managers3. Employees
Key Players
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Shareholders (Voting power)Board of Directors (Represents interests)CEO (Delegated executive powers)Senior Managers (Delegated executive
powers)
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 good terms
Business Associates
Continued business at good terms
Society Good citizenship by the company
Collective Interest of all stakeholders
Continued profitable existenceStrategic
ManagementRisk Management
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Ind
ivid
ual
Inte
rest
s
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Different Board Types: The Good, Bad, and Ugly
‘Yes-men’ Board‘Rubber Stamp’
Board
‘Country Club’ Board
‘Good Old Boys’ Board
‘The Real Thing’
‘Paper’ Board
?‘Trophy’ Board
Responsibilities of the Board
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Oversight (Watchful and Responsible)DirectionalAdvisory
The Oversight Function
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Approving and monitoring Company’s Strategic Plans.
Approving annual budgets and plans.Engaging outside auditors.Ensuring integrity of financial statementsReview of major operational activities.
The Directional Functions
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Setting Mission Statement, Vision Statement and Value Statement.
Appointment of CEO / Senior ManagersPlanning for succession of these managers
as well as outside directorsAppointing various committeesPrescribing code of conduct for the
management.
The Advisory Function
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General guidance to management.What is happening in the rest of the world.Specialized input in certain areas
Responsibilities of CEO & Senior Management
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Operating the company in an effective and ethical manner.
Drawing the strategic plansDrawing annual plans and budgetsSelection of managerial and other staffIdentifying business risksFinancial reportingInternal ControlsCode of Conduct for all staff
Tools Available to the Board
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Composition of the BoardIndependenceCommitteesIncentivesExternal HelpGovernment Intervention
Composition of the Board
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The Board should not represent interests alone.
Experienced and qualified practitionersPool of talent – covering all areas
Independence
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Independent from those who appointed them (?)
Management StakeholdersNo special interests (linked directorships)Meeting in absence of CEO or Chairman
The Concept of Independent Directors
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Relatively a new concept in PakistanOnly public sector companies have tried itPrivate sector companies rarely appoint
independent directorsNo pool of professional directors availableRegulators trying to popularize the concept
The Role of Independent Directors
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Providing Independent Professional View point
Protecting the interest of all stakeholdersServing on Independent Committees
Committees
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Audit Committee (only independent directors)
CG Committee (only independent directors)Other Committees
Ad hoc Committees (e.g. investigation) Permanent Committees (e.g. HR)
Functions of C G Committee
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Compliance with CG Regulations Nominating Independent directorsMonitor and Safeguard the independence
of directorsReview of all information to the Board from
ManagementDrawing up CG Policy and processes
Incentives to the Board
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Financial (Carrots)Others (Carrots)Legal Obligations (Sticks)
Code of Corporate Governance
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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
Objectives of CCG
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Protect the interest of all stakeholdersInfuse some independence in the BoardsBring Transparency in conduct of
meetingsImprove reliability of financial reportingIntroduce Professionalism in BoDsReduce undue influence of controlling
groupsDevelop a corporate culture
fromSaif Ullah
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Thank you