Lahore University of Management Sciences

FINN 383 Capital Markets & Corporate Governance

Fall Semester 2015
Instructor Khalid Aziz Mirza
Room No. SDSB Building Room 311
Office Hours TBA
Email ka.mirza10@gmail.com
Telephone 0300-555 7229
Secretary/TA Saleem Ahmad Khan, Administrative Assistant
TA Office Hours TBA
Course URL (if any) suraj.lums.edu.pk

COURSE BASICS
Credit Hours 3
Lecture(s) Nbr of Lec(s) Per Week Twice weekly Duration 75 minutes
Recitation/Lab (per week) Nbr of Lec(s) Per Week -- Duration --
Tutorial (per week) Nbr of Lec(s) Per Week -- Duration --

COURSE DISTRIBUTION
Core
Elective
Open for Student Category
Close for Student Category
Yes
Seniors and Juniors
Freshman and Sophomore

COURSE DESCRIPTION

The course covers the theoretical underpinnings of corporate governance viewed in the historical and contemporary context. It
is recognized that perhaps the most significant stakeholder in corporate governance is the shareholder --- in particular, the
minority shareholder --- and that adherence to corporate governance norms has a profound impact on engendering investor
confidence (thus creating an environment that is attractive for capital). The course thus begins by delving in some detail in the
manner in which equity markets function. The course then moves on to deal with the principal aspects/foundations of corporate
governance on which it is based; and then, importantly, the diverse as well as widely acknowledged views regarding corporate
governance. Ranging from classical theories to current controversies, the course seeks to enlighten the student with an erudite
perspective of corporate governance and contemporary analysis with respect to this subject. It is hoped that students taking this
course will develop insights into the conceptual basics of this fast emerging field, the practical manifestation of which differs
substantially even between jurisdictions with closely aligned legal systems, circumstances, and corporate legacies.

The spate of corporate governance scandals --- notably Enron --- that engulfed some of the most spectacularly successful corporate
groups in the early part of the last decade and that continue to recur across the globe with unacceptable frequency have
heightened interest in corporate governance. At the same time, it is felt that the widely differing response these developments
have evoked at both regulatory and corporate levels point to the need for a clearer understanding of the fundamentals and
principles that constitute the essence of sound corporate governance.

In order not to be oblivious of the local context, the course also addresses Pakistans approach to corporate governance largely
embodied in the two Codes of Corporate Governance issued by the capital markets regulator ( i.e. SECP) in 2002 and 2012.
 Lahore University of Management Sciences
COURSE PREREQUISITE(S)

Principles of Finance: micro and macro economics

COURSE LEARNING OBJECTIVES

To provide a perspective on :
(a) how equity markets operate; and
(b) the essence of corporate governance and the theories/controversies regarding this subject (as indicated in
the Course Description above)

LEARNING OUTCOMES
Students should be able to demonstrate a clear understanding of:
(a) the functioning of equity markets: and
(b) the principles/conceptual foundations of corporate governance

UNDERGRADUATE PROGRAM LEARNING GOALS & OBJECTIVES

General Learning Goals & Objectives

Goal 1 Effective Written and Oral Communication
Objective: Students will demonstrate effective writing and oral communication skills
Goal 2 Ethical Understanding and Reasoning
Objective: Students will demonstrate that they are able to identify and address ethical issues in an organizational
context.
Goal 3 Analytical Thinking and Problem Solving Skills
Objective: Students will demonstrate that they are able to identify key problems and generate viable solutions.
Goal 4 Application of Information Technology
Objective: Students will demonstrate that they are able to use current technologies in business and management
context.
Goal 5 Teamwork in Diverse and Multicultural Environments
Objective: Students will demonstrate that they are able to work effectively in diverse environments.
Goal 6 Understanding Organizational Ecosystems
Objective: Students will demonstrate that they have an understanding of Economic, Political, Regulatory, Legal,
Technological, and Social environment of organizations.

