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Safdar H. TahirPhD-Scholar (Finance)

Mohammad Ali Jinnah University(MAJU) Islamabad

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CORPORATE GOVERNANCE: An introductory text for Pakistan, 2nd edition

by Safdar A Butt,Available from:

Azeem Academy Aminpur Bazar

Faisalabad

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Governing the corporate entity What is a company?

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According to OECD:Corporate Governance is the system by which

business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among

different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and

procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and

the means of attaining these objectives and monitoring performance.

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According to LaPorta et al., (2000), Corporate governance is a set of mechanisms

through which outside investors protect themselves against expropriation by the

insiders. They define “the insiders” as both managers and controlling shareholders.

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Corporate Governance is the: System by which companies are directed and

controlled, Structure that specifies distribution of rights and

responsibilities among stakeholders, Spells out the rules and procedures for decision

making, Provides structure for setting and attaining

company objectives and monitoring its performance.

(IFC)

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Corporate governance refers to the manner in which the affairs of a corporate body

are or should be conducted in order to serve and protect

the individual and collective interests of all stakeholders.

(Safdar A Butt)

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a) Unlimited Companiesb) Limited Companies:

a) Company Limited by Guaranteeb) Company Limited by shares:

a) Private limited companyb) Public limited company:

a) Listed public Limitedb) Unlisted Public Limited

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Shareholders Creditors Management and Employees Suppliers Customers Society at large (this includes government)

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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

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Controlling Groups (Internal Equity) Outsider Shareholders (External Equity)

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If in Majority: Can protect their interest easily Needs monitoringIf in Minority: Can protect their interest easily Needs highest degree of monitoring

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Institutional Investors Have some means of protecting their

interest but still require protectionIndividual or General Public They require the greatest degree of

protection, as they have virtually no means of protecting their interest.

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Institutional Investors Have some means of protecting their

interest through legal documentation, are relatively at lower risk but still require protection

Individual or General Public They require the greatest degree of

protection, as they have virtually no means of protecting their interest.

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Government (Taxes, Law and Order) Clients (Value for money) Community (Social Rights)

How do we ensure that these stakeholders get their dues?

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Shareholders (Voting power) Board of Directors (Represents interests) CEO (Delegated executive powers) Senior Managers (Delegated executive

powers)

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Accountability Fairness Transparency Responsibility

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1. Shareholders2. Management Board of Directors CEO Senior Managers3. Employees

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Sloth Greed Fear

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Is corporate governance an extension of Agency theory???

What is agency theory?

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Shareholders Approach Stakeholders Approach Enlightened Approach

Which approach is the best?

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1. Financial Reporting2. Directors Remuneration3. Risk Management4. Effective communication5. Corporate Social Responsibility

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Improve image of the company, Reduce company’s cost of funds, Reduce agency costs:

◦ Divergence costs◦ Monitoring costs◦ Incentive costs

Improve company performance,

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fromSAFDAR H. TAHIR

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