An Introduction

to Corporate
Governance

What is it about?

Corporate
Governance

Company

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

Characteristics of a Company

Ownership in shares
Freely transferable shares
Separate entity apart from shareholders
Liability of shareholders
Indefinite life
Board of directors

Types of Companies

Limited or Unlimited
Limited by shares or by guarantee
Private or Public
Listed or Unlisted

Hierarchy of a Company

Shareholders

Board of Directors

Own the company, do not run it.

Elected by and reporting to shareholders

Management
Appointed by and reporting to directors
Includes executive directors

Top Players

Shareholders: Voting power

Chairman:

Directors

May be executive or non-executive

Chief Executive Officer

May be executive or non-executive

May or may not be a director

Senior Managers:

May or may not be directors

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Classification of Stakeholders

Owners
Lenders
Employees
Business Associates

Suppliers and Customers

Society

Includes government

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

Classification of Stakeholders
Classified on
basis 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

Controlling
Shareholders

Institutional Investors
with Board representation

Minority and individual

shareholders with no board
Representation

Lenders

Financial institutions
with elaborate lending
Contracts

Buyers of listed bonds

with trustee arrangements

Other lenders

Employees

Executive Directors

Senior Managers

Other employees
on regular or
contract terms

Business Associates

Suppliers who sell

only on cash terms

Major Suppliers and

clients with contracts

Smaller suppliers
and smaller clients

Government

Public at large

Society

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Need for a System

There is therefore a need for a system that would
ensure that:
Individual interest of each stakeholder is
protected and served.
Collective interest of all stakeholders is
protected and served.
No one usurps any one elses rights.
Corporate Governance is that system.
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Definition
Corporate governance refers to the mechanism
used to control and direct the affairs of a
corporate body
in order to serve and protect
the individual and collective interests
of all stakeholders.
(Dr Safdar A Butt)
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Governance & Management

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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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

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Management

Current & Operational Affairs

Taking directions from the Board
Implementing the Plans
Developing Suggestions and Alternatives

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Approaches to
Corporate Governance

Shareholders Approach
Stakeholders Approach
Enlightened Shareholders Approach
Which approach is best?

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Corporate Sins

Sloth

Greed

Unwillingness to take initiative or risk, prefer status

quo, be lazy.
Putting self above company

Fear

Not annoy or stand up to any stakeholder / investor

/ boss.
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Agency Theory

What is Agency Theory?

Does it apply to companies?
Two-party and three-party model
Principal-Watchdog-Agent

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Key Issues

Financial reporting
Directors remuneration
Risk management
Effective communication
Corporate Social Responsibility

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Financial Reporting

Accuracy
Reliability

Internal and external audit

Comprehensiveness
Timeliness

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Directors Related Issues

Remuneration
Powers
Balance between:

executive and non-executives

Election and re-election

Representation

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Risk Management

Risk profile
What risks to take?

Avoidable and non-avoidable risks

What not to take?

How to handle risks taken?

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Communication

Transparency
Regular communication
With who?
In what format?

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Corporate Social
Responsibility

Business Ethics
Being a good citizen
Doing business responsibly

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Why is CG Important?

Good reputation is good business

Protection of stakeholders interest
Support to capital markets
Support to society
Every one wins

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Thank you

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