Major Specific Learning Goals & Objectives

Goal 7 (a) Discipline Specific Knowledge and Understanding
Objective: Students will demonstrate knowledge of key business disciplines and how they interact including
application to real world situations (Including subject knowledge).
Goal 7 (b) Understanding the science behind the decision-making process (for MGS Majors)
Objective: Students will demonstrate ability to analyze a business problem, design and apply appropriate
decision-support tools, interpret results and make meaningful recommendations to support the decision-maker
 Lahore University of Management Sciences
Indicate below how the course learning objectives specifically relate to any program learning goals and objectives.
PROGRAM LEARNING GOALS AND
OBJECTIVES
Goal 1 Effective Written and Oral
Communication
Goal 2 Ethical Understanding and
Reasoning
Goal 3 Analytical Thinking and Problem
Solving Skills
Goal 4 Application of Information
Technology
Goal 5 Teamwork in Diverse and
Multicultural Environments
Goal 6 Understanding Organizational
Ecosystems
Goal 7 (a) Program Specific Knowledge
and Understanding
Goal 7 (b) Understanding the science
behind the decision-making process
COURSE LEARNING OBJECTIVES COURSE ASSESSMENT ITEM
The course needs to provide sufficient The assignment to write an essay as well
opportunities to both demonstrate as well as participation in class discussions.
articulate effectively --- verbally and in
writing.
The ethical dimension is a recognized The assignment, examinations, and class
aspect of corporate governance and will participation.
be emphasized --- likely to be fully
absorbed by the students.
Pertinent capital markets and corporate The assignment, examinations, and class
governance issues raised throughout the participation.
course will challenge students to apply
their minds and develop their analytical
skills.
Not directly applicable but is a useful -
complement in pursuing the course.
Students will need to develop a fair The assignment, examinations, and class
appreciation of societal and cultural participation.
differences, including multi-cultural
settings, in order to formulate an
appropriate response to corporate
governance issues.
Students need to fully understand the The assignment, examinations, and class
organizational ecosystem which is the deliberations.
foundation on which the governance
structure rests.
The course aims to get students acquire The assignment, examinations, and class
an understanding of corporate deliberations.
governance parameters (i.e. how
corporates are directed and controlled)
within the scope of which specific
knowledge and the decision making
process can be usefully applied as
required by the situation.
 Lahore University of Management Sciences
GRADING BREAKUP AND POLICY

(i) As an assignment, students will be required to write an essay (1000-1500 words) on a topic provided to them which is to
be submitted by the 21st lecture.
(ii) Not less than three surprise quizzes may be given in class on the assigned last reading; and the best two results will count
towards the final grade. No make up quizzes shall be allowed.
(iii) Students are expected to participate sensibly in class discussions --- only intelligent and contributory participations will be
rewarded.
(iv) Primarily lecture method based on assigned topics. Lecture notes/takeaways to be distributed, as necessary.
Specialist guest speakers to be arranged as well (as indicated in the Course Overview)

Final grade break-down:

Source % of
Total
Class Participation 10
Assignment 10
Quiz (s) 10
Mid-Term Exam 30
Final Examination 40
Total 100

EXAMINATION DETAIL

Yes/No: Yes
Combine Separate:
Midterm
Duration: 60 minutes
Exam
Preferred Date: 16th lecture
Exam Specifications: TBD

Yes/No: Yes
Combine Separate:
Final Exam Duration: 120 minutes
Exam Specifications: TBD
 Lahore University of Management Sciences
COURSE OVERVIEW
WEEK/
RECOMMENDED
LECTURE/ TOPICS SESSION OBJECTIVES
READINGS
MODULE
Module 1: The Capital (Equity) Market
Introduction to: (a) the Fabozzi - Capital Markets Set the stage for the course. Give a perspective of
Lecture 1
course; and (b) the equity (Chapter 1) pp 1-18 financial markets and financial assets, including
market. inter alia the differences between debt and equity
claims. Create an awareness regarding the
economic goal of the equity market and its linkage
with corporate governance.

Lecture 2 The Players in the Equity Fabozzi Capital Markets To provide an overview of market participants,
Market (Chapters 2,4 and 5) financial innovation, and the operations of certain
pp 19-38, pp 62-73, pp 74-99 non-bank financial institutions.

Lecture 3 The Organization and Fabozzi Capital Markets To understand the essentials of how investment
Structure of Markets (Chapters 6 and 7) banks function and how corporate securities, in
pp 100-114, pp 115-142 particular equity instruments, are issued, traded,
and regulated.
Lecture 4 The Common Stock Fabozzi -- Capital Markets To achieve clarity regarding the functional aspects
Market ( the market for (Chapter 13) of equity markets, pricing efficiencies, and
Ordinary Shares) pp 251-270 vulnerabilities.

