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Corporate Governance

A Brief Overviewby

Dr Safdar A Butt

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28 April 2012 2Corporate Governance - Dr S A Butt

What is a Corporate Body?

Any Company is a corporate body. However, in abroader sense only public limited companies are takento 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.

In USA and Europe, companies are even run by

minority shareholders. Hence, they require even greaterdegree of CG.

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28 April 2012 3Corporate Governance - Dr S A Butt

Stakeholders in a Company

Management and Employees

Lenders

Suppliers and Clients Shareholders

Society at large (this includes government)

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28 April 2012 4Corporate Governance - Dr S A Butt

The Important Questions

Who is in a position to protect his interest?

Who needs protection?

Who needs to be monitored?Who should monitor?

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28 April 2012 5Corporate Governance - Dr S A Butt

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

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28 April 2012 6Corporate Governance - Dr S A Butt

Individual Vs Collective Interest

Interests of various stakeholders differ

How to create a balance

Shareholders: Share Value & Profit Management: Survival & Job Security

Lenders: Debt security, low risk

Society:Environmental/Economic Issues

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Need for a System

There is therefore a need for a system that would

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 elses rights.

Corporate Governance is that system.

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Definition

Corporate governance refers to the manner in

which the affairs of a corporate body should be

conducted

in order to serve and protect

the individualand collectiveinterests

of all stakeholders.

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28 April 2012 9Corporate Governance - Dr S A Butt

Governance & Management

How do these terms differ?

Does Governance include Management?

Or Does Management include Governance?

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28 April 2012 10Corporate Governance - Dr S A Butt

Governance & Management

Governance Function Management

Approval of Plans Planning Preparation of plans

Providing overall

leadership

Leading Leading those who

implement plans

Arranging

resources

Organizing Tasks division &

resource usage

Controlling

managers

Controlling Controlling

employees

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28 April 2012 11Corporate Governance - Dr S A Butt

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

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28 April 2012 12Corporate Governance - Dr S A Butt

Management

Current & Operational Affairs

Taking directions from the Board

Implementing the Plans Developing Suggestions and Alternatives

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Tools of CG

The principal tool of enforcing good governance

in a corporate entity is Board of Directors.

The composition and functioning of the Board

determines how well a company serves and

protects the interest of all its stakeholders.

Law, regulators and professional associations

have a role too. Another potent influence is

institutional investors.

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28 April 2012 14Corporate Governance - Dr S A Butt

Corporate Hierarchy

Shareholders (voting power)

Management

Board of Directors (represents interests)

CEO (delegated executive powers)

Senior Managers (delegated powers)

Employees (follow orders)

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28 April 2012 15Corporate Governance - Dr S A Butt

Approaches to

Corporate Governance

Shareholders Value Approach

Enlightened Shareholders Approach

Pluralist Approach