Corporation or a Company

Focusing on Pakistan

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 Forms of Business Ownership

Three general types of business ownership:

Sole proprietorship
Partnership
Corporation

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 Comparison of three forms

Sole proprietorship Partnership Corporation

Business owner Single owner Partners Shareholders

Owner’s liability Unlimited Unlimited Limited

Easy access to capital No No Yes
market?
Is management and No No Yes
ownership separate?

Are business owners No No Yes

exposed to double
taxation?

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 Pros and Cons of Corporations

Pros:
Easy access to capital markets
Infinite life unless go bankrupt or merged by others
Owners have limited liability
Liquid corporate ownership
Cons:
Shareholders are exposed to double taxation
Costs of running a corporation is relatively high
Corporations suffer from potentially serious
4 governance problems.
 Separation of Ownership and Control

The thousands, or more, investors who own

public firms could not collectively make the
daily decisions needed to operate a
business. Therefore:
The shareholders are owners of the firm
The officers (or executives) control the firm

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 Principal-agent problem

 Principal—shareholders
 Agent—managers
 Principal-agent problem represents the
conflict of interest between management and
owners. For example if shareholders cannot
effectively monitor the managers’ behavior,
then managers may be tempted to use the
firm’s assets for their own ends, all at the
expense of shareholders.
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 Solutions to Principal-agent problem

Incentives—aligning executive incentives

with shareholder desires.
e.g. stock, restricted stock, and stock options.
Monitoring—setting up mechanisms for
monitoring the behavior of managers.

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 Can Investors Influence Managers?

 Some inactive shareholders will go along

with whatever management wants.

 Some active shareholders have tried to

influence management, but they are often
met with defeat.

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 Monitors

 Monitors are called for because managers

may not act in the shareholder’s best
interest.

inside the corporate structure

Board of directors
outside the structure
Auditors, analysts, bankers, credit agencies, and attorneys

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 Figure 1.1

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 Inside monitors-Board of directors

 Oversee management and are supposed to

represent shareholders’ interests.
 Evaluates management and design
compensation contracts to tie management’s
salaries to the firm’s performance.

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 Outside monitors

 Interact with the firm and monitor manager

activities
– Auditors
– Analysts
– Bankers
– Credit agencies
– Attorneys

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 Major Regulators/Monitors in
Pakistan

 The SECP- Security and Exchange Commission of Pakistan

 SBP- State Bank of Pakistan
 FBR- Federal Board of Revenue
 CCP- Competition Commission of Pakistan
 OGRA- Oil and Gas Regulatory Authority
 PTA- Pakistan Telecommunication Authority
 NEPRA- National Electric Power Regulatory Authority
 PEMRA-Pakistan Electronic Media Regulatory Authority
 PPRA-Public Procurement Regulatory Authority
 DRAP- Drug Regulatory Authority of Pakistan
 PNRA -Pakistan Nuclear Regulatory Authority
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 Other monitors

 Market forces
 Stakeholders
 Creditors
 Employees
 Society

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 An Integrated System of Governance

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