Lecture 5 The Market for Stock Fabozzi Capital Markets To understand the basics of stock derivatives
Derivatives (Chapters 14 and 15) (Options, Index Futures/Options, Warrants, equity
pp 271-297, pp 298-315 swaps) including trading modalities and pricing.

Accessing Global Equity Global Equity Markets for To become conscious of the growing trend in
Lecture 6
Markets by growth- Emerging Growth Firms: entrepreneurial finance to raise funds in external
oriented enterprises. Partners, Drivers, Implications equity markets.
for the Globalizing
Entrepreneur by
R. Amit and C. Zott pp 1-33
Lecture 7 Guest Speaker --- The Pakistan Economic Survey, To become perceptive regarding the state of the
Equity Market in 2013-14 ( Chapter 6) pp 89-104 equity market in Pakistan and the related
Pakistan regulatory imperative.
Speech delivered by K. Mirza in
the Toronto Centre (Securities
Market Leadership Program) on
July 14, 2004. pp 1-13
Module 2: Overview of Corporate Governance, Foundations, and the Agency Theory
Lecture 8 An Overview of Corporate Clark Corporate Governance To broadly understand the essence of corporate
Governance and its (Introductory Chapter: pp 1-30.) governance and the contemporary theories that
conceptual contours. underpin it.

Lecture 9 The Economic Clark Corporate Governance To drive home the ascendency of management, the
Foundations of Corporate (Part 1: pp 33-53). significance of the corporation, and managerial
Governance. capitalism.
 Lahore University of Management Sciences
Lecture 10 Agency Theory (1): The
theoretical basics of the
firm and the separation
of ownership and control.
Lecture 11 Agency Theory (2): An
assessment and review.
Module 3: Managerial Hegemony, Stewardship Theory, and External Pressures
Lecture 12 Managerial Hegemony:
the role of Directors vis-i-
vis CEO/management.
Lecture 13 The Stewardship Theory
of Management.
External Pressures (1):
Lecture 14
exogenous influences on
governance.
External Pressures (2):
Lecture 15
network governance.
MID-TERM
Lecture 16
EXAMINATION
Module 4: Stakeholder Theory and Convergence
Lecture 17 Stakeholder Theory (1):
Ownership and Control.
Stakeholder Theory (2):
Lecture 18
The philosophy of adapting
an inclusive approach in a
Stakeholder
Corporation.
Theories of Convergence
Lecture 19
(1): Corporate leadership
in a Globalizing Equity
Market.
Clark Corporate Governance
(Part 2: pp 58-77).
Clark Corporate Governance
(Part 2: 78-92)
Clark Corporate Governance
(Part 3: pp 96-114)
Clark Corporate Governance
(Part 4: pp 118-134).
Clark Corporate Governance
(Part 5: pp 138-148).
Clark Corporate Governance
(Part 5: pp 149-170)
Clark -- Corporate Governance
(Part 6: pp 174-188)
Clarke --- Corporate
Governance (Part 6 : pp 189-
201).
Clarke Corporate Governance
(Part 7 : pp 206 -222)
To draw attention to the manifest tensions
inherent in the firm, mainly between the
shareholders (residual risk takers) and managers
(self-interested utility maximizers).
To appraise the Agency Theory and assess the
extent to which this theory provides too simplistic
a view of firm dynamics)
To provide an assessment regarding the reality of
the power of a corporate board and recent
developments in this respect.
To understand the basis for the opposite view i.e.
instead of the much-touted conflict of interest,
managers actually have a stewardship role aligned
with the interest of the owners.
To appreciate that governance structures and
processes (including Board composition, role, and
the making of strategic choices) cannot be isolated
from, and are affected by, the external
environment.
To get familiar with the pros and cons of
governance processes resting on informal social
systems rather than structured, contractual
arrangements.
To clarify how a corporate organization can be duly
perceived as comprising institutional arrangements
governing relationships between all parties that
contribute to firm-specific assets, tangible and
intangible.
To examine the imperative to satisfy more complex
constituencies than the Agency Theory or a
shareholder value based approach might suggest.
To provide the back drop for the thesis that global
integration of capital markets will induce
convergence of corporate systems and structures.
 Lahore University of Management Sciences
Lecture 20 Theories of Convergence Clarke Corporate Governance To consider the reality of convergence in corporate
(2): Corporate Governance Part 7 : pp 223-242 governance across borders (which cannot be
and Globalization. isolated from the rest of the institutional
underpinnings in the local economy).
Lecture 21 Theories of Convergence Clarke Corporate Governance To appreciate why Europe is likely to have
(3): Convergence (Part 7: pp 243-286). continued diversity in corporate governance; and
uncertainties --- the also, why the dominance of family
European experience and ownership/other forms of embedded capitalism
global prospects. would mean convergence advocacy being viewed
as culturally and politically insensitive.
Module 5: Shareholder Value and Post-Enron
Shareholder Value (1): Clarke Corporate Governance To understand the implications when enhancing
Lecture 22
Maximizing the value of (Part 8: pp 290-303). shareholder value is the primary aim of
the ownership stake. governance.

Shareholder Value (2): A Clarke Corporate Governance To appreciate that merely adopting the
Lecture 23
conceptual critique of (Part 8: pp 304-318). shareholder value approach to corporate
shareholder ideology. governance may be too constricting since this
approach does not recognize other relations and
inter-dependencies on which the company relies
for its success.
Post-Enron Analysis (1): Clarke Corporate Governance To recognize how some of the basic pillars of
Lecture 24
Some initial reflections. (Part 9: pp 322-332). corporate governance were shaken (and their
validity questioned) as a consequence of the Enron
collapse.

Post-Enron Analysis (2): Clarke Corporate Governance To recognize not only the immediate causes for
Lecture 25
What caused the Enron (Part 9: pp 333-358). the Enron debacle but also that it was the natural
collapse? consequence of trends and forces developing for
some time and were by-products of the then
prevailing governance structures.

Module 6: Corporate Governance in Pakistan

Guest speaker --- Enhancing Corporate To become perceptive regarding the state of
Lecture 26
Corporate Governance in Governance. Speech by K. corporate governance in the developing world,
the developing world. Mirza at a meeting organized including Pakistan.
by the Pak-Brunie Investment
Company in Karachi (2011). pp
1-13

Instituting Corporate (i) The Code of Corporate To understand the fundamentals of corporate
Governance in Pakistan Governance (SECP governance in Pakistan.
Lecture 27 (1). Publication, 2012). pp 1-44
(ii) The Code of Corporate
Governance, 2002. --- the
previous code (SECP
Publication). pp 1-17
 Lahore University of Management Sciences
Lecture 28 Instituting Corporate Harmonizing the Code of
Governance in Pakistan Corporate Governance with
(2). other laws/regulations (SECP
Publication -- UNDP Project,
April, 2003). pp 1-121
pp 1-34 and 111-118 are
important.
To appreciate the Code of Corporate Governance
in Pakistan in the context of other corporate laws
and regulations subsisting in Pakistan and
governance practices in relevant developed
jurisdictions.

TEXTBOOK(S)/SUPPLEMENTARY READINGS
Required Texts:
(i) Frank Fabozzi & Franco Modigliani --- Capital Markets: Institutions and Instruments, 4th Edition, Prentice Hall PTR
2009. ( essentially Chapters 1, 2, 4 to 7, and 13 to 15)
(ii) Thomas Clarke (Editor) --- Theories of Corporate Governance: The Philosophical Foundations of Corporate
Governance, Routledge, 2004.
(iii) Amit,R. and Zott,C. --- Global Equity Markets for Emerging Growth Firms: Pattern, Drivers, Implications for the
Globalizing Entrepreneur, Working Paper Series (INSEAD-Wharton Alliance Centre fpr Global Research
2003/85/ENT/ACGRD 1), Fountain-bleau: INSEAD.
(iv) The two Codes of Corporate Governance issued by SECP in 2002 and 2012 and the SECP publication in 2003
Harmonizing the Code of Corporate Governance with other laws/regulations.

Supplementary Readings:
(i) As indicated under Course Overview above.
(ii) Students may find it helpful to keep in touch with the financial press, namely, the daily Business Recorder, the daily
DAWN (the weekly Economic and Business Review), the Financial Times, and the Wall Street Journal.
(iii) Other reading material may be provided as the course proceeds.