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CORPORATE GOVERNANCE
An Introduction
Definition
2
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
3
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.
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)
How do these terms differ? Does Governance include Management? Or Does Management include Governance?
Function
Planning
Management
Preparation of plans
Leading
Organizing Controlling
Governance
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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
Management
8
Current Affairs Implementing the Plans Developing Suggestions and Alternatives Operational Matters
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 Employees Lenders Suppliers and Clients Shareholders Society at large (this includes government)
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
13
If in Majority: Can protect their interest easily Need monitoring If in Minority: Can protect their interest easily Need highest degree of monitoring
Outsider Shareholders
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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.
Lenders
15
Institutional Investors Have some means of protecting their interest through legal documentation, are relatively at lower risk 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.
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
17
1.
2.
3.
4.
Employees
Key Players
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Shareholders (Voting power) Board of Directors (Represents interests) CEO (Delegated executive powers) Senior Managers (Delegated executive powers)
Shareholders
Lenders Employees
Individual
Interests
Business Associates
Society
19
Paper Board
?
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Approving and monitoring Companys Strategic Plans. Approving annual budgets and plans. Engaging outside auditors. Ensuring integrity of financial statements Review of major operational activities.
Setting Mission Statement, Vision Statement and Value Statement. Appointment of CEO / Senior Managers Planning for succession of these managers as well as outside directors Appointing various committees Prescribing code of conduct for the management.
General guidance to management. What is happening in the rest of the world. Specialized input in certain areas
Operating the company in an effective and ethical 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
Composition of the Board Independence Committees Incentives External Help Government Intervention
Balance of talents
Finance,
Balance of representation
As
Balance of power
Distribution
Balance of views
Different
Independence
28
Independent from those who appointed them (?) Management Stakeholders No special interests (linked directorships) Meeting in absence of CEO or Chairman
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
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Providing Independent Professional View point Protecting the interest of all stakeholders Serving 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 directors Monitor and Safeguard the independence of directors Review of all information to the Board from Management Drawing up CG Policy and processes
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 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