Corporate Governance

Definition
The system by which business corporations are directed and controlled Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. Primarily concerned with public listed companies i.e. those listed on stock exchange

Corporate Governance Parties

Share Holders

Directors

Managers

-Those that own the company - Supply equity or risk capital

Guardians of the companys assets for the shareholders

Who use the companys assets

Shareholders

BOD

Audit Committee

Compensation Committee

-Provide capital to the company by purchasing shares -Fragmented group including:

individual share holders, private holders, institutional investors, employees, managers etc

-Elected by owners to represent their interest in effective running of corporation -Inside (executive): hold management positions in the company -Outside: not employed or engaged with the organization

-Members of BOD -Oversee financial reporting process, monitor internal controls, choice of accounting policies, hiring and performance of external auditors

-Members of BOD -Oversee compensation packages and benefits of senior executives

Governance of Modern Corporation

Four Pillars

1. Accountability
2. Fairness 3. Transparency 4. Independence

Accountability
Ensure that management is accountable to the Board Ensure that the Board is accountable to shareholders

Fairness
Protect Shareholders rights

Treat all shareholders including minorities, equitably

Provide effective redress for violations

Transparency
Ensure timely, accurate disclosure on all material matters, including the financial situation, performance, ownership and corporate governance

Independence
Procedures and structures are in place so as to minimize, or avoid completely conflicts of interest Independent Directors and Advisers i.e. free from the influence of others
the board of directors of each listed company shall have at least one and preferably one third of the total members of the board as independent directors. "independent director" means a director who is not connected or does not have any other relationship, whether pecuniary or otherwise, with the listed company, its associated companies, subsidiaries, holding company or directors

Corporate Governance Models

SHAREHOLDER MODEL
Concept of maximization of wealth for investors and owners Classic Agency Problem
Investors have ownership but managers have control The agent who is supposed to make the decisions that would best serve the principal is naturally motivated by self-interest, and the agent's own best interests may differ from the principal's best interests. Also known as the "principalagent problem."

Corporate Governance Models

STAKEHOLDER MODEL
Adopts a broader view of the purpose of business that includes satisfying the concerns of other stakeholders Employees Suppliers, Government regulators Communities and Special interest groups Identification of primary stakeholders Stakeholder model is more realistic than shareholder model

Corporate Governance Issues

Shareholder rights Executive compensation Auditing and control Board of directors composition CEO selection and termination decisions Integrity of financial reporting Shareholder participation and input level Compliance with corporate governance reform CEOs role in board decisions Organizational ethics programs

Corporate Governance in Pakistan

Code of Corporate Governance was promulgated in the year 2002 by the Securities and Exchange Commission of Pakistan (SECP) after the initial drafting by the Institute of the Chartered Accountants of Pakistan in 1998. Presently, corporate governance primarily falls within the ambit of two entities:
the SECP and the State Bank of Pakistan (SBP).

The SECP is largely an independent body that regulates the corporate sector and financial markets, On the other hand the SBP is Pakistan's central bank and is responsible for regulating the country's banking and finance sector

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