Lecture 14

 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.
 There are a large number of people, called
stakeholders, who have an interest in a
corporate body.

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 Shareholders
 Management
 Employees
 Lenders
 Suppliers and Clients
 Society at large (this includes government)

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Interests of various stakeholders differ:
 Shareholders:
 Share Value & Profit
 Management/Employees:
 Job Security & Good terms
 Lenders:
 Debt security, low risk
 Suppliers/Clients:
 Continued business on good terms
 Society:
 Environmental/Economic Issues
 Collective interest of all:
 Profitable existence of the company
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 Who is in a position to protect his interest?
 Who needs protection?
 Who needs to be monitored?
 Who should monitor?
 If stakeholders’ interests conflict, who can
ensure that a balance is maintained?

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 Controlling shareholders have the greatest
opportunity to protect their interest and usurp
others’ interests.
 Managers and Employees come next.
 Major Lenders, Suppliers and Clients
essentially go by each transaction or contract.
 Smaller lenders and minority shareholders are
very vulnerable.
 Society depends entirely on law.

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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

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Therefore we need a system to ensure that:
 Individual interest of each stakeholder is

protected and served.

 Collective interest of all stakeholders is

protected and served.

 No one usurps any one else’s rights.

Corporate Governance is that system.

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 Corporate governance refers
to the mechanism
used to control and direct
the affairs of a corporate body
in order to serve and protect
the individual and collective interests
of all stakeholders.

(Dr Safdar A Butt)

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 How do these terms differ?
 Does Governance include Management?

Or
 Does Management include Governance?

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 Governance Function Management

Approval of
Planning Preparation of plans
Plans
Providing overall Leading those who
Leading
leadership implement plans
Arranging Tasks division &
Organizing
resources resource usage
Controlling Controlling
Controlling
managers employees

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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

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 Current & Operational Affairs
 Taking directions from the Board
 Implementing the Plans
 Developing Suggestions and Alternatives

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 Shareholders (voting power)
 They elect the
 Board of Directors (represents interests)
 They appoint the
 Management (delegated powers)
 CEO / MD
 Executive directors
 Senior Managers / CFO, COO, etc.
 Other employees

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 Fairness (Equally fair to all, agency issues)
 Accountability (Means, avenues)
 Responsibility (for their acts and consequences)
 Transparency (Accurate, adequate, timely disclosures)
 Risk Management (Who decides, how much?)
 Corporate Social Responsibility (Ethics, Good
citizenship)

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 Good for the company itself:
 Satisfies stakeholders
 Ensures sustainability
 Good for capital markets
 Good for the economy

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 Shareholders Approach
 Stakeholders Approach
 Enlightened Shareholders Approach
 Which approach is best?

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 Lack of true corporate culture.
 Ineffective Boards due to family control.
 No balance at Boards.
 Ineffective Code of Governance.
 Unwillingness of controlling shareholders to
share power with independent directors.
 Non-availability of good directors.

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Thank you
Dr Safdar A Butt

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