An Introduction
to Corporate
Governance
Dr. Safdar H. Tahir
What is it about?
Corporate
Governance
Company
What is a company/ Corporation?
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
4
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
7
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
9
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
Minority and
individual
shareholders with no
board
Representation
Owners
Controlling
Shareholders
Institutional
Investors
with 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
10
Need for Corporate
Governance
To protect and serve individual
interest of each stakeholder
To protect and serve the collective
interest of all stakeholders
To ensure no one benefits at the
expense of another
To ensure no stakeholder has
monopoly of decision-making.
11
Governance &
Management
How do these terms differ?
Does Governance include
Management?
Or
Does Management include
Governance?
12
Governance &
Management
Governance
Function
Management
Approval of
Plans
Providing
overall
leadership
Planning
Preparation of
plans
Leading those
who implement
plans
Arranging
resources
Controlling
managers
Organizing
Tasks division &
resource usage
Controlling
Controlling
employees
Leading
13
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
14
Management
Current & Operational Affairs
Taking directions from the Board
Implementing the Plans
Developing Suggestions and
Alternatives
15
Approaches to
Corporate Governance
Shareholders Approach
Stakeholders Approach
Enlightened Shareholders Approach
Which approach is best?
16
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.
17
Agency Theory
What is Agency Theory?
Does it apply to companies?
Two-party and three-party model
Principal-Watchdog-Agent
18
Key Issues
Financial reporting
Directors remuneration
Risk management
Effective communication
Corporate Social Responsibility
19
Financial Reporting
Accuracy
Reliability
Internal and external audit
Comprehensiveness
Timeliness
20
Directors Related Issues
Remuneration
Powers
Balance between:
executive and non-executives
Election and re-election
Representation
21
Risk Management
Risk profile
What risks to take?
Avoidable and non-avoidable risks
What not to take?
How to handle risks taken?
22
Communication
Transparency
Regular communication
With who?
In what format?
23
Corporate Social
Responsibility
Business Ethics
Being a good citizen
Doing business responsibly
24
Why is CG Important?
Good reputation is good business
Protection of stakeholders interest
Support to capital markets
Support to society
Every one wins
25
Thank you
Dr. Safdar H Tahir
26
