An Introduction

to Corporate
Governance

1
 What is it about?
 Corporate
 Governance

2
 Company
 What is a company?
 Characteristics of a Company
 Types of Companies

3
 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

5
 Hierarchy of a Company
 Shareholders
 Own the company, do not run it.
 Board of Directors
 Elected by and reporting to shareholders
 Management
 Appointed by and reporting to directors
 Includes executive directors

6
 Top Players
 Shareholders: Voting power
 Chairman:
 May be executive or non-executive
 Directors
 May be executive or non-executive
 Chief Executive Officer
 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

8
 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 Classified on basis of opportunity to protect individual interests
basis of Role
in the Company Those with Those with a Those with
Full Opportunity Partial Opportunity Virtually No opportunity

Minority and individual

Controlling Institutional Investors
Owners shareholders with no board
Shareholders with Board representation
Representation

Financial institutions
Buyers of listed bonds
Lenders with elaborate lending Other lenders
with trustee arrangements
Contracts

Other employees
Employees Executive Directors Senior Managers on regular or
contract terms

Suppliers who sell Major Suppliers and Smaller suppliers

Business Associates
only on cash terms clients with contracts and smaller clients

Society Government Public at large

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 Planning Preparation of plans

Providing overall Leading Leading those who

leadership implement plans
Arranging Organizing Tasks division &
resources resource usage
Controlling Controlling Controlling
managers employees

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
 Unwillingness to take initiative or risk, prefer
status quo, be lazy.
 Greed
 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 S A Butt